Financial objectives and dividend policy
Overall objective These factors also contribute to stabilizing
the share price development.
SKF's overall ﬁnancial objective is to create SKF's objective is to have a solvency of
value for its shareholders through providing 35 percent calculated as an average over an
a sustainable and market-comparable total economic cycle.
return in the form of dividends and value
appreciation. Over time, the return require- Dividend policy
ment on the shareholders’ investment in
SKF, the market-value shareholders’ equity, SKF's dividend policy is based on the prin-
should exceed the risk-free interest rate by ciple that the dividend should be adapted to
about 5–6 percentage points. This is the the trend of earnings and cash ﬂow, taking
basis for SKF’s decisions on ﬁnancial into account the Group’s development
objectives in its operations. potential and ﬁnancial position.
The Board of Directors’ view is that the
Management model dividend should amount to approximately
one third of SKF’s average net income,
SKF's management model, which is a sim- calculated over an economic cycle.
pliﬁed economic value-added model, is
intended to create value for shareholders Financing
and, consequently, promotes improved
margins, capital reductions and proﬁtable SKF's policy is that Group operations
growth. The model is linked to operating should be ﬁnanced through long-term bor-
income, less taxes paid and costs for own rowing. The goal is that the loans required
and external capital in accordance with to ﬁnance anticipated needs should have
generally accepted principles. The result maturities exceeding three years. As of
shows a good correlation with the trend of December 1997, the average maturity of
the share price. Today, Group manage- SKF's loans was 5.5 years.
ment’s bonus and option programs are According to the Group’s ﬁnancial
based on this model. policy, SKF should have – in addition to
this loan ﬁnancing – payment capacity in
Capital costs, return requirement the form of surplus liquidity and/or long-
term credit facilities, amounting to
Currently, a weighted capital cost is used in approximately USD 350 m. As of Decem-
SKF's management model in which costs ber 31, 1997, the Parent Company had
after tax for shareholders’ equity is about 6 long-term loan commitments totaling USD
percent higher than interest on government 475 m from ten banks.
bonds. The weighted capital cost is cur- The Group has been assigned a “BBB+”
rently approximately 9 percent. Accord- rating for long-term credits by Standard &
ingly, this corresponds to the average return Poor’s and a “Baa2” rating by Moody’s
requirement over an economic cycle which Investors Service.
the company must exceed to create value
for its shareholders. The weighted capital
cost and the return requirement are calcu-
lated based on the market value of share-
A strong ﬁnancial position and good credit
rating are prerequisites for solid long-term
growth and proﬁtability in a business that is
sensitive to changes in economic conditions.
Financial risk management
Financial risks currencies, can affect Group income by a Interest-rate risks
couple of hundred million kronor.
SKF’s operations are exposed to currency SKF’s policy is to hedge currency ﬂows The risk associated with interest rates is
risks, interest-rate risks and credit risks. As for four months on average. This is the that changes in interest rates will have a
a result of the broad geographic distribution length of time deemed to be required, under negative impact on Group income. SKF’s
of its business, with operations in many present conditions, to adjust to new condi- basic policy for establishing ﬁxed-interest-
countries, the Group has a complex and tions. Within the framework of established rate periods is that the average duration
changeable risk situation, but one that is risk limits, it is possible for SKF Treasury should be six months. This applies to bor-
diversiﬁed. Center AB to make signiﬁcant deviations rowing as well as investment of funds and
The Group’s ﬁnancial policy clearly from this average period. Risks are man- also includes the use of derivatives.
deﬁnes currency, interest-rate and credit aged based on a risk-evaluation system that The composition of the Group’s interest-
risks and establishes responsibility and takes into account the volatility of curren- rate portfolio is diversiﬁed and normal
authority for the management of ﬁnancial cies as well as their mutual relationship. As changes in interest rates are not considered
risks. This policy states that the primary of year-end, the lengths of the actual for- to have any signiﬁcant impact on SKF’s
objective is to avoid or minimize risk and to ward contracts largely conformed with the earnings.
contribute to a better return on Group assets basic policy.
through an active management of risks. Credit risks
The management of these risks, and Translation exposure
responsibility for all treasury operations, is Group income is also affected by the effect Credit risks pertain to the creditworthiness
largely centralized in SKF Treasury Centre of translating the income of foreign sub- of counterparties and can be reduced
AB, the Group’s internal bank. sidiaries to Swedish kronor. When there is a through a detailed evaluation of their ability
change of approximately 10 percent in the to fulﬁll their obligations before credit is
Currency risks value of the krona, this effect can also granted. Credit risks that arise as a result of
amount to a couple of hundred million kro- trading in ﬁnancial instruments and in con-
The currency risks to which the Group is nor, depending on the country in which the nection with the investment of liquid funds
exposed consist of changes in exchange income arose and the respective currency are carefully deﬁned in the ﬁnancial policy.
rates in future ﬂows of payments, trans- movement in relation to the Swedish krona. Transactions are carried out only within
action exposure, as well as the revaluation The Group is also affected by the trans- established limits, and with counterparties
of income, assets and liabilities in foreign lation to Swedish kronor of net assets held who have good credit ratings.
currencies when these currencies are outside Sweden. At year-end 1997, SKF’s
translated to Swedish kronor, translation net foreign assets amounted to SEK
exposure. 9 200 m, of which approximately SEK
1 300 m was hedged. In accordance with a
Transaction exposure policy decision, only a few currencies are
The Group’s principal commercial ﬂows of hedged.
foreign currencies pertain to exports from
Europe to North America and Asia, and to Economic exposure
ﬂows of currencies within Europe. Over the SKF’s principal competitors have the
long term, SKF is seeking to establish a greater part of their production capacity in
balance between production and sales Germany, the U.S. and Japan. Currency
within the European, American and Asian changes affecting those countries’ cost situ-
zones. ation primarily in relation to Sweden, Italy
SKF has ﬂows in some 20 currencies. and France, where SKF, in addition to
The total ﬂow of goods exceeds SEK Germany and the U.S., has substantial man-
31 000 m. After offsetting ﬂows in the same ufacturing operations, affect SKF’s compet-
currency, the net ﬂow amounts to approxi- itiveness in relation to these competitors.
mately SEK 8 000 m. The ﬂows that – due Over the long term, SKF is seeking to
to their size – could have a major impact on establish a better balance in production and
SKF’s income are inﬂows in USD, DEM sales between the European, American and
and GBP that are converted into SEK, FRF Asian zones.
and ITL. Fluctuations of approximately 10
percent in foreign exchange rates in these
SKF and European Monetary Union
Countries other than Sweden accounted for 95 percent of SKF Group sales work covers strategic, ﬁnancial and infra-
structural aspects, such as information tech-
during 1997. nology, ﬁnancial accounting and reporting,
as well as legal aspects.
European countries accounted for 54 percent of SKF Group sales during
As a result of the wide geographic
1997. spread of Group operations in many differ-
ent countries, SKF is exposed to a complex
Today, more than half of SKF’s sales are to countries within Europe, situation regarding currency risks. The
introduction of EMU will simplify the
with a strong concentration to Germany, France and Italy. The Group has Group’s risk situation, since the number of
currencies handled will be smaller. Today,
also located production facilities in a number of European countries.
SKF’s operations are concentrated to cur-
rencies linked to the DEM and USD. With
the introduction of EMU, the currencies
The map below shows the locations of SKF’s operations in Europe. that are linked to the DEM will be replaced
by a common EU currency, the euro.
SKF is a Group with a centralized infra-
structure, particularly regarding informa-
tion technology. IT is the area that will
require the largest single work input to
prepare the Group for EMU. During 1997,
SKF’s Group-wide systems for orders,
sales, purchasing and production were
scrutinized in order to identify areas where
system or process changes are needed. A
corresponding review of local systems that
will be affected by EMU was conducted
The companies in the SKF Group will
switch over from their present local curren-
cies to the euro during the transitional
period from 1999 to 2001. Various coun-
tries could switch to the euro at different
times during this period. Introduction of a
Group-wide ﬁnance and accounting system
will begin during 1998. The system, called
SARA (SKF Accounting and Reporting
Applications), will be implemented at all of
SKF’s major European companies in the
run-up to the year 2000. SARA will be able
In the current situation, it is likely that ﬁnancial reports expressed in euro would to meet the requirements faced by each
European Monetary Union (EMU) will provide the most accurate picture of the SKF company when EMU is introduced.
start on January 1, 1999 and encompass up Group's ﬁnancial position and earnings. The transition to the euro will be co-
to 11 European countries, including Ger- For as long as no other option is permitted ordinated among all the Group companies
many, France, the Netherlands, Belgium, under Swedish law, however, SKF will that change their ﬁnancial systems during
Finland and possibly Italy. retain the Swedish krona as its working the period from 1999 to 2001.
Viewed in the light of SKF’s operations currency. The preparatory work prior to imple-
in these countries, the introduction of EMU SKF has been working on preparations mentation of EMU will continue during the
will mean that Group operations will be for EMU since November 1996, with the next few years, and will cease when the
absorbed into EMU regardless of whether aim of assessing the effect of changed present local currencies have been com-
Sweden as a country decides to join EMU external conditions and ensuring that the pletely replaced by the euro.
or remain outside it. Obviously this also requirements and demands directed at the
means that as far as SKF is concerned, organization can be met. The preparatory
Environment - Toward ISO 14001
Nineteen ninety-seven was a milestone year auditing, which greatly reduces the costs. reduction in the number of hours lost, when
for Group environmental affairs. SKF The external auditors can assess the whole compared to 1996.
became the ﬁrst of the major bearing manu- Group based on sample audits at selected
facturers to achieve a certiﬁcate for ISO sites. About one third of the sites are Performance improved during
14001: the new international standard for expected to receive this external assessment 1997
environmental management. Seven of the prior to certiﬁcation. The frequency of sub-
Group’s plants were registered to this sequent surveillance audits at the sites is The total consumption of electrical energy
standard during the year, and SKF has also reduced, cutting the overall cost of a at all SKF manufacturing units in 1997 was
embarked on an ambitious program to Group certiﬁcate to about 20 percent of that about 1 777 gigawatt hours (GWh); the
certify the rest of the Group. for individual certiﬁcation. same as in 1996. About 28 percent of the
electrical energy was used in the steel mills.
Group certiﬁcation before 1999 Corporate audits improved However, when compared to 1996, the
consumption of electricity and most hydro-
In 1997 SKF applied to a leading certiﬁca- Several improvements were made in 1997 carbon materials reduced in relation to the
tion body for Group registration to ISO to the corporate program for environmental, production volumes, which increased sig-
14001. The registration process takes about health and safety auditing. The number of niﬁcantly. This enhanced performance is a
18 months, and should be completed by the auditors was increased, and all audit staff result of continual improvements to the
end of 1998. The application is for a single received training to “Lead Auditor” level. Group’s manufacturing equipment and
certiﬁcate covering all manufacturing units The revised audit scheme, and the ISO processes.
in the Group, rather than individual certiﬁ- 14001 project, have together signiﬁcantly Investments in environmentally related
cates for each unit. The strategy for Group increased the rate at which environmental projects at SKF Engineering and Research
certiﬁcation was developed after extensive improvements have been implemented. This Centre was SEK 3.8 m in 1997. In addition,
liaison with external auditing/certiﬁcation rate of improvement will be maintained in a total of SEK 120 m was invested in envi-
bodies, and is unique to SKF. 1998, as more companies reach the stan- ronmental, health and safety improvement
To be eligible for a Group certiﬁcate, dard for ISO 14001 certiﬁcation. projects throughout the Group during the
SKF has developed an environmental man- year.
agement system conforming to ISO 14001, Accidents and injuries reduced
suitable for all manufacturing units; worldwide SKF Environmental Report 1997
whether they make bearings, seals, steel or
other related products. The new system The improvement trend seen is not conﬁned The Environmental Report, which is dis-
allows SKF to operate globally to a set of to environmental performance. Accidents tributed together with the Annual Report, is
common management procedures by deﬁn- and injuries have been reduced in the a comprehensive description of the SKF
ing national and local variations in supple- Group’s plants worldwide. An example is Group’s environmental activities during the
ments or appendices to these procedures. the plant at Pune in India. The number of year.
A major advantage of Group certiﬁcation work related injuries there was reduced by
is a much reduced frequency of external 53 percent in 1997, with a 40 percent
Toward Year 2000
Problems related to the inability of com- tems are today Year 2000 compliant. The cial services, and utilities, regarding their
puter systems, microprocessors, and other work proceeds in all the affected operations Year 2000 plans and readiness.
electronic devices to deal appropriately during 1998 and 1999 with the objective of The Year 2000 program is organized
with dates on or after January 1, 2000, are solving the major issues by the end of 1998. under the umbrella of a Group project to
becoming a major issue for all businesses. Our Year 2000 activities also include secure a safe and trouble-free transition into
About a year ago SKF started to identify checks with our business partners, includ- Year 2000 and the new millennium.
Year 2000 critical computer hardware and ing customers, suppliers, transport
systems. Adaptation work is in progress and providers, communication providers, ﬁnan-
several of our main common business sys-
SKF 100 – A sprint that never ends
”The difference between the many athletes who can run 100 meters in 10 seconds
and the few who can do it in 9.8 seconds is mostly mental,” says world-famous
American track coach John Smith. It is a question of believing that it is possible to
improve the speed in every stride by a few thousandths of a second, achieving
barely measurable gains that demand the mobilization of everything the individual
his particular coach is no different Göteborg was allowed to negotiate directly able personnel. Power was concentrated at
T from many others in today’s most
highly competitive sports. It is true
that sprints are the most extreme form of
However, SKF’s competitors learned
more about the company’s capabilities, and
the management level. Now, however, in an
era when minute differences count, power is
gradually shifting back to the many team
competition, with the competitors in a in due course the customers began review- members - albeit only the power to “van-
world-class ﬁnal often ﬁnishing within a ing all the alternatives. During the 1970s, quish or vanish.” Any organization that fails
few hundredths of a second of each other. A the situation reached the point where SKF to motivate its employees incurs such a dis-
sprinter who runs at only 99.9 percent of had to ﬁght for its very existence. The com- advantage that it can totally lose the battle.
his or her capacity in an important ﬁnal petition in the ball bearing segment
risks losing. This tough and unrelenting changed character, as happened in many The most extensive cultural
competition characterizes an increasing other traditional segments. change process in the company’s
number of sports. Last year was SKF’s ninetieth anniver- history
For one who has been writing about sary. The company produced more than
companies and competition for almost three ever and was still the world leader, but had Accordingly, SKF 100 should not be
decades, it is impossible not to be fasci- barely two thirds as many employees as viewed as preparation for the company’s
nated by the nature of competition, whether during the 1960s. The intervening years centenary, but rather as an attempt to mobi-
in relation to sport or to business. There are were a period of constant rationalization lize another few percentage units of the
competitive situations where it seems that and the pursuit of greater efﬁciency. And company’s potential resources. It will be the
those who quickly move into the lead will this must continue to be the case. most extensive cultural change process ever
be able to retain it for some time. Microsoft, in the company’s history.
Intel and certain other IT companies oper- How do you learn to pick up your The tool which the company uses in its
ate in young, rapidly changing markets in feet a few thousandths of a efforts to involve all employees in an ongo-
which the competition seems to fall into second faster with every stride? ing process of change and mental mobiliza-
this pattern. tion is called TQM (Total Quality Manage-
How is it possible to maintain the lead in a ment). It is a work process that involves the
Difference between winning and ﬁeld where competition is so ﬁerce? How participation of all company employees –
losing becoming smaller do you learn to pick up your feet a few more akin to the study circles arranged by
thousandths of a second faster with every popular movements in former times than to
By contrast, the more established form of stride? How can the company secure its the mass meetings, marshaled with mili-
competition between companies is more world leadership for another decade? taristic discipline, that used to characterize
akin to those sporting events where the For me, the company’s SKF 100 program companies. The objective is that all employ-
difference between winning and losing is is an interesting example of the manner in ees will work toward a common vision by
becoming even smaller. which tough global competition transforms both accepting and actively changing the
At the beginning of this century, SKF the competing companies. Competition is steps that lead there. Some of the old mili-
resembled today’s IT companies, as the now entering the mental phase to which tary terms (such as authority and strategy)
company grew within a few decades from John Smith referred. Even the best technol- have been complemented with concepts
being a basement operation to become a ogy and the most rigorous discipline are no such as ethical standards and openness.
world leader. During World War II, SKF longer sufﬁcient; results must also come The process is never-ending. Continuous
was even regarded as such an important from motivation and total mental mobilization. measurement of factors such as quality,
international player that the company’s When SKF was in its infancy, Taylorism work climate, speed and ﬁnancial results
products played a substantial part in the held sway, with its emphasis on “the tech- constantly provides incentives to go back
economic aspect of the war. Toward the end nology of interchangeable parts.” Which led and try to repeat the same steps – but better
of the war, the SKF management in in turn to production based on interchange- and faster.
SKF’s basic values SKF’s strategic drivers More “minimalism.” No extravagant ges-
tures. The company will do precisely what
The ﬁrst step in SKF’s process of change is The second step concerns SKF’s four it has always done, with no deviations. The
based on the seven basic values which all strategic drivers, or day-to-day methods as aim is to achieve the same market position
employees must know, share and practice: they could also be termed. in North America and Asia as exists in
• Business focus – which means never los- • Quality, or total quality, means that the Europe. Growth must derive from market
ing sight of objectives and customer job is done “right from the start.” It is a growth, or occur at the expense of competi-
needs. fundamental precept. tors. Certain competitors will be acquired if
• Continuous improvement – which means • Cost means that products and services the opportunity arises. There are no other
continuously growing and improving in will be supplied at the lowest possible options.
every area. cost, and faster than before.
• Empowerment – which means that deci- • Growth will be assured by being able to SKF’s vision
sions and initiatives should, as a matter of offer customers better products and ser-
course, be concentrated wherever the best vices than the competition. The vision of SKF that everyone will per-
expertise is to be found. • Speed means eliminating waste and ceive is as a world leader in all the above-
• High ethics – which simply means that the unnecessary steps and processes without named product areas. This will be achieved
organization shall display honor and compromising quality. by being best at giving customers value for
integrity in all its actions. Reading between the lines, we can detect money, best at developing the company’s
• Innovation – which is the organization’s here a blend of traditional entrepreneurial own employees, and best at creating value
weapon for responding to every change wisdom and oriental inﬂuences. Everything for shareholders.
and new opportunity. should be simple and clear. Those who want While coach John Smith’s expertise may
• Openness – the aim of which is that all to be the masters cannot afford to dissipate not extend to team sports, he would nod
employees shall have access to the infor- their energy. Because the competition won’t approvingly at SKF’s mental mobilization
mation they require, regardless of their do so either! process. There will be no huge, revolution-
position in the organization. ary changes for SKF prior to the company’s
• Teamwork – which is founded on com- SKF’s strategies centenary in 2007, since we are so close to
mon values and mutual respect. reaching the limits of the vision. Rather,
“Just empty phrases,” may be the scornful The third step in the process focuses on everything depends on gaining those thou-
response of a few ﬁnancial analysts or understanding the SKF Group’s strategies, sandths with every step. This is why the
adherents of the old-style militaristic school meaning the competitive weapons and the changes demand so much from all who are
of management. In that case they have parameters Group management has estab- involved.
ignored the trend that has characterized the lished for operations based on analyses of And don’t forget that – just as in sport –
manner in which companies are viewed customers and competitors. The four most the winner takes all!
during the past decade. And the old-style important strategies are as follows:
idealists of the popular movements might • SKF will concentrate on bearings, seals
well be horriﬁed and amazed at the manner and closely related products, as well as
in which organizations dedicated to capital- providing services and support in the soft- The author, who was editor-in-chief of
ism are now appropriating the dream of the ware area to the company’s extensive cus- Affärsvärlden (Business World) magazine
“model organization.” It is a potent dream, tomer base. for many years, has also received plaudits
which was valid when circumstances were • SKF will increase its world market share for his series of books entitled Före-
different. Motivated and committed people in the bearings segment. tagsledarnas Århundrade (The Company
can achieve miracles by working together. • SKF will actively participate in the Managers’ Century), published by
But the key is to constantly keep the pio- restructuring of the bearings production Norstedts.
neering spirit alive. Perhaps competition industry.
itself provides a guarantee that even compa- • SKF will grow strongly in Asia, Central
nies that are approaching 100 years of age and Eastern Europe and North America,
can enjoy eternal youth. Otherwise the era and consolidate its position in Western
of the megacompany will be no more than a Europe.