CORRESP 1 filename1.txt Electrolux Mr. Larry Spirgel Assistant Director Division of Corporation Finance Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0303 Aktiebolaget Electrolux (publ) Form 20-F for the fiscal year ended December 31, 2004 (File No. 0-15741) ------------------------------------------------------------------------ Dear Mr. Spirgel: We refer to the Staff's comment letter dated June 1, 2005, relating to the Form 20-F for the fiscal year ended December 31, 2004 (the "Form 20-F") of Aktiebolaget Electrolux (publ) ("Electrolux"). Set forth below in detail are the responses to the Staff's comments, which have been provided in each case following the text of the comment in the Staff's letter of June 1, 2005. All references to page numbers in this letter refer to the page numbers of the Form 20-F as filed with the Commission on April 8, 2005. Form 20-F for the fiscal year ended December 31, 2004 Selected Financial Data, page 4 Operating and Financial Review and Prospects, Value Creation, page 30 1. Refer to "Value Creation" and footnote 2. Expand your disclosures to discuss the following: o the specific manner in which you use this non-GAAP measure to conduct or evaluate the business; o the economic substance behind your decision to use such a measure; o the material limitations associated with the use of this non-GAAP measure as compared to the use of the most directly comparable GAAP measure, operating income; and o the manner in which you compensate for these limitations when using this non-GAAP measure. Response For future filings, Electrolux will amend its disclosure relating to "Value Creation" in the manner set forth in Annex A to this letter (additional disclosure underlined). Page 2 Aggregate Contractual Obligations, page 47 2. Present the required interest payments in the table. Response Electrolux's interest-bearing liabilities relating to its long-term debt are disclosed in Note 18 of its financial statements on pages F-28 and F-29 of the Form 20-F. As disclosed in footnote (1) to the "Interest-bearing Liabilities" table on page F-29, Electrolux's interest-bearing liabilities on its long-term debt have been swapped from fixed to floating rates pursuant to certain interest-rate swap agreements. Consequently, it is not possible to add details of Electrolux's interest-bearing liabilities relating to its long-term debt to the table entitled "Aggregate Contractual Obligations" under Item 5.F of the Form 20-F. For future filings, however, Electrolux will add a footnote to the table under Item 5.F cross-referencing Note 18 of its financial statements in this regard. The element of interest payable in respect of Electrolux's capital and operating lease obligations is already included in the Swedish kronor amounts presented in the table under Item 5.F. against the line items "Capital Lease Obligations" and "Operating Leases", respectively. Financial Statements 3. Refer to your asbestos litigations disclosure on page 9. Please tell us why the details of any settlements, accruals and/or the range of possible loss related to these litigations are not required to be disclosed in the footnotes. Also tell us whether any settlements and/or accruals considered insurance coverage. If so, tell us how you accounted for the insurance coverage. Response Under Swedish GAAP, Electrolux is not required to disclose in the notes to its financial statements details of any settlements, accruals and/or the range of possible loss relating to the asbestos-related personal injury claims in the United States, unless, in the case of settlements or accruals, such amounts are material. Electrolux's settlements and provisioning in respect of such claims are immaterial. Further, due to the lack of predictability of either the number of future claims, the number of plaintiffs that any future claims may represent and the outcome of litigation in respect of any future claims made against Electrolux, Electrolux cannot reasonably estimate a range of possible loss relating to future asbestos-related lawsuits. As of January 1, 2005, Electrolux has applied International Financial Reporting Standards ("IFRS"). Electrolux's Form 20-F for the fiscal year ended December 31, 2005 will contain financial statements in conformity with IFRS. IFRS will require qualitative disclosure relating to Electrolux's asbestos-related personal injury claims in the United States to be contained in Note 25 (Contingent Liabilities) (or its 2005 equivalent). As disclosed in its Form 20-F, Electrolux believes its predecessor companies may have had insurance coverage applicable to some of the asbestos-related personal Page 3 injury cases during some of the relevant years. As required by Swedish GAAP, Electrolux does not take account of the insurance coverage when provisioning for the asbestos-related claims. Note 1 Basis of Preparation, page F-8 4. Refer to the last sentence in the first paragraph. Please tell us how this accounting policy complies with Swedish GAAP. Response Electrolux hereby confirms that the "Electrolux Accounting Manual" referenced in the last sentence of the first paragraph under "Note 1 - Accounting and valuation principles - Basis of Preparation" is fully compliant with Swedish GAAP. From January 1, 2005, the "Electrolux Accounting Manual" is fully compliant with IFRS. For future filings, Electrolux will add a sentence to the effect that such manual is fully compliant with IFRS. Note 3 Segment information, page F-17 5. Refer to your line item "Operating income". Revise the title here and all applicable sections of the filing since it is confusingly similar to operating income under Swedish GAAP. Response Swedish GAAP requires companies to disclose information in their financial statements as to events and transactions with effects on income that are of significance when income from the period is compared with that of other periods. Electrolux reports these events and transactions on the line-item "items affecting comparability" which appears separately on the face of the income statement and in Note 7 to its consolidated financial statements contained in the 20-F. In several tables within, and sections of, its 2004 20-F, Electrolux includes and/or discusses "operating income" excluding items affecting comparability. For future filings, Electrolux will amend its disclosure in the manner set forth in Annex B to this letter (additional disclosure underlined) so as to clearly distinguish "operating income" from "operating income excluding items affecting comparability", as well as to specify what such "items affecting comparability" consist of. Note 7 Items affecting comparability (SEK million), page F-20 6. We note that you recorded a provision for loan guarantees in 2003. Please provide us the details of this provision. Response Electrolux supplementally advises the Staff that the provision for loan guarantees in 2003 relate to the fact that, in accordance with business practice in the sector, Electrolux has historically provided guarantees for certain loans in connection with the setting up of launderettes in Germany that are equipped with professional laundry Page 4 equipment supplied by the Electrolux Group. In 2003, such German launderettes have experienced financial difficulties due to weak market conditions. As of December 31, 2003, Electrolux had fulfilled the major part of its guarantee commitments. The provision of SEK293 million was taken in September 2003. Of this, SEK 64 million remained unutilized at December 31, 2003. At December 31, 2004, SEK 29 million of the provision remained unutilized. Note 10 Taxes, page F-23 7. Please tell us the nature of the deferred taxes recognized in equity. Also tell us how this was reflected in the equity reconciliation in Note 30. Response Electrolux hereby supplementally advises the Staff that the "deferred taxes recognized in equity" contained in the third table under Note 10 (Taxes) of its financial statements consists of the following:
(SEK millions) Deferred tax on the adjustment for exchange differences on loans designated as equity hedges................................... 51 Difference between average exchange rates and balance sheet date rate for deferred taxes relating to items affecting comparability................................................. (16) Deferred tax on opening balance adjustment of a Swiss pension plan.......................................................... (9) ------------- Total............................................................ 26 =============
No adjustment was made for the deferred taxes recognized in equity in the equity reconciliation in Note 30. Note 30 Restructuring and other provisions, page F-49 8. Please provide us with a schedule reconciling this provision with your provision under Swedish GAAP and tell us the nature of the US and Swedish GAAP differences. Response According to the reconciliation table on page F-55 of the Form 20-F, the total adjustment is SEK 178 million. Electrolux hereby supplementally advises the Staff that it made the following adjustments in accordance with U.S. GAAP with respect to its 2004 restructuring projects, each as more fully described below:
(SEK millions) Building exit costs/factory decommissioning ...................... 117 Lease contract terminations....................................... 31 Consultancy fees.................................................. 10 Other items....................................................... 20 ------------- Total....................................................... 178 =============
Page 5 Building exist cost/factory decommissioning: Under IAS 37 (included in the Swedish GAAP as from 2002), costs relating to idle facilities and other similar costs which do not benefit future periods could be provided for. Pursuant to FAS 146 and SOP 95-1, only costs associated by environmental clean-up regulated by statutory requirements could be provided for. Other costs relating to this topic are recorded as incurred under US GAAP. Lease contract terminations: Under IAS 37, lease and other contract termination costs can be recorded to the extent that such costs result from the restructuring and are not associated with ongoing activities of Electrolux. FAS 146 states that costs to terminate a contract before the end of its term should be recognized and measured at fair value when the entity actually terminates the contract according to existing lease provisions or through negotiation. Other contract termination costs are recognized and measured at fair value when the entity ceases using the rights conveyed by the contract. Consultancy fees: Under FAS 146, consultancy fees should be recorded when incurred. IAS 37 permits immediate recording. Note 30 Comprehensive income, page F-55 9. Please refer to footnote 1. We are unable to locate the description in Item 5. Please advise. Response Electrolux hereby supplementally advises the Staff that the footnoted cross-reference to Item 5 more specifically should refer to the sub-section of Item 5 entitled "Changes in Financial Reporting and Accounting Policies - Swedish GAAP - Accounting Policies Adopted in 2004 - RR29: Employee Benefits". For future filings, Electrolux will add this additional level of specificity to the cross-reference in footnote 1 of this table. * * * * * Should the Staff have any questions or require any additional information, please do not hesitate to contact me. Very truly yours, /s/Fredrik Rystedt Fredrik Rystedt Chief Financial Officer cc: Dean Suehiro, Senior Staff Accountant Michael Henderson, Staff Accountant Page 6 - United States Securities and Exchange Commission, Washington D.C Carl-Henrik Lindgren Mikael Ostman - AB Electrolux, Stockholm, Sweden Anders Lundin Christine Rankin-Johansson - PriceWaterhouseCoopers, Stockholm, Sweden James Bartos Peter Young - Shearman & Sterling (London) LLP, London ANNEX A ------- Value Creation Value Creation is a performance measure focused on growth and shareholder return in Swedish kroner terms. Value Creation is extensively used by Electrolux for internal reporting purposes and as a management tool for measuring and evaluating financial performance within the Group. Electrolux uses Value Creation internally to measure and evaluate business areas, product lines and regional performance. As more fully described below, Value Creation for the Group is calculated by assuming a cost of capital on net assets across the Group for a particular year and then measuring the "value created" by comparing the Group's operating income for the same year against the assumed cost of capital for that year. A higher return (in operating income terms) than the assumed cost of capital on net assets across the Group implies that the Group has created value in Swedish kroner terms for its shareholders. A lower return would imply inefficiency in utilization of the Group's asset base. Because Value Creation is expressed in Swedish kroner rather than as a percentage (like, for instance, return on assets), Electrolux believes it focuses on growth in kroner terms as opposed to a measure which could improve simply because the asset base shrinks. Value Creation is also used by the Group as a basis for remuneration for managers and employees. The Group has a program of variable salary for management and other key personnel. Variable salary is based on a financial target for Value Creation, as well as non-financial targets. The Group also has a performance-based long-term incentive program for approximately 200 of its most senior managers. This performance share program is linked to targets for the Group's Value Creation over a three-year period. Value Creation is not a measure determined in accordance with GAAP. Electrolux believes, however, that its definition links operating income and asset efficiency with the cost of the capital employed in operations. Value Creation should not be considered as an alternative measure of performance and may not be comparable to similar measures disclosed by other companies because value creation is not uniformly defined. Value Creation is measured excluding items affecting comparability and defined as operating income less the weighted average cost of capital (WACC) on average net assets during a specific period. 1 Value Creation is reconciled to operating income as follows:
2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- (SEK millions, except percentages) Operating Income 4,714 7,175 7,731 6,281 7,602 Excluding items affecting comparability 1,960 463 434 141 448 -------- -------- -------- -------- -------- 6,674 7,638 8,165 6,422 8,050 Less asset capital charge 3,696 4,189 4,704 6,160 5,627 -------- -------- -------- -------- -------- Value Creation 2,978 3,449 3,461 262 2,423 -------- -------- -------- -------- -------- Weighted Average Cost of Capital x 12% 13% 13% 14% 14% -------- -------- -------- -------- -------- Average net assets = 30,797 32,226 36,182 44,002 40,194 -------- -------- -------- -------- -------- Asset capital charge 3,696 4,189 4,704 6,160 5,627 -------- -------- -------- -------- --------
The cost of capital varies between different countries and business units due to country-specific factors such as interest rates, risk premiums and tax rates. WACC is calculated annually by Electrolux to apply for the following year on the basis of agreed parameters aimed at determining the Group's cost of capital. Net assets are total assets exclusive of liquid funds (short-term investments and cash and bank balances), interest-bearing financial receivables, as well as non-interest-bearing liabilities and provisions and excluding items affecting comparability. A higher return on net assets than the WACC implies that the Group creates value. The method by which Electrolux calculates the "asset capital charge" within the Value Creation measure is potentially disadvantageous in that it has the potential to encourage inappropriate management of the asset base in order to upwardly manage the value created against such asset base. Electrolux mitigates against this potential risk by prohibiting or restricting certain activities, such as factoring, as well as taking account of specific investments in property, plant and equipment through the budgeting process. Total Value Created in 2004 amounted to SEK 2,978 million (3,449). The decline reflects mainly the decrease in operating income, which was partly offset by a decline in average net assets. The capital turnover rate was 3.92, as against 3.85 in the previous year. The WACC rate for 2004 was computed at 12%, as compared against 13% for 2003. The change in the WACC rate had a positive impact of SEK 308 million on Value Created in 2004. 2 ANNEX B -------
Operating Income by Business Area 2004 2003(3) 2003(4) ----------------------------------- ---------------------- ---------------------- ---------------------- SEK SEK SEK million %(2) million %(2) million %(2) ----------- --------- ----------- --------- ----------- --------- Consumer Durables(1)............. 5,623 74.5 6,365 75.9 6,250 74.6 Professional Products(1)......... 1,921 25.5 2,018 24.1 2,132 25.4 Common Group costs, etc.......... -870 - -745 - -744 - ----------- --------- ----------- --------- ----------- --------- Total Operating Income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments...................... 6,674 - 7,638 - 7,638 - ----------- --------- ----------- --------- ----------- --------- Items affecting comparability.... -1,960 - -463 - -463 - ----------- --------- ----------- --------- ----------- --------- Total Operating Income........ 4,714 - 7,175 - 7,175 - =========== ========= =========== ========= =========== =========
---------- 1. Operating income by business area is presented after excluding items affecting comparability because this is a measure which management uses to manage the operations of the Group. It is not, however, a measure under Swedish GAAP or U.S. GAAP. For more information on the use of non-GAAP measures and items affecting comparability, please see "Presentation of Information" and Note 7 to the consolidated financial statements. 2. As a percentage of total operating income, excluding items affecting comparability and common group costs. 3. Based on 2004 segmental reporting structure. See "Changes in Segment Reporting in 2004" above. 4. Based on 2003 segmental reporting structure. The following discussion includes statements about operating income and operating margin with respect to the Consumer Durables and Professional Products business areas. Both operating income and operating margin for these business areas are presented excluding items affecting comparability. These financial measures are not measures under Swedish GAAP or U.S. GAAP. For more information on non-GAAP financial measures and items affecting comparability and U.S. GAAP, see "Presentation of Information" and Note 30 to the consolidated financial statements.
Consumer Durables Consumer Durables by Region 2004 2003 --------------------------------------------------------------------- --------------- --------------- (SEK million, except percentage amounts and employee numbers) Europe Net sales ........................................................... 42,703 44,267 Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)......................................................... 3,124 3,289 Operating margin, %(1)............................................... 7.3 7.4 Net assets(2)........................................................ 6,121 5,873 Return on net assets, %(3)........................................... 46.1 46.1 Capital expenditure.................................................. 1,561 1,202 Average number of employees.......................................... 26,146 27,788 North America Net sales ........................................................... 30,767 32,247 Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments.......................................................... 1,106 1,583 Operating margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments),%(1).................................................... 3.6 4.9 Net assets(2)........................................................ 6,619 7,683 Return on net assets, %(3)........................................... 14.3 18.8 Capital expenditure.................................................. 1,439 618 Average number of employees.......................................... 16,329 15,249
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Rest of the world Net sales............................................................ 13,479 12,544 Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)......................................................... -159 0 Operating margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................... -1.2 0.0 Net assets(2)........................................................ 5,062 4,420 Return on net assets, %(3)........................................... -3.5 0.0 Capital expenditure.................................................. 438 470 Average number of employees.......................................... 13,547 15,389 Consumer Outdoor Products Net sales............................................................ 17,579 17,223 Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)......................................................... 1,552 1,493 Operating margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................... 8.8 8.7 Net assets(2)........................................................ 4,578 4,498 Return on net assets, %(3)........................................... 26.8 25.6 Capital expenditure.................................................. 517 560 Average number of employees.......................................... 6,041 5,633
---------- 1. Defined as operating income excluding items affecting comparability expressed as a percentage of net sales. 2. Defined as total assets exclusive of liquid funds, interest bearing financial receivables, as well as non-interest-bearing liabilities and excluding items affecting comparability. 3. Defined as operating income as a percentage of average net assets, excluding items affecting comparability. Operations in Europe -------------------- Major Appliances. Total industry shipments of core appliances in Europe in 2004 increased in volume by approximately 3.8% over 2003. Western Europe showed an increase of about 2%, while the increase in Eastern Europe was almost 9%. A total of 78.1 (73.1) million units of appliances (excluding microwave ovens) were estimated to have been shipped in the European market during 2004. Of these, a total of 56.4 (55.0) million units referred to Western Europe. Group sales of appliances in Europe for the full year were somewhat lower than in 2003, mainly as a result of the divestment of Vestfrost in 2003, and lower volumes in Western Europe, particularly in Germany. Sales in Eastern Europe showed a continued positive trend. Operating income and margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), declined as a result of lower volumes, higher investments in brand-building and increased costs for materials, particularly in the fourth quarter. Floor-care. Market demand for floor-care products in Europe rose by approximately 8% in 2004. The increase in demand referred primarily to the low-price segments. Group sales declined in comparison with the previous year. Operating income and margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), declined as a result of lower volumes and downward pressure on prices. Costs related to transfer of production from Sweden to Hungary also had a negative impact. Group sales of core appliances in North America showed good growth in U.S. dollars, but declined in SEK. Operating income, excluding items affecting comparability (impairment and restructuring charges and 33 capital gains/losses on divestments), for the full year in U.S. dollars was in line with 2003, despite higher costs for materials and increased investments in product innovations and brand building. Sales in the fourth quarter were particularly strong and showed a significant increase in SEK. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), in the fourth quarter increased substantially and margin improved, as a result of higher volumes, improved productivity and a positive pricing trend. Floor-care Products. The market for floor-care products in the United States increased by approximately 4% in volume over the previous year. Group sales showed a marked decline. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), was substantially lower than in 2003 as a result of downward pressure on prices and lower volumes particularly in the lower price segments. Income in the fourth quarter was positive, following two weak quarters, as a result of implemented restructuring. Operations in Rest of the World ------------------------------- Brazil. The market for core appliances in Brazil showed a strong upturn for the year as a whole. Group sales of appliances rose substantially on the basis of strong demand, increased prices and new product launches. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), improved and was positive. India and China. Group sales of appliances in India increased in comparison with the previous year, mainly within air-conditioners and microwave ovens, which have been added to the product offering. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), for the Indian operation improved substantially, but was still negative. Group sales of appliances in China declined from the previous year. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), for the Chinese operation showed a substantial downturn in the fourth quarter and the operating loss for the full year was larger than in 2003. The negative trend in income in the fourth quarter was mainly due to an increase of the provision for warranties related to prior years. Lower volumes and downward pressure on prices also had a negative impact on operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), for the full year. Australia. The market for appliances in Australia increased in volume. Sales for the Group's Australian operation were largely unchanged for the year as a whole. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), showed a substantial downturn for the full year, but improved considerably in the fourth quarter as a result of implemented restructuring and new product launches. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), was negatively impacted by costs for restructuring in the amount of approximately SEK 100 million. This in addition to the restructuring charge of SEK 103 million that was reported in the third quarter within items affecting comparability. Consumer Outdoor Products ------------------------- Demand for consumer outdoor products in Europe in 2004 is estimated to have increased somewhat over the previous year. Sales for the Group's European operation showed good growth. Operating income and margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), improved considerably as a result of higher sales of products imported from the Group's U.S. operation, an improved product mix and lower operating costs. Both sales and operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), for the Group's North American operation increased somewhat in U.S. dollars but declined in SEK. Operating margin was largely unchanged in comparison with 2003. 34
Professional Products Professional Indoor Products 2004 2003 --------------------------------------------------------------------- --------------- --------------- (SEK million, except percentage amounts and employee numbers) Net sales............................................................ 6,440 8,113 Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments) 442 556 Operating margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................................. 6.9 6.9 Net assets(2)........................................................ 1,018 974 Return on net assets, %(3)........................................... 41.7 38.3 Capital expenditure.................................................. 144 278 Average number of employees.......................................... 3,595 6,126
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Professional Outdoor Products 2004 2003 --------------------------------------------------------------------- --------------- --------------- (SEK million, except percentage amounts and employee numbers) Net sales............................................................ 9,623 9,596 Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)......................................................... 1,479 1,462 Operating margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................... 15.4 15.2 Net assets(2)........................................................ 3,869 4,117 Return on net assets, %(3)........................................... 35.6 35.0 Capital expenditure.................................................. 393 283 Average number of employees.......................................... 5,616 5,759
---------- 1. Defined as operating income excluding items affecting comparability expressed as a percentage of net sales. 2. Defined as total assets exclusive of liquid funds, interest bearing financial receivables, as well as non-interest-bearing liabilities and excluding items affecting comparability. 3. Defined as operating income as a percentage of average net assets, excluding items affecting comparability. Professional Indoor Products Overall, sales of Professional Indoor Products were in line with the previous year, after adjustment for divestments. Operating income and margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), improved somewhat for comparable units. Food-service equipment. Demand for food-service equipment in 2004 is estimated to have been somewhat lower than in the previous year. Group sales for the year were largely unchanged. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), declined slightly, mainly due to the costs of entering the U.S. market. Laundry equipment. Group sales of laundry equipment in local currency were in line with the previous year. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), improved somewhat on the basis of implemented price increases and lower production costs, despite the negative impact of changes in exchange rates. Professional Outdoor Products Demand for professional chainsaws in 2004 is estimated to have increased in most major markets. Group sales showed strong growth over the previous year. Group sales of commercial lawn and garden equipment declined for the full year, mainly due to lower pre-season sales than in 2003. Overall, sales of construction equipment in local currency were in line with the previous year, showing an increase in North America and a decrease in Europe, Asia and Australia. Total sales of Professional Outdoor Products increased in local currency. Operating income and margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), were largely unchanged. Margin was negatively impacted by changes in exchange rates. 36 Value Creation See "Results of Operations for 2004 as compared to 2003 - Value Creation" above. Total value created in 2003 amounted to SEK 3,449 million compared with SEK 3,461 million in the previous year. Value created was positively impacted by lower average net assets, excluding items affecting comparability, which declined to SEK 32,226 million (36,182). The decline in net assets was mainly due to changes in exchange rates and divestments, partially offset by an increase in working capital. Results of Operations by Business Area The following tables set out certain information regarding Electrolux's net sales and operating income by business area.
Net Sales by Business Area 2003 2002 -------------------------------------------------------- ---------------------------- ---------------------------- SEK million %(1) SEK million %(1) -------------- ----------- -------------- ----------- Consumer Durables...................................... 105,021 84.7 111,520 83.8 Professional Products.................................. 18,969 15.2 21,484 16.1 Other.................................................. 87 0.1 146 0.1 -------------- ----------- -------------- ----------- Total consolidated amounts.......................... 124,077 100.0 133,150 100.0 ============== =========== ============== ===========
---------- 1. As a percentage of total consolidated net sales.
Operating Income by Business Area 2003 2002 -------------------------------------------------------- ---------------------------- ---------------------------- SEK million %(2) SEK million %(2) -------------- ----------- -------------- ----------- Consumer Durables(1)................................... 6,250 74.6 6,587 74.4 Professional Products(1)............................... 2,132 25.4 2,261 25.6 Common Group costs, etc................................ -744 - -683 - -------------- ----------- -------------- ----------- Total Operating Income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)................... 7,638 - 8,165 - -------------- ----------- -------------- ----------- Items affecting comparability.......................... -463 - -434 - -------------- ----------- -------------- ----------- Total Operating Income.............................. 7,175 - 7,731 - ============== =========== ============== ===========
---------- 1. Operating income by business area is presented after excluding items affecting comparability because this is a measure which management uses to manage the operations of the Group. It is not, however, a measure under Swedish GAAP or U.S. GAAP. For more information on the use of non-GAAP measures and items affecting comparability, please see "Presentation of Information" and Note 7 to the consolidated financial statements. 2. As a percentage of total operating income, excluding items affecting comparability and common group costs. Demand increased during 2003 in most of the Group's product areas in both Europe and North America. Market conditions in Asia and Australia improved, while demand in Brazil showed a significant downturn. The strengthening of the Swedish krona against most currencies during the year had a negative impact on sales and income, particularly for Consumer Durables in North America and Professional Outdoor Products. The markets for Consumer Durables in both Europe and the United States were characterized by an increased downward pressure on prices. This was offset, however, by improved manufacturing efficiencies, savings from restructuring and lower costs for materials and components. Sales and operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), for Consumer Durables increased in comparable currencies, but declined in Swedish krona. Operating margin was largely unchanged compared with the previous year. 40 Sales for Professional Products declined, mainly as a result of the divestment of the compressor and motor operations within Indoor Products. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), was lower than in the previous year, but margin improved. The following discussion includes statements about operating income and operating margin with respect to the Consumer Durables and Professional Products business areas. Both operating income and operating margin for these business areas are presented excluding items affecting comparability. These financial measures are not measures under Swedish GAAP or U.S. GAAP. For more information on non-GAAP financial measures and items affecting comparability and U.S. GAAP, see "Presentation of Information" and Note 30 to the consolidated financial statements.
Consumer Durables Consumer Durable By Region 2003 2002 --------------------------------------------------------------------- --------------- --------------- (SEK million, except percentage amounts and employee numbers) Europe Net Sales............................................................ 47,312 48,250 Operating Income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments) 3,382 3,265 Operating Margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................................. 7.1 6.8 Net Assets(2)........................................................ 6,977 7,576 Return on net assets, %(3)........................................... 40.4 37.1 Capital Expenditure.................................................. 1,269 1,328 Average number of employees.......................................... 28,755 30,837 North America Net Sales............................................................ 45,063 48,450 Operating Income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)... 2,866 3,271 Operating Margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................................. 6.4 6.8 Net Assets(2)........................................................ 10,724 12,874 Return on net assets, %(3)........................................... 22.8 21.8 Capital Expenditure.................................................. 1,089 984 Average number of employees.......................................... 19,602 18,318 Rest of the world Net Sales............................................................ 12,646 14,820 Operating Income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)... 2 51 Operating Margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................................. - 0.3 Net Assets(2)........................................................ 4,461 3,913 Return on net assets, %(3)........................................... - 0.3 Capital Expenditure.................................................. 470 406 Average number of employees.......................................... 15,418 17,518
40 ---------- 1. Defined as operating income excluding items affecting comparability expressed as a percentage of net sales. 2. Defined as total assets exclusive of liquid funds, interest bearing financial receivables, as well as non-interest-bearing liabilities and excluding items affecting comparability. 3. Defined as operating income as a percentage of average net assets, excluding items affecting comparability. Operations in Europe -------------------- Major Appliances. Industry shipments of core appliances in Europe increased in volume by approximately 4% during 2003 as compared with 2002. This industry-wide growth relates primarily to Eastern Europe with industry shipments increasing by approximately 10% during 2003 compared with 2002. Industry shipments of white goods in Western Europe increased by approximately 3%. A total of 72.6 (69.6) million units of appliances (excluding microwave ovens) were estimated to have been shipped in the European market during 2003. Of these, a total of 55.0 (53.6) million units were estimated to have been shipped in Western Europe. Group sales of appliances in Europe increased in volume, with growth particularly in Eastern Europe, Spain and the United Kingdom. Group operating income and margin was in line with the previous year. Floor-care. The general market for floor-care products in Europe grew in volume terms, particularly in the lower price segments where Electrolux does not compete. Group sales for floor-care products declined compared with 2002, due principally to lower sales volumes. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), improved, principally as a result of a better product mix and implemented restructuring. Consumer Outdoor Products. Demand for Group consumer outdoor products in Europe was weaker in 2003 than in 2002, mainly due to unfavorable weather. Group sales in Europe declined, although Group operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), improved. Operations in North America --------------------------- Major Appliances. In the United States, industry shipments of core appliances increased by approximately 4% from 2002. Industry shipments of major appliances (i.e., inclusive of room air-conditioners and microwave ovens) rose by approximately 8%. The U.S. market for core appliances (exclusive of microwave ovens and room air-conditioners), which consists of industry shipments from domestic producers plus imports, amounted to 43.5 (41.7) million units in 2003. Group sales of appliances in North America grew in U.S. dollar terms. Operating income and margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), increased in 2003 as a result of higher volumes, lower costs for materials and improved manufacturing efficiency. Floor-care Products. Demand for floor-care products in the United States grew in 2003 compared with 2002, despite significant price erosion in the market. Sales for the Group's American operation declined in local currency. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), showed a considerable downturn, mainly as a result of an unfavorable product mix and downward pressure on prices. Consumer Outdoor Products. Demand for garden equipment in North America also improved. The Group achieved sales growth in U.S. dollar terms. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), increased substantially as a result of higher volumes and improved manufacturing efficiency. Operations in Rest of the World ------------------------------- Brazil. The market for appliances in Brazil showed a considerable downturn for 2003. However, shipments in the fourth quarter of 2003 were largely unchanged compared with the same period in 2002. The market for appliances in Australia showed an upturn in volume in 2003 compared with the previous year. In 41 Brazil, sales of appliances grew in local currency, but declined following translation into SEK. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), improved from the previous year, but was still negative. India and China. In India and China, sales of appliances were substantially lower in 2003 compared with 2002 as a result of implemented restructuring and focusing of operations on core areas. Income for both operations remained negative in 2003, but improved from 2002, mainly in the fourth quarter. In China, production of refrigerators was consolidated from two plants to one. In India, production was discontinued at both compressor plants and at one of the three refrigerator plants. Capacity was reduced in the remaining refrigerator plants. In addition, as Asia is becoming an important base for sourcing, a new purchasing office was established in the region in 2003. Both the Indian and Chinese operations are being increasingly integrated into the Group, participating in global products councils, and benefiting from other supporting Group processes in purchasing, talent management, branding and improved manufacturing efficiency. 42 Australia. The Australian operation, which was acquired at the beginning of 2001, showed a decline in both sales and operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), although operating margin in 2003 was in line with 2002. The Australian operation markets appliances under eight different brands. During the year, a process was initiated to reduce the number of brands to three and at the same time introduce the Electrolux brand. The Group is also strengthening the product portfolio in Australia with a substantial number of new products in 2004.
Professional Products Professional Products 2003 2002 --------------------------------------------------------------------- --------------- --------------- (SEK million, except percentage amounts and employee numbers) Professional Outdoor Products Net Sales............................................................ 10,856 10,597 Operating Income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)... 1,576 1,508 Operating Margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................................. 14.5 14.2 Net Assets(2)........................................................ 4,429 3,866 Return on net assets, %(3)........................................... 34.2 46.9 Capital Expenditure.................................................. 305 229 Average number of employees.......................................... 6,043 5,945 Professional Indoor Products Net Sales............................................................ 8,113 10,887 Operating Income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments)... 556 753 Operating Margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), %(1)................................................................. 6.9 6.9 Net Assets(2)........................................................ 974 1,621 Return on net assets, %(3)........................................... 38.3 22.0 Capital Expenditure.................................................. 278 295 Average number of employees.......................................... 6,126 7,995
---------- 1. Defined as operating income excluding items affecting comparability expressed as a percentage of net sales. 2. Defined as total assets exclusive of liquid funds, interest bearing financial receivables, as well as non-interest-bearing liabilities and excluding items affecting comparability. 3. Defined as operating income as a percentage of average net assets, excluding items affecting comparability. Professional Indoor Products Total sales for Professional Indoor Products were lower in 2003 compared to 2002 mainly as a result of the divestment of the compressor operation. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), declined, but with an unchanged margin. Food-Service Equipment. Demand for food-service equipment was considerably lower in 2003 compared to 2002 particularly in some key markets in Southern Europe and the Nordic region. Sales declined as operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), showed a substantial downturn. 41 Laundry Equipment. Group sales of laundry equipment declined slightly in 2003 due to lower demand in the United States and Japan. Group sales increased for comparable units. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), decreased, mainly as a result of changes in exchange rates. Operating margin, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), was somewhat lower than in the previous year. Components. As of August 1, 2003, the Group divested its compressor operation, which had external sales of approximately SEK 2,800 million in 2002, and about 4,100 employees. The sale generated a capital loss of SEK 85 million. During 2002, the Group divested Zanussi Metallurgica, its European motor operation and its Mexican compressor plant. These operations had aggregate annual sales of approximately SEK 1,730 million. For a discussion of these dispositions, see "Item 5--Factors Affecting Results--Dispositions". Professional Outdoor Products Demand for professional chainsaws showed some growth in 2003, in both North America and Europe, however, mainly referring to lower-specified products. Group sales of chainsaws increased in volume during 2003. Group sales of professional lawn and garden products showed good growth. Sales of diamond tools and power cutters for comparable units declined, as a result of continued weak market demand. Overall, sales for Professional Outdoor Products were higher than in the previous year. Operating income, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments), improved somewhat and margin was largely unchanged. A. LIQUID FUNDS AND CAPITAL RESOURCES Operating cash flow is the Group's primary source of liquid funds. Electrolux also utilizes long-term and short-term borrowings as a source of liquid funds. The Group's liquid funds and capital resources are managed by the Group's treasury operations in accordance with the Electrolux internal financing policy. For additional discussion regarding liquid funds and capital resources, please see "Item 11--Quantitative and Qualitative Disclosures About Market Risk--Financing Risk". Liquid Funds Liquid funds consist of short-term investments (less than one year) and cash equivalents. The book value of liquid funds is approximately equal to fair value. The Group's goal is to ensure that the level of liquid funds corresponds to at least 2.5% of annualized net sales. This means that liquid funds less short-term borrowings shall exceed zero, taking into account fluctuations referring to acquisitions, divestments and seasonal variations. As shown in the table below, liquid funds as a percentage of annualized net sales have considerably exceeded the Group's minimum criterion in recent years, primarily as a result of positive operating cash flow and divestment of operations.
Liquidity profile 2004 2003 2002 --------------------------------------------------------------------------- -------- ------- ------- (SEK million) Investments with maturities over three months.............................. 265 3,783 7,602 Investments and deposits with maturities up to three months................ 7,675 8,207 6,698 Fair value derivative assets included in short-term investments............ 762 612 - ======== ======= ======= Liquid funds............................................................... 8,702 12,602 14,300 % of annualized net sales.................................................. 7.7 11.3 11.8 Net liquidity.............................................................. 2,799 8,593 12,682 Fixed-interest term, days.................................................. 61 64 48 Effective yield, % (average per annum)..................................... 2.4 4.4 4.4 ======== ======= =======
For 2004, liquid funds amounted to SEK 8,702 million (12,602), corresponding to 7.7% (11.3) of annualized net sales for 2003, liquid funds amounted to 11.3% (11.8%) of annualized net sales. For 2003, liquid funds amounted to 11.3% (11.8%) of annualized net sales. The net liquidity is calculated by deducting short-term loans from liquid funds. As from year 2003, long-term borrowings maturing within 12 months are included in short-term loans. Cash Flow from Operations Total cash flow from operations and investments decreased to 3,224 million in 2004 (3,723). Cash flow in 2004 was negatively impacted by a decline in income, increased capital expenditure, and a payment of approximately SEK 300 million relating to the U.S. pension fund, as well as lower proceeds from divestments and acquisitions. Cash flow was positively impacted by lower working capital with an increase in accounts payable and a decrease in accounts receivable. Lower spending on restructuring also had a positive impact. Capital expenditure, by business area 2004 2003 2002 ---------------------------------------------- ------ ------ ------ Consumer Durables (SEK million) Europe........................................ 1,561 1,202 1,273 % of net sales ............................... 3.7 2.7 2.8 North America................................. 1,439 618 477 % of net sales................................ 4.7 1.9 1.4 Rest of the world............................. 438 470 406 % of net sales................................ 3.2 3.7 2.7 Consumer Outdoor.............................. 517 560 566 % of net sales................................ 2.9 3.3 3.1 Professional Products Indoor ....................................... 144 278 295 % of net sales............................... 2.2 3.4 2.7 Outdoor ...................................... 393 283 227 % of net sales............................... 4.1 2.9 2.6 Other......................................... 23 52 91 ---------------------------------------------- ------ ------ ------ Total......................................... 4,515 3,463 3,335 % of net sales............................... 3.7 2.8 2.5 We are currently investing in new, efficient plants in low-cost countries and in new products. Therefore, Group capital expenditure is expected to increase from the current level of approximately SEK 4.5 billion to a level of approximately SEK 4.5-5.5 billion during 2005. We have funded, and expect to continue funding, such capital investments from cash generated from our business operations. B. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC Costs for research and development in 2004, including capitalization of SEK 486 million (344), increased to SEK 2,052 million (1,628 in 2003 and 1,797 in 2002), corresponding to 1.7% (1.3 in 2003 and 1.3% in 2002) of net sales. R&D projects during the year mainly referred to new products and design projects within appliances including development of new platforms. Major projects were new products within cooking and washing in North America and new products within the floor-care operation. C. TREND INFORMATION Demand for appliances in 2005 is expected to show some growth in both Europe and the United States as compared to 2004. Higher costs for materials and components will have an adverse effect on the Group's operating income. Efforts to strengthen the Group's competitive position through investments in product development and in building the Electrolux brand will continue. Operating income for the full year of 2005, exclusive of items affecting comparability (impairment and restricting charges and capital gains/losses on divestments), is expected to be somewhat lower than in 2004. D. OFF-BALANCE SHEET ARRANGEMENTS Electrolux is party to only a limited amount of off-balance sheet arrangements. As of December 31, 2004, the aggregate amount of Electrolux off-balance sheet arrangements was approximately SEK 1,323 million. The principal component of these arrangements are guarantees in the amount of SEK 855 million issued on behalf of third parties, and receivables sold with recourse, in an aggregate amount of SEK 468 million. Electrolux has, jointly with the state-owned company AB Swedecarrier, issued letters of support for loans and leasing agreements totaling SEK 1,412 million in the associated company Nordwaggon AB. These off-balance sheet arrangements do not, and are not reasonably likely to have, a current or future effect on Electrolux financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to Electrolux shareholders. Amendments to Note 3 to the Financial Statements ------------------------------------------------ Electrolux products are classified in three areas, i.e., Consumer Durables, Professional Indoor Products and Professional Outdoor Products. These areas form the basis for the Group's primary segment information. The Consumer Durables business area comprises mainly white goods. It also includes floor-care products as well as garden equipment and light-duty chainsaws. Professional Indoor Products comprise food-service equipment and laundry equipment for professional users. Professional Outdoor Products comprise mainly high-performance chainsaws and professional lawn and garden equipment, as well as power cutters and diamond tools. Within Consumer Durables, the white-goods operation is managed regionally while floor-care products is managed globally. Consumer Outdoor Products is together with Professional Outdoor Products managed globally. In the Group's external financial reporting, floor-care products is reported together with white goods within the respective geographical regions, since these products are sold in the same markets and to a large extent to the same retailers, and are therefore exposed to similar risks. Consumer Outdoor Products is reported separately, due to the unified management for all Outdoor Products. Financial information related to the above business areas is reported below.
Business area (SEK million) Net sales Operating income ---------------------------------------------------------------------------- 2004 2003 2002 2004 2003 2002 ---------------------------------------------------------------------------- Europe................................ 42,703 44,267 45,128 3,124 3,289 3,136 North America......................... 30,767 32,247 35,245 1,106 1,583 2,027 Rest of the world..................... 13,479 12,544 14,796 -159 - 56 Consumer Outdoor Products............. 17,579 17,223 18,229 1,552 1,493 1,445 ---------------------------------------------------------------------------- Total Consumer Durables............... 104,528 106,281 113,398 5,623 6,365 6,664 ---------------------------------------------------------------------------- Professional Indoor Products.......... 6,440 8,113 10,887 442 556 753 Professional Outdoor Products......... 9,623 9,596 8,719 1,479 1,462 1,431 ---------------------------------------------------------------------------- Total Professional Products........... 16,063 17,709 19,606 1,921 2,018 2,184 ---------------------------------------------------------------------------- Other................................. 60 87 146 - - - Common Group costs.................... - - - -870 -745 -683 ---------------------------------------------------------------------------- Total, excluding items affecting comparability (impairment and restructuring charges and capital gains/losses on divestments).......... 120,65 124,077 133,150 6,674 7,638 7,638 ---------------------------------------------------------------------------- Items affecting comparability......... - - - -1,960 -463 -434 ---------------------------------------------------------------------------- Total................................. 120,651 124,077 133,150 4,714 7,175 7,731 ----------------------------------------------------------------------------
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