The selected financial data set
forth below at December 31, 2001, 2002 and 2003 and for each of
the years ended December 31, 2001, 2002 and 2003 have been
derived from the consolidated financial statements of Volvo. See
"Item 18. Financial Statements". Financial data at
December 31, 1999 and 2000 and for the years ended December 31,
1999 and 2000 have been derived from Volvo’s published
Swedish financial statements not included herein.
The selected financial data at
December 31, 2001, 2002 and 2003 and for each of the years ended
December 31, 2001, 2002 and 2003 should be read in conjunction
with, and are qualified in their entirety by reference to, the
consolidated financial statements and notes thereto included in
Item 18.
1999
3
2000
4
2001
5
2002
6
2003
7
2003
8
AMOUNTS IN ACCORDANCE WITH SWEDISH
ACCOUNTING PRINCIPLES
1, 2
(In millions,
except per share amounts)
SEK
SEK
SEK
SEK
SEK
USD
Net sales…………………………….
125,019
130,070
189,280
186,198
183,291
24,577
Net
sales from discontinued
operations………………………...
-
-
-
-
-
-
Net
sales from continuing operations
125,019
130,070
189,280
186,198
183,291
24,577
Operating
income (loss)…………….
34,158
6,668
(676)
2,837
2,504
336
Net
income (loss)………….……….
32,222
4,709
(1,467)
1,393
298
40
Income
from discontinued
operations………………………...
26,726
479
65
-
-
-
Income
(loss) from continuing operations…………………………...
5,496
4,230
(1,532)
1,393
298
40
Net
income (loss) per share
9
……..
73.00
11.20
(3.50)
3.30
0.70
0.09
Income
(loss) per share from
discontinued operations
9
………...
60.50
1.20
0.10
-
-
-
Income
(loss) per share from continuing operations
9
……………
12.50
10.00
(3.60)
3.30
0.70
0.09
Cash
dividends per share
10
………...
7.00
8.00
8.00
8.00
8.00
1.07
Total
assets…………………………
195,612
200,743
260,925
239,222
231,252
31,008
Non-current
liabilities...…………….
32,514
40,670
54,130
53,123
51,301
6,879
Shareholders’
equity……………….
97,692
88,338
85,185
78,278
72,420
9,711
Share
capital……………………….
2,649
2,649
2,649
2,649
2,649
355
Weighted
average number of shares. (in thousands)
11
……………………..
441,521
421,684
422,429
419,445
419,445
419,445
1999
3
2000
4
2001
5
2002
6
2003
7
2003
8
AMOUNTS IN ACCORDANCE WITH U.S. GAAP
1
Operating income (loss).…………...
33,606
4,935
(4,014)
(5,171)
5,275
707
Net income (loss)…………………...
31,690
3,127
(4,320)
(6,265)
3,979
534
Income
from discontinued operations…………………………..
26,115
375
-
-
-
-
Income
(loss) from continuing operations…………………………..
5,575
2,752
(4,320)
(6,265)
3,979
534
Basic
and diluted net income (loss)
per share
12
………………………...
71.80
7.40
(10.20)
(14.90)
9.50
1.27
Income
per share from
discontinued
operations
12
……….
59.20
0.90
-
-
-
-
Income
(loss) per share from continuing operations
12
……………
12.60
6.50
(10.20)
(14.90)
9.50
1.27
Shareholders’
equity……………….
99,607
84,761
81,291
71,182
74,790
10,028
1 The consolidated financial
statements of Volvo are prepared in accordance with accounting
principles generally accepted in Sweden (Swedish GAAP), which
differ in certain significant respects from generally accepted
accounting principles in the United States (US GAAP). See Notes 1
and 35 to the consolidated financial statements.
2 Effective in 2001, Volvo applied
ten new accounting standards issued by the Swedish Financial
Accounting Standards Council. All these accounting standards
conform in all significant respects with the corresponding
accounting standard issued by the International Accounting
Standards Board (IASB). In applying the transition rules as a
consequence of the aforementioned accounting standards, there
were no retroactive effects on Volvo’s earlier financial
statements. In applying the new standards during fiscal year 2001,
RR 1:00 Consolidated Financial Statements and Business
Combinations, RR 14 Joint Ventures, RR 15 Intangible Assets and
RR 16 Provisions, Contingent Liabilities and Contingent Assets,
resulted in a change in Volvo’s accounting principles. In
accordance with RR 1:00 Consolidated Financial Statements and
Business combinations, when a subsidiary is acquired through the
issue of own shares, the purchase consideration is determined by
the market price of the issued shares at the time of the
transaction. In accordance with Volvo’s previous accounting
principles, purchase consideration was determined based on the
average market price of the issued shares during ten days prior
to the public disclosure of the transaction. In accordance with
RR 14 Joint ventures, a joint venture should either be reported
by use of the proportionate consolidation method or the equity
method. Effective in 2001, the proportionate consolidation method
is the preferred method under Volvo's accounting principles. In
previous years, all joint ventures have been reported by use of
the equity method. In accordance with RR 15 Intangible Assets,
the expenditures for development of new products, production and
information systems are reported as intangible assets if such
expenditures with a high degree of certainty will result in
future financial benefits for the company. The acquisition value
for such intangible assets is amortized over the estimated useful
life of the assets. Volvo’s application of the new rules
means that high demands are established in order for these
development expenditures to be reported as assets. For example,
it must be possible to prove the technical functionality of a new
product prior to this development being reported as an asset. In
normal cases, this means that expenditures are capitalized only
during the industrialization phase of a product development
project. In accordance with Volvo’s previous accounting
principles, all costs for the development of new products,
production and information systems were expensed on a current
basis. Operating income from continuing operations in accordance
with Swedish GAAP in 2001, 2002 and 2003 included positive impact
of SEK 2,038 million, SEK 1,357 and SEK 483 million respectively,
relating to, capitalization and amortization of development costs
in accordance with RR 15. In accordance with RR 16 Provisions,
Contingent Liabilities and Contingent Assets, a provision for
committed restructuring measures is reported first when a
detailed plan for the implementation of the measures is complete
and when this plan is communicated to those who are affected. In
accordance with Volvo’s previous accounting principles, a
provision for restructuring measures was reported in connection
with the measures being decided by the company’s management.
See Notes 1 and 35 to the Consolidated Financial Statements.
Effective in 2003, Volvo has
adopted RR 29 Employee benefits in its financial reporting. RR 29
Employee benefits, which was issued by the Swedish Financial
Accounting Standards Council in December 2002, conforms in all
significant respects with IAS 19 Employee benefits issued earlier
by the International Accounting Standards Board (IASB). By
adoption of RR 29, defined benefit plans for pensions and health-care
benefits in all the Group's subsidiaries are accounted for with
consistent principles. In Volvo's financial reporting up to 2002,
such plans have been accounted for by applying the local rules
and directives in each country. In accordance with the transition
rules of the new standard, a transitional liability has been
established as of January 1, 2003, determined in accordance with
RR 29. This transitional liability has been determined to exceed
the liability recognized as of December 31, 2002, in accordance
with earlier principles by SEK 2.3 billion. The excess liability
has consequently been recognized as of January 1, 2003, as an
increase of provisions for post- employment benefits and a
corresponding decrease of shareholders’ equity. In
accordance with the transition rules of the new standard, Volvo
has not restated figures for earlier years in accordance with the
new accounting standard. Because the Group's subsidiaries up to
2002 have been applying local rules in each country, the impact
of adopting RR 29 differs for different countries of operations.
Compared with earlier accounting principles in Sweden, the
adoption of RR 29 has mainly had the effect that plan assets
invested in Volvo's Swedish pension foundation as from 2003 are
accounted for at a long-term expected return rather than being
revalued on each closing date to fair value. For Volvo's
subsidiaries in the United States, differences relate to
accounting for past service costs and the fact that RR 29 does
not include rules about minimum liability adjustments. See Notes
1 and 35 to the Consolidated Financial Statements.
Effective in 2003, Volvo has
adopted RR 27 Financial instrument: Disclosure and presentation,
which conforms to a large extent with IAS 32 issued by the
International Accounting Standards Board (IASB). The adoption of
RR 27 has affected the balance sheet presentation of certain
derivative instruments that are used to manage financial risks
related to financial assets and liabilities. According to RR 27,
derivative instruments with unrealized gains should be presented
as assets and derivative instruments with unrealized losses
should be presented as liabilities. According to Volvo's earlier
accounting principles, derivative instruments used for management
of financial assets were reported as assets and derivative
instruments used for management of financial liabilities were
reported as liabilities. As a consequence of adoption of the
presentation principles in RR 27, the Volvo Group's assets
increased by SEK 3.6 billion and the Group's liabilities
increased with the corresponding amount.
3 AB Volvo completed the sale of
Volvo Cars to Ford on March 31, 1999. AB Volvo began accounting
for Volvo Cars as a discontinued operation beginning on January 1,
1999. Income from discontinued operations in 1999 pertained to a
capital gain after tax of SEK 26,726 million on the sale of Volvo
Cars to Ford. For US GAAP purposes, the gain amounted to SEK 26,115
million. The difference was mainly attributable to historical
differences between Swedish and US GAAP that resulted in a higher
value of the net assets divested.
4 In 2000, operating income from
continuing operations under Swedish GAAP included SEK 610 million
pertaining to realized gains on the remaining securities
portfolio in Volvia and SEK 683 million in surplus funds from the
SPP insurance company. Operating income from discontinued
operations in 2000 of SEK 520 million included a favorable
adjustment of the gain from the sale of Volvo Cars.
5 Effective January 2, 2001, AB
Volvo acquired Renault’s truck operations, Renault V.I. and
Mack Trucks. Under the terms of the acquisition, AB Volvo
acquired all outstanding shares of Renault V.I. and Mack Trucks
in exchange for 15% of the shares in AB Volvo.
In 2001, operating income from continuing operations under
Swedish GAAP included restructuring costs amounting to SEK 3,862
million of which SEK 3,106 million is for Trucks, SEK 392 million
for Buses and SEK 364 million for Construction Equipment.
Restructuring costs in Trucks included costs for the integration
of Mack Trucks and Renault V.I. in order to secure coordination
gains made possible through the acquisition. The integration
measures included reduction of the North American production
capacity through a decision to close Mack's Winnsboro plant and
transfer of production to Volvo's New River Valley plant.
Integration measures further included restructuring of the global
distribution system and production structure. In addition to the
integration measures, restructuring costs in Trucks included
significant personnel reductions due to the prevailing business
conditions, especially in North America. Restructuring costs in
Buses were attributable to the shut down of Nova Bus' plant for
city buses in Roswell, United States. In Construction Equipment,
restructuring measures pertained to the close down of fabrication
in the plant in Asheville, United States, and to an overall
redundancy program.
6 Net income (loss) in 2002 in
accordance with US GAAP included value adjustments amounting to
SEK 9,683 million pertaining to Volvo’s shareholdings in
Scania AB, Deutz AB and Henlys Group Plc. If a security’s
quoted market price has been below the carrying value for an
extended period of time, US GAAP includes a presumption that the
decline is other than temporary. Under such circumstances, US
GAAP requires that a value adjustment must be recorded in net
income with a corresponding credit to Other comprehensive income.
In accordance with Swedish accounting principles, no value
adjustments were made since the fair value of the investments in
Scania AB, Deutz AB and Henlys Group Plc. were considered to be
higher than the quoted market price of these investments.
7 In 2003, operating income from
continuing operations under Swedish GAAP included write-down of
shares in Scania AB amounting to SEK 3,601 million and write-down
of shares in Henlys Group Plc amounting to SEK 429 million. In
accordance with US GAAP, no write-down of shares in Scania AB was
recognized during 2003 and write-down of shares in Henlys Group
Plc amounted to SEK 62 million. See further in Note 35 to the
Consolidated Financial Statements.
8 Translated for convenience at
US$ 1 = SEK 7.4579 the Noon Buying Rate on May 28, 2004.
9 Net income (loss) per share is
calculated as net income divided by the weighted average number
of shares outstanding during the year. The weighted average
number of shares outstanding during 2003 was 419,444,842.
10 Cash dividends are those
declared out of the unrestricted equity of the parent company as
recommended by the Board of Directors and approved by the Annual
General Meeting of Shareholders held in the spring of the
following year. In addtion to a cash dividend of SEK 8.00 per
share, the Board of Directors in March, 2004, proposed the Annual
General Meeting to approve a dividend of 2 shares in the wholly
owned subsidiary Ainax AB for every 31 shares in AB Volvo. Ainax
AB would at the date of the distribution hold 27,320,838 Series A
shares in Scania AB and a working capital of SEK 100 million. At
the Annual General Meeting of AB Volvo on April 16, 2004, the
Board’s proposal was approved. Based upon the carrying value
of the net assets at April 16, 2004, the dividend of shares in
Ainax AB represents a value of approximately SEK 15.00 per Volvo
share.
11 During 2000 AB Volvo
repurchased 10 percent of its outstanding shares – 13,860,494
Class A shares and 30,291,594 Class B shares. The transaction was
carried out through an offer to repurchase shares held by Volvo
shareholders and, to a minor extent, through additional purchases
in the open market. Following the repurchase transactions, 397,368,797
Volvo shares were outstanding at December 31, 2000, and the
weighted average number of shares outstanding in 2000 was 421,683,857.
On January 2, 2001, the 13,860,494
Class A shares and 30,291, 594 Class B shares that were
repurchased during 2000 were transferred to Renault S.A. as
partial payment for the shares of Renault V.I. and Mack Trucks.
Subsequently during the beginning of 2001, AB Volvo repurchased
an additional 10% of its outstanding shares - 13,860,494 Class A
shares and 30,291,594 Class B shares of which 5% - 6,930,247
Class A shares and 15,145,797 Class B shares were transferred to
Renault S.A. as final payment for the shares of Renault V.I. and
Mack Trucks. Following these transactions, 419,444,842 Volvo
shares were outstanding at December 31, 2001, and the weighted
average number of shares outstanding in 2001 was 422,429,364.
The weighted average number of
shares outstanding during 2003 was 419,444,842.
12 US GAAP basic and diluted net
income (loss) per share is calculated as net income (loss)
determined in accordance with US GAAP divided by the weighted
average number of shares outstanding during the year. No diluting
securities have been outstanding during the period.
Dividends
AB Volvo has paid annual cash
dividends on its A and B Shares each year since 1935. Under
Swedish company law, a dividend may be paid from funds available
for dividends if recommended by the Board of Directors and
approved by the Annual General Meeting of Shareholders. No
interim dividend may be paid in respect of a financial period as
to which audited financial statements have not been adopted by
the Annual General Meeting of Shareholders. Consequently, AB
Volvo pays only a yearly dividend, generally in the month of
April subsequent to the year to which the dividend relates.
The following table sets forth the
cash dividends per share in kronor, and the dollar equivalents,
paid in respect of each of the five years ended December 31, 2003:
Year
Dividend
Paid per Share
(SEK)
(US$
1
)
1999……………………………
7.00
0.77
2000…………………………………
8.00
0.78
2001…………………………………
8.00
0.79
2002………………………………
8.00
0.95
2003……………………..
8.00
2
1.06
____________
1
Translated into
dollars at the Noon Buying Rate on the dividend payment date.
2
In addition, a
dividend of 2 shares in Ainax AB for every 31 Volvo shares was
distributed on June 8, 2004. The Annual General Meeting of AB
Volvo resolved to transfer all A shares in Scania AB held by
Volvo to Ainax AB and thereafter to distribute 27,060,958 shares
in Ainax AB to Volvo’s shareholders. The value of the
distribution of shares in Ainax AB was set at SEK 6,309,538,645,
corresponding to approximately SEK 15.00 per Volvo share.
Dividends received by United
States holders of American Depositary Shares or B Shares are
subject to Swedish withholding taxes. See "Item 10.
Additional Information – 10.E Taxation".
The share capital of the parent
company is divided into two classes: A and B shares. Both classes
have the same rights except that each A share carries one voting
right and each B share carries one-tenth of a voting right.
Exchange Rates
Fluctuations in the exchange rate
between the krona and the dollar will affect the dollar
equivalent of the krona price of the B Shares traded on the
Stockholm Stock Exchange and, as a result, should affect the
price of the American Depositary Shares in the United States.
Such fluctuations will also affect the dollar amounts received by
holders of American Depositary Shares on conversion by the
depositary of cash dividends paid in kronor on the B Shares
represented by the American Depositary Shares.
Since a substantial portion of the
Company’s sales are sales outside Sweden (93% in 2001, 93%
in 2002 and 92% in 2003), earnings are materially affected by
movements in the exchange rate between the krona and the
currencies in which such sales are invoiced. See " Item 5.
Operating and Financial Review and Prospects – 5.A Operating
Results – General Impact of Currency Fluctuations."
The following table sets forth
certain information with respect to the Noon Buying Rate of
dollars in terms of kronor for the years shown:
Year
Average
1
High
Low
Period-End
1999…………………………………………….
8.3007
8.6500
7.7060
8.5050
2000…………………………………………….
9.2251
10.3600
8.3530
9.4440
2001…………………………………………….
10.4328
11.0270
9.4890
10.4571
2002…………………………………………….
9.6571
10.7290
8.6950
8.6950
2003……………………………………………
8.0730
8.7920
7.1950
7.1950
December 2003
…………………………………
7.5420
7.1950
January 2004
……………………………………
7.4120
7.0850
February 2004
………………………………….
7.4330
7.1295
March 2004
……………………………………..
7.6620
7.3660
April 2004
………………………………………
7.7330
7.4650
May 2004
………………………………………
7.7725
7.4170
_________
1
The average of the
Noon Buying Rates on the last day of each month during the year.
The noon buying rate on May 28,
2004 was 7.4579.
Credit ratings
Moody's Investors Service confirmed the short term rating at
P-2 in March 2004, and its unsolicited long term A3-rating, with
an upgrade to stable outlook. In February 2004 Standard &
Poor's International Ratings confirmed its short term A2 rating.
Dominion Bond Rating Services (DBRS) confirmed its short term R-1
(low) rating for Volvos short-term borrowings in the Canadian
market, in February 2004, and its unsolicited long term rating of
A (low) with a lifted outlook to stable. In February 2004, Rating
and Investment Information, Inc. affirmed A as Volvo’s long-term
rating, for borrowing in the Japanese market. Volvo Treasury AB
is assigned a K-1 rating by Standard & Poor's for short-term
borrowing in Sweden. Fitch Ratings Ltd has assigned an
unsolicited short term F2 rating, which was confirmed in June
2004.
Inflation
The effects of inflation on the Group’s operations have
not been significant in recent years.
The commercial vehicles
industry is cyclical.
The markets in which Volvo competes
have been subject to considerable volatility in demand
corresponding to cycles in the overall business and economic
environment in general and in the industrial sector, in
particular. The rate of infrastructure spending, construction and
mining, and housing starts affects the Group’s operations as
its products are an important part of these activities. Economic
development in Europe and North America is particularly important
to Volvo because a significant part of the Group’s revenues
are derived from sales in these markets. In Europe, Volvo’s
largest commercial market in terms of sales, a downturn was noted
in the market for commercial vehicles in 2002, in 2003 the
situation stabilized somewhat and the market was in line with the
previous year. In North America, Volvo’s second-largest
market, the market for heavy trucks in 2003 was on the same level
as in 2002, while the market for construction equipment showed
signs of improvement compared with 2002. There can be no
assurance as to the future performance of the commercial vehicles
industry or the timing or severity of changes in economic
conditions affecting the commercial vehicles industry. See "Item
5. Operating and Financial Review and Prospects
¾
5.A.
Operating Results."
Competition is intense among
manufacturers of commercial vehicles and engines.
Continued
consolidation in the industry, including DaimlerChrysler’s
acquisition of American truck producer Western Star and American
engine manufacturer Detroit Diesel; German heavy truck
manufacturer MAN’s acquisition of British truck producer ERF
and Polish truck company Star; and Volvo’s acquisition of
Mack and Renault V.I., should create fewer but stronger
competitors. Volvo’s products face substantial competition
from commercial vehicles and engines provided by these and other
manufacturers, and such competition may have a significant impact
on the prices Volvo receives for its products and on the Group’s
future sales volume. Our major competitors are DaimlerChrysler,
Paccar, Navistar, MAN, Scania, Caterpillar and Komatsu. There can
be no assurance that Volvo will be able to compete successfully
in the future. See "Item 4. Information on the Company
¾
4.B.
Business Overview."
Prices for commercial vehicles
can be volatile.
Prices for commercial vehicles in certain
markets have, at times, experienced sharp changes over short
periods of time. This volatility is caused by many factors,
including short-term fluctuations in demand, shortages of certain
supplies, volatility in underlying economic conditions, changes
in import regulations, excess inventory and increased competition.
There can be no assurance that such price volatility will not
continue or that price volatility will not begin in markets which
to date have not experienced such volatility. Overcapacities
within the industry will likely increase if there is an economic
downturn in Volvo’s major markets or worldwide, leading,
potentially, to further increased price pressure. Price
volatility in certain markets could adversely affect the Group’s
results of operations.
Volvo is sometimes subject to
production capacity constraints.
The cyclicality of demand
for Volvo’s products has at times resulted, and may in the
future result, in temporary constraints upon Volvo’s ability
to produce the quantities necessary to fulfill orders in a timely
manner. A prolonged delay in Volvo’s ability to fulfill
orders on a timely basis at a time when Volvo’s competitors
are not experiencing the same difficulty could adversely affect
Volvo’s market share.
Volvo relies on suppliers for
the provision of certain raw materials and components.
Volvo
purchases raw materials, parts and components from numerous
outside suppliers, but relies upon some suppliers for a
substantial number of components for its commercial products. A
majority of the Group’s requirements for raw materials and
supplies is filled by single-source suppliers. The impact of an
interruption in supply will vary by commodity. Some parts are
generic to the industry while others are of a proprietary design
requiring unique tooling, which would require time to recreate.
The inability of a supplier to deliver could have an adverse
effect on production at certain of Volvo’s manufacturing
locations.
The Group’s operations are
exposed to currency fluctuations.
In 2001, 2002 and 2003,
approximately 90% of Volvo’s sales were in countries other
than Sweden. Changes in exchange rates have a direct effect on
Volvo’s results of operations, balance sheet and cash flow
and an indirect effect on Volvo’s competitiveness, which
will over time affect the Group’s results. Volvo’s
income statement is affected primarily by the translation of
revenue and expenses in foreign currencies, and its balance sheet
is affected primarily by the translation of net assets of foreign
subsidiaries into Swedish kronor at rates different from those
used to translate earlier figures. In addition, currency
movements may affect Volvo’s pricing of products sold and
materials purchased in foreign currencies as well as those of its
competitors, which may be affected differently by such movements.
Since Volvo has substantial manufacturing operations in Sweden
and generates a substantial portion of its revenues in currencies
other than the Swedish krona, Volvo’s results of operations
would be materially adversely affected by an appreciation of the
Swedish krona against other currencies. There can be no assurance
that exchange rate fluctuations will not adversely affect the
Group’s results of operations, cash flow, financial
condition or relative price competitiveness in the future.
Volvo uses hedging instruments in
order to reduce the effects of currency fluctuations and interest
rate risk. As with all hedging instruments, there are risks
associated with the use of foreign currency forward exchange
contracts, as well as interest rate swap agreements. While
providing protection from certain fluctuations in currency
exchange and interest rates, by utilizing such hedging
instruments Volvo potentially foregoes benefits that might result
from other fluctuations in currency exchange and interest rates.
Volvo has entered into, and expects to continue to enter into,
such hedging arrangements with counterparties that will be
selected and approved primarily on the basis of general
creditworthiness. However, any default by such counterparties
might have an adverse effect on Volvo. See "Item 11.
Quantitative and Qualitative Disclosures about Market Risk."
Volvo’s profitability is
dependent upon the successful introduction of new products.
Volvo’s
long-term profitability depends upon its ability to introduce and
market its new products successfully. Product life cycles
continue to shorten which puts increased focus on the success of
Volvo’s product development. It is crucial to meet and
exceed customer demand in order to be able to strengthen the
Group’s position in its established markets and to be able
to expand into additional markets and/or product segments. As
both Volvo and its competitors either have recently introduced or
plan to introduce new products or updated versions of existing
products, Volvo cannot predict the market shares its new products
will achieve. An inability by Volvo to introduce new innovating
products in a timely fashion or to meet customer demand would
have an adverse effect on the Group’s results of operations.
The commercial vehicles
industry is subject to extensive government regulation.
Regulations
regarding emission levels, noise, safety and levels of pollutants
from production plants and products are extensive within the
industry. These regulations are subject to change, often making
them more restrictive. The costs to comply with these regulations
can be significant to the Group’s operations.
Volvo is reliant on the
protection and preservation of its intellectual property.
Volvo
products are sold primarily under the marks "Volvo",
"Volvo Penta", "Renault" and "Mack".
Volvo owns or otherwise has rights in a number of patents and
trademarks relating to the products it manufactures, which have
been obtained over a period of years. These patents and
trademarks have been of value in the growth of Volvo’s
business and may continue to be of value in the future. Volvo
does not regard any of its businesses as being dependent upon any
single patent or group of patents. However, an inability to
protect this intellectual property would have an adverse effect
on Group operations.
Volvo’s Financial Services
business area conducts business under highly competitive
conditions in an industry with inherent risks.
Financing for
users of Volvo’s products is available through a variety of
competitive sources, principally commercial banks and finance and
leasing companies. Financial Services emphasizes prompt and
responsive service to meet customer requirements and offers
various financing plans designed to increase the opportunity for
sales of its products and to generate financing income for the
Group. The financial services offered involve risks relating to
residual value, credit risk and cost of capital. Competition for
customers and/or these risks may affect the Group’s results
of operations in the future.
Volvo will be obligated to
adopt new accounting standards in 2005 that may have a
considerable impact on its accounts.
Effective in 2005 Volvo
will adopt International Financial Reporting Standards ("IFRS")
in its financial reporting, as required for all listed companies
within the European Union as of 2005. Applying these standards to
Volvo’s financial statements may have a considerable impact
on a way certain items are valued and presented. Volvo continues
to evaluate the main differences between IFRS and Swedish GAAP.
As of the date of this Annual Report not all of the financial
standards applicable to Volvo had been adopted and therefore
Volvo cannot assess the total impact IFRS will have on the Group
until all of the new reporting standards are adopted.
Complaints or litigation from
customers and other third parties could adversely affect Volvo.
Volvo is the subject of complaints and litigation from its
customers, employees or other third parties, alleging health,
environmental, safety or operational concerns or failure to
comply with applicable laws and regulations. These claims, even
if successfully disposed of without direct adverse financial
effect, could have a material adverse effect on Volvo’s
reputation and divert financial and management resources from
more beneficial uses.
AB Volvo is an international
transport equipment group with a worldwide marketing organization
and production. AB Volvo, which was incorporated in 1915 under
the laws of Sweden, started production of cars in 1927 and of
trucks in 1928. Historically Volvo has operated in two main areas:
cars and vehicles for commercial use. The latter includes trucks,
buses, construction equipment and marine and industrial engines.
Operations also include production and maintenance of aircraft
engines and financial services. In March 1999, Volvo sold Volvo
Cars to Ford Motor Company. As a result of this sale, Volvo is
today focused entirely on the commercial transport products
segment. Through the acquisition of Mack Trucks Inc. and Renault
V.I. in 2001, the Volvo Group strengthened its position as a
producer of heavy trucks.
Headquartered in Göteborg,
Sweden, the Volvo Group had 75,740 employees at December 31, 2003.
With 55% of sales in Western Europe, 5% in Eastern Europe, 24% in
North America, 3% in South America and 9% in Asia, the Group
operates in an international environment with production and
assembly carried out on six continents. Its shares are traded on
stock exchanges in Stockholm, London, Frankfurt, Düsseldorf,
Hamburg and in the United States its American Depositary Shares
are traded on the Nasdaq National Market ("NASDAQ"). In
the fourth quarter of 2003, Volvo decided to apply for delisting
of its shares from the German stock exchanges in Frankfurt,
Hamburg and Düsseldorf. The delisting is planned to become
effective in the latter part of 2004.
Volvo’s brand name is
strongly identified with quality, safety and concern for the
environment. The Group’s position in the fields of vehicle
safety and quality is being consolidated through continuing
improvements and technical innovations. In the environmental
area, Volvo is intensifying its efforts to reduce the negative
impact on the environment throughout the entire life cycle of its
products.
AB Volvo is domiciled in Göteborg,
Sweden. The address and telephone number of AB Volvo is S-405 08,
Göteborg, Sweden, +46 31 660000.
Significant events in 2003
Volvo Trucks began production
in Russia.
Volvo Trucks became the first Western truck
manufacturer to start production in its own name in Russia. The
new assembly facility for heavy trucks was inaugurated on March
20 in Zelenograd, just north of Moscow.
Volvo CE started production in
China.
The first Volvo Excavator, built in Volvo CE’s
new plant located in the Pudong area outside Shanghai in China,
left the production line at the beginning of April.
Volvo CE acquired US dealer L.B.
Smith.
On May 2, Volvo Construction Equipment purchased the
assets associated with the Volvo distribution business of L.B.
Smith, Inc., its largest dealer in the United States. The
intention is to spin off the acquired operations.
Volvo started assembly of
trucks in China.
On June 9, Volvo Trucks signed a joint-venture
agreement with China National Heavy Truck Corporation for
production of trucks. Production started during the first quarter
of 2004.
Volvo Trucks introduced new
models.
Volvo Trucks launched the new Volvo NH in Brazil.
This model was developed for the South American market and is
built in Brazil. The launch was accompanied by the introduction
of the new Volvo FH and Volvo FM in South America. The new medium-heavy
truck in the 17-23 ton segment, Volvo VM, was also introduced
during 2003. This marks a renewal of the entire Volvo truck range
in South America.
On June 5, Volvo Trucks presented
the new Volvo FH16. The Volvo FH16 was developed to meet the
trend for heavier and longer truck combinations. The new Volvo FH16
is equipped with an all-new 16-liter engine, with a power output
of up to 610 hp, making it the most powerful truck in the
European market.
Volvo Penta introduced new
products.
Volvo Penta is launching a new generation of medium-heavy
diesel engines for leisure boats. The new electronic diesel
engines, the D4 at 210 hp and the D6 at 310 hp, are manufactured
at Volvo Penta’s engine plant in Vara, Sweden.
Volvo Penta is also launching the
new 130- or 160-hp D3 diesel engine and the new D2 75-hp engine
for sailing yachts.
Volvo acquired Bilia's truck
and construction equipment operations.
The truck and
construction equipment operations of Bilia was acquired in the
third quarter through the exchange of the predominant part of
Volvo's holding in Bilia for 98% of the shares in the acquired
operations, Kommersiella Fordon Europa AB (KFAB). KFAB is a
leading service supplier and reseller of Volvo trucks and
construction equipment in Europe.
Significant events in 2004
Divestment of Scania shares.
Volvo’s
holding of Scania B shares was sold to Deutsche Bank on March 4,
2004 for an amount of approximately SEK 15 billion. As a
consequence of the divestment, the Scania holding was written
down as of the fourth quarter of 2003. The transaction was
carried out as part of Volvo’s commitment to the European
Commission to divest the Scania shares not later than April 23,
2004. After the sale of the Scania B shares to Deutsche Bank,
Volvo owned 27.3 million A shares in Scania AB, corresponding to
24.8% of the votes and 13.7% of the capital. At the Annual
General Meeting of AB Volvo on April 16, 2004, the Board’s
proposal to transfer all A shares in Scania to Ainax and
thereafter to distribute 99% of the shares in Ainax to Volvo’s
shareholders was approved. The value of the distribution of Ainax
was set at SEK 6,309,538,646. The shares in Ainax were
distributed to Volvo’s shareholders on June 8, 2004.
Volvo Trucks agreed upon
cooperation covering engine manufacture in China.
Volvo
Trucks signed an Engine Cooperation Frame Agreement with the
truck manufacturers China National Heavy Truck Corporation (CNHTC),
and First Automotive Works (FAW) covering the establishment of a
jointly owned engine plant in China. The plant will manufacture
complete engines for Volvo’s business areas in China and for
CNHTC’s and FAW’s trucks. The three companies will form
a joint company for production of engines for the Chinese market
of which Volvo will own 52% and CNHTC and FAW 24% each. In
accordance with the agreement, the company will produce the
future heavy diesel engines based on the Volvo Group’s new
engine platform. The plan is for a definitive agreement to be
concluded during 2004. The aim is to start production of
component kits from Europe during 2005 and begin own production
during 2006. The plant will have an annual production of 50,000
engines in 2010.
Renault Trucks concludes
agreement in principle to manufacture trucks in China.
The AB
Volvo subsidiary Renault Trucks has signed an agreement in
principle with the Chinese truck manufacturer Dong Feng Motors
aimed at establishing a joint-venture company for manufacturing
trucks and truck components in China. It is planned that the new
company will manufacture Renault’s Kerax heavy construction
trucks for the Chinese market. The agreement is still subject to
final negotiation. The relevant Chinese authorities must also
approve the agreement. Initially, the agreement aims to establish
local assembly of CKD kits for Renault’s Kerax trucks. The
long-term aim is to manufacture components, primarily cabs, for
Renault’s and Dong Feng’s Chinese product range.
Industrial relocation within
Renault Trucks.
The Volvo Group is carrying out an industrial
relocation in Europe as a result of which manufacture of
crankshafts for medium-heavy truck engines is being increased at
Villaverde, Spain, while the production of Renault branded trucks
is being concentrated to the plant in Bourg-en-Bresse, France.
The relocation is a consequence of the transition to a greater
degree of shared technical architecture for trucks within the
Volvo Group.
Volvo CE initiated LB Smith
divestiture.
As part of its stated intention to divest the
assets which Volvo Construction Equipment acquired from its
former dealer, LB Smith, Volvo CE has sold its Florida
construction equipment distribution marketing area, with the
exception of Tallahassee, to Flagler Construction Equipment LLC,
Orlando, Florida, USA and its Nashville and Memphis, Tennessee,
market areas to its Louisiana dealer, Scott Construction
Equipment Company.
Capital Expenditures
The following table sets forth the
Group’s aggregate capital expenditures for property, plant
and equipment, intangible assets and assets under operating
leases, by principal business areas for each of the three years
ended December 31:
2001
2002
2003
(In millions
of SEK)
Capital
expenditures
Trucks..……………………………………………………
5,949
4,797
4,384
Buses……………………………………………………...
360
256
161
Construction
Equipment………………………………….
569
660
525
Volvo
Penta
………………………..
…………………….
199
236
362
Volvo
Aero………………………………………………..
933
583
262
Financial
Services………………………………………...
5,775
5,461
5,459
Other
and corporate capital expenditures…………………
354
244
528
Group
total
………………………………………………
14,139
12,237
11,681
Investment projects emphasized
plant and machinery for the production, design and development of
commercial vehicles and machinery. The following table
illustrates the geographic distribution of the capital
expenditures:
2001
2002
2003
(In millions
of SEK)
Sweden……………………………………………...
4,646
3,701
2,629
Europe
(excluding Sweden)………………………...
5,942
5,793
6,042
North
America………………………………………
3,169
2,261
2,442
Other
countries……………………………………...
382
482
568
Group
total
………………………………………...
14,139
12,237
11,681
Capital expenditures for property,
plant and equipment in 2003 amounted to SEK 4.9 billion (SEK
4.8 billion in 2002, SEK 5.7 billion in 2001). Capital
expenditures in Trucks, which amounted to SEK 3.2 billion (SEK 3.2
billion in 2002, SEK 4.1 billion in 2001), were made in
tools and equipment for the production of new truck models in
North America, Brazil and France. Investments were also made in
Sweden and France for increased capacity in the paint shops. The
level of capital expenditures in Buses amounted to SEK 0.1
billion (SEK 0.1 billion in 2002, SEK 0.1 billion in 2001), in
Construction Equipment SEK 0.4 billion (SEK 0.4 billion in 2002,
SEK 0.4 billion in 2001), in Volvo Aero SEK 0.2 billion (SEK 0.2
billion in 2002, SEK 0.2 billion in 2001) and in Volvo Penta to
SEK 0.2 billion (SEK 0.2 billion in 2002, SEK 0.1 billion in 2001).
Capital expenditures for
intangible assets, mainly product and software development, amounted
to SEK 1.2 billion (SEK 2.0 billion in 2002, SEK 2.6 billion in
2001). The capital expenditures were distributed among Trucks
SEK 0.7 billion (SEK 1.3 billion in 2002, SEK 1.6 billion in 2001),
Buses SEK 0.1 billion (SEK 0.1 billion in 2002, SEK 0.2 billion
in 2001), Construction Equipment SEK 0.1 billion (SEK 0.2 billion
in 2002, SEK 0.2 billion in 2001) and Volvo Penta SEK 0.2
billion (SEK 0.1 billion in 2002, SEK 0.1 billion in 2001) and
Volvo Aero SEK 0.1 billion (SEK 0.3 billion in 2002, SEK 0.5
billion in 2001).
Capital expenditures for assets
under operating leases amounted to SEK 5.6 billion (SEK 5.4
billion in 2002, SEK 5.9 billion in 2001), including SEK 5.3
billion in Financial Services (SEK 5.1 billion in 2002, SEK 5.4
billion in 2001). The capital expenditures pertained mainly to
vehicles and machines subject to new operating lease contracts
with external customers within Financial Services’
operations in North America and Western Europe.
Capital expenditures currently in
progress are shown in "Item 5.B – Liquidity and Capital
Resources".
Five years ago, the operations of
the Volvo Group were concentrated on those products with the
strongest positions and most competitive volumes. This meant that
Volvo exited the car industry and transferred these resources
over to commercial vehicles, machines and engines through a
series of acquisitions.
In recent years, major changes
have been implemented in the organization to coordinate the new
structure and simultaneously renew large segments of the product
range. The result is a streamlined Group with considerably
reduced costs and strong global market positions.
Three large acquisitions were made
on three different continents: Samsung’s excavator
operations in Southeast Asia, Renault Trucks in Europe and Mack
Trucks Inc. in North America. These acquisitions strengthened the
Group’s presence in Asia and made the Volvo Group the
largest heavy truck manufacturer in Europe, with a market share
of 27 percent, and the third-largest in North America, with a 20-percent
market share by the end of 2003. Following the acquisitions,
Volvo believes it is the world’s largest manufacturer of
diesel engines, in the 9-16 liter segment, for heavy vehicles and
machinery.
All business areas hold strong
positions in their respective markets. Volvo Buses is the world’s
second-largest bus manufacturer and Volvo Construction Equipment
("Volvo CE") is one of the largest manufacturers of
construction equipment. Volvo Penta is a global market leader in
marine leisure diesel engines. Components from Volvo Aero are
included in 80 percent of all new major aircraft in the world.
The new companies have been
integrated rapidly. The new excavators have been sold under the
Volvo brand since 1999 and the plant in South Korea is now Volvo’s
global center for the development and production of crawler
excavators, the largest product segment in the construction
equipment industry.
Commercial transport equipment
market
In parallel with the changes in
recent years, most of the business areas have implemented
extensive measures to adjust capacity to lower demand. The
recession in the United States, which first became noticeable in
2000 in the form of falling demand for construction equipment,
impacted in full during 2001 with a sharp decline in the North
American truck market. To adjust capacity in the short term and
improve efficiency in the longer term, a number of actions were
taken, including the merger of Mack’s and Volvo’s
tractor truck manufacturing operations to the New River Valley
plant at the end of 2002. These actions have resulted in
significantly reduced costs and consequently, improved earnings.
The Group experienced a general
downturn in Europe in 2002 and 2003, although the extent varied
greatly between countries and product segments. Truck sales in
Europe have been sustained at a relatively high level, and the
high customer values in the new Volvo product range have resulted
in increased market shares. In Europe, Volvo Trucks continued to
deliver a solid performance with improved margins. Demand for our
new models resulted in strong exports to Eastern Europe and Asia.
The business area that has fared
the best in the recession is Volvo Penta, which increased its
sales and consolidated its position as a global leader within
marine diesel engines. Compared with most of its competitors,
Volvo CE has been best able to handle the downturn. Volvo Buses
and Volvo Aero, on the other hand, suffered the effects of the
global downturn in the travel and aviation industry, and were
consequently forced to reduce capacity considerably. Volvo Buses
exited the unprofitable US market for city buses in 2002 and
reduced capacity in Europe in 2003.
The Group as a whole has performed
well during the recession. Excluding the restructuring costs
incurred in 2001 in connection with implementing the new truck
organization, the Group has generated profit throughout the
period, demonstrating that we are better equipped to manage
cyclical fluctuations than previously.
Strategy
A major challenge over the next
few years is to consolidate the market organization and increase
sales in growth markets. With its strong economic growth, Eastern
Asia is a priority region. Volvo already has a well-functioning
market organization in the region and extensive industrial
operations in South Korea.
In 2003, an agreement was
concluded with China National Heavy Trucks regarding a joint
venture to manufacture Volvo branded trucks in China. Volvo is
already the largest imported brand of Western trucks in China and
will now become the first Western truck company with
manufacturing of heavy trucks in the country. The production
volume will initially be 2,000 trucks per year, but will
gradually increase. Renault Trucks has initiated a cooperative
venture with China’s third-largest truck manufacturer, Dong
Feng Motors, on the transfer of engine technology.
Volvo Construction Equipment also
commenced production in China during the year and had appointed
19 dealers in China by the end of 2003. Volvo Buses and Volvo
Penta already have manufacturing operations in China through
joint-venture agreements.
In Eastern Europe and the Middle
East, the Group is in a development phase in terms of building
the dealer network. Volvo Trucks has for some time held a strong
position as an import make in these regions. In recent years,
Renault Trucks has increased its activity in Eastern Europe,
resulting in considerably increased sales in the new EU countries.
Like some of the competitors,
Volvo has worked hard during the recession to adapt production
costs to lower demand. Substantial efficiency improvements have
been made within the industry in general. With the positive trend
in the world economy discerned in the latter half of 2003, we are
well positioned for profitable growth in 2004.
Summary of Group Businesses
Volvo Trucks.
Volvo’s
truck manufacturing operations started in 1928. Today, Volvo
Trucks is one of the world’s largest producers of heavy
trucks by volume. In 2003, vehicles of more than 16 tons
accounted for 90% of total production. Volvo Trucks’
products are marketed in more than 130 countries, with most sales
in Western Europe and North and South America.
Renault Trucks.
Renault
Trucks is one of the largest European manufacturers of commercial
vehicles, with its origins in the Renault automobile company that
was founded in 1898, and also in Berliet, another manufacturer
founded in 1895. Renault Trucks has a product program that
includes a variety of commercial vehicles, ranging from light
trucks for urban distribution services to special vehicles and
heavy trucks for long-haul operations.
Mack Trucks.
Mack is one of
the largest manufacturers of heavy trucks in North America by
volume. Mack was founded in 1900, and focused on commercial
vehicles from the start. Today, Mack is one of the most-recognized
heavy-truck brands and a leader in the vocational segment of
the North American market. The products are sold and
serviced in more than 45 countries worldwide.
Buses.
Volvo Buses is the
world’s second largest bus manufacturer, with a complete
range of heavy buses and coaches to meet demanding customer
requirements for passenger transport solutions. The product range
includes complete buses and coaches as well as chassis combined
with a comprehensive range of services.
Construction Equipment.
Volvo Construction Equipment develops, manufactures and markets
equipment for the construction and related industries. Products
include a comprehensive range of wheel loaders, wheeled and
crawler hydraulic excavators, articulated haulers and motor
graders as well as compact excavators, compact wheel loaders,
backhoe loaders and skid steer loaders. Distribution takes place
mainly through independent dealers and a rental channel.
Volvo Penta
. Volvo Penta
provides engines and complete power systems for leisure boats and
workboats and for industrial applications such as power-generating
equipment. Volvo Penta operates worldwide and has one of the
industry’s most-recognized brand names and the largest
dealer networks with more than 5,000 dealers globally. The engine
program comprises diesel and gasoline engines with power outputs
of between 10 and 2,000 hp.
Volvo Aero
. Volvo Aero
develops and manufactures components for aircraft and rocket
engines with a high technology content in cooperation with the
world’s leading producers, such as General Electric, Pratt
& Whitney and Rolls-Royce. In the aftermarket, Volvo Aero
offers an extensive range of services, including sales of spare
parts for aircraft engines and aircraft, sales and leasing of
aircraft engines and aircraft, as well as overhaul and repair of
aircraft engines.
Financial Services
. Volvo
Financial Services (VFS) develops and coordinates Volvo's
operations within customer financing and insurance, treasury,
real estate and related services. It is focused on providing
financial services to the Group's internal and external customers.
Financial solutions created by VFS are designed to enhance the
long-term competitiveness of the Volvo Group and its distributors.
Trucks
The total market.
The total
market for heavy trucks in Western Europe was unchanged during
2003, compared with 2002. The markets in Germany and in the UK
strengthened by 6% and 10%, respectively, while the markets in
Italy and France weakened. Eastern Europe continues to show a
positive trend.
The total market for heavy trucks
in North America (Class 8) was unchanged at 179,000 trucks in
2003 compared with 2002. The trend during the fourth quarter
showed positive signs in the vocational segment, however the
uncertainty remains in other segments. The market for heavy
trucks in Brazil rose by 28% compared with a year earlier.
Business environment.
The
acquisitions of Mack and Renault V.I. in 2001 were part of the
restructuring that has been under way in the heavy-truck industry
for a long time. In 1965 there were 40 independent manufacturers
of heavy trucks in Western Europe; today, there are fewer than
ten. Deregulation and increased globalization have created very
tough competition that is driving the trend toward fewer and
larger transport companies with increasingly streamlined
operations. As a result, demands on truck manufacturers are also
growing. Large development resources and rational production are
required in order to meet customers' needs in a cost-effective
way.
In 2003, Trucks accounted for 64%
of Volvo’s sales.
Volvo Trucks.
In 2003,
Volvo Trucks presented the new Volvo FH16. The Volvo FH16 is
equipped with an all-new 16-liter engine, available with a choice
of two power outputs, 610 and 550 hp, making it the most powerful
standard truck ever in Europe. Also in 2003, Volvo Trucks
introduced an entirely new truck, the Volvo VM, mainly for the
South American market in the 17- to 23-ton class. In addition, a
new generation of the Volvo NH, Volvo FH and Volvo FM was
launched in South America. With these introductions, the entire
Volvo Trucks product range has been renewed since 2000.
Volvo Trucks' products are
marketed in more than 130 countries. The greater part of the
sales takes place in Western Europe and in North and South
America.
Volvo Trucks has an extensive
network of dealers and service centers in both Europe and North
America. The distribution network in Europe was strengthened in
2003 through the acquisition of Bilia's network of truck dealers.
To further improve its customers' ability to conduct competitive
operations, Volvo Trucks offers a broad range of services.
During 2003, Volvo Trucks
delivered a total of 75,312 trucks, an increase of 8% compared
with 2002. Deliveries increased by 15% in North America and by 37%
in Asia. The strong development in Asia is largely based on high
deliveries to Iran.
Renault Trucks.
In 2003,
Renault introduced a light truck, the new generation of the
Renault Master. The Renault Master features new exterior and
interior design, new engines and improved performance. The
Renault Master is also accompanied by new service offers to
reinforce and improve Renault Trucks’ market share in the
less than 3.5-ton segment. An integrated Customer Center was
opened in March within the Saint Priest facilities outside Lyon
as part of an enhancement intended to increase service levels and
strengthen the network in Europe. Renault Trucks has a strong
international presence, with 2,000 dealers and service centers
throughout the world, of which 1,350 are located in Europe.
Aftersales services are provided in more than 80 countries.
Renault Trucks’ deliveries
during 2003 amounted to 61,686 vehicles, a decrease of 4%.
Deliveries to Eastern Europe rose by 11%. In Western Europe
deliveries of Renault trucks decreased by 8%, while deliveries in
other parts of the world rose by 6%.
Mack Trucks.
Due to the
success of the Granite model in the vocational truck market, Mack
ended the production of its RD model at the end of 2003 –
further streamlining its product line-up while addressing a
broader range of applications.
Mack deliveries were down to 18,991
trucks in 2003, compared with 23,245 trucks a year earlier. The
decline was partly related to competition from truck OEMs able to
offer engines that are not compliant with the EPA ’02
emission requirements as well as the transition of production of
highway trucks from Winnsboro to the New River Valley plant in
the first half of 2003.
Strategic development.
The
aim in 2004 is to continue the development of the distribution
networks in Europe and North America, including the integration
of the acquired former Bilia distribution network in Europe. In
2004, the brand identities and product ranges of the three strong
brand names Volvo, Renault and Mack will be developed further.
Products.
The customer
offering is based on an adequate vehicle specification for every
customer's needs. The truck operations of the Volvo Group have a
broad range of truck specifications for all kinds of transport
needs, from city distribution to construction work and long-distance
transports. More than 90 % of the trucks branded Volvo are sold
in the heavy truck segment (above 16 tons), where all models are
based on the company's global modular platform. The use of a
common platform ensures product quality, parts availability and
service, all contributing to higher vehicle uptime.
Customers are also offered an
extensive range of support services. For example, financial
services include many different kinds of leasing solutions, often
in combination with service and insurance agreements. One common
type of leasing contract gives the customer a fixed price per
kilometer, apart from fuel and driver costs.
Production.
The following
table sets forth, by series, the number of trucks produced by
Volvo during each of the years 1999 through 2003 and the numbers
of trucks produced by Mack and Renault during the years 2001,
2002 and 2003.
1 Includes other truck models
produced in the United States
Production and capacity.
Production of trucks in 2003 amounted to 75,440 Volvo trucks (68,610),
42,558 Renault trucks (44,220) and 18,519 Mack trucks (20,706).
In addition, Renault Trucks also distributes the Renault Mascott
and Renault Master trucks, which are produced by Renault SA and
the SISU trucks.
On June 9, 2003, Volvo Trucks
signed a joint venture agreement with China National Heavy Truck
Corporation, CNHTC, for production of trucks. Production started
during the first quarter of 2004 in CNHTC's premises in Jinan, in
the Shandong Province. The initial capacity is 2,000 trucks per
year. Volvo’s product range in China will comprise the Volvo
FL, Volvo FM9 and Volvo FM12. The aim is to increase volumes to
10,000 trucks per year by 2010 with a high level of local
integration.
The transfer of production of Mack
highway trucks from Winnsboro to New River Valley was completed
on May 1, 2003.
Markets and Sales.
In 2003,
Trucks accounted for 64% of Volvo’s sales. Volvo’s
truck operations’ sales by principal geographic market area
and operating income for the years 1999 through 2003 are set
forth in the following table:
1999
2000
2001
2002
2003
(In millions
of SEK)
Western
Europe…………………..
30,006
30,415
60,841
61,406
63,097
Eastern
Europe……………………
2,265
3,158
5,526
6,424
7,004
North
America……………………
22,303
17,048
33,630
33,721
28,151
South
America……………………
2,190
3,111
3,993
3,277
3,464
Asia………………………………..
2,010
3,432
4,659
5,919
9,206
Other
markets…………………….
1,492
1,911
7,919
8,005
6,047
Total sales…………………………
60,266
59,075
116,568
118,752
116,969
Operating
income………………...
3,247
1,414
(2,066)
1,189
3,951
Includes Mack Trucks and Renault V.I.
since January 2001
Total deliveries for Volvo’s
truck operations amounted to 155,989 vehicles during 2003, a
decrease of 1% compared with 2002.
In Europe, deliveries from Volvo
and Renault Trucks amounted to 92,083 trucks in 2003, down 5%. In
North America, Mack and Volvo delivered a total of 34,765
vehicles, a decrease of 5% compared with a year earlier. Total
deliveries of Mack and Volvo trucks in South America were up 12%
to 5,976 vehicles.
On July 11, 2003, all conditions
for Volvo’s acquisition of Bilia’s truck and
construction equipment operations, Kommersiella Fordon Europa AB
(KFAB), were met. KFAB is a leading service supplier and dealer
of Volvo trucks and construction equipment, with operations in
the Nordic countries and in several other countries in Europe.
The acquisition of the KFAB dealerships and workshop network has
significantly strengthen Volvo Trucks' European distribution
system.
Buses
The total market
. The
global market for tourist buses remained very low in 2003,
particularly in North America and Europe. The total market in
Europe is weak, in particular in Central Europe. Strong price
pressures continue to prevail. In Asia, the markets in Hong Kong
and Singapore are still at a low level, while a positive trend
was noted in China. In 2003, the market was stable in Mexico
while markets in South America continued to be weak, but with a
tendency towards recovery.
General.
As of December 31,
2003, Volvo was the second-largest manufacturer, by volume, of
heavy buses, coaches and bus chassis (with a total weight above
12 tons) in the world. Volvo Buses' product line comprises
complete buses, bus chassis and bodies for various applications
such as city, intercity buses and coaches as well as related
services. Priority is given to transport economy, reliability and
environmental characteristics in the development of products of
Volvo Buses. Buses’ customers are primarily bus operators
with vehicle fleets varying from a single bus up to as many as 20,000
buses.
In 2003, Buses accounted for 7% of
Volvo’s sales.
Strategic development.
Volvo
Buses’ aim for 2004 is to continue implementing a
comprehensive program to achieve profitability. Restructuring of
the commercial and industrial operations in Europe will continue.
The product program will be standardized and globalized to secure
economies of scale. Focus during 2004 will also be placed on
capital utilization and cash flow, primarily through reducing
lead times.
Business environment.
Within the OECD countries, deregulation and privatization have
altered the conditions for many operators. New competitors are
penetrating and establishing a foothold in previously restricted
areas, and competition between operators is increasing. There is
a move toward fewer and larger operators who impose high demands
on good overall economics and better potential for focusing on
their core operations. Significant bus markets in Europe are in a
state of recession, which results in increased competition in
other markets. The trend toward consolidation in the bus industry
is prevailing.
Products.
Volvo Buses has
renewed its entire product range in less than five years. Most of
the new models are based on a common product platform for
intercity buses and tourist coaches. The introduction of the TX
platform has provided Volvo one of the most modern product ranges
in the bus industry. The product range provides efficient
transport solutions and includes complete buses and chassis for
city and intercity traffic as well as coaches, which meet
customers' and environmental demands.
Volvo Buses offers an extended
range of facilities within servicing and financing to be able to
offer all-encompassing customer-tailored transport solutions with
the best total economy. In 2003, an agreement was made with
Renault Trucks covering the sale of Volvo buses. The French bus
market is the second largest in Europe and the cooperation with
Renault Trucks gives Volvo Buses access to an extensive dealer
network for sales, repair, service and spare parts availability.
Production
. The following
table sets forth the number of buses and bus chassis produced by
Volvo during each of the years 1999 through 2003:
Company
Location
1999
2000
2001
2002
2003
Volvo
Bus Corporation
Sweden
4,745
4,975
5,405
5,968
4,898
Volvo
Truck & Bus
UK
971
381
0
0
0
Volvo
do Brasil
Brazil
782
1,169
964
691
561
Prévost
Car Inc.
Canada
996
1,018
518
544
404
Nova
Bus Corporation
Canada
1,201
1,176
807
762
352
Volvo
Bus de Mexico
Mexico
1,293
1,791
1,847
1,117
1,051
Volvo
Poland
Poland
-
722
756
650
335
Volvo
Peru
Peru
66
12
24
0
0
Proportional
method
Nova/Prevost
1
-
-
(154)
(657)
(378)
Total
buses and bus chassis
10,054
11,244
10,167
9,063
7,223
1
From October 2001, Nova/Prévost was consolidated
using the proportional method, reflecting a reduction in Volvo’s
ownership in those entities.
Production and capacity.
During 2003 Volvo produced 7,223 (9,063 in 2002) buses and bus
chassis, of which 35% were complete buses. The degree of
utilization in the production system in Europe and North America
decreased as an effect of the downturn in the market. In 2003,
Volvo Buses decided to close the bus body plant in Aabenraa,
Denmark. Some 200 employees will be affected by the closure.
Markets and Sales
. Sales by
Volvo Buses by principal geographic market area and operating
income for the years 1999 through 2003 are set forth in the
following table:
1999
2000
2001
2002
2003
(In millions
of SEK)
Western
Europe…………………..
5,735
6,767
6,263
6,695
6,153
Eastern
Europe…………………
226
182
373
409
381
North
America……………………
6,871
7,723
6,847
3,838
2,984
South
America……………………
469
732
757
366
329
Asia………………………………..
943
1,269
1,839
2,022
1,447
Other
markets…………………….
469
514
596
705
684
Total
sales………………………..
14,713
17,187
16,675
14,035
11,978
Operating
income (loss) ………
224
440
(916)
(94)
(790)
The deliveries of buses from Volvo
amounted to 7,817 (9,059 in 2002) units during 2003, a 14%
decrease from 2002. The decline was attributable mainly to
significantly lower volumes in North America, which were offset
to some extent by favorable volumes in China and the Nordic
countries.
Volvo CE
The total market.
The world
market for heavy and compact construction equipment, within Volvo
CE's product range, increased by 11% during 2003. In North
America the market increased by 15%, Western Europe was down 1%,
while other markets were up 19%, primarily driven by strong
development in China, up 60%. Eastern Europe rose 48% and Africa
was up 32%.
The increase in the total market
is mainly driven by heavy construction equipment, which rose 18%
during the year. The North American market for heavy equipment
was up 15% while the market in Europe was flat. Other markets
rose by 30%.
The world market for compact
equipment increased slightly in 2003, up 5% compared with the
preceding year. The market in North America was up 15%, while
markets in Europe were down 1%. Other markets rose by 6%.
General
. Volvo CE has
production facilities in Sweden, Germany, France, Poland, the US,
Canada, Brazil, South Korea and China. Volvo CE’s products
are sold and serviced through an extensive network of independent
distributors and dealers worldwide, combined with Volvo CE’s
own sales and marketing companies. Operations are focused on
strong growth. The objective is to broaden the range of products,
continue to penetrate new markets outside Europe and North
America and implement programs directed at important customer
segments. Services such as financing, handling of used equipment
and information technology support in the sales and distribution
process are also being intensively developed.
In 2003, Construction Equipment
accounted for 13% of Volvo’s sales.
Strategic development.
Volvo
CE’s aim for 2004 is to capitalize on the recently launched
new products and the extended product range to increase market
shares. The dealer development program will continue, focusing on
integrating the acquired network of former Bilia dealers in
Europe and on developing and divesting the former L.B. Smith
distribution network in the United States. The Rental initiative
will be further developed and additional rental stores will be
opened in Europe and North America. In China, the new production
plant for excavators is important, since China is the fastest-growing
and one of the largest markets for crawler excavators.
Business environment.
The
number of acquisitions in the construction equipment industry was
reduced in 2003, compared with 2002. Instead, a high number of
joint ventures or cooperation agreements took place, such as
Caterpillar that set up a supply agreement with Blount
International to expand their forestry offering. Another example
is Daewoo Heavy Industries & Machinery, which agreed to
supply heavy equipment for Terex in the United States. Companies
such as Caterpillar, Komatsu and Mitsubishi are also focusing on
China, which remains a huge market for construction equipment.
Products.
Volvo CE's
products, spare parts and services are offered worldwide in more
than 200 countries. The products are used in a number of
applications including general construction, road construction
and maintenance, forestry, demolition, waste handling and mining.
Volvo CE has launched more than 40
new products on the market over the past two years. The product
range comprises a comprehensive offering of excavators, wheel
loaders, articulated haulers, motor graders and a range of
compact wheel loaders, compact excavators, backhoe loaders and
skid-steer loaders.
Services such as financing,
leasing and sales of used equipment are also offered. In 2002,
Volvo CE launched a franchise initiative for the rental market,
Volvo CE Rents. At December 31, 2003, Volvo CE Rents had 45
stores open, most of them in North America.
Markets and Sales.
Sales by
Construction Equipment by principal geographic market area and
operating income for the years 1999 through 2003 are set forth in
the following table:
1999
2000
2001
2002
2003
(In millions
of SEK)
Western
Europe…………………..
9,901
10,029
10,326
10,383
11,576
Eastern
Europe……………………
193
255
341
454
772
North
America……………………
5,725
5,823
6,145
5,667
5,428
South
America……………………
498
776
847
709
636
Asia………………………………..
1,903
2,484
2,773
3,048
3,707
Other
markets…………………….
662
626
703
751
1,035
Total
Sales……………………….
18,882
19.993
21,135
21,012
23,154
Operating Income………………...
1,709
1,594
527
406
908
Production and capacity.
Over
the past two years Volvo CE has launched more than 40 new
products. The product portfolio is now in a highly competitive
position. During the spring of 2003, production of excavators
began in the new facilities located in the Pudong area outside
Shanghai in China. The new factory ramped up production to around
1,200 machines a year. In addition, the dealer network expanded
and in the beginning of 2004, there were 19 dealer partners
supporting Volvo CE in China.
Volvo Penta
The total market.
The world
market for marine and industrial engines was relatively stable
during 2003, although the situation varied considerably in
different parts of the world. The demand in Europe has been
relatively strong, while the total demand in North America has
been weaker. An increase of the North American demand was,
however, noted in the second half of 2003. Demand for industrial
engines in China has continued to rise.
General
. By supplying
technologically advanced products focused on performance and
operational reliability, and sensitivity to customer demands on
effective service solutions, Volvo Penta has developed a strong
position as a supplier of engines and power systems, and one of
the industry’s most-recognized brands. With more than 5,000
dealers in some 130 countries, Volvo Penta has a global presence.
The plant in Vara in Sweden
manufactures large diesel engines. Gasoline engines and drive
systems are developed and manufactured in the United States.
In 2003, Volvo Penta accounted for
approximately 4% of Volvo’s sales.
Business environment.
Environmental
issues are gaining increasing importance in the industries in
which Volvo Penta is active. Environmentally, Volvo Penta is well
positioned, particularly as a result of the favorable
environmental characteristics of the diesel engines launched in
2003. All new engines already fulfill the comprehensive
environmental standards planned for Europe and the US in 2006 and
2007. In addition, Volvo Penta’s new engines also feature
very low fuel consumption and noise levels.
The D12 engine contributed during
the year to increased sales for Volvo Penta, among other segments
to car and passenger ferries. These types of vessels are often
operated in traffic in urban environments or in the vicinity of
other built-up areas, which means that operators often place
higher demands on exhaust emission standards than legally
required. Consequently, the D12’s very low emissions level
has strengthened Volvo Penta’s competitiveness.
In China, Volvo Penta was selected
as engine supplier to a number of newly built tourist boats that
will traffic one of China’s large systems of inland
waterways. Since the inland system represents an important
reserve of fresh water the local Chinese authorities conducted a
very thorough evaluation of the engine’s environmental
impact and fuel consumption. The choice fell on Volvo Penta’s
newly launched 4- and 5-liter diesel engines, the so-called
workhorse engines.
Strategic development.
The
activity levels for new product introductions will remain high
during 2004. At the same time, Volvo Penta is focusing resources
in order to secure efficient customer support for the new
products. The strategy to strengthen the cooperation and the
integration with key customers in all business segments will
continue. Volvo Penta has no intention to compete with its
customers through the production of boats or generator sets.
Products
. Volvo Penta
offers complete power systems and service for leisure boats,
workboats and industrial applications such as power-generating
equipment. Volvo Penta operates within three areas of activity:
Marine Leisure, Marine Commercial and Industrial.
The year 2003 was the most
comprehensive product introduction period in the history of Volvo
Penta and it includes the launch of the completely new generation
of medium-heavy marine diesel engines, D4 at 210 hp and D6 at 310
hp. These electronic diesel engines, launched with new stern
drives and specially-adapted propellers, feature a number of
technical solutions that make the boats faster. In addition the
engines are more powerful, cleaner and quieter than their
predecessor.
The D4-210 and D6-310 are
developed for leisure boats as well as commercial vessels in the
sizes of about 22 to 45 feet. This is a performance diesel
segment in which Volvo Penta is a market leader.
The new D3-130 and D3-160 engines,
which are the marine versions of Volvo Car Corporation’s
successful diesel engine for passenger cars, were also launched
in 2003. D3's advantages in terms of weight, noise level and fuel
consumption will open new segments for Volvo Penta.
In 2003, Volvo Penta also launched
the D2-75 diesel engine together with a new four-blade folding
propeller for sailing yachts.
Production and capacity.
All
of Volvo Penta's production facilities; the diesel engine
factories in Vara, Sweden, and in Wuxi, China, and the gasoline
engine factory in Lexington, Tennessee, USA; were operated at
full capacity in 2003. The production capacity in all of these
factories was increased in order to meet the strong demand for
Volvo Penta products. During 2003 the production of the new
diesel engines, D4-210 and D6-310, started in Vara. The Vara
plant will have parallel production of these new engines together
with the 3- and 4-liter engines.
Markets and Sales
. The
following table sets forth Volvo Penta’s sales by geographic
market area and operating income (loss) for the years 1999
through 2003:
1999
2000
2001
2002
2003
(In millions
of SEK)
Western
Europe…………………..
2,986
3,204
3,789
3,846
4,081
Eastern
Europe……………………
26
30
38
99
108
North
America……………………
1,770
2,257
2,175
2,261
2,109
South
America……………………
134
160
213
127
146
Asia………………………………..
692
794
988
1,141
947
Other
markets…………………….
153
154
177
195
205
Total
sales………………………..
5,761
6,599
7,380
7,669
7.596
Operating
income (loss) ………
314
484
658
647
695
Volvo Aero
The total market.
At the
end of 2003, air traffic showed a positive trend in all regions
of the world. Accumulated, however, 2003 declined compared with
2002, and it was the third consecutive year of declining air
traffic.
Substantial challenges remain for
the airline industry. There are positive signs from the low-cost
segment, which has shown tremendous growth in the United States
and Europe. It is also starting to become established in Asia.
This segment continues to put pressure on the established
airlines.
General
. In the aerospace
field, Volvo has substantial resources for the development and
manufacturing of engine components and also for the aerospace
aftermarket.
Operations include development and
production of commercial and military aircraft engines in
association with the major engine manufacturers - Pratt &
Whitney, General Electric, Snecma, MTU and Rolls-Royce. Volvo
Aero is also developing and manufacturing engine components for
Ariane space rockets. In the aftermarket, Volvo Aero offers an
extensive range of services, including sales of spare parts for
aircraft engines and aircraft, sales and leasing of aircraft
engines and aircraft, as well as overhaul and repair of aircraft
engines.
In 2003, Volvo Aero accounted for
approximately 4% of Volvo’s sales from continuing operations.
Strategic Development.
The
aviation industry’s sharp downturn necessitates continued
adaptation to new conditions. Restoring profitability is the most
important goal for 2004, while opportunities for increasing
market shares are also created during a recession.
Accordingly, Volvo Aero aims to
continue building its components business and will make strong
efforts to become involved in engine programs, either as a
partner or long-term supplier.
In the service sector, major
efforts are being made to develop the customer offering and sign
long-term contracts with airlines, partners and other customers.
Business environment.
Aircraft
deliveries decreased in 2003 for the second consecutive year and
the production of large commercial aircraft will most likely
remain on the same level in 2004. Since there is a time lag
between airline profits and orders and deliveries of new
aircraft, a recovery in deliveries is not expected before the end
of 2005 or the beginning of 2006. A recovery in the aftermarket
is expected during 2004.
Products
. Volvo Aero
develops and manufactures high-technology components for
commercial aircraft and rocket engines. Volvo Aero also develops,
manufactures and maintains military engines. Volvo Aero offers a
wide range of services, including sale of parts for aircraft
engines and aircraft, sale and leasing of aircraft engines and
aircraft, overhaul and repair of aircraft engines, and asset
management. In addition, Volvo Aero provides aftermarket services
for gas-turbine engines and systems.
The company's operations are based
on close cooperation with partners and on selective
specialization. In 2003, overhaul contracts were signed with SAS,
General Electric, MK Airlines, and Skyways Express. Partnership
agreements for the manufacture of components for the GP7000
engine were signed with MTU Aero Engines. In addition, an
extension of the marketing and distribution agreement for
Boeing's surplus inventory for commercial aircraft, was signed
with Boeing in 2003.
Production and capacity.
To
align operations to a lower level, Volvo Aero is reducing its
workforce in Trollhättan, Sweden. As a consequence, 195 persons
will leave the company, mainly during 2004.
In 2003, a contract was signed
with SAS, whereby Volvo Aero became the principal supplier of
engine overhaul services for SAS/Spanair's fleet of MD80
aircraft. The contract covers the period up to and including 2006.
Also in 2003, Skyways Express and Volvo Aero signed an agreement
whereby Volvo Aero will become Skyways’ exclusive supplier
of engine overhaul and equipment maintenance services for the PW125
engines. The agreement is based on a price per hour of flying
time and is valid until 2005. Volvo Aero also signed overhaul
contracts of JT9D engines for General Electric and the UK freight
carrier MK Airlines.
An agreement was also signed with
MTU Aero Engines of Germany to manufacture components for the GP
7000, an engine intended for Airbus’s forthcoming A380 jumbo
jet. Volvo Aero will produce the low-pressure turbine case over a
15-year period. Volvo Aero is already a partner in the Rolls-Royce
Trent 900 engine program, the second engine alternative for the A380.
Volvo Aero has been a partner with
General Electric since the 1980s and in 2003 Volvo Aero and GE
agreed to cooperate as partners in the new LMS100 gas turbine.
Volvo Aero will deliver a number of key components for the new
environmentally friendly gas turbine.
Markets and Sales.
The
following table sets forth Volvo Aero’s sales by geographic
market area and operating income for the years 1999 through 2003:
1999
2000
2001
2002
2003
(In millions
of SEK)
Western
Europe…………………..
4,560
4,651
4,788
3,422
3,951
Eastern
Europe……………………
16
42
87
28
49
North
America……………………
4,557
5,040
5,841
4,573
3,301
South
America……………………
193
134
187
177
152
Asia………………………………...
491
701
708
497
428
Other
markets……………………..
136
145
173
140
149
Total
sales…………………………
9,953
10,713
11,784
8,837
8,030
Operating
income………………
584
621
653
5
(44)
Financial Services
Financial services are a
significant part of Volvo's strategy to become the world's
leading provider of commercial transport solutions. The business
area Volvo Financial Services (VFS) was established in 2000 to
handle Group customer-financing operations, the insurance
business, treasury activities and real estate operations. The aim
is to focus on developing various types of financial services
primarily related to Volvo's products and services.
VFS aims to fulfill the market's
growing need for increasingly sophisticated financial solutions
separately or combined with insurance and/or service contracts.
This strengthens the competitiveness of Volvo's dealers thereby
potentially enhancing the Group's growth and profitability.
Volvo's customer-financing
operations cover Europe, North America, Australia, parts of South
America and Asia. Customized finance programs for the Group’s
three truck brands – Mack, Renault and Volvo – as well
as for the other Business Areas in the Group. The range of
financing services includes installment contracts, financial
leasing, operational leasing and dealer financing. In most
markets, insurance, service and maintenance contracts are also
provided for as stand-alone products or in combination with
financing services.
Net sales amounted to SEK 9,153
million (SEK 9,925 million in 2002) representing 5% of Volvo’s
sales from continuing operations. Operating income in 2003
amounted to SEK 926 million (SEK 490 million in 2002). Return on
equity (net income divided by average shareholders’ equity)
was 9.8% (4.8% in 2002).
Operational excellence initiatives
will be pursued in 2004 to further improve efficiency and ability
to care for customers. The approach will be conservative when
moving into emerging markets.
Suppliers
Volvo’s decision on whether
to manufacture or to purchase from suppliers any particular
component is made competitively on commercial terms. Although
Volvo manufactures certain major components, including engines,
transmissions and truck cabs, components are, to a large extent,
purchased from suppliers outside of the Volvo Group.
Increasingly, Volvo contracts with suppliers to manufacture an
entire functional unit, such as completely finished seats, with
the supplier assuming full responsibility for production to Volvo’s
specifications. The primary prerequisites for cooperation with
suppliers are near zero-defect quality level, competitive cost,
and flexible and reliable delivery performance. Volvo also
considers environmental matters in its selection of suppliers.
Sources and availability of raw
materials.
Volvo purchases raw materials, components and
parts from a number of suppliers. An interruption of supply will
have an impact on Volvo’s operations. The impact would vary
depending on the commodity. Volvo’s exposure to such
interruptions is no greater than the industry as a whole. Volvo
keeps contingent business interruption insurance in order to
limit the losses from an interruption of supply.
Research and Development
In 2003, 2002 and 2001, research
and development expenses were SEK 6,829 million, SEK 5,869
million and SEK 5,391 million, respectively. Considerable
research work is devoted not only to traditional product
development, but also to developing effective software and total
solutions designed to improve profitability in Volvo’s
customer’s business.
New products offering customers
improved operating economy.
Volvo's research and development
focuses on its customers' business, environmentally adapted
solutions and safety awareness. During 2003, Volvo introduced a
large number of new products that offer customers improved
operating economy through reduced fuel consumption, as well as a
higher degree of reliability and quality. One area of priority in
research involves the development of transport telematics and
other software designed to improve profitability in the
customer's business, which also has positive effects on the
environment. In product development, all business areas and
business units use a well-structured process with quality gates
and milestones specifying the requirements that have to be
fulfilled before a project is allowed to continue. Safety and
environmental requirements are also key parameters in the process.
The focus on product quality in
the development process as well as in the interface with the
customer has led to improved results in customer satisfaction
measurements.
Safety in focus.
Safety is
one of Volvo's core values and research in this field has a high
priority. So-called "active" safety involves research
pertaining to the driving and road characteristics of a vehicle,
such as electronic stability systems, ABS brakes and disc brakes
on heavy trucks, while "passive" safety is being
developed in the form of safety belts, airbags and impact-resistant
cabs.
An important area of safety
research deals with the interplay between driver and vehicle or
machine. The driver has to feel comfortable and must be able to
see and reach all-important controls in order to operate the
vehicle as safely and efficiently as possible. A dedicated work
to integrate the Volvo safety features and concepts into the new
product lines at Volvo CE demonstrates how a good workplace with
easy entrance and good visibility for the operator adds to higher
safety.
Future fuels and energy
efficiency.
Major changes regarding the use of energy
sources, fuels and vehicle powertrains, are based on extensive
investigations involving many different aspects and take a long
time to develop. A few of the most important are possible energy
supply, energy efficiency and greenhouse gas emissions, all of
them in a well-to-wheel perspective.
The Volvo Group believes that DME
(Di-Methyl Ether) has a very strong potential as a long term
vehicle fuel, derived both from fossil and renewable sources. The
Group also believes that the diesel engine will play a vital role
in future drive trains, due to its inherent energy efficiency and
ultra low emission potential, also together with fuels derived
from renewable sources.
The focused environmental agenda
defines far-reaching objectives for energy efficiency also in the
production processes. The organization is now being challenged on
how to achieve substantially decreased CO2 emissions in the most
cost-effective way.
Patents, Trademarks and
Licenses
Volvo’s patents, trademarks,
trade names and licenses are important to the business of each of
the business areas within Volvo. Volvo owns or otherwise has
rights to a substantial number of trademarks that it uses in
conjunction with its business. Volvo believes that the level of
protection of trademarks and other intellectual property rights
used in its business is and has historically been adequate
relative to its business. Volvo will use its best efforts to
maintain the protection of such rights to the same extent in the
future and is continuously evaluating and renewing its trademark
and trade name registrations in all countries in which Volvo does
any material amount of business. After the sale of Volvo Cars to
Ford, the Volvo trademark is owned by Volvo Trademark Holding AB,
which is jointly owned by AB Volvo and Volvo Car Corporation. The
right to use the trademark "Volvo" has thereafter been
regulated through license agreements made between Volvo Trademark
Holding AB and AB Volvo and Volvo Car Corporation, respectively.
Volvo Car Corporation has the
right to use the "Volvo" trademark for passenger cars,
minivans carrying up to 10 passengers, light trucks with payload
up to 1,500 kilograms, sports utility vehicles and other
vehicles, but not buses or other vehicles used solely for
commercial purposes, that have a gross vehicle weight of not
greater than 5,400 kilograms (12,000 lbs. gross weight). AB Volvo
has the right to use the trademark for trucks, buses,
construction equipment, industrial and marine engines, aerospace
equipment and all other products (apart from those which Volvo
Car Corporation has the right to use the trademark for).
Renault VI has the right under a
license agreement with the proprietor of the Renault trademark,
Renault SA, to use the trademark "Renault" for trucks
and certain other related products and services. The trademark
"Mack" is owned by Mack Trucks Inc.
Sales by Geographical Areas
The following table sets forth the
geographic distribution of the Volvo Group’s net sales.
Sales are shown based upon the market where the customer is
located.
The Volvo Group's operations
during 2003 were organized in eight business areas: Volvo Trucks,
Renault Trucks and Mack Trucks, Buses, Construction Equipment,
Volvo Penta, Volvo Aero and Financial Services. In addition to
the eight business areas, there are certain operations,
consisting mainly of service companies that are designed to
support the business areas' operations. In the financial
reporting the business areas Volvo Trucks, Renault Trucks and
Mack Trucks are reported as one segment.
Each business area except
Financial Services has total responsibility for its operating
income and operating capital. The Financial Services business
area has responsibility for its net income and total balance
sheet within certain restrictions and principles that are
established centrally.
The supervision and coordination
of treasury and tax matters is organized centrally to obtain the
benefits of a Group wide approach. The legal structure of the
Volvo Group is based on optimal handling of treasury, tax and
administrative matters and, accordingly, differs from the
operating structure.
See Note 2 to Volvo’s
consolidated financial statements for information concerning
Volvo’s group structure and significant subsidiaries,
including the name, country of incorporation, proportion of
ownership interest and, to the extent different, proportion of
voting power held.
At December 31, 2003, the eight
business areas of Volvo had manufacturing facilities worldwide.
Major components for the Group’s
products are manufactured in Sweden, including engines, power
transmission systems, cabs and sheet metal components.
Trucks are assembled in Volvo-owned
plants in Sweden, France, Belgium, Brazil, Malaysia, Australia,
the United States and India. There are local manufacturers of
Volvo trucks in Morocco, Botswana, Colombia, Iran, Tunisia,
Egypt, Saudi Arabia and China.
Besides eleven plants in Europe,
Volvo’s bus production takes place in Poland, Sweden,
Finland, Germany, Brazil, the United States, Canada, Mexico and
China. Facilities for production of construction equipment are
located in Sweden, Germany, France, Poland, the United States,
Canada, Brazil, South Korea and China.
Volvo Penta’s production
facilities are in Vara, Sweden, as well as in Lexington,
Tennessee, United States and Wuxi, China. The principal
production facilities of Volvo Aero are located in Trollhättan,
Sweden and in Kongsberg, Norway.
Spare part operations of Trucks,
Buses, Construction Equipment and Marine and Industrial Engines
in Europe is being coordinated through Volvo Parts’
warehouses in Belgium and six support warehouses in England,
France, Italy, Sweden, Finland and Spain.
The major part of the properties
owned by the Volvo Group are used in the Group’s own
operations. A certain number of the properties owned are leased
to Volvo Car Corporation. The greater part of Volvo’s
production facilities is owned by Volvo.
Volvo believes that the Group’s
principal manufacturing facilities and other significant
properties are in good condition and are adequate to meet the
needs of the Volvo Group.
Environmental impact from
production.
The Volvo Group has production sites on five
continents. Maintaining environmental standards and implementing
ongoing improvement programs are required at all plants, and have
been followed up by regular audits since 1989. The environmental
audits identify environmental risks and possible need for clean-up
or other corrective actions, with a follow-up to ensure that
these are promptly conducted. The Volvo Group has insurance
coverage for possible accidental damage to nearby areas.
At the beginning of 2004, Volvo
had a total of 48 plants for the production of trucks, buses,
construction equipment, marine and industrial power systems, and
aircraft engines, of which 16 are in Sweden. All the plants have
the requisite permits, which in Sweden cover waste, noise and
emissions to air, water and soil. Two Swedish permits are to be
renewed during 2004 due to a future increase in production volume.
Consumption of energy remained at
roughly the same level as in 2002 but a slight decrease can be
seen in the emissions of CO2 and NOx during 2003. The total water
consumption also decreased during 2003. The program to increase
resource efficiency is starting to give effect also in the
emission values. Although using low sulphur content fuels when
possible, an increase in the use of heating oil caused an
increase in sulphur dioxide emissions compared to 2002. A total
increase in production volumes caused a minor increase in solvent
emissions and hazardous waste.
Freight.
Transport to and
from Volvo's production facilities and distributors cause more
substantial emissions of air pollutants than the operations at
the company's production plants. In order to encourage
environmental improvement measures, Volvo Logistics, the Group's
procurement company for transport services, continuously assesses
the environmental work of contracted transport companies
according to a classification system. Every new supplier contract
includes an environmental clause whereby the transport company
undertakes to operate in accordance with the ISO 9000 and ISO
14001 standards.
The following operating financial
review should be read in conjunction with the Company's
Consolidated Financial Statements included herein. The
Consolidated Financial Statements and the financial information
discussed below have been prepared in accordance with generally
accepted accounting principles in Sweden (Swedish GAAP). For a
discussion of the principal differences between Swedish GAAP and
US GAAP, see "Item 18. Financial Statements—Note 35."
General
The following table sets forth the
Volvo Group’s sales and operating income by business areas
for each of the years in the three-year period ended December 31,
2003.
2001
2002
2003
(In millions
of SEK)
Net
sales
Trucks
116,568
118,752
116,969
Buses
16,675
14,035
11,978
Construction
Equipment
21,135
21,012
23,154
Volvo
Penta
7,380
7,699
7,596
Volvo
Aero
11,784
8,837
8,030
Financial
Services
9,495
9,925
9,153
Other
and eliminations
6,243
5,968
6,411
Total,
as reported
189,280
186,198
183,291
Operating
income (loss)
1
Trucks
(2,066)
1,189
3,951
Buses
(916)
(94)
(790)
Construction
Equipment
527
406
908
Volvo
Penta
658
647
695
Volvo
Aero
653
5
(44)
Financial
Services
325
490
926
Other
53
194
(3,142)
Subtotal,
continuing operations
(766)
2,837
2,504
Gain
on the sale of Volvo Cars
90
-
-
Total,
as reported
(676)
2,837
2,504
____________
1
Operating income in
2003 included write-down of shares in Scania AB and Henlys Group
Plc amounting to SEK 4,030 million, of which SEK 429 million was
reported in Buses (Henlys Group Plc) and SEK 3,601 million was
reported in Other (Scania AB).
Operating income in 2001 was
charged with restructuring costs of SEK 3,862 million, of which
SEK 3,106 million was allocated to Trucks (mainly related to the
integration of Renault Trucks and Mack Trucks), SEK 392 million
to Buses and SEK 364 million to Construction Equipment.
Volvo’s investment in
Scania AB
During 1999 and 2000, Volvo
acquired 45.5% of the capital and 30.6% of the voting rights in
Scania AB, one of the world’s leading manufacturers of
trucks and buses. As a condition in connection with the European
Commission’s approval of Volvo’s acquisition of Renault
V.I. and Mack Trucks Inc. in 2001, Volvo undertook to divest its
holding in Scania not later than April 2004. At year-end 2003,
the carrying value of Volvo's holding in Scania AB was determined
to be SEK 20.4 billion. The carrying value of the holding of the
63.8 million Scania Series B shares was determined based upon the
consideration received when Volvo divested those shares to
Deutsche Bank on March 4, 2004. The carrying value of the holding
of 27.3 million Scania Series A shares was determined based upon
the closing share price of SEK 202 on December 31, 2003. A write-down
of SEK 3.6 billion was thereby charged to Volvo’s operating
income under Swedish GAAP for 2003. In April 2004, the Annual
General Meeting approved a dividend to AB Volvo's shareholders of
99% of the shares in Ainax AB, a wholly owned subsidiary holding
all of Volvo's Scania Series A shares. The distribution of shares
in Ainax AB to Volvo’s shareholders was made on June 8, 2004
and the value of this dividend was set at SEK 6,310 million.
Volvo’s investment in
Henlys Group Plc
During 1998 and 1999, Volvo
acquired 9.9% of the capital and voting rights in Henlys Group
Plc at a total acquisition cost of SEK 524 million. Henlys Group
is a British company involved in manufacturing and distribution
of buses and bus bodies in Great Britain and North America. Volvo
and Henlys Group jointly own the shares of the North American bus
operations Prévost and Nova Bus. In February and March 2004,
Henlys announced that its earnings for 2004 were expected to be
significantly lower than previously anticipated. As a consequence
of receiving this information, it was determined at the date when
Volvo issued its 2003 financial statements that Volvo's holding
in Henlys Group Plc was permanently impaired at December 31, 2003,
and a write-down of SEK 429 million was charged to operating
income under Swedish GAAP for 2003. After this write-down, the
carrying value of Volvo's shares in Henlys Group amounted to SEK
95 million, corresponding to the market value of these shares at
year-end 2003.
In October 1999, Volvo issued a
convertible debenture loan to Henlys Group Plc of USD 240 million
in connection with Henlys Group's acquisition of the US school
bus manufacturer Bluebird. The convertible debenture loan matures
in October 2009. In connection with the preparation of Volvo’s
2003 financial statements, Volvo evaluated the financial
situation of Henlys Group and assessed that no impairment loss
had then been incurred on the convertible debenture loan.
On March 31, 2004, Henlys Group
further announced that its 30% shareholding in TransBus would be
written down as a consequence of TransBus being placed into
administration. At the end of May 2004, the market value of
Volvo's shares in Henlys Group amounted to SEK 16 million.
On June 10, 2004, Henlys Group
announced that it was holding discussions with its lending banks
and other principal creditors regarding a restructuring of the
Henlys Group, and that it intended to delist its shares from the
London Stock Exchange. No assurance can be given that Volvo will
not be required in 2004 to take further write downs in Volvo’s
holdings of the Henlys Group’s shares or to record an
impairment loss on the convertible debenture loan.
Volvo and Renault agreement
In July 2000, AB Volvo reached an
agreement with Renault S.A. to acquire Mack Trucks and Renault V.I.,
the truck operations of Renault, in exchange for 15% of AB
Volvo's shares.
During 2000, AB Volvo repurchased
10% of the Company’s outstanding shares. On January 2, 2001,
the acquisition became effective and these shares were
transferred to Renault S.A. as partial payment for the shares of
Mack Trucks and Renault V.I..
During the beginning of 2001,
Volvo made an additional repurchase of 10% of the total number of
outstanding shares in AB Volvo. On February 9, 2001, 5% of the
shares were transferred to Renault S.A. as final payment for the
shares of Renault V.I.
The purchase price for the shares
of Mack Trucks and Renault V.I. was set at SEK 10.7 billion,
based on the Volvo shares price at the date of the acquisition.
The fair value of the acquired assets and liabilities was
established at the end of 2001 and goodwill related to the
acquisition was set at SEK 8.4 billion.
During 2001, AB Volvo and Renault
S.A. entered into a dispute regarding the final value of the
acquired assets and liabilities in Renault V.I. and Mack Trucks.
This process could result in an adjustment in the value of the
transfer. Any such adjustment will affect the amount of acquired
liquid funds and Volvo’s reported goodwill amount. The
outcome of this dispute cannot yet be determined with certainty.
However, Volvo believes that the outcome will not lead to an
increase of the goodwill amount.
Economic and market conditions.
2003 demonstrated a significant upswing in global economic
momentum despite the Iraq crisis, which dampened the economic
development in the first half of the year. In addition to the
United States, Asia in general and China in particular stood out
as the most buoyant economies. While the economic expansion in
the United States was underpinned by very stimulative financial
policies, monetary and fiscal, the European Union faced a much
tighter set-up of financial policies. The latter, in combination
with a significant appreciation of the Euro, resulted in another
lost year in terms of economic acceleration. The combination of
growing expectations on the global economy and the end of the war
in Iraq triggered a marked improvement in the risk appetite among
financial investors, which lead to an impressive rebound in
equity prices. However, due to a sluggish development in the US
labour market and subdued inflation expectations globally, there
was no spike in long-term interest rates.
The total market for heavy trucks
in Western Europe during 2003 was unchanged compared with the
preceding year at approximately 215,000 trucks. The markets in
Germany and in the United Kingdom strengthened by 6% and 10%,
respectively, while the markets in Italy and France weakened. In
North America, the total market for heavy trucks (Class 8) was
unchanged compared with the year earlier at a historically low
level of 179,000 vehicles. Growth rates in Eastern Europe and
Asia remained favorable and the market for heavy trucks in Brazil
rose by 28% compared with a year earlier. The total world market
for heavy and compact construction equipment, within Volvo CE’s
product range, increased by 11% during 2003. The growth was
mostly attributable to North America, China and Eastern Europe.
The market conditions for Volvo Buses and Volvo Aero remained
weak during 2003. However, at the end of 2003 air traffic showed
a positive trend in all regions of the world.
Factors affecting results.
The
Volvo Group’s sales are principally affected by unit sales
volume and vehicle prices as well as by currency fluctuations,
product mix and sales of optional equipment. The profitability of
Volvo’s operations depends on a number of factors, including
research and development expenses and the ability to achieve cost
and capital efficiencies in product manufacturing.
Impact of Currency Fluctuations.
A substantial amount of Volvo’s assets and debt are
denominated in currencies other than Swedish kronor or located in
countries other than Sweden. Most of Volvo’s sales take
place outside Sweden with invoicing in U.S. dollars and other
currencies. The sales outside Sweden amounted to SEK 175,665
million, SEK 173,275 million and SEK 168,490 million, or 93%, 93%
and 92% of Group sales in 2001, 2002 and 2003, respectively.
A large part of Volvo’s
production takes place outside Sweden. In addition, a large
percentage of the Group’s suppliers are located outside the
production countries from which Volvo imports, among other
things, parts and various raw materials which may be invoiced in
currencies other than kronor. Volvo’s sales and income,
expressed in kronor, may be materially affected by fluctuations
in the exchange rates between the kronor and the currencies in
which the Group sells to customer or purchases from suppliers.
Changes in exchange rates have
both dynamic and direct effect on income. The dynamic effects
include the pricing of products sold and materials purchased in
foreign currency. Changes in exchange rates also affect
competitors and thus have an indirect impact on Volvo’s
competitiveness. The direct effects arise mainly when income,
expense, assets and liabilities in foreign currencies are
translated to Swedish kronor at rates different than those used
to translate financial items for an earlier period.
The Swedish krona strengthened
during 2003 against most of Volvo's inflow currencies, with a
negative effect on operating income. The US dollar, the Canadian
dollar and pound sterling had the greatest impact. Changes in
spot-market rates for other currencies had minor effects.
The total effect of changes in
currency exchange rates on operating income in 2003 compared with
2002 was negative by approximately SEK 900 million. The
transactional effect of changed spot-market rates was negative,
approximately SEK 2,050 million. The effect on income of forward
and option contracts amounted to a gain of SEK 1,243 million (loss
of SEK 195 million in 2002), which resulted in a positive impact
of SEK 1,438 million for 2003, compared with 2002. Changes in
spot rates in connection with the translation of income in
foreign subsidiaries and the revaluation of balance sheet items
in foreign currencies had a negative impact of SEK 290 million.
Adoption of International
Financial Reporting Standards.
Effective in 2005 Volvo will
adopt International Financial Reporting Standards ("IFRS")
in its financial reporting. The transition from Swedish GAAP to
IFRS is being made to implement a regulation applicable to all
listed companies within the European Union as of 2005. Volvo
considers that the most significant effects will pertain to
accounting for financial instruments and goodwill. Restatement of
figures for prior years will be made in accordance with the
requirements of the transition rules. During 2003, Volvo has
started a number of projects aimed at adapting the internal
reporting routines to the new regulation. More detailed
information about the IFRS transition effects will be presented
in connection with the publication of the 2004 financial
statements.
Volvo and the Euro.
Volvo
established the Euro as the functional currency for its
operations in the countries that are members of the European
Monetary Union (EMU) in 2001. In September 2003, a referendum was
held in Sweden about membership in the EMU. The majority of the
votes was against Swedish membership.
Restructuring costs in 2001.
Restructuring
costs in 2001 amounted to SEK 3,862 million of which SEK 3,106
million was for Trucks, SEK 392 million was for Buses and SEK 364
million was for Construction Equipment.
Restructuring costs in Trucks
included costs for the integration of Mack Trucks and Renault
Trucks in order to secure coordination gains made possible
through the acquisition. The integration measures included
reduction of North American production capacity through a
decision to close Mack's Winnsboro plant and transfer production
to Volvo's New River Valley plant. Integration measures also
included restructuring of the global distribution system and
production structure. In addition to these integration measures,
restructuring costs in Trucks included significant personnel
reductions due to the prevailing business conditions, especially
in North America. Restructuring costs in Buses were attributable
to the shut down of Nova Bus' plant for city buses in Roswell,
United States. In Construction Equipment, restructuring measures
included terminating fabrication in the Asheville plant, United
States, and to an overall redundancy program.
Of the total restructuring costs,
SEK 2,259 million was attributable to contractual pensions and
excess personnel, SEK 573 million was attributable to writedowns
of assets and the remainder, SEK 1,030 million was attributable
to other restructuring costs.
Results from continuing
operations
2003 compared with 2002
Volvo Group.
Net sales in
2003 amounted to SEK 183,291 million (SEK 186,198
million in 2002), a decrease of 2% compared with 2002.
Adjusted for changes in currency exchange rates, net
sales increased by 6%.
Net sales of Volvo’s truck operations amounted to SEK 116,969
million, a decrease of 2% compared to 2002. Adjusted for currency
effects, sales increased by 5% compared with 2002. Net sales were
positively affected by higher deliveries in Asia and Eastern
Europe. In North America, deliveries of trucks were
down by 5% and in Western Europe the Volvo Group's deliveries of
trucks were 4% lower than in the preceding year.
In Buses, net sales decreased 15% compared with 2002. The decline
was partly attributable to currency movements. Adjusted for these
effects, net sales decreased 8%, pertaining mainly to lower
deliveries in North and South America, partially offset by
favorable volumes in China and the Nordic countries. In an increasing world
market, net sales of Construction Equipment rose 10%, adjusted
for currency effects 18%, driven by a wider product range and
improved market shares. In Volvo Penta, a weakening total
market and negative currency effects were partially compensated
by increased market shares, and net sales decreased by 1%.
Adjusted for changes in currency rates Volvo Penta’s net
sales increased by 8%. Volvo Aero's net sales declined by 9%, due
mainly to negative effect from changes in currency rates.
Adjusted for changes in currency rates, Aero’s net sales
increased by 4% despite the crisis in the airline industry.
The Group’s net sales in Western Europe increased by 4%.
Net sales in North America were down 17% due to lower USD
exchange rates and lower deliveries of Mack trucks. Sales in
Eastern Europe and Asia grew by 12% and 25% respectively while
sales in South America were unchanged.
Operating income for the Volvo
Group in 2003 amounted to SEK 2,504 million, compared with
SEK 2,837 million in 2002. Operating income included write-down
of shares in Scania AB and Henlys Group Plc amounting to SEK 3,601
million and SEK 429 million, respectively. Higher margins on
newly introduced products as well as price realization and
cost rationalization affected operating income positively .
Trucks' operating income in 2003
amounted to SEK 3,951million (SEK 1,189 million in 2002).
The improvement across the three truck brands, Mack, Renault and
Volvo, is largely related to increased margins due to price
realization and cost rationalization. Earnings improved in North
America, where profitability developed favorably for both Volvo
and Mack despite adverse market conditions. In Europe, Volvo
Trucks’ strong performance continued and both Renault
Trucks and Volvo Trucks reported improved earnings.
The operating loss during 2003 in Buses amounted to SEK 790
million compared with a loss of SEK 94 million in 2002. The
weaker result was related to the write-down of shares Henlys
Group Plc amounting to SEK 429 million, lower volumes, continued
price pressure and currency effects. Construction Equipment
reported operating income of SEK 908 million compared
with SEK 406 million in 2002. The improved earnings were
primarily related to increased volumes due to recently
launched products and further improved market shares partly
offset by strongly negative currency effects.
Operating income in 2003 for Volvo Penta amounted to SEK 695
million (SEK 647 million in 2002). The strong financial
performance of Volvo Penta mainly related to higher deliveries
and improved gross margins. In Volvo Aero, operating income
declined to a loss of SEK 44 million (income of SEK 5
million in 2002). The lower earnings were mainly a result of
provisions for expected losses on contracts of SEK 170 M in
the fourth quarter.
Operating income within Financial Services amounted to SEK 926
million (SEK 490 million in 2002). Financial Services' favorable
trend of ten consecutive quarters of progressively increasing
earnings primarily pertained to lower credit losses in the US
customer financing operations and strong results in the
operations in Europe as well as in other parts of the world.
Group operating income in 2002 was negatively affected
by provisions of SEK 807 million relating to a deficit
within the Volvo Group’s Swedish pension foundation.
Operating margin during 2003 was 1.4%,
compared with 1.5% in 2002.
Trucks.
Total deliveries
from the Group’s truck operations amounted to 155,989 trucks
in 2003, a decline of 1% compared with 2002. In Europe, 92,083
trucks were delivered, compared with 96,289 trucks in 2002.
Deliveries in North America were down 5% compared with the year-earlier
period and totaled 34,756 trucks. Deliveries in Asia, including
the Middle East, continued to develop favorably, particularly in
Iran. Net sales of Volvo’s truck operations amounted to SEK
116,969 million in 2003. Adjusted for currency effects, sales
increased by 5% compared with 2002.
Operating income in 2003 amounted
to SEK 3,951 million (SEK 1,189 million in 2002). The
improvement across the three truck brands, Mack, Renault and
Volvo, is largely related to increased margins due to price
realization and cost rationalization. The strong customer values
in the new Volvo range, increased market shares and increased
efficiency has contributed to the improved earnings in 2003.
These positive effects were partly offset by negative currency
effects and higher costs for research and development. Earnings
improved in North America, where profitability developed
favorably for both Volvo and Mack despite adverse market
conditions. In Europe, Volvo Trucks’ strong performance
continued and both Renault Trucks and Volvo Trucks reported
improved earnings.
Research and development expenses
within the truck operations amounted to SEK 4,874 million in 2003,
compared with SEK 4,175 million in 2002.
Buses.
Volvo delivered 7,817
(9,059 in 2002), buses and bus chassis during 2003, a decrease of
14%. The decline was mainly attributable to significantly lower
volumes in North America, which were offset to some extent
by favorable volumes in China and the Nordic countries.
Net sales in 2003 declined to SEK
11,978 million (SEK 14,035 million in 2002). The decrease
was largely explained by lower deliveries, mainly in North
America, and changes in currency exchange rates.
Adjusted for currency effects, net sales were down 8%
compared with 2002.
The operating loss rose to SEK
790 million, compared with a loss of SEK 94 million in 2002. The
weaker result compared with the year-earlier period was
related to the write-down of shares in Henlys Group Plc amounting
to SEK 429 million, lower volumes, continued price
pressure and currency effects. In December 2003, the
decision was taken to close the bus body plant in Aabenraa,
Denmark. The cost for the closure amounted to SEK 42 million.
Research and development expenses
for Buses in 2003 amounted to SEK 453 million, compared with SEK
396 million in 2002.
Construction Equipment.
Net
sales amounted to SEK 23,154 million (SEK 21,012 in 2002),
up 18% adjusted for currency effects. The increase was mainly attributable
to all-time-high volumes as a result of the expanded
product range.
Operating income in 2003 was
SEK 908 million (SEK 406 million in 2002) and the operating
margin 3.9% (1.9% in 2002). The improved earnings were
primarily related to increased volumes, which were strongly
offset by negative currency effects.
Research and development costs for
Construction Equipment in 2003 amounted to SEK 904 million
compared with SEK 685 million in 2002.
Volvo Penta
. Net sales in 2003
totaled SEK 7,596 million compared with SEK 7,669 million in 2002.
Operating income amounted to SEK
695 million (SEK 647 million in 2002), which is Volvo Penta's best
result to date. The operating margin for 2003 was 9.1% (8.4%
in 2002). Both sales and earnings were negatively affected
by an unfavorable currency development, mainly from the
weaker US dollar.
Research and development costs for
Volvo Penta amounted to SEK 291 million in 2003, compared with
SEK 352 million in 2002.
Volvo Aero
. As a result of
the negative impact of changes in currency rates, Volvo Aero’s
net sales declined 9% to SEK 8,030 million (SEK 8,837 million in
2002).
Earnings deteriorated to an
operating loss of SEK 44 million, compared with operating income
of SEK 5 million in 2002. The declines in sales and earnings were
primarily attributable to a combination of lower volumes, mainly
within engine overhaul in combination with strong price pressure
and the falling USD exchange rate. Earnings were also negatively
affected by provisions for expected losses on contracts amounting
to SEK 170 million.
Despite the severe crisis in the
aviation industry, Volvo Aero’s manufacture of components
for commercial aircraft engines and the military operations
reported positive results for the full year. The operating margin
was a negative 0.5% (positive of 0.1% in 2002).
Research and development costs in
Volvo Aero amounted to SEK 224 million in 2003, compared with SEK
173 million in 2002.
Financial Services
. Year-end
operating income amounted to SEK 926 million (SEK 490 million in
2002). Return on equity was 9.8% (4.8% in 2002) with a year-end equity
ratio of 12.0% (10.8% at end of 2002).
Write-offs
in 2003 totaled SEK 848 million resulting in an annualized write-off
ratio for the year of 1.37% (1.39% for 2002). Total credit
reserves amounted to SEK 1.3 billion at the end of December, and
the credit reserve ratio at year-end was 2.14%.
Other.
Operating income in
2003 and 2002 from the Group’s other operations included AB
Volvo and certain internal service companies. Operating income
from the Group’s other operations in 2003 included write-down
of shares in Scania amounting to SEK 3,601 million and a dividend
received from Scania of SEK 501 million (SEK 319 million in 2002).
Net interest expense.
Net
interest expense for the year amounted to SEK 791 million (SEK
624 million in 2002). The higher net interest expense was mainly
explained by lower yield on financial assets and higher average
net financial debt during 2003, in part due to higher
provisions for post-employment benefits and the acquisition
of Bilia's truck and construction equipment operations.
Income taxes.
During 2003,
income tax expenses of SEK 1,334 million was reported,
compared with SEK 590 million for 2002. The income tax
expense was mainly related to current tax expenses.
Minority interests.
Minority
interests in the Volvo Group were mainly attributable to Volvo
Aero Norge AS (22%) and Volvo Aero Services LP (5%).
2002 compared with 2001
Volvo Group.
Net sales in
2002 amounted to SEK 186,198 million (SEK 189,280 million in 2001),
a decrease of 2% compared with the preceding year. Adjusted for
changes in group structure and foreign currency exchange rates,
net sales increased by 2%. Net sales of Volvo’s truck
operations amounted to SEK 118,752 million, an increase of 2%.
The increase in sales related mainly to higher deliveries in
North America, Asia and Eastern Europe. In Buses, net sales
decreased 16% compared to 2001 largely explained by proportionate
consolidation of Prévost and Nova Bus as from the fourth quarter
2001 reflecting a reduction in Volvo’s ownership in these
entities and changes in currency exchange rates. Net sales of
Construction Equipment fell 1% while net sales of Volvo Penta
rose 4%. In both Construction Equipment and Volvo Penta, a
weakening total market and negative impact from changes in
currency exchange rates was compensated by increased market
shares. Volvo Aero's net sales suffered heavily from the crisis
in the airline industry and net sales dropped 25%.
Operating income from continuing
operations for the Volvo Group in 2002 amounted to SEK 2,837
million, compared with an operating loss of SEK 766 million in
the preceding year. The favorable deviation was mainly explained
by improved gross margins in the truck operations and
restructuring costs that were charged to operating income in 2001.
Trucks' operating income in 2002
amounted to SEK 1,189 million (operating loss of SEK 2,066
million in 2001). The earnings were favorably affected by
improved gross margins and lower losses on forward exchange
contracts partially offset by lower capitalization of development
costs. Furthermore, the operating loss for 2001 included
restructuring costs amounting to SEK 3,106 million and a gain on
sale of shares in Mitsubishi Motors Corporation of SEK 574
million.
The operating loss in Buses of SEK
94 million (operating loss of SEK 916 million in 2001) was
substantially lower than in the year earlier, mainly derived from
turn around activities in North America, improved earnings in
Europe and Asia and restructuring costs of SEK 392 million
included in the operating loss for 2001. These positive effects
were partially offset by lower volumes in Mexico and South
America. Construction Equipment reported an operating income of
SEK 406 million compared with SEK 527 million in the year earlier.
The lower earnings were primarily explained by deteriorating
market conditions in North America, changes in the product mix
and launch costs for new products. The operating income of
Construction Equipment in 2001 included restructuring costs
amounting to SEK 364 million. Operating income in 2002 for Volvo
Penta amounted to SEK 647 million (SEK 658 million in 2001). In
Volvo Aero, operating income declined to SEK 5 million (SEK 653
million in 2001) as a result of significantly lower sales due to
the general downturn in the aviation industry. Operating income
within Financial Services amounted to SEK 490 million (SEK 325
million in 2001). The favorable trend was primarily pertaining to
lower credit losses in the US customer financing operations. The
operating income in 2001 included significant losses in the US
truck financing portfolio and a gain on the divestment of
Volvia's insurance operations.
Group operating income in 2002 was
negatively affected by provisions of SEK 807 million (SEK 292
million in 2001) relating to a deficit within the Volvo Group’s
Swedish pension foundation for securing commitments in accordance
with the ITP plan (a defined benefit plan for salaried employees).
The deficit was a result of the downturn on the stock markets.
Operating margin during 2002 was 1.6%,
compared with negative 0.4% in 2001.
Trucks.
Net sales of Volvo’s
truck operations amounted to SEK 118,752 million (SEK 116,568
million in 2001). The increase in sales related mainly to higher
deliveries in North America, Asia and Eastern Europe. In North
America, the total market for heavy trucks increased 5% mainly as
a result of a peak in demand during the middle of the year before
new emission regulations (EPA02) became effective during the last
quarter of the year. In Western Europe, the Volvo Group's
deliveries of trucks were 3% lower than in the preceding year.
The reduction related primarily to Volvo Trucks and limited
production capacity during the first quarter in connection with
the introduction of the new Volvo FH and FM series. During the
remaining part of the year, the demand was high for the new
product range and the production capacity was increased
successively. The demand in the southern part of Europe continued
to be high and Renault Trucks' deliveries in Western Europe
remained unchanged at a high level.
Trucks' operating income in 2002
amounted to SEK 1,189 million (operating loss of SEK 2,066
million in 2001). The earnings were favorably affected by
improved gross margins as a result of improved price realization,
positive effects from the integration of the truck companies and
cost rationalizations. Operating income was also positively
affected by lower losses on forward exchange contracts offset by
lower capitalization of development costs (SEK 945 million in
2002 compared withSEK 1,586 million in 2001). The operating loss
for 2001 included restructuring costs of SEK 3,106 million mainly
relating to the integration of Mack Trucks and Renault Trucks in
order to secure coordination gains made possible through the
acquisition. The operating loss during 2001 further included a
gain on sale of shares in Mitsubishi Motors Corporation of SEK
574 million. The earnings of Volvo's truck operations during 2002
gained from continued strong earnings in Europe but also
continued to suffer from low volumes and capacity utilization in
North America due to the poor market conditions, even if the
demand increased temporarily during the middle of the year in
advance of the new US emission regulations.
Research and development expenses
within the truck operations amounted to SEK 4,175 million in 2002,
compared with SEK 3,614 million in 2001.
Buses.
Net sales in 2002
declined to SEK 14,035 million (SEK 16,675 million in 2001). The
decrease was largely explained by proportionate consolidation of
Prévost and Nova Bus as from the fourth quarter 2001 as well as
changes in currency exchange rate. Adjusted for these effects,
net sales were down 1% pertaining mainly to decreased deliveries
in North and South America partially offset by favorable volumes
in China and the Nordic countries. At October 1, 2001, the
operations of Prévost and Nova Bus became jointly controlled by
Volvo and the Henlys Group Plc and Volvo’s ownership was at
the same time reduced from 51% to 50%. Consequently, Volvo
interest in Prévost and Nova Bus is from the same date reflected
in the Group’s financial statements by application of the
proportionate consolidation method which means that 50% of items
in the income statement and balance sheet of Prévost and Nova
Bus are reflected in the Volvo Group’s financial statements.
Prior to October 1, 2001, Volvo’s interest in Prévost and
Nova Bus was fully consolidated with a minority interest of 49%.
Buses’ operating loss during
2002 was SEK 94 million compared with an operating loss of SEK
916 million in 2001. The substantially lower loss compared with
the year-earlier period was to a large extent due to turn-around
activities in North America, improved earnings in Europe and Asia
and restructuring costs of SEK 392 million included in the
operating loss for 2001. The restructuring costs during 2001 were
attributable to the shutdown of the Nova Bus plant for city buses
in Roswell, US. Operating income during 2002 was negatively
affected by lower volumes in Mexico and South America.
Research and development expenses
for Buses in 2002 amounted to SEK 396 million, compared with SEK
498 million in 2001.
Construction Equipment.
Net
sales in 2002 amounted to SEK 21,012 million (SEK 21,135 million
in 2001). In spite of a decreasing world market, net sales
adjusted for changes in currency rates rose 3% driven by a wider
product range and improved market shares.
Operating income in 2002, amounted
to SEK 406 million (SEK 527 million in 2001). The lower earnings
were primarily explained by deteriorating market conditions in
North America, changes in the product mix and costs for the
introduction of new products. The operating income in 2001
further included restructuring costs of SEK 364 million
pertaining to the operations in Asheville, US, and an overall
redundancy program.
Research and development costs for
Construction Equipment in 2002 amounted to SEK 685 million
compared with SEK 674 million in 2001.
Volvo Penta
. Net sales in
2002 totaled SEK 7,669 million (SEK 7,380 million in 2001), an
increase by 4%. Sales improved in all segments except Industrial.
In Europe, market shares strengthened for marine engines as well
as for industrial engines. Volvo Penta also continued to increase
its share of the North American marine engine market, especially
for diesel engines. A strong level of demand in 2002 for
industrial engines for irrigation pumps in Saudi Arabia could
also be noticed.
Operating income amounted to SEK
647 million (SEK 658 million in 2001).
Research and development costs for
Volvo Penta amounted to SEK 352 million in 2002, compared with
SEK 368 million in 2001.
Volvo Aero
. As a result of
the continued downturn in the aviation industry, Volvo Aero’s
net sales declined 25% to SEK 8,837 million (SEK 11,784 million
in 2001).
Operating income deteriorated to
SEK 5 million (SEK 653 million in 2001). The weak earnings were
attributable primarily to the sharp decline in the aftermarket,
in which Volvo Aero was hit by the reduced need for engine
overhauls and new and old spare parts. Concurrently, the Land
& Marine Gas Turbines unit was affected by the decline in the
gas turbine market. Despite the deep crisis in the aviation
industry, Volvo Aero’s Aerospace Components and Military
Engines business units were able to deliver positive earnings for
the full year, which offset the declines in the other business
units.
Research and development costs in
Volvo Aero amounted to SEK 173 million in 2002, compared with SEK
211 million in 2001.
Financial Services
.
Operating income amounted to SEK 490 million (SEK 325 million in
2001). Operating income in the established customer-financing
companies was stable. Provisions for expected credit losses in
the U.S customer finance operations affected operating income
adversely, but were on a lower level than last year. Operations
in South America and Eastern Europe continued to perform well,
with operating income higher than in previous years. Mainly due
to higher claims, the insurance operation reported lower
operating income than in 2001. Income from real estate and
treasury was higher than in the preceding year.
Other.
Operating income in
2002 and 2001 from the Group’s other operations included AB
Volvo and certain internal service companies. Furthermore,
operating income from the Group’s other operations in 2002
included a dividend received from Scania of SEK 319 million (SEK
637 million in 2001).
Net interest expense.
Net
interest expense for the year amounted to SEK 624 million (SEK 1,000
million in 2001). The lower expense was mainly explained by lower
net financial debt and lower funding costs in the US as a
consequence of lower interest rates and lower US dollar exchange
rates.
Income taxes.
During 2002,
income tax expenses of SEK 590 million was reported compared with
tax income of SEK 326 million in the preceding year. The income
tax expenses was mainly related to current tax expenses in
subsidiaries outside Sweden.
Minority interests.
Minority
interests in the Volvo Group were mainly attributable to Volvo
Aero Norge AS (22%) and Volvo Aero Services LP (5%). The Henlys
Group’s holding (49%) in Prévost Holding BV was reported as
minority interest up to the third quarter 2001.
Cash flows relating to major
acquisitions and divestments of subsidiaries are included in the
consolidated cash flow from the point of acquisition or through
to the point of divestment. The effects of changes in exchange
rates on translation of foreign subsidiaries have also been
excluded since these effects do not influence cash flow. For
further information regarding the impact of changes in foreign
exchange rates see "– 5.A. Operating Results –
General – Impact of Currency Fluctuations".
Cash flow from operating
activities.
Cash flow from operating activities increased to
SEK 17.1 billion in 2003 from SEK 15.3 billion in 2002, and SEK
14.1 billion in 2001. The increase in 2003 versus 2002 was mainly
derived from increased earnings capacity and lower working
capital tied up, mainly reduced inventories. The increase between
2002 and 2001 was due mainly to a favorable earnings capacity.
Cash flow from/used in
investing activities.
Net cash used in investing activities
in 2003 amounted to SEK 12.8 billion, compared with SEK 14.7
billion in 2002 and net cash from investing activities of SEK 1.9
billion in 2001.
Investments in fixed assets in
2003 amounted to SEK 6.0 billion compared with SEK 6.7 billion
and SEK 8.1 billion in 2002 and 2001, respectively. Capital
expenditures for property, plant and equipment in 2003 amounted
to SEK 4.8 billion (SEK 4.8 billion in 2002 and SEK 5.5 billion
in 2001). Capital expenditures in Trucks, which amounted to SEK 3.9
billion (SEK 4.5 billion in 2002 and SEK 5.5 billion in 2001),
were made in tools and equipment for the production of new truck
models in North America, Brazil and France. Investments were also
made in Sweden and France for increased capacity in the paint
shops. The level of capital expenditures remained at the same
level as last year in Buses at SEK 0.2 billion and Volvo Aero at
SEK 0.3 billion, decreased in Construction Equipment from SEK 0.6
billion to SEK 0.5 billion and increased in Volvo Penta from SEK
0.3 billion to SEK 0.4 billion.
Investments in leasing assets
amounted to SEK 5.3 billion in 2003 compared with SEK 5.2 billion
and SEK 5.9 billion in 2002 and 2001, respectively. Investments
in customer-financing receivables (net) during 2003, amounted to
SEK 4.3 billion compared with SEK 5.7 billion and SEK 3.7 billion
in 2002 and 2001, respectively. The investments pertained mainly
to the operations in North America and Western Europe.
Cash flow from investment in
shares, net was negative SEK 0.1 billion in 2003 as well as in
2002. Cash flow from investment in shares in 2001 resulted in a
positive cash flow of SEK 3.9 billion and was mainly related to
the sale of Volvo’s holding in Mitsubishi Motors Corporation.
Net acquisitions of subsidiaries
and other business units in 2003 had an insignificant effect on
cash flow and affected cash flow in 2002 negatively by SEK 0.2
billion. Net divestments of subsidiaries and other business units
in 2001 resulted in a positive cash flow of SEK 13.0 billion,
mainly attributable to the final payment of SEK 12.1 billion from
the sale of Volvo Cars, divestment of the insurance operation in
Volvia and acquired liquid funds within Mack and Renault V.I.
Cash flow from financing
activities.
Net cash flow used in financing activities
amounted to SEK 0.5 billion in 2003 and SEK 1.8 billion in 2002.
Net cash provided by financing activities amounted to SEK 3.2
billion in 2001, excluding the repurchase of own shares. The
increase in loans during 2003 provided liquid funds of net SEK 1.9
billion, of which new borrowing during the year, mainly through
the issue of bonds and a commercial paper program, contributed
SEK 25.4 billion (amortization of debt was SEK 23.5 billion).
Loans to external parties
decreased in a net amount of SEK 0.9 billion during 2003 compared
to SEK 1.7 billion and SEK 0.2 billion during 2002 and 2001
respectively.
Dividends paid to AB Volvo
shareholders in 2003 totaled SEK 3.4 billion the same as in 2002
and in 2001.
Repurchase of own shares in 2001
amounted to SEK 8.3 billion.
Change in cash and cash
equivalents.
The Group’s liquid funds increased during
2003 by SEK 3.1 billion, of which changes in exchange rates
decreased liquid funds by SEK 0.6 billion. Liquid funds at year-end
amounted to SEK 28.7 billion. Liquid funds were SEK 25.6 billion
at December 31, 2002 and SEK 27.4 billion at December 31, 2001.
Net financial position
is
calculated as liquid funds and short-term and long-term interest
bearing receivables reduced by short-term and long-term interest-bearing
loans (including provisions for pensions and other post
retirement benefits). Net financial position does not include net
financial debt in Volvo Financial Services, since interest
expense in these companies is charged against operating income
and does not affect consolidated net interest expense/income. The
balance sheets as of December 31, 2003, 2002 and 2001 for the
Volvo Group with Financial Services consolidated in accordance
with the equity method as well as for the Volvo Group as a whole
is shown under " -Financial Services Operations".
Net financial debt at December 31,
2003 was calculated as follows:
(in
millions of SEK)
Volvo Group, excl Financial
Services
Liquid
funds 1)…………….……………………………
28,103
Short-term
interest-bearing receivables and loans……………………………………………
6,502
Long-term
interest-bearing receivables and loans……………………………………………
2,911
Financial assets………………………………...
37,516
Loans…………………………………………...
24,679
Provisions
for pensions and other post-employment benefits…………………………………………
15,263
Financial
liabilities…………………………….
39,942
Net
financial debt………………………………
(2,426)
1) Liquid funds include cash and
bank balances and marketable securities. Marketable securities
are stated at the lower of cost or market value in accordance
with the portfolio method. Marketable securities consist of
interest-bearing securities, to some extent with maturities
exceeding three months. However, these securities have high
liquidity and can easily be converted to cash. Liquid funds are
mainly invested in SEK.
The Group’s net financial
debt, which amounted to SEK 6.1 billion at the beginning of the
year, totaled a net financial debt of SEK 2.4 billion at December
31, 2003. The decrease was due primarily to positive cash flow
from operating activities and currency effects partly offset by
dividends paid to AB Volvo shareholders, change in provision for
post employment benefits and debt in acquired and divested
operations.
The net financial position as a
percentage of shareholders’ equity and minority interests
was negative 3.3% at the end of 2003 compared with 7.7% at the
end of 2002.
Volvo generally maintains lines of
credit throughout the geographical areas where it conducts
business. The unused portion of committed credit lines, which may
be used without restrictions, amounted to approximately SEK 15
billion at the end of 2003. Of these facilities approximately SEK
13 billion consists of stand-by facilities with varying
maturities up to the end of 2007.
Credit risks.
Credit risks
are related to customer credits, to the deposit of liquid funds
and to engagements in derivative instruments. Credit risk depends
on the creditworthiness of counterparts and is reduced through
careful evaluation of their ability to fulfill their obligations.
Customer credits comprise of
credit granted to agents and dealers as well as loans made to end-customers
by customer-financing companies. In addition, an evaluation of
the political and economic situation in the purchaser’s
country is made in connection with export transactions. At year-end
2003, Volvo’s accounts receivable amounted to SEK 16.9
billion. The average age of these receivables was 32 days.
Operations are governed by common
policies for credits and by rules for classifying customers. The
credit portfolio is distributed properly among different
categories of customers and different industries. Credit risks
are managed through active monitoring and follow-up routines and,
in appropriate cases, procedures for repossessing products.
Allocations are also made to credit-risk reserves. The credit
risk in customer financing is distributed among a large number of
individual customers and dealers. Collateral is provided in the
form of the products being financed. When issuing credit, an
effort is made to balance risk exposure and expected yield. Total
assets in the consolidated customer-financing companies,
consisting mainly of current and long-term accounts receivable,
amounted to SEK 62.7 billion in 2003 compared to SEK 64.9 billion
in 2002.
The liquidity in the Group is
invested mainly in local cash pools or directly with Volvo
Treasury. Volvo Treasury invests the liquid funds in the money
and capital markets. This concentrates the credit risk within the
Group’s in-house bank. All investments must meet criteria
for low credit risk and high liquidity. In accordance with Volvo’s
credit policy, counterparts for both investments and transactions
in derivatives must in general have received a rating of "A"
or better from one of the well-established credit-rating
institutions.
The derivative instruments used by
Volvo to reduce its foreign-exchange and interest-rate risk in
turn give rise to a counterparty risk, the risk that a
counterparty will not fulfill its part of a forward or option
contract, and that a potential gain will not be realized.
Transactions with derivative instruments are mainly conducted via
Volvo Treasury, which means that the counterparty risk is
concentrated within the Group's in-house bank. Where appropriate,
the Volvo Group arranges master netting agreements with the
counterparties to reduce exposure.
Policies and procedures.
The
Volvo Group Financial Risk Policies form the basis for each Group
company’s action program. Monitoring and control is
conducted continuously in each company as well as centrally. Most
of the Volvo Group’s financial transactions are carried out
through Volvo’s in-house bank, Volvo Treasury, which
conducts its operations within established risk mandates and
limits.
Commercial exposure.
The
objective of the Volvo Group Currency Policy is to minimize the
short-term impact of adverse exchange rate fluctuations on the
Volvo Group’s operating income, by hedging the Group's
forecasted transaction exposure, including firm flows. In order
to meet the objective of the Volvo Group Currency Policy,
forecasted currency flows representing firm exposure and
forecasted exposure with a pre-fixed price in local currency
should be hedged. Volvo uses forward exchange contracts and
currency options to hedge these flows. In accordance with the
Group’s currency policy, between 50% and 80% of the net flow
in each currency is hedged for the coming 6 months, 30% to 60%
for months 7 through 12 and firm flows beyond 12 months should
normally be hedged.
Financial exposure.
Loans
and deposits in the Group companies are mainly made through Volvo
Treasury in local currencies and financial currency exposure in
the individual entities are thereby being minimized. Volvo
Treasury uses various derivative instruments in order to provide
deposits and lending in different currencies without increasing
the company’s own risk. The Volvo Group’s net financial
position is being affected by changes in currency rates because
financial assets and liabilities are allocated between Group
companies operating in different currencies.
Interest-rate risks.
Interest-rate
risks relate to the risk that changes in interest-rate levels
affect the Group’s profit. By matching fixed-interest
periods of financial assets and liabilities, Volvo reduces the
effects of interest-rate changes. Interest-rate swaps are used to
change the interest-rate periods of the Group’s financial
assets and liabilities. Exchange-rate swaps make it possible to
borrow in foreign currencies in different markets without
incurring currency risks.
Volvo also holds standardized
futures and forward-rate agreements. The majority of these
contracts are used to secure interest levels for short-term
borrowing or deposits.
Liquidity risks.
Volvo
ensures maintenance of a strong financial position by
continuously keeping a certain percentage of sales in liquid
assets. A proper balance between short- and long-term borrowing,
as well as the ability to borrow in the form of credit
facilities, are designed to ensure long-term financing.
Non-current liabilities.
Volvo
Treasury AB and Volvo Group Finance Europe BV issue most of the
Group’s non-current liabilities. The total outstanding non-current
liabilities, excluding current portion as per year-end amounted
to SEK 46.7 billion (SEK 46.4 billion in 2002). The material
currencies issued were the Euro, US dollar, Swedish kronor, Pound
Sterling and Canadian dollar amounting to SEK 26.3 billion, SEK 6.9
billion, SEK 6.7 billion, SEK 1.8 billion and SEK 1.5 billion,
respectively.
Most of Volvo’s non-current
liabilities are issued with a fixed interest rate, with currency
and interest rate risk hedged using derivative instruments.
The maturity structure of the
Group’s non-current liabilities is set considering the long-term
funding needs within the Group. Approximately 53% mature within
two to three years, 33% within four to five years and 14% within
six years or later. See Note 24 to Volvo’s consolidated
financial statements.
Residual value risks.
Residual-value
risk is attributable primarily to contracts involving buy-back or
trade-back commitments, residual value guarantees or operational
lease contracts. It comprises the risk that the product, at the
end of the contract period, has another residual value than
foreseen when the contract was entered. This may force Volvo to
dispose of used products at a loss. Residual-value risks are
managed within Volvo's business areas through solid knowledge of
the market, knowledge of product and price trends, and programs
supporting the value of second-hand products. It is Volvo’s
policy to provide for this exposure on a continuing basis, so
that the book value of these vehicles are in line with current
and anticipated future price levels on used commercial vehicles.
Repurchase of shares of AB
Volvo.
At the beginning of 2001, Volvo held 10% of the total
number of shares in AB Volvo. Such shares were transferred to
Renault SA on January 2, 2001, as partial payment for Renault V.I.
and Mack. The transfer of shares to Renault SA was treated as an
issue of new shares. During the beginning of 2001, Volvo
repurchased an additional 10% of the total number of shares
outstanding in AB Volvo. As a result, a total of SEK 8.3 billion
was transferred to the shareholders of AB Volvo. On February 9, 5%
of the total number of shares outstanding were transferred to
Renault SA as final payment for the shares of Renault V.I. Volvo
thus holds 5% of the total number of registered Volvo A and Volvo
B shares.
The total number of outstanding
Volvo shares by year-end 2003 was 419,444,842. The average number
of outstanding shares was 419,444,842 in 2003. On April 16, 2004,
the Annual General Meeting resolved that Volvo may transfer
treasury stock to fulfill undertakings for the Company’s
employee stock options program of 2002. Furthermore, the Meeting
decided to establish a new share-based incentive program during
the second quarter of 2004 for senior executives in the Volvo
Group and it was resolved that Volvo may transfer own shares to
the participants in the new share-based incentive program. The
Annual General Meeting of AB Volvo also authorized the Board of
Directors to decide on the acquisition of own shares for, among
other reasons, to create a more effective capital management for
AB Volvo. Accordingly, on June 16, 2004, the Board decided to
acquire through purchase on Stockholmsbörsen a maximum of 22,076,045
Series A and/or Series B shares, however, not to exceed a total
purchase amount of SEK 4,300,000,000.
The purchases may be carried out
during the period until the Annual General Meeting in 2005. The
buyback, which will begin as soon as possible, shall be made
within the so-called spread and settlements will be reported via
Stockholmsbörsen in accordance with applicable rules.
Capital Expenditures for
Property, Plant and Equipment.
Capital expenditures that had been
approved but not yet implemented at year-end 2003 amounted to
approximately SEK 6.4 billion. The distribution of these
investments, by principal business areas, is as follows:
(in billions of SEK)
Trucks………………………………………………………….
4.7
Buses…………………………………………………………………..
0.2
Construction
Equipment……………………………………………….
0.9
Volvo
Penta………………….………………………………………...
0.0
Volvo
Aero….…………………………………………………………
0.1
Other
and corporate expenditures……………………………………..
0.5
Total……………………………………………………………………
6.4
Historically, Volvo’s
principal method of financing capital expenditures has been with
funds provided by operations, supplemented by outside borrowings
as required. These sources of financing will continue to be
utilized. Volvo has sufficient working capital to meet its needs
for the foreseeable future.
Financial Services operations
Supplementary income statements and balance sheets
In the supplementary income
statements and balance sheets below, all Financial Services
activities are separated from Volvo’s other operations in
order to show how the activities have developed.
Condensed
income statements, Financial Services
2001
2002
2003
(In millions
of SEK)
Net
sales……………………………………………………..
9,495
9,925
9,153
Income
after financial items
………………………………...
325
490
926
Income
taxes………………………………………………...
10
(134)
(170)
Net
income………………..
………………………………...
335
356
756
The condensed balance sheets below
are presented for the Total Volvo Group as well as separately for
Financial Services and for the Volvo Group excluding Financial
Services. Separate condensed balance sheets are presented for
Financial Services and for Volvo’s industrial and commercial
operations ("Volvo Group excluding Financial Services")
since the capital structures of these operations are signficantly
different and therefore this additional information is requested
from shareholders and creditors in order to be able to better
evaluate the financial position of the Volvo Group. The Volvo
Group’s financial targets as established by its Board of
Directors further include separate targets for the capital
structure within Financial Services and Volvo’s industrial
and commercial operations.
(In
billions of SEK, except for %)
Volvo Group,
excl Financial Services
1
Financial
Services
Total Volvo
Group
Condensed
balance sheets
2001
2002
2003
2001
2002
2003
2001
2002
2003
Assets
Intangible
assets
17.4
16.9
16.7
0.2
0.1
0.1
17.5
17.0
16.8
Property,
plant and equipment
30.4
27.8
27.2
2.9
3.1
3.4
33.2
30.8
30.6
Assets
under operating leases
15.0
11.1
9.0
14.1
13.3
13.2
27.1
23.5
21.2
Shares
and participations
35.1
34.7
9.6
0.2
0.3
0.2
27.8
27.5
1.8
Long-term
customer finance receivables
0.0
0.1
0.1
26.3
25.4
23.9
26.1
25.2
23.4
Long-term
interest bearing receivables
5.6
4.2
2.9
0.0
0.0
0.0
5.6
4.2
2.8
Other
long-term receivables
9.0
8.5
7.9
0.1
0.0
0.1
8.9
8.3
7.7
Inventories
30.6
27.6
25.8
0.5
0.7
0.6
31.1
28.3
26.5
Short-term
customer finance receivables
0.1
0.0
0.1
23.7
22.7
22.9
22.7
21.8
22.6
Short-term
interest bearing receivables
6.8
4.3
6.5
0.1
0.0
0.0
2.5
1.3
3.9
Other
short-term receivables
29.8
25.8
25.2
2.5
2.1
1.6
31.0
25.7
24.9
Shares
in Scania
-
-
20.4
-
-
-
-
-
20.4
Marketable
securities
13.0
16.6
19.4
0.5
0.1
0.1
13.5
16.7
19.5
Cash
and bank accounts
11.9
7.6
8.7
2.4
1.6
0.7
13.9
8.9
9.2
Total assets
204.7
185.2
179.5
73.5
69.4
66.8
260.9
239.2
231.3
Shareholders’
equity and liabilities
Shareholders’
equity
85.2
78.3
72.4
7.6
7.5
8.0
85.2
78.3
72.4
Minority
interests
0.4
0.2
0.2
0.0
0.0
0.0
0.4
0.3
0.2
Provisions
for postemployment benefits
14.6
16.2
15.3
0.0
0.0
0.0
14.6
16.2
15.3
Other
provisions
14.1
13.9
12.8
4.3
2.8
2.3
18.4
16.7
15.1
Loans
29.7
22.5
24.7
58.0
54.3
52.8
81.6
72.4
74.1
Other
liabilities
60.7
54.1
54.1
3.6
4.8
3.7
60.7
55.3
54.2
Total
shareholders’ equity and liabilities
204.7
185.2
179.5
73.5
69.4
66.8
260.9
239.2
231.3
Shareholders’
equity and minority interests as percentage of total
assets
41.8
42.4
40.5
10.3
10.8
12.0
32.8
32.8
31.4
____________
1
Financial Services
operations are reported in accordance with the equity method.
Net sales and income.
The
net sales value consists mainly of interest income and fees for
rental and leasing contracts. Total sales of SEK 9,153 million in
2003 were 8% lower than in 2002.
Income after financial items
amounted to SEK 926 million (SEK 490 million in 2002). Income
from all the business segments; customer finance, real estate and
treasury, was higher than in the preceding year .
At year-end 2003 the credit
portfolio amounted to SEK 60 billion (SEK 61 billion in 2002).
Excluding currency effects, the portfolio growth was 7% (8% in
2002). Provision is made for both credit risks and residual-value
risks to the degree that residual-value risks are attributable to
the customer-financing company. For customers unable to fulfill
their contractual obligations, specific provisions for credit
risks are made based on an individual assessment of each contract.
In addition, in accordance with established policies, provisions
are made for estimated credit and residual value losses for each
customer-financing company.
Provisions for estimated credit
value losses amounted to 2.1% (2.6% in 2002) of the credit
portfolio at year-end 2003. Realized credit losses in 2003
amounted to SEK 848 million (SEK 893 billion in 2002).
Financial position.
Total
assets in Financial Services operations decreased during the
year, to SEK 66.8 billion from SEK 69.4 billion in 2002. 33% of
the credit portfolio is denominated in USD and 39% in Euro.
Customer and leasing receivables
amounted to SEK 46.8 billion compared to SEK 48.0 billion in 2002.
Assets under operating leases decreased from 13.3 billion in 2002
to SEK 13.2 billion in 2003.
Volvo’s objective is to
maintain an equity/assets ratio of 10% in its Financial Services
operations. The equity/assets ratio, calculated as shareholders’
equity and minority interests as percentage of total assets was
12.0% in 2003, compared to 10.8% in 2002 and 10.3% in 2001.
The Volvo Group’s financial
statements have been prepared in accordance with accounting
principles generally accepted in Sweden, which vary in certain
significant respects from US GAAP. Note 35 to Volvo’s
consolidated financial statements for 2003 summarizes the effect
that the application of US GAAP would have on consolidated net
income and shareholders’ equity. Also see Note 35 to Volvo’s
consolidated financial statements for discussion of the impact of
recently issued US accounting pronouncements.
Critical Accounting Policies
and Estimates
Volvo’s significant
accounting principles are set out on pages F-8 to F-11 of the
consolidated financial statements and conform with accounting
principles generally accepted in Sweden ("Swedish GAAP").
The preparation of Volvo’s Consolidated Financial Statements
requires the use of estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities and provisions
at the date of the financial statements and the reported amounts
of sales and expenses during the periods presented. In preparing
these financial statements, Volvo’s management has made its
best estimates and judgements of certain amounts included in the
financial statements, giving due consideration to materiality.
The application of these accounting principles involves the
exercise of judgement and use of assumptions as future
uncertainties and, as a result, actual results could differ from
these estimates. In accordance with Financial Reporting Release
No. 60 (FR60) issued by the Securities and Exchange Commission of
the United States, registrants are required to provide additional
disclosure of accounting principles in which estimates, judgments
and assumptions are particularly sensitive and which, if actual
results are different, may have a material impact on the
financial statements. The accounting principles applied by Volvo
that are deemed to meet these criteria are discussed below:
Impairment of goodwill, other
intangible assets and other long-lived assets.
In accordance
with Swedish GAAP, property, plant and equipment, goodwill,
intangible assets and certain other long-lived assets are
amortized over their useful lives. Useful lives are based on
management’s estimates of the period that the assets will
generate revenue. If, at the date of the financial statements,
there is any indication that a tangible or intangible non-current
asset has been impaired, the recoverable amount of the asset
should be estimated. The recoverable amount is the higher of the
asset’s net selling price and its value in use, estimated
with reference to management’s projections of future cash
flows. If the recoverable amount of the asset is less than the
carrying amount, an impairment loss is recognized and the
carrying amount of the asset is reduced to the recoverable amount.
Determination of the recoverable amount is based upon management’s
projections of future cash flows, which are generally made by use
of internal business plans or forecasts. While management
believes that estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially
affect our valuations.
Under U.S. GAAP, prior to 2002,
property, plant and equipment, goodwill, intangible assets and
certain other long-lived assets were amortized over their useful
lives in a manner similar to that adopted under Swedish GAAP. In
January, 2002, Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible
Assets," became effective. This standard requires that
goodwill amortization cease and instead an annual impairment
review of goodwill is required to be performed. Such an
impairment review will require management to determine the fair
value of Volvo’s reporting units on the basis of projected
cash flows and internal business plans and forecasts. Volvo is
required to perform an annual impairment test of goodwill. No
impairment charges were required in 2002 or 2003.
Residual value risks.
In
the course of its operations, Volvo is exposed to residual value
risks through operating lease agreements and sales combined with
repurchase agreements. The products, primarily trucks, for which
Volvo has a residual value commitment, are generally recognized
in the balance sheet as assets under operating leases.
Depreciation expenses for these products are charged on a
straight-line basis over the term of the commitment in amounts
required to reduce the value of the product to its estimated net
realizable value at the end of the commitment. Estimated
impairment losses are immediately charged to income in accordance
with Swedish GAAP. The estimated net realizable value of the
products at the end of the residual value commitments is
monitored individually on a continuing basis. In monitoring
estimated net realizable value of each product under a residual
value commitment, management makes consideration of current price-level
of the used product model, value of options, mileage, condition,
future price deterioration due to expected change of market
conditions, alternative distribution channels, inventory lead-time,
repair and reconditioning costs, handling costs and overhead
costs in the used product divisions.
Recoverability of investments
in shares and participations.
Investments in shares and
participations which are not associated companies or joint
ventures are valued at cost. Dividends received in respect of
such investments are included in income unless received closely
after cost was determined. If there is a diminution in value and
this diminution is considered to be permanent, the investment is
written down to this lower value, and the diminution is charged
to income. If a write-down is no longer needed, it is restored to
income. The judgement of whether a permanent diminution of value
has occurred is made based upon the purpose of the shareholding
and its estimated value in use or estimated net selling price.
Under US GAAP, if a diminution in
value of an investment is considered to be other than temporary,
a write-down is recognized in the income statement of the company.
If subsequently the value of the investment recovers, the
impairment amount is not reversed.
At December 31, 2003 investments
in shares and participations amounted to SEK 22,206 million under
Swedish GAAP. At December 31, 2003, the market value of Volvo's
investments in listed companies amounted to SEK 18,798 million
compared with a carrying value for these investments of SEK 21,217
million. For further information, see note 13 to the consolidated
financial statements included in item 18 of this document.
Deferred taxes.
Under
Swedish GAAP, deferred taxes are recognized for temporary
differences, which arise between the taxable value and reported
value of assets and liabilities as well as for unutilized tax-loss
carryforwards. Volvo records valuation allowances against
deferred tax assets where management does not expect such assets
to be realized based upon current forecasts. In the event that
actual results differ from these estimates or management adjusts
these estimates in future periods, an additional valuation
allowance may need to be established that could materially impact
our financial position and the results of operations. At December
31, 2003, a valuation allowance of SEK 2,718 million was
established for the value of deferred tax assets. Net of this
valuation allowance, deferred tax assets net of SEK 6,259 million
were recognized in the Group’s balance sheet.
Under US GAAP, income taxes have
been provided using the full liability method which is equal to
the treatment under Swedish GAAP.
Inventory obsolescence.
Inventories
are reported at the lower of historical cost, in accordance with
the first-in, first-out method (FIFO), or net realizable value.
The estimated net realizable value includes management
consideration of out-dated articles, over-stocking, physical
damages, inventory-lead-time, handling and other selling costs.
If the estimated net realizable value is lower than historical
cost, a valuation allowance is established for inventory
obsolescence. At December 31, 2003, a total valuation allowance
of SEK 2,246 million was established in the Group’s balance
sheet for inventory obsolescence.
Credit loss reserves.
The
establishment of credit loss reserves on customer financing
receivables is dependent on estimates including assumptions
regarding past dues, repossession rates and the recovery rate on
the underlying collateral. At December 31, 2003, the total credit
loss reserves in Volvo Financial Services amounted to 2.14% of
the total credit portfolio.
Pensions and other post-employment
benefits.
Provisions and costs for post-employment benefits,
i.e. mainly pensions and health-care benefits, are dependent on
assumptions used by actuaries in calculating such amounts. The
appropriate assumptions and actuarial calculations are made
separately for each population in the respective countries of
Volvo’s operations. The assumptions include discount rates,
health care cost trends rates, inflation, salary growth, long-term
return on plan assets, retirement rates, mortality rates and
other factors. Discount rate assumptions are based on long-term
bond yields available at year-end. Health care cost trend
assumptions are developed based on historical cost data, the near-term
outlook, and an assessment of likely long-term trends. Inflation
assumptions are based on an evaluation of external market
indicators. The salary growth assumptions reflect the long-term
actual experience, the near-term outlook and assumed inflation.
Retirement and mortality rates are based primarily on officially
available mortality statistics. Actual results that differ from
management’s assumptions are accumulated and amortized over
future periods and, therefore, generally affect the recognized
expense and recorded provisions in such future periods. See Note
22 of the Notes to the Consolidated Financial Statements for more
information regarding costs and assumptions for post-employment
benefits. At December 31, 2003 net provisions for post-employment
benefits amounted to SEK 15,094 million.
Product warranty costs.
Estimated
costs for product warranties are charged to cost of sales when
the products are sold. Warranty costs include contractual
warranty, campaigns and goodwill warranty (warranty cover in
excess of contractual warranty or campaigns which is accepted as
a matter of policy or normal practice in order to maintain a good
business relation with the customer). Warranty provisions are
estimated with consideration of historical claims statistics, the
warranty period, the average time-lag between faults occurring
and claims to the company and anticipated changes in quality
indexes. Differences between actual warranty claims and the
estimated claims generally affect the recognized expense and
provisions in future periods. Refunds from suppliers, that
decrease Volvo’s warranty costs, are recognized to the
extent these are considered to be virtually certain. At December
31, 2003 warranty cost provisions amounted to SEK 6,175 million.
Introduction of new accounting
policies
For a description of changes in
accounting principles
see
Note 1 to Volvo’s consolidated financial statements. For a
description of changes in US generally accepted accounting
principles see Note 35 to Volvo’s consolidated financial
statements.
For a description of the Company’s
research and development activities for the last three years, see
"Item 4. Information on the Company — 4.B Business
Overview – Research and Development." For a description
of the Company's patents and licenses, see "Item 4.
Information on the Company — 4.B Business Overview –
Patents, Trademarks and Licenses."
Research and development expenses
in 2003 amounted to SEK 6,829 million compared with SEK 5,869
million and SEK 5,391 million in 2002 and 2001, respectively.
Effective in 2001, Volvo has adopted a new Swedish accounting
standard, RR15 Intangible Assets, which in all significant
respects complies with the corresponding accounting standard
issued by the International Accounting Standards Board (IASB). In
accordance with the new accounting standard, expenditures for
development of new products and production systems shall be
reported as intangible assets if such expenditures with a high
degree of certainty will result in future financial benefits for
the company. The acquisition value for such intangible assets
shall be amortized over the estimated useful life of the assets.
Volvo’s application of the new rules means that high demands
are established in order for these development expenditures to be
reported as assets. For example, it must be possible to prove the
technical functionality of a new product prior to this
development being reported as an asset. In normal cases, this
means that expenditures are capitalized only during the
industrialization phase of a product development project. Other
research and development expenses are charged to income as
incurred. As result of adoption of this new accounting standard,
research and development expenses in 2003, 2002 and 2001 were
reduced by SEK 352 million, SEK 1,236 million and SEK 1,921
million respectively. In accordance with the transition rules of
the new standard, no retroactive application is permitted. See
further in Note 1 to the Consolidated Financial Statements.
The Group’s off-balance sheet
arrangements at December 31, 2003 include:
guaranteed bank loans and
other credits for associated companies in an amount of
SEK 154 million.
guaranteed bank loans and
other credits for customers and others in an amount of
SEK 3,508 million.
tax claims in an amount of
SEK 1,098 million for actual or anticipated actions
against the Volvo Group for which provisions are not
considered necessary.
other contingent liabilities
amounting to SEK 4,851 million.
According to the Swedish Companies
Act, the board is elected by the general meeting of shareholders.
The members’ terms of office shall be specified in the
articles of association. AB Volvo’s articles of association
stipulate that members are to be elected at the Annual General
Meeting for a term equal to the period up to the time when the
next Annual General Meeting has been held. Under Swedish law, the
employees of Volvo have a right to be represented on the Board of
Directors. Thus, the employee organizations have a right to
appoint a number of board members. The term of office for each
such member is decided by the organization appointing the member.
In 2003, Volvo's Board of
Directors consisted of eight members up to and including the
Annual General Meeting, and ten members thereafter, all elected
by the shareholders. In addition, the Board had three members and
two deputy members appointed by employee organizations. The
President is a member of the Board of Directors.
During 2003, the Board held six
regular meetings and three extraordinary meetings.
The Board has adopted work
procedures for its internal activities that contain rules
pertaining to the number of Board meetings, matters to be handled
at regular meetings of the Board and duties incumbent on the
Chairman.
The Board has also issued written
instructions specifying when and how information that is required
to enable the Board to evaluate the company's and Group's
financial position should be reported to the Board, as well as
the distribution of work between the Board and the President, and
in what circumstances the Executive Vice President is to
substitute for the President.
The Annual General Meeting decides
on the fees paid to the Board members elected by the shareholders.
For 2003 the total amount was SEK 5,200,000 of which the Chairman
of the Board, Lars Ramqvist, received a fee of SEK 1,200,000.
During the year, the Board
reviewed the financial position of the company and Group on a
regular basis. The Board also dealt regularly with matters
involving divestments, acquisitions, the establishment of new
operations, and matters related to investments in product renewal
and product development in the Group's business areas.
At the Annual General Meeting of
AB Volvo on April 16, 2004, the following AB Volvo Board members
were reelected: Per-Olof Eriksson, Patrick Faure, Haruko Fukuda,
Tom Hedelius, Leif Johansson, Finn Johnsson, Neelie Kroes, Louis
Schweitzer and Ken Whipple. At a statutory meeting held following
the annual General Meeting, the Board elected Finn Johnsson as
Chairman.
Audit Committee
In December 2002, the Board of
Directors of AB Volvo established an Audit Committee primarily
for the purpose of overseeing the accounting and financial
reporting processes and the audit of the financial statements.
Finn Johnsson was elected Chairman of the Committee and Per-Olof
Eriksson and Ken Whipple were appointed members. In March 2004,
Finn Johnsson resigned from the Committee. Haruko Fukuda was
appointed member and Per-Olof Eriksson Chairman of the Committee.
As assigned by the Board, the Committee's duties include reviews
of the financial reporting, the performance, qualifications and
independence of the auditors and the performance of the internal
audit function.
Remuneration Committee
In April 2003, the Board of
Directors of AB Volvo established a Remuneration Committee
primarily for the purpose of overseeing remuneration issues. Lars
Ramqvist was elected Chairman of the Remuneration Committee and
Tom Hedelius and Louis Schweitzer were appointed members. Lars
Ramqvist resigned from the Committee on February 2, 2004. Finn
Johansson was appointed new Chairman of the Committee.
The duties of the Committee
include the review and recommendation for resolution by the Board
regarding terms of employment and remunerations of the President
and the Executive Vice President, principles for remuneration for
the Group Executive Committee, principles for variable salary
systems, share based incentive programs and pension schemes. The
Committee shall approve proposals on remuneration of the Group
Executive Committee.
The Directors and Deputy Directors
of AB Volvo during 2003, their respective ages, the years in
which such positions were attained and their material memberships
on the Boards of other companies are:
Name Age Position and Other
Directorships
Finn Johnsson 58 Chairman of the
Board (since February 2004). Director (since 1998). Chairman of
the Remuneration Committee. President of Mölnlycke Health Care
AB. Chairman of the Boards of Wilson Logistics Holding AB and
Unomedical A/S. Member of the Boards of Skanska AB and AB
Industrivärden.
Lars Ramqvist 65 Director 1998-February
2, 2004, Chairman 1999-2004. Chairman of the Remuneration
Committee and member of the Nomination Committee up to February
2004. Resigned as Chairman and as member of the Board on February
2, 2004. Dr. of Philosophy. Hon. Dr. of Technology, Hon. Dr. of
Philosophy. Honorary Chairman: Telefonaktiebolaget LM Ericsson.
Member of the Royal Swedish Academy of Sciences and the Royal
Swedish Academy of Engineering Sciences.
Per-Olof Eriksson 66 Director (since
1994). Chairman of the Audit Committee. Master of Engineering,
Hon. Dr. of Technology. Board Chairman: Consolis Oy, Callans Trä
AB and Odlander, Fredriksson & Co. Board member: AB Custos,
SSAB Svenskt Stål AB, Assa Abloy, Senea AB and Elkem. Member of
the Royal Swedish Academy of Engineering Sciences.
Patrick Faure 57 Director (since
2001). Bachelor of Laws. Executive Vice President of Renault S.A.
and Chairman and CEO of Renault F1 since 1991. Chairman and CEO
of Renault V.I. 1998-2001. With Renault since 1979. Board member:
VINCI, ERTICO.
Haruko Fukuda 57 Director (since
2003). Member of the Audit Committee. OBE, MA (Cantab), DSc.
Board member: The Foreign & Colonial Investment Trust plc,
Investec plc, Aberdeen Asian Smaller Companies Investement Trust
plc, Business Advisory Council of the United Nations Office for
Project Service (UNOPS). Senior Advisor at Lazard, Advisor at
METRO AG.Honorary Fellow of New Hall Cambridge, Chairman of the
Advisory Board of New Hall Cambridge, Honorary Vice President of
the Japan Society, Trustee of Mitsubishi Trust Oxford Foundation,
Freeman of the City of London.
Tom Hedelius 64 Director (since
1994). Member of the Remuneration Committee. Master of Business
Administration, Hon. Dr. of Economics. Board Chairman: AB
Industrivärden, Bergman & Beving AB and Sandrews. Honorary
Chairman: Svenska Handelsbanken. Vice Chairman: Addtech AB and
Lagercrantz Group AB. Board member: Svenska Cellulosa
Aktiebolaget SCA and Lundbergs AB. Vice chairman in Jan Wallander
and Tom Hedelius foundation.
Leif Johansson 52 Director (since
1997). Master of Engineering. President of AB Volvo and Chief
Executive Officer of the Volvo Group since 1997. With Volvo since
1997. Board member: Bristol-Myers Squibb Company, Confederation
of Swedish Enterprise and The Association of Swedish Engineering
Industries. Member of the Royal Swedish Academy of Engineering
Sciences.
Neelie Kroes 62 Director (since
2003). Board Chairman: Meyer Monitor.Board member: P&O
Nedlloyd and Nederlandse Spoorwegen NV, mmO2 Plc, Cório, Royal
Nedlloyd, Ballast Nedam, Prologis, New Skies Satellites, and
Lucent Technologies BV the Netherlands. Cabinet Minister of
Transport and Public Works in the government of the Netherlands
1982-1989 and former advisor to the Transport Commissioner within
the EU Commission.
Louis Schweitzer 61 Director (since
2001). Member of the Remuneration Committee. Bachelor of Laws.
Chairman and CEO of Renault since 1992. CFO and Executive Vice
President 1988-1992. President and Chief Operating Officer 1990-1992.
With Renault since 1986. Board Chairman: Renault Nissan BV and
board member and proposed as Chairman in AstraZeneca Plc. Board
member: R.C.I. Banque, Philips, Electricité de France, BNP-Paribas,
and VEOLIA.
Ken Whipple 69 Director (since
2001). Member of the Audit Committee. Bachelor of Business and
Engineering. Board Chairman and CEO of CMS Energy Corporation,
CEO of Glenlore Enterprises. Board member: 14 JP Morgan Fleming
Mutual Funds and Korn-Ferry International AB.
Lars-Göran Larsson* 56 Director (1994
– May, 2004).
Martin Linder 31 Director (since
May, 2004)
Olle Ludvigsson* 55 Director (since
1988). Deputy Director 1983 – 1988.
Johnny Rönnkvist* 57 Director (since
1999).
Stellan Rosengren* 43 Deputy
Director (since 1999).
The members of the Volvo Group
Executive Committee are appointed by, and report to, the Chief
Executive Officer.
Stefano Chmielewski was appointed
President of Renault Trucks and member of the Volvo Group
Executive Committee effective May 1, 2003. He succeeded Philippe
Mellier, who left the Volvo Group for an appointment as President
of Alstom Transport. At the beginning of 2003, Tryggve Sthen left
Volvo for a new appointment as President of SKF Automotive
Division. Håkan Karlsson assumed the position of President of
Volvo Bus Corporation on June 1 and also became a member of the
Group Executive Committee from that date. He succeeded Jan Engström,
who was appointed Senior Advisor of AB Volvo. Michel Gigou was
appointed Senior Vice President of AB Volvo. As of January 1,
2004 Paul Vikner, who has served since July 2001 as President of
Mack Trucks, Inc., was appointed member of the Group Executive
Committee.
The senior executive officers of
AB Volvo, together with the years in which they were appointed to
their respective offices, are as follows:
Name Age Position
Leif Johansson 52 President of AB
Volvo and Chief Executive Officer of the Volvo Group (since 1997).
President and CEO of Electrolux Group (1994-1997), President of
AB Electrolux (1991-1997), President of Facit AB (1982-1983),
President of Husqvarna Motorcyklar AB (1979-1981). Member of
Volvo Board (since 1997).
Lennart Jeansson 62 Executive Vice
President of AB Volvo (since 1990) and Deputy CEO (since 1995).
President of Volvo Car Corporation (1990-1993). Member of Group
Executive Committee (since 1986). Chief Financial Officer of
AB Volvo (1986-1990).
Jorma Halonen 55 President of
Volvo Truck Corporation (since 2001). Various positions at Scania
(1990-2001). Member of Group Executive Committee (since 2002).
Stefano Chmielewski 52 President
of Renault Trucks (since May 1, 2003). Senior Vice President
Sales, Renault Trucks 2001-2003. Various positions with Iveco and
VW 1982-2001. Member of Volvo Group Executive Committee (since
May 1, 2003).
Paul Vikner 55 President of Mack
Trucks, Inc. since 2001. Executive Vice President of Sales and
Marketing, Mack Trucks, Inc. 1996-2001. Previously at Iveco
Trucks North America and Isuzu Trucks North America 1972-1994.
Member of Group Executive Committee since January 1, 2004.
Michel Gigou 57 Senior Vice
President of AB Volvo, President of Volvo Trucks North America
and Chairman of the Board of Mack Trucks, Inc. (2000-2003).
President of Mack Trucks, Inc. (1996-2000). Previously at Renault
S.A, with various positions in Europe. Member of Group Executive
Committee (since 2002).
Håkan Karlsson 42 President of
Volvo Bus Corporation. President of Volvo Logistics 2000-2003.
Member of Group Executive Committee since June 1, 2003.
Tony Helsham 50 President of Volvo
Construction Equipment (since 2000). President and CEO of
Euclid Hitachi Heavy Equipment (1995-1998). President of
Volvo Construction Equipment Korea, (1998-2000). Member of Group
Executive Committee (since 2000).
Staffan Jufors 52 President of AB
Volvo Penta (since 1998). Vice President of Volvo Car
Corporation, Olofström (1992-1998). Member of the Group
Executive Committee (since 1998).
Fred Bodin 57 President of AB
Volvo Aero Corporation (since 1997). Senior Vice President of AB
Volvo (1993-1997). General Counsel (1988-1997). Member of the
Group Executive Committee (since 1993).
Salvatore L Mauro 43 President of
Volvo Financial Services (since 2001). President of Volvo Car
Finance Europe (1999-2001). Vice President and CFO Volvo Car
Finance Inc. (1993-1996). Member of the Group Executive Committee
(since 2001).
Lars-Göran Moberg 60 President of
Volvo Powertrain (since 2000). Member of the Group Executive
Committee (since 2001).
Stefan Johnsson 44 Senior Vice
President of AB Volvo and CFO of the Volvo Group (since 1998).
President of Volvo Group Finance Sweden (1994–1998). Member
of Group Executive Committee (since 1998), responsible for
economy, finance, strategic matters and business development.
Eva Persson 51 Senior Vice
President of AB Volvo and General Counsel of the Volvo Group (since
1997). Member of Group Executive Committee (since 1997),
responsible for legal, tax and security matters.
Per Löjdquist 55 Senior Vice
President of AB Volvo (since 1997), responsible for corporate
communications and investor relations. Member of the Group
Executive Committee (since 1997).
Karl-Erling Trogen 58 Senior Vice
President of AB Volvo. President of Volvo Truck Corporation (1994-2000).
President of Volvo Trucks North America (1991–1994). Member
of the Group Executive Committee (since 1994).
See note 32 to Volvo’s
consolidated financial statements for additional information
concerning the compensation of the company’s directors and
executive officers.
Volvo has service contracts with
the members of the Group Executive Committee and certain other
senior executives that provide for benefits on termination of
employment that are customary in Sweden, such as severance
payments. The rules governing severance payments provide that,
when employment is terminated by the Company, an employee is
entitled to severance pay equal to the employee’s monthly
salary for a period of 12 or 24 months, depending on age at date
of severance. In certain contracts, replacing contracts concluded
earlier, an employee is entitled to severance payments amounting
to the employee’s monthly salary for a period of 30 to 42
months. In agreements concluded after the spring of 1993,
severance pay is reduced, in the event the employee gains
employment during the severance period, in an amount equal to 75%
of income from new employment.
Leif Johansson has twelve months
notice of termination from AB Volvo and six months on his own
initiative. If Leif Johansson’s employment is terminated by
AB Volvo, he is entitled to a severance payment equal to two
years’ salary, plus variable salary. The severance payment
will be adjusted for any income after the termination of his
contract with Volvo.
AB Volvo does not provide its
board members with any pension or retirement benefits.
For details regarding the time of
appointments for the members of the board and the members of the
Group Executive Committee, please refer to "– 6.A.
– Directors and Senior Management" above. The members
of the board are appointed annually by the ordinary general
meeting of the shareholders and their respective term of office
is until the next ordinary general meeting of the shareholders
has been held. This does not apply to employee representatives
who are appointed by their respective trade unions for a period
decided by the trade unions.
The number of employees in Volvo
as of December 31, 2003, was 75,740.
The following table sets forth the
approximate number of employees, by business area, at December 31,
2001, 2002 and 2003:
2001
2002
2003
Trucks………………………………….
44,180
43,470
46,900
Buses………………………………………………
6,230
6,660
6,680
Construction
Equipment…………………………..
7,780
8,410
9,280
Volvo
Penta………………………………………
1,370
1,410
1,440
Volvo
Aero
…………………………….
4,040
3,660
3,440
Financial
Services…………………………………
1,080
1,060
1,060
Other
operations………………………………..
6,240
6,490
6,940
Total, as reported
…………………………………
70,920
71,160
75,740
The following table sets forth the
approximate number of employees, by geographic area, at December
31, 2001, 2002 and 2003:
2001
2002
2003
Europe…………………………………………….
52,150
52,550
55,500
North America…………………………………….
12,670
12,440
12,270
South America…………………………………….
2,090
2,020
2,640
Asia……………………………………………….
2,550
2,590
3,710
Other markets…………………………………….
1,460
1,560
1,620
Total, as reported…………………………………
70,920
71,160
75,740
In accordance with customary
Swedish practices, factory workers in Sweden belong to unions
within the Swedish Trade Union Confederation and office workers
belong to unions within the Federation of Salaried Employees in
Industry and Services. Wages and general working conditions are
negotiated in collective bargaining at the national level between
the employers’ association and the labor union association
within each branch of industry. Within the limits established by
these agreements, the Company also negotiates directly with the
union representing its employees. In accordance with the Swedish
Co-Determination Act regarding employee participation in decision-making,
Volvo is required to negotiate with trade unions regarding
important changes in operations and in working and employment
conditions. Within the Group, special negotiating committees and
other participatory arrangements have been established in each of
the business areas.
Since 1988, three employee
representatives have been appointed to the Board of Directors and
two others as Deputy Members. See "6.A. – Directors and
Senior Management."
Finn Johnsson 2,000 Volvo Series B
shares
Lars Ramqvist None
Per-Olof Eriksson 6,200 Volvo Series A shares
Patrick Faure 2,000 Volvo Series B shares
Haruko Fukuda None
Tom Hedelius 2,000 Volvo Series A shares
Leif Johansson 42,262 Volvo shares, including 35,538 Series B
shares; 13,866 call options and 50,000 employee stock options.
Neelie Kroes None
Louis Schweitzer 2,000 Volvo Series B shares
Ken Whipple None
Lars-Göran Larsson 94 Volvo shares, including 50 Series B shares
Olle Ludvigsson 155 Volvo Shares, including 105 Volvo Series B
shares
Johnny Rönnkvist 285 Volvo shares, including 50 Series B shares
Deputy Board Members
Stellan Rosengren 250 Volvo Series B shares
Berth Thulin 100 Volvo Series B shares
Executive officers
Holdings, June 4, 2004*
Leif Johansson 42,262 Volvo
shares, including 35,538 Series B shares; 13,866 call options and
50,000 employee stock options.
Lennart Jeansson 31,368 Volvo shares, including 30,431 Series B
shares; 5,952 call options and 25,000 employee stock options.
Jorma Halonen None; 25,000 employee stock options.
Stefano Chmielewski None; 5,000 employee stock options
Michel Gigou None; 25,000 employee stock options.
Paul Vikner None; 25,000 employee stock options
Håkan Karlsson 267 Volvo A shares; 5,000 employee stock options
Tony Helsham 25,000 employee stock options.
Staffan Jufors 1,348 Volvo shares, including 194 Series B shares;
2,661 call options and 25,000 employee stock options.
Fred Bodin 3,004 Volvo shares including 2,227 Series B shares; 2,683
call options and 25,000 employee stock options.
Salvatore L. Mauro 1,003 American Depositary Receipts (ADRs) of
AB Volvo; 25,000 employee stock options.
Lars-Göran Moberg 5,858 Volvo shares, including 5,652 Series B
shares; 1,381 call options and 25,000 employee stock options.
Stefan Johnsson 75 Series A shares; 3,706 call options and 25,000
employee stock options
Per Löjdquist 5,398 Volvo shares, including 2,224 Series B
shares; 2,484 call options and 25,000 employee stock options.
Eva Persson 500 Volvo shares, including 248 Series B shares; 2,323
call options and 25,000 employee stock options.
Karl-Erling Trogen 14,251 Volvo Series B shares; 7,316 call
options and 25,000 employee stock options.
* The cumulative shareholdings of
the Board members and executive officers corresponds to less than
1% of the votes and shares in the Company.
Option Programs.
Volvo
currently has two different types of option programs for senior
executives, one call option program and one program for employee
stock options. In April 2004, the Annual General Meeting resolved
on a new share-based incentive program for senior executives
within the Volvo Group that will replace the present stock option
program. Detailed information on the Option Programs and share-based
incentive programs are reported in Note 32 to the consolidated
financial statements included in Item 18 of this annual report.
Profit sharing and Volvo
Company Pension.
Volvo is a worldwide organization with a
global profit sharing scheme. The system, Volvo Profit Sharing,
comprises approximately 53,000 employees throughout the world.
Implementation of the profit sharing system requires that the
return on the Company's shareholders' equity exceed 10%.
Profit sharing involves a focus on
Volvo's success factors: growth, product cycle management and
operational excellence. Because employees will become
shareholders, their understanding of the role of shareholders
within the company will increase. Profit sharing also helps to
make Volvo more attractive as an employer to both present and
future employees. Profit sharing gives employees an additional
incentive to have a favorable impact on earnings and to feel a
greater sense of solidarity with Volvo. There were no payments
for profit sharing to employees for 2003, 2002 and 2001.
Since 1995, Volvo has offered
employees in Sweden an extra pension-savings plan via Volvo's 60-Year
Fund. Effective in 2000, as a result of the changed conditions
for pension-savings, this plan was replaced by the Volvo Company
Pension, a defined-contribution pension insurance policy that is
paid for by Volvo. The objective is the same as that of the 60-Year
Fund: to improve the financial position of employees when they
retire with pension benefits.
The shares of AB Volvo are divided
into two classes, A Shares and B Shares. Each A Share confers one
vote per share and each B Share confers one tenth of one vote per
share.
On May 28, 2004, Renault SA was
known to AB Volvo to be the holder of shares representing 21.0%
of the votes and 21.0% of the share capital of AB Volvo, based on
the number of outstanding shares. The holding of Renault SA
consists of 27,720,989 A Shares and 60,583,188 B Shares. It
equals 21.0% of the number of outstanding A Shares and 21.0% of
the B Shares. The holding of A Shares equals 6.6% of the total
number of outstanding shares. The holding of B Shares equals 14.4%
of the total number of outstanding shares.
On May 28, 2004, certain Franklin-Templeton
funds held shares representing 1.6% of the votes and 6.2% of the
share capital of AB Volvo. This holding consists of 26,049,296 B
Shares equaling 9.1% of the number of outstanding B Shares. The
holding of B Shares equals 6.2% of the total number of
outstanding shares.
On May 28, 2004, SHB held shares
representing 6.1% of the votes and 2.5% of the share capital of
AB Volvo. This holding consists of 9,767,708 A shares and 593,887
B Shares equaling 7.4% of the number of outstanding A shares and
0.2% of the number of outstanding B Shares. The holding of A
Shares equals 2.3% of the total number of outstanding shares. The
holding of B Shares equals 0.1% of the total number of
outstanding shares.
As far as known to AB Volvo, it
was not directly owned or controlled by another corporation or by
any foreign government as of May 28, 2004.
As of June 4, 2004, the directors
and members of the executive committee of AB Volvo, as a group,
held 120,418 shares of AB Volvo of which 22,095 were A Shares,
representing less than one percent of the nominal share capital
and voting rights in AB Volvo.
On May 28, 2004, there were
approximately 210,900 shareholders of Volvo’s shares
registered with the Swedish Securities Register Center, VPC AB
("VPC").
The Company and Group Companies
have entered into various transactions in the normal course of
business with Renault S.A. and subsidiaries ("Renault").
Amounts due from and due to Renault amounted to SEK 501 million
and SEK 537 million, respectively, at December 31, 2003. Sales to
and purchases from Renault amounted to SEK 2,893 million and SEK
2,756 million, respectively, for 2003. The sales were mainly from
Renault Trucks and consisted of bus components and spare parts.
The purchases was mainly made by Renault VI and consisted of
light trucks. The transactions also comprise a trademark license
from Renault for the use of the trademark "Renault".
For information regarding the acquisition of Renault V.I. and
Mack trucks see "Item 4. Information on the Company – 4.A.
History and Development of Company".
The Company and Group Companies
have entered into various transactions in the normal course of
business with Deutz AG ("Deutz"). The agreements cover
the development and long-term supply by Deutz of certain small
and medium size diesel engines. Volvo owns 11% of the capital and
voting rights in Deutz.
The Company and Group Companies
have entered into various transactions in the normal course of
business with Shanghai Sunwin Bus Corporation ("Sunwin Bus"),
Xian Silver Bus Corporation ("Silver Bus"), Jinan Hua
Wo Truck Corporation ("Hua Wo Truck") and Prévost
Holding BV ("Prévost"). All these entities are
entities over which Volvo has joint control together with one or
more external parties. Volvo currently owns 50% of the capital
and voting rights of all these joint ventures. Transactions with
these entities mainly comprise of sales of components for bus and
truck manufacturing. Volvo also purchases manufactured trucks
from Hua Wo Truck.
8.A.
Consolidated Statements and Other Financial Information
8.A.1
See Item 18.
8.A.2
See Item 18.
8.A.3
See Reports of Independent Auditors, pages F-2
through F-3.
8.A.4
We have complied with this requirement.
8.A.5
Not applicable.
8.A.6
See Note 35 to the Financial Statements.
8.A.7
Litigation.
In
March 1999, an FH 12 Volvo truck was involved in a fire in the
Mont Blanc tunnel. The tunnel suffered considerable damage from
the fire, which continued for 50 hours. 39 people lost their
lives in the fire, and 34 vehicles were trapped in the tunnel. It
is still unclear what caused the fire. The Mont Blanc tunnel was
re-opened for traffic in 2002. An expert group was appointed by
the Commercial Court in Nanterre, France, to investigate the
cause of the fire and the losses it caused. At present, it is not
possible to anticipate the result of this on-going investigation
or the result of other French legal actions in progress regarding
the fire. The investigating magistrate appointed to investigate
potential criminal liability for the fire issued its final order
and all parties previously placed under investigation, including
Volvo Truck Corporation, have been sent to trial for
unintentional manslaughter. It is expected that the trial will
take place in 2005.
A claim was filed with the
Commercial Court in Nanterre by the insurance company employed by
the French tunnel operating company against certain Volvo Group
companies and the trailor manufacturer in which compensation for
the losses claimed to have been incurred by the tunnel operating
company was demanded. The claimant requested that the Court
postpone its decision until the expert group has submitted its
report. The Court of Nanterre has since then declined
jurisdiction in favour of the civil Court of Bonneville before
which several other claims had been filed in connection with this
matter. As a result, the Court of Bonneville is likely ultimately
to rule on all civil liability claims filed in France against
Volvo Group companies in connection with the Mont-Blanc tunnel
fire. Volvo Group companies are also involved in proceedings
regarding this matter before courts in Aosta, Italy and Brussels,
Belgium. Although the total sums claimed are substantial, Volvo
is unable to determine the ultimate outcome of the litigation
referred to above.
AB Volvo and Renault SA have a
dispute regarding the final value of acquired assets and
liabilities in Renault V.I. and Mack. This process could result
in an adjustment in the value of the transfer. Any such
adjustment will affect the amount of acquired liquid funds and
Volvo's reported goodwill amount. The outcome of this dispute
cannot be determined with certainty. However, Volvo believes that
the outcome will not lead to an increase in goodwill.
Volvo is involved in a number of
other legal proceedings incidental to the normal conduct of its
businesses. Volvo does not believe that any liabilities related
to such proceedings are likely to be, in the aggregate, material
to the financial condition of the Group.
8.A.8
Dividend policy.
For a description of the Company’s dividend policy, see
"Item 3. Key Information – 3.A. Selected Financial Data."
The table below sets forth, for
the periods indicated, the high and low closing sales prices in
SEK for A shares and B shares traded on the Stockholmsbörsen
and in U.S. dollars for the ADSs traded on NASDAQ. Each ADS
represents one B Share. The data below reflects price and volume
information for trades completed by members of the Stockholmsbörsen
during the day as well as for inter-dealer trades completed off
the Stockholmsbörsen and certain inter-dealer trades completed
during trading on the previous business day.
A shares
B shares
ADSs
High
Low
High
Low
High
Low
(SEK per
Share)
(SEK per
Share)
($ per ADS)
Annual information
for the past five years
2003
216
130.5
225
136
30.62
16.03
2002
201
117
209.5
124
20.90
13.40
2001
191.5
114.5
198
121
20.13
11.42
2000
234
137
241
138
27.81
13.69
1999
266
184
268.5
190
32.25
24.00
Quarterly
information for the past two years
2004
First Quarter
248.5
210
258.5
220.5
34.43
30.36
2003
First Quarter
160.5
130.5
167.5
136
19.40
16.03
Second Quarter
169
138
177.5
145
22.88
17.39
Third Quarter
205
164.5
213.5
172
25.83
21.80
Fourth Quarter
216
169.5
225
179.5
30.62
24.03
2002
First Quarter
207.5
152
216
159.5
20.60
14.65
Second Quarter
201
164.5
209.5
171
20.75
17.72
Third Quarter
187
118.5
194
124
20.90
13.65
Fourth Quarter
166
117
173.5
124
19.18
13.40
Monthly
information for most recent six months
May 2004
254.5
232
265
233
34.69
32.00
April 2004
265
241.5
270.5
250
34.89
33.00
March 2004
248.5
216.5
258.5
225
33.69
30.36
February 2004
238
214
248.5
222
34.21
31.17
January 2004
239
210
252
220.5
34.43
30.81
December 2003
215
204
225
214.5
30.62
28.98
Fluctuations in the exchange rate
between the Swedish Kronor and the U.S. dollar will affect
the U.S. dollar equivalent of the Swedish Kronor price of
the shares on the Stockholmsbörsen.
Price Information on the London
Stock Exchange.
The table below sets forth for the periods
indicated the high and low sale prices for the B shares, on the
London Stock Exchange:
The principal market for both
Volvo’s A and B Shares is the Stockholmsbörsen. Volvo’s
A and B Shares are also traded on the London, Frankfurt, Düsseldorf
and Hamburg Stock Exchanges. Since December 1984, ADS’s
representing AB Volvo’s B Shares (prior to January 1, 1993,
Non-Restricted B Shares) have been traded in the United States
through Nasdaq. These American Depositary Shares are evidenced by
American Depositary Receipts ("ADRs") issued by
Citibank, N.A., as depositary, and are traded under the symbol
"VOLVY". Each ADS outstanding represents one B Share
deposited with Citibank. Citibank has advised Volvo that, as of
December 31, 2003, there were 8.0 million ADS’s outstanding
and 4,008 record holders. On the basis of this information, the
ADS’s held on such date in the United States represented
approximately 2% of AB Volvo’s outstanding B Shares. In
October 2003, the Board of Directors of AB Volvo decided to apply
for a delisting of the Volvo share from the stock exchanges in
Frankfurt, Düsseldorf and Hamburg.
AB Volvo believes that there has
also been very limited over-the-counter market in the United
States for its A and B Shares.
Trading on the Stockholmsbörsen
continues until 5:30 P.M. each business day. In addition to
official trading on the Exchange, there is also trading off the
Exchange during official trading hours. The Stockholmsbörsen
publishes a daily Official List, which includes the volume of
recorded transactions in each listed stock, together with the
prices of the highest and lowest recorded trades of the day. The
Official List reflects price and volume information for trades
completed by members on the floor during the day, as well as for
inter-dealer trades completed off the floor and certain inter-dealer
trades completed on the floor during the previous business day.
The Annual General Meeting of
shareholders authorized the Board of Directors to repurchase and
transfer Company shares as follows. The decision concerns an
authorization of the Board to decide on the acquisition and/or
transfer of Company shares and means that both Series A and
Series B shares may be acquired and/or transferred. The Company
may acquire shares through trading on a stock exchange or another
regulated market in which the Company’s shares are listed.
However, the Company is not allowed to own more than 10% of the
total number of shares. For the purpose of financing company
acquisitions, transfer of shares held by the Company may occur
through an offering directed to all shareholders.
The purpose of allowing the Board
to repurchase the Company’s shares is to be able to
continuously adapt the capital structure to the Company’s
need for capital and thereby contribute to increased shareholder
value and to enable the Company to transfer shares in conjunction
with the fulfillment of its obligations in accordance with
already decided incentive programs or in conjunction with
financing any company acquisition.
In November 2003, Volvo obtained
an exemption from Nasdaq from the shareholder approval
requirements pursuant to Nasdaq Marketplace Rule 4350(i)(1)(A)
with respect to certain equity compensation plans.
AB Volvo is registered in the
Swedish Companies Register under the number 556012-5790. AB Volvo’s
corporate purposes are to concentrate on the following product
areas: transportation, food processing, energy and finance (with
the exception, however, of activities that are subject to the
relevant law on banking activities and credit market companies),
management of real estate, goods and chattels and other
operations associated with these activities. Set forth below is a
summary of certain material provisions of AB Volvo’s
Articles of Association and Swedish company legislation. This
description does not purport to be complete.
According to the Articles of
Association, each Class A Share confers one vote per share and
each Class B Share confers one-tenth of one vote per share. In
all other respects, AB Volvo’s Class A and B shares rank
equally. Notice of the annual ordinary general meeting of
shareholders or an extraordinary meeting of shareholders at which
a proposal for a change of the Articles of Association will be
considered must be given not less than four or more than six
weeks prior to the meeting. Notice of any other extraordinary
meetings of the shareholders must be given not less than two nor
more than six weeks prior to the meeting. In order to be entitled
to attend and vote at a general meeting of shareholders, a
shareholder must be registered in the register of shareholders
ten days prior to the date of the meeting. The Articles of
Association provide that the shareholder must give notice to AB
Volvo of the intention to attend the meeting not later than the
date specified in the notice convening the meeting (a date not
earlier than the fifth weekday preceding the meeting). A
shareholder may attend and vote at the meeting in person or by
proxy. A person designated in the register as a nominee (including
the depositary of the ADRs) is not entitled to vote at a general
meeting, nor is a beneficial owner whose share is registered in
the name of a nominee (including the depositary of the ADRs)
unless the beneficial owner first arranges to have such owner’s
own name entered in the register of shareholders.
According to the Articles of
Association the share capital of AB Volvo is comprised of a
minimum of SEK 1,900 million and not more than SEK 7,600 million.
Each share has a par value of SEK 6.
Apart from specially appointed
members and deputy members, the Board of AB Volvo is to consist
of not less than six and not more than twelve members with not
more than the same number of deputies. Members and deputy members
are to be elected annually at the ordinary General Meeting of the
shareholders for the time up to and inclusive of the next
Ordinary Meeting of the Shareholders.
According to the Swedish Companies
Act, a member of the board of directors and the managing director
may not take part in matters regarding agreements, litigation or
other legal proceedings between the director and the company,
between the company and third parties where the director has a
material interest in the matter which may conflict with the
interests of the company, or agreements between the company and a
legal entity which the director may represent, either
individually or together with any other person. The directors may
not vote compensation to themselves or any members of the board
of directors.
The board members are charged with
the organization of the company and the management of the company’s
operations and the managing director is charged with the day-to-day
management of the company in accordance with any guidelines and
instructions provided by the board of directors. The managing
director thus has borrowing powers only to the extent such
borrowing is part of the day-to-day management of the company and
in accordance with any guidelines and instructions provided by
the board of directors.
Under the Swedish Companies Act,
the annual general meeting of the shareholders shall be held
within six months of the end of each financial year. The annual
report and the audit report, and where the company is a parent
company, the consolidated annual report and the audit report on
the group shall be presented at such meeting. At the meeting
resolutions shall be passed with respect to (i) adoption of the
income statement and the balance sheet, (ii) dispositions of the
company’s profit and loss according to the adopted balance
sheet, (iii) discharge from liability for the members of the
board and managing director and (iv) other matters which
according to the Swedish Companies Act or the articles of
association rest upon the general meeting for resolution.
Under Swedish law, only an annual
general meeting of shareholders may authorize the payment of
dividends, which may not exceed the amount recommended by the
Board of Directors, except that in the event a demand is made by
holders of at least 10% of the total number of shares
outstanding, a dividend of at least 50% of the net profits for
the fiscal year remaining after certain deductions and with
certain limitations must be declared. Under Swedish law, no
interim dividends may be paid in respect of any fiscal period for
which audited financial statements of the Company have not been
adopted at the annual general meeting of shareholders of the
Company. In a decision to issue new shares shall be specified
from which time the new shares are entitled to receive dividends.
The right to receive dividends shall, however, commence no later
than for the fiscal year during which the shares shall have been
fully paid. Any person entered in the share register or in a list
pursuant to Chapter 3, s. 12 of the Swedish Companies Act on the
stipulated recording date shall be deemed to be entitled to
receive a dividend, and, in the event of a bonus issue, new
shares due to the holder and to exercise the shareholder’s
preferential right to take part in the issue. The right to
receive a dividend is time-barred ten years after the decision by
the annual general meeting of the shareholders. When said period
has lapsed, the Company is entitled to the dividend in question.
Under the Swedish Companies Act,
resolutions at the general meeting of the shareholders are
normally passed by a simple majority of votes cast. Exceptions
include, but are not limited to: (i) resolutions to waive
shareholder preferential rights in connection with an issue or to
reduce the share capital or to approve a merger, which require a
qualified two-thirds majority of the votes cast as well as at
least two-thirds of the shares represented at the general
meeting; (ii) resolutions which restrict the transferability of
shares, or limit the number of shares in respect of which a
single shareholder may vote, or which deal with certain other
special matters, in which case a minimum quorum and a larger
majority, or in some cases unanimity, is required; (iii)
resolutions which amend the Articles of Association in other
respects, for which a majority consisting of at least two-thirds
of the shares represented at the meeting and of the votes cast is
required; (iv) resolutions where under the legal position of
certain shares would be adversely changed for which, in addition
to (iii) above, the approval of all holders of such shares
represented at the meeting and representing at least nine-tenths
of all such shares is required; and (v) resolutions where under
the legal position of an entire class of shares would be
adversely changed, for which, in addition to (iii) above, the
approval of the holders of at least half of all the shares of
such class and of nine-tenths of the shares of such class
represented at the meeting is required.
In addition to the quorum rules
above, the Swedish Companies Act contains certain other
provisions granting rights to a minority of the shareholders.
Such rights, subject to the minority reaching certain minimum
number, include but are not limited to; (i) the right to have a
matter at a general meeting of the shareholders adjourned to a
resumed general meeting; (ii) allow the company to institute an
action for damages in favour of the company against a board
member, the managing director, a shareholder or the auditor; (iii)
request that the general meeting declares a dividend in an amount
of at least half the sum of the net profit for the financial year
remaining after certain deductions; (iv) request that the board
convenes an extra ordinary general meeting of the shareholders; (v)
request that the County Administrative Board appoints an auditor
to take part in the auditing of the company or that the County
Administrative Board appoints a special examiner to examine a
specific past period or matter relating to the company.
A shareholder or proxy for one or
more shareholders may at any general meeting of shareholders,
unless the company’s articles of association provide
otherwise, cast the full number of votes represented by such
holder’s shares. AB Volvo’s Articles of Association do
not prevent the shareholders from casting the full number of
votes represented by such shareholder’s shares.
There are no provisions in the
Articles of Association limiting foreigners’ right to
purchase, own, sell or vote for AB Volvo shares. As a general
rule under Swedish law, AB Volvo shares may be freely sold to and
owned by nationals from other countries than Sweden. In some
cases of transactions in AB Volvo shares, certain flagging and
ownership examination rules apply to the transaction,
irrespective of the nationality of the parties involved.
The Swedish Financial Instruments
Trading Act provides that any person, foreign or Swedish, who has
acquired or transferred shares in a Swedish limited liability
company that has issued shares which are quoted on a securities
exchange within the European Economic Area or are, without being
listed, quoted on a securities exchange or an authorized market-place
in Sweden, shall within seven days thereafter report in writing
the acquisition or the transfer to the company and the Swedish
exchanges and market-places where shares in the company are
quoted or, if the shares are not quoted in Sweden, to the Swedish
Financial Supervisory Authority (the FSA), if:
the acquisition results in
the acquirer’s share of the number of votes for all
shares in the company reaching or exceeding any of the
thresholds 10, 20, 33.33, 50 and 66.67%, or
the transfer results in the
transferor’s share of the number of votes for all
shares in the company falling below any of the thresholds
described in (1) above.
In connection with the above,
shares owned by persons and companies that are affiliated to or
are acting in concert with the acquirer or the transferor shall
be treated as if the shares were the acquirer’s or
transferor’s own.
It is prevailing market practice
on the Swedish securities market pursuant to self-regulation that
any person, who holds 5% or more of the capital and/or voting
rights in a company, that acquires or transfers shares and/or
forms of securities that can be converted into or exchanged into
shares in a listed or quoted Swedish limited liability company
shall make an announcement when his holding increases or
decreases above or below 5% of the share capital or the total
number of voting rights in the company, as well as above or below
each subsequent 5% threshold. In addition, any person who holds
less than 30% of the total voting rights in such company and who
acquires shares so that after the acquisition he possesses 30% or
more of the votes in the company, shall make a public offer to
acquire all of the outstanding shares in the company.
10.D
Exchange controls
There are no Swedish governmental laws, decrees or
regulations that restrict the export or import of capital or that
affect the remittance of dividends or other payments to non-residents
of Sweden who hold Volvo shares. In addition, since January 1,
1993, there have been no limitations imposed by Swedish law or
Volvo’s Articles of Association on the right of non-residents
of Sweden or non-citizens of Sweden to hold or vote Volvo shares.
General.
The taxation
discussion set forth below is intended only as a general summary
and does not purport to be a complete analysis or listing of all
potential tax effects relevant to ownership and disposition of B
Shares or ADSs represented by ADRs. The statements of United
States and Swedish tax laws set out below are based on the laws
in force as of the date of this Annual Report and may be subject
to changes in United States or Swedish tax law and in the double
taxation convention or treaty between the United States and
Sweden, occurring after that date, possibly with retroactive
effect.
The following summary outlines
certain United States federal income tax consequences and certain
Swedish tax consequences to "U.S. Holders". A U.S.
Holder is a beneficial owner of ADSs or B Shares who (i) is a
citizen or resident of the United States for United States
federal income tax purposes, a corporation (or other entity
taxable as a corporation for United States federal income tax
purposes) created or organized in or under the laws of the United
States or of any state thereof (including the District of
Columbia), an estate the income of which is subject to United
States federal income taxation regardless of its source, or a
trust if a court within the United States is able to exercise
primary supervision over its administration and one or more U.S.
persons have the authority to control all of the substantial
decisions of the trust; and (ii) holds the ADSs or B Shares as
capital assets. If a partnership (including for this purpose any
entity treated as a partnership for United States federal income
tax purposes) holds ADSs or B Shares, the tax treatment of a
partner generally will depend upon the status of the partner and
the activities of the partnership. A partner in a partnership
that holds ADSs or B Shares is urged to consult its tax advisor
regarding the specific tax consequences of the ownership of the
ADSs or B Shares.
Because this summary is not
exhaustive of all possible tax considerations (such as situations
involving taxpayers who own (directly, indirectly or by
attribution) 10% or more of the voting stock or outstanding share
capital of Volvo, who are securities broker-dealers, financial
institutions, banks, insurance companies, U.S. expatriates, tax-exempt
entities, or whose functional currency is not the U.S. dollar), U.S.
Holders are urged to consult their tax advisors as to the overall
United States federal, state and local tax consequences, as well
as the overall Swedish tax consequences, of their ownership of
ADSs or B Shares. In particular, U.S. Holders are urged to
consult their tax advisors concerning whether they are eligible
for benefits under the Treaty (as defined below). Other holders
of ADSs or B Shares are also urged to consult their own tax
advisors as to the overall tax consequences of their ownership of
such ADSs or B Shares.
For the purposes of both the
convention between the United States of America and Sweden for
the avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on income, as amended (the "Treaty"),
and the United States Internal Revenue Code of 1986, as amended (the
"Code"), U.S. Holders of ADSs will be treated as the
owners of the underlying B Shares that are represented by such
ADSs.
Taxation of Dividends.
For
United States federal income tax purposes, the gross amount of
dividends paid (including any Swedish withholding tax thereon) to
U.S. Holders of ADSs or B Shares will be taxed as ordinary
dividend income to such Holders to the extent paid out of the
current or accumulated earnings and profits of Volvo.
Distributions in excess of Volvo’s current and accumulated
earnings and profits will be treated first as a tax-free return
of capital to the extent of the U.S. Holder’s tax basis in
the ADSs or B Shares, and to the extent in excess of adjusted tax
basis, will be taxable as capital gain from a sale or exchange of
such ADSs or B Shares. Dividends paid by Volvo will not be
eligible for the dividends received deduction generally allowed
to U.S. corporate shareholders with respect to dividends received
from other U.S. corporations. The amount of any dividend that
will be included in gross income will be the U.S. dollar value of
the payment calculated by reference to the spot rate in effect of
the date of receipt by the U.S. Holder in the case of B Shares (or
the date of receipt by the Depositary in the case of ADSs)
regardless of whether the payment is in fact converted into U.S.
dollars. A US Holder of B Shares who converts kronor into U.S.
dollars on the date of receipt generally should not recognize any
exchange gain or loss. A U.S. Holder who does not convert kronor
into U.S. dollars on the date of receipt generally will have a
tax basis equal to its U.S. dollar value at the time of receipt.
Exchange gain or loss, if any, recognized by a U.S. Holder on a
subsequent conversion or disposition of kronor generally will be
treated as U.S. source ordinary income or loss.
In general, under Swedish tax law,
dividends paid by a Swedish corporation such as Volvo to non-residents
of Sweden are subject to Swedish withholding tax at a rate of 30%.
However, pursuant to the Treaty, dividends paid by Volvo to a
shareholder who is (i) treated as a resident of the United States
for the purpose of application of the Treaty, (ii) who qualifies
for treaty benefits under the "Limitation on Benefits"
article of the Treaty, and (iii) who does not have a "permanent
establishment" or "fixed place of business" in
Sweden (or in the case of an individual U.S. Holder who does not
perform or has not performed independent personal services in
Sweden) to which the receipt of the dividend is attributable will
generally be subject to Swedish withholding tax at a reduced rate
of 15%. A U.S. Holder of ADSs or B Shares may be required to
provide documentary evidence that such Holder is entitled to the
reduced 15% withholding tax rate under the Treaty. The gross
amount of such dividends will be treated as foreign source income
for United States federal income tax purposes. This may be
relevant in determining the Holder’s foreign tax credit
limitation.
Subject to certain conditions and
limitations, the Swedish withholding taxes described above will
be treated as foreign taxes eligible for credit against such
Holder’s United States federal income tax liability. The
rules governing the foreign tax credit are complex. Under the
Code, the limitation on foreign taxes eligible for credit is
calculated separately with respect to "passive income",
or in the case of certain Holders "financial services income".
The consequences of the separate limitation calculation will
depend on the nature and sources of each Holder’s income. In
lieu of claiming a credit, a U.S. Holder who itemizes deductions
may elect to deduct against income all of such Holder’s
foreign income taxes in the taxable year. A deduction, however,
does not reduce taxes on a dollar-for-dollar basis like a credit,
but the deduction for foreign taxes paid is not subject to the
same limitations as those applicable to the foreign tax credit.
The United States Treasury has expressed concern that parties to
whom ADSs are released may be taking actions that are
inconsistent with the claiming of foreign tax credits for U.S.
Holders of ADSs. Accordingly, the analysis of the creditability
of Swedish withholding taxes could be affected by future actions
that may be taken by the United States Treasury. Each U.S. Holder
is urged to consult its own tax advisor concerning whether the
Holder is eligible for benefits under the Treaty, and whether,
and to what extent, a foreign tax credit will be available.
Recent U.S. Tax Law Changes
Applicable to Individuals.
Under 2003 U.S. tax legislation,
certain U.S. Holders (including individuals) are eligible for
reduced rates of U.S. federal income tax (currently a maximum of
15%) in respect of "qualified dividend income" received
in taxable years beginning after December 31, 2002 and beginning
before January 1, 2009. For this purpose, qualified dividend
income generally includes dividends paid by non-U.S. corporations
if, among other things, certain minimum holding periods are met
and either (i) the shares (or ADSs) with respect to which the
dividend has been paid are readily tradable on an established
securities markets in the United States or (ii) the non-U.S.
corporation is eligible for the benefits of a comprehensive U.S.
income tax treaty (such as the Treaty) which provides for the
exchange of information. Volvo currently believes that dividends
paid with respect to its ADSs and B Shares will constitute
qualified dividend income for U.S. federal income tax purposes,
provided the individual U.S. Holders of its ADSs or B Shares meet
certain requirements. Some of the eligibility requirements for
non-U.S. corporations are not entirely certain, however, and
further guidance from the United States Internal Revenue Service
(the "IRS") is anticipated. In addition, the IRS is
expected to issue certification procedures in 2004 whereby a non-U.S.
corporation will be required to certify as to the eligibility of
its dividends for the reduced United States federal income tax
rates.
Tax on Sale or Exchange.
For United States federal income tax purposes, a U.S. Holder
generally will recognize capital gain or loss on any sale or
exchange of ADSs or B Shares in an amount equal to the difference
between the U.S. dollar value of the amount realized on the sale
or exchange and the U.S. Holder’s adjusted tax basis (determined
in U.S. dollars) in the ADSs or B Shares. This capital gain or
loss will be U.S. source income or loss and will be treated as a
long-term capital gain or loss if the U.S. Holder’s holding
period in the ADSs or B Shares exceeds one year. The
deductibility of capital losses is subject to significant
limitations. In the case of a U.S. Holder who is an individual,
capital gains generally will be subject to United States federal
income tax at preferential rates if specified minimum holding
periods are met.
The deposit and withdrawal of B
Shares in exchange for ADSs by a U.S. Holder under the deposit
agreement will not be subject to United States federal income tax.
In general, under the Treaty, a
shareholder who is (i) treated as a resident of the United States
for the purpose of application of the Treaty, (ii) who qualifies
for treaty benefits under the "Limitation on Benefits"
article of the Treaty, and (iii) who does not have a "permanent
establishment" or "fixed place of business" in
Sweden (or in the case of an individual U.S. Holder who does not
perform or has not performed independent personal services in
Sweden) to which the holding of the ADSs or B Shares is
attributable and (iv) who was not an individual resident of
Sweden within ten years preceding the disposition of the ADSs or
B Shares will not be subject to Swedish tax on any capital gain
derived from the sale or exchange of ADSs or B Shares. Different
rules may apply to a shareholder who is resident in more than one
country.
Passive Foreign Investment
Company Status.
A non-U.S. corporation will be classified as
a Passive Foreign Investment Company (a "PFIC") for any
taxable year if at least 75% of its gross income consists of
passive income (such as dividends, interest, rents or royalties (other
than rents or royalties derived in the active conduct of a trade
or business and received from an unrelated person), or gains on
the disposition of certain minority interests), or at least 50%
of the average value of its assets consist of assets that
produce, or are held for the production of, passive income. Volvo
currently believes that it did not qualify as a PFIC for the
taxable year ending December 31, 2003 for United States federal
income tax purposes. If Volvo were to become a PFIC in any
taxable year, the tax on distributions on its ADSs or B Shares
and on any gains realized upon the disposition of ADSs or B
Shares may be less favorable than as described herein.
Furthermore, dividends paid by Volvo would not be "qualified
dividend income" and would be subject to tax at the higher
rates applicable to other items of ordinary income. U.S. Holders
should consult their tax advisors regarding the potential
application of the PFIC rules to Volvo.
Swedish Estate and Gift Taxes.
Under Swedish legislation with regard to estate and gift taxes,
the transfer of an ADS or B Share by gift or by reason of the
death of the owner is subject to Swedish gift or inheritance tax
if the donor or decedent is domiciled or resident in Sweden or is
a Swedish citizen or is married to a Swedish citizen and has left
Sweden less than ten years before the gift transaction or death.
If the ADS or B Share was classified among fixed or current
assets of a business activity run in Sweden by the donor or
decedent, the transfer would also be subject to Swedish gift or
estate tax as a general rule. Further, transfers by gift would be
subject to Swedish gift tax if either the donor or donee is a
Swedish legal entity or if the donee is a Swedish citizen. Under
the current convention between Sweden and the United States for
the avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on estates, inheritances and gifts
(the "Estate Tax Treaty"), the transfer of an ADS or B
Share by a citizen or domiciliary of the United States who is not
a Swedish citizen or domiciliary, as defined in the Estate Tax
Treaty, by gift or by reason of the death of the owner is
generally not subject to Swedish gift or inheritance tax, unless
such ADS or B Share (1) forms part of the business property of a
permanent establishment situated in Sweden or (2) pertains to a
fixed base situated in Sweden and is used for the performance of
independent personal services. In cases where the transfer of an
ADS or B Share by a citizen or domiciliary of the United States
who is not a Swedish citizen by gift or by reason of the death of
the owner is subject to both Swedish and United States estate or
gift tax, the Estate Tax Treaty generally provides that the
United States will allow as a credit (subject to limitations)
against United States tax imposed with respect to the transfer an
amount equal to the tax paid to Sweden with respect to such
transfer. In the case where a transfer is subject to estate or
gift tax in the United States by reason of the transferor’s
domicile, and subject to Swedish gift or inheritance tax by
reason of the transferor’s citizenship, the Estate Tax
Treaty requires Sweden to allow a credit for United States tax
paid in respect of such transfer.
Swedish Taxes on Property.
In general, under the Treaty, a U.S. Holder of ADSs or B Shares
who is a resident, corporation or other entity of the United
States will not be subject to taxes on property (in Sweden,
"förmögenhetsskatt") unless such ADSs or B Shares are
included in a business carried on in Sweden.
United States Information
Reporting Backup Withholding.
Holders of ADSs or B Shares
may, under certain circumstances, be subject to United States
information reporting requirements and backup withholding at a
current rate of 28% with respect to dividends paid on or the
proceeds from a sale, exchange or redemption of ADSs or B Shares,
unless such Holder provides an accurate taxpayer identification
number or certificate of foreign status and makes any other
required certification, or who is otherwise exempt from backup
withholding. Certain exempt recipients (such as corporations) are
not subject to the information reporting requirements. Any U.S.
persons who are required to establish their exempt status
generally must provide IRS Form W-9 (Request for Taxpayer
Identification Number and Certification). Non-U.S. holders
generally will not be subject to United States information
reporting or backup withholding. However, such holders may be
required to provide certification of non-U.S. status in
connection with payments received in the United States or through
certain U.S.-related financial intermediaries. Backup withholding
is not an additional tax. Amounts withheld as backup withholding
may be credited against a Holder’s United States federal
income tax liability. A Holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by timely
filing the approximate claim for refund with the IRS and
furnishing any required information.
United States State and Local
Taxes.
In addition to United States federal income tax, U.S.
Holders may be subject to United States state and local taxes
with respect to their ADSs or B Shares.
The documents referred to in this
report can be read at the U.S. Securities and Exchange Commission’s
public reference facilities at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the website www.sec.gov.
Quantitative and qualitative
disclosures about market risk are reported in Note 34 to the
consolidated financial statements included in Item 18 of the
document.
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