FINANCIAL INFORMATION - Skanska

Skanska in brief SwedenFinlandNorwayDenmarkSkanska is one of the world’s leading companies in constructionrelated services and project development.PolandUnitedStatesCzech RepublicHong Kong Skanska’s annual net sales are about SEK 146 billion. Operations take place in 11 “home markets”. Skanska has 76,000 employees. Fortune magazine has ranked Skanska as the world’smost admired company in the construction industry and asEurope’s third most admired company in all categories.IndiaArgentina – base forSouth American operationsUnited KingdomSkanska’s operations focus mainly on eleven “home markets”. It has construction businesses in all these markets. In the Nordic countriesas well as in Poland and the Czech Republic, Skanska performs residential project development. Skanska also has certain operations inother countries. Commercial project development is performed by specialized units in Sweden, Poland, the Czech Republic and Hungary.BOT operations focus on Skanska’s home markets but include projects in Chile, Brazil and Mozambique as well.Business streamsThe largest global construction companies 1Total sales 2001 2Constructionand ServicesResidentialProject DevelopmentCommercialProject DevelopmentBOTCompanyCountryVinciFrance15.4Skanska ABSweden14.3BouyguesFrance12.8Hochtief AGGermany11.7Norway6%11.3Finland5%Bechtel Group Inc.Fluor Corp.Construction refers to buildingand civil construction. About 60percent of Skanska’s sales arerelated to building construction.Civil construction consists mainlyof infrastructure projects suchas rail systems, bridges, tunnels,roads, harbors and power plants.The main business of SkanskaServices, Facilities Management(FM), includes a broadspectrum of services related tooperation and maintenance ofproperties, as well as individuallytailored contracts for propertymanagement.At year- end, Constructionand Services accounted for 51percent of capital employed.00 Inledning UTVIK1 ENG.indd ASkanska is conductingResidential Project Developmentin the Nordic countries, in Polandand in the Czech Republic. Thisbusiness covers the activitiesfrom land acquisition throughto the sale of apartments. At theend of 2002, over 6,000 unitswere in production, and Skanskahad over 19,000 unutilizedbuilding rights.Successful residential projectdevelopment involves challengesquite different from constructionoperations.Residential development isanother type of business, whichmust be evaluated on the basisof return on capital employed.From the second quarter of 2003onward, this business streamwill be reported separatelyfrom construction operations inEurope.Skanska carries out commercialproject development in anumber of Scandinavian andCentral European markets.These operations focus onoffice and retail projects, wherethe objective is to completethe entire development cycle– land purchase, planning,pre-construction engineering,leasing, construction anddivestment – within an averageperiod that should not exceedthree years.In the future, the focus willcontinue to be on the stages of aproperty’s life cycle that add thegreatest value – with planning,leasing work and transactionwork as the most important.At year-end, Residential ProjectDevelopment accounted for 13percent of capital employed.At year-end, these operationsaccounted for 33 percent ofcapital employed.BOT – Build-Operate-Transferrefers to infrastructure projectsthat are financed privately,instead of via public fundsor taxes. BOT projects mayinclude everything from pureinfrastructure such as roads andbridges to school, hospital andprison properties.Skanska’s BOT expertiseencompasses the whole chainfrom financing to design,construction, operation andmaintenance of the finishedfacility.Net salesby geographic areaUnited StatesUnited StatesUSD bn7.2CentexUnited States6.3Halliburton KBRUnited States5.9China State Const.China5.8EIFFAGEFrance5.6United States39%Sweden19%United Kingdom10%Czech Republic5%Other countries16%Source: Engineering News Record, ENR Sourcebook, December 20021 Excluding Japanese construction companies.2 Data not available for 2002.Allocation ofcapital employedOrder backlogNet salesSEK MOperating income excludingitems affecting comparabilitySEK M180,0005,0004,000120,0003,0002,000Civil construction35%Construction and Services 51%Building construction57%Residential ProjectDevelopment13%Commercial ProjectDevelopmentBOT33%Residential development 5%ServicesAt year-end, BOT operationsaccounted for 3 percent ofcapital employed.3%60,0001,00001998 1999 2000 2001 200201998 1999 2000 2001 20023%Skanska i n br i e f – Ska nska A n n u a l R e p or t 2 0 0 203-03-21, 10.22.50

The year 2002 in brief Net sales in 2002 amounted to SEK 146 billion.Operating income in construction-relatedoperations successively improved duringthe year, as did the cash flow from businessoperations.In 2002, Sverker Martin-Löf was elected thenew Chairman of the Board of Skanska ABand Stuart Graham was appointed the newPresident and CEO.2002Comments by thePresident and CEO A strategic review of all units was carried outduring the autumn of 2002. The Group’s operating income amountedto SEK 976 million. Writedowns andrestructuring expenses totaling SEK 2.0 billionwere charged to operating income as a resultof the strategic review. For the full year, the Group reported a lossafter tax totaling SEK –837 M.Our strategy has the potential to significantly increase earningswithout further geographic expansion2002 IN REVIEW2002strengthening of internal controls and the integration of ourcompared to 2001. Most construction business units showedrecent acquisitions into the Skanska Group. This will servepositive development in operating income before the impactto reduce risk and generate stable earnings growth in theof goodwill writedowns. The star performers in constructionfuture.were Skanska CZ (Czech Republic) and Skanska USA Civil. TheSkanska demonstrated its leadership in the industry byProject Development Sweden business unit maintained moreintroducing and beginning the implementation of a rigorousthan 85 percent pre-leasing in ongoing projects.Code of Conduct. It is vital to the future of the companySkanska Services, though still quite small, improvedstandard. Training and enforcement will be importantdownsizing by its largest customer.cornerstones in our work with the Code of Conduct goingTurnarounds were achieved in Skanska Denmark andforward. Violations of the Code will not be tolerated.Selmer Skanska (Norway). Our South American operations,In Sweden, where we have had several disappointingSade Skanska, showed strong profit improvement despiteevents over the past few years, we initiated the “Turn theextremely difficult economic conditions. This business unitTide” program to improve quality and customer focus. Weis a prime example of the true entrepreneurial spirit andare, and intend to remain, the leader in the construction anddetermination that have always characterized Skanska.project development industry in Sweden.In 2002, we maintained our ISO 14001 certification andprogress and we expect a sale of one of our projects in 2003,remained a leader in the construction industry in managingdemonstrating the long range potential in this business. Ourour work in an increasingly environmentally sensitive way.ChangeSEK MEUR M–10%137,59015,021construction business units are showing good profitability onDetails of our environmental and social responsibilityprogram are covered in a separate Sustainability Report.Order backlog–13%137,94015,075BOT projects, making this an even more attractive businessNet sales–12%145,57615,893for Skanska. 4%2,621286Operating income excl. items affecting comparabilitythat Skanska behaves according to an irreproachable ethicalmargins and reduced capital employed despite the impact ofOur BOT (privately financed project) business continued toOrder bookingsThe year 2002 was also highlighted by the continuedEarnings in Skanska’s construction operations improved,Unfortunately, the need to adjust goodwill in SelmerFinally, in 2002 we intensified the focus on developingmanagers and leaders to better serve our customers-1,645-180Skanska (Norway), Skanska Poland and Gammon Skanskaand produce attractive results for our shareholders. WeOperating income–57%976107(Hong Kong), as well as year-end provisions to cover exit costsestablished an improved personnel evaluation system andIncome after financial items–93%738for parts of certain business units, totaled about SEK 2 billion,revamped the Skanska Management Institute into what weresulting in a loss for the year at Skanska. Also excluded fromnow call the Skanska Leadership Institute. We plan even moreyear-end results is the sale of the CityCronan commercialimprovements in management development during 2003.Items affecting comparabilityResult per share, SEKReturn on shareholders’ equityReturn on capital employed–2.00negneg4.3%4.3%project in Stockholm, which will generate a gain exceedingSEK 1 billion.We did a lot of things right in 2002 that will benefit ourshareholders in 2003 and beyond.The year 2002 in br ief – Skanska An n ual Rep o rt 2 0 0 200 Inledning UTVIK2 ENG.indd A03-03-19, 02.34.59

Looking forwardbusiness units into one company – Skanska. We will continueDuring the summer of 2002, our Board reconfirmed Skanska’sthis process of integration in 2003 to make Skanska a consis-strategic direction. In the fall of 2002, we further defined ourtent, recognizable leader in all of our markets.strategy and analyzed each of our businesses against thatsharpened strategy.We also want to make Skanska easier for our shareholdersto understand. Therefore we are initiating several changesAs a result of this analysis we determined that our strat-that will improve visibility and justify the capital employedegy, if maximized, has the potential to significantly increasein the various business streams. Our intention is to provideearnings without further geographic expansion. We alsoclear and transparent information for our shareholders todecided that two business units no longer fit our strategicunderstand Skanska and see short-term results in the contextrequirements: Skanska International Projects (because of theof our business. We think this will encourage investors who“home market” strategy) and our residential developmentare interested in solid long-term investments.business in the U.S. (because we are not a leader in this sec-Finally, I want to thank my predecessor and long-timetor). Certain other small operations in other markets will alsoassociate Claes Björk for his 35 years of service to Skanska.be phased out.Claes initiated and developed our very successful businessOur review also led to initiatives to strengthen our balancein the United States and then, as CEO, expanded Skanskasheet. Beginning in 2003, we will dispose of underutilizedthrough numerous acquisitions in Europe. The platformassets, reduce capital employed in residential as welldeveloped during his tenure provides us with marvelousas commercial project development and reduce debt.opportunity. It is now up to his successors to deliver on thisResidential development will be a separate business streamopportunity.from construction, improving visibility.Going forward, we want Skanska to be defined as adecentralized/integrated company. This concept embodiesour strong belief that construction and development arelocal businesses, requiring local management and know-how.Experience tells us this is a lower risk model than exportingStockholm, March 2003construction services internationally from headquarters. Thisis why our strategy is based on achieving leading positions inthe countries we call home markets. However, there is alsogreat value in the Skanska brand that requires certain com-STUART E. GRAHAMmon standards and control processes to integrate the variousPresident and CEOC omments by the President and C EO – Skanska Annual Rep o rt 2 0 0 202 VDXkommentar v16.indd 3303-03-19, 02.12.26

Mission, vision and strategyMissionVisionMaximizing Skanska’s strategySkanska’s mission isSkanska shall be a world leaderSkanska’s goals are to:to develop, build and– the client’s first choice – in Be number 1 or 2, in terms of size and profitability,maintain the physicalconstruction-related services andin all the home markets of its constructionenvironment for living,project development.business units.traveling and working. Be the leading project developer in selectedcountries and in selected product areas such asresidential, office, retail and selected types of BOTprojects. Have a value-enhancing Services business.404 AffXrside v12.indd 4Ska nska A nn u al R e port 2002 – M ission , vision a nd stra tegy03-03-19, 02.05.04

Focus on performanceResultBe truly customer-focusedSteadily rising shareholder value.Customer focus means, first and foremost, delivering the expected quality at thepromised time. By adding value and exceeding expectations, Skanska gains the longterm trust of its customers. It takes a lot of time and effort to gain good customers,but only one bad experience to lose them.By focusing on performance, aside from satisfied clientsand employees, the result will also be that Skanska willgenerate greater shareholder value.Have a great management development programSuccessful projects and customer relations depend on good managers. Opportunitiesfor further training and personal development are prerequisites for retaining theseemployees. Skanska has a system for developing managers with potential, rewardinggood performance and taking steps to deal with those who do not meet expectations.A broad base of highly skilled managers is a crucial asset in maximizing the strategy.Optimize the balance between decentralization and integrationConstruction and development are local businesses so it is important for Skanskato maintain the decentralized entrepreneurial approach. At the same time Skanskais one company and must have the controls, standards and procedures to protectthe Companys’ financial position and brand name. Therefore, the decentralized/integrated model is the best way to create added value to customers, employeesand shareholders.Be an agent for changeSkanska must take advantage of its leading position to influence the constructionindustry in a positive direction. The industry needs to be more receptive to changeand accord greater value to ethics and quality. To contribute to all this is Skanska’sresponsibility as a leading company. In turn, it will attract both customers andtalented employees.Mission, vision and stra tegy – Skanska Annua l R ep o rt 2 0 0 204 AffXrside v12.indd 5503-03-19, 02.05.17

“We work very hard tounderstand and satisfy theneeds of our customers”Simon Hipperson, Skanska UK06 ProjektXPFI v19.indd 603-03-19, 02.03.23

Healthy outlook for PFI in the UKSkanska UK is a PFI market leader after completing15 projects, all of them successful.More and more of Britain’s infrastructure is being replaced under the PrivateFinance Initiative, whereby the risks ofbuilding and operating new hospitals,schools, prisons and other infrastructure projects are transferred to the private sector. This requires constructioncompanies to understand the needs ofthe end users. They must also createfacilities that are economical to operate and maintain, while maximizing theoperational capability.Success comes when the wholeteam – from finance through designand construction to operation andmaintenance – is integrated and provides the customer with a solution thatwas not previously available.Skanska UK is a market leader in thissegment, having undertaken 15 PFIprojects and delivered every one successfully.During 2002, Skanska completedahead of schedule the first phase ofthe King’s College PFI redevelopment– a new 23,000 sq metre seven storeyclinical building. Skanska also reachedfinancial closure on the new CoventryHospital amounting to SEK 6.9 billion. This was Skanska’s largest-everorder for a privately financed project.By securing this work and then following it with preferred bidder statusfor a similar hospital project in Derby,Skanska has secured its position as themarket leader in the healthcare sectorof PFI projects, with a market share ofabout 25 percent.Being the winner is not just a matterof an attractive price and excellent customer relations. It requires a genuineunderstanding of the customer’s needsand the risks involved as well as theability to provide advanced technicaland operational solutions for the building and its subsequent management.According to Simon Hipperson ofSkanska Integrated Projects in the UK,“We work very hard to understand andsatisfy the needs of our customers. Ouraim is to design into both the buildingand its future operations the certaintyof high quality performance.”Here the broad collective competenceof Skanska is of great importance.Where appropriate Skanska BOT canparticipate as an investor in the consortium that finances and owns the project. Working with Skanska FinancialServices also helps to identity the bestfinancial and operational solution forthe project. Skanska UK provides thedesign and build skills as well as maintaining the building for its lifetime.With contracts running into manybillions of kronor, it is essential forsuccessful bidders to have the highest quality risk management, the bestpeople and an extremely strong financial status. Skanska sets itself apartfrom its many competitors by providing all these. “Skanska works closelywith its customers to avoid surprises,and provides first-class technical solutions. That is what it’s about,” says Mr.Hipperson, as an explanation of whySkanska has been so successful in theBritish PFI sector.A recent British government studyindicated that PFI facilities are threeto four times more likely to be delivered on time and on budget thanconventionally procured facilities. Thisconfirms that there will be growing PFIopportunities for Skanska UK, which iswell equipped to meet the challenge.A Private Finance Initiative, PFIis a model for private capital to finance investments invarious forms of public services traditionally financedby public sector funds. The PFI model has grown rapidlyin the United Kingdom over the past five years, since itfrees up scarce public sector resources. The largest PFIprojects have been hospitals, where private interestsare responsible for financing, design, construction andoperation of the physical hospital building during a contract period, which may run for up to 40 years. It shouldbe noted that the core operations, the medical treatment, is not a part of the PFI hospital projects.Other common PFI projects in the UK are schools,prisons

Sade Skanska, showed strong profit improvement despite extremely difficult economic conditions. This business unit is a prime example of the true entrepreneurial spirit and determination that have always characterized Skanska. Our BOT (privately financed project) business continued to prog