Six month report, January - June 1997

 

Changes in accounting principles

Effective from the 1997 financial year, the Skanska Group bases its revenue recognition of work in progress on the percentage of completion method. This means that operating income from contracting assignments is reported successively as projects are completed over time, instead of being based on contracts completed during the year, as previously. Comparative figures related to final results for 1996 have been recalculated accordingly. A detailed presentation of the effects of this change in accounting principle is found in the appendix.

 

Market

As a whole, the Swedish construction market was weak during the first half of 1997. The level of residential construction – which has remained extremely low over the past three years – plummeted further. The number of housing starts was half as many as during the same period last year. As for other building construction, investment volume remains at largely unchanged levels. In the road and civil engineering market, the slowdown noted earlier continued.

In Finland, residential construction is rising sharply. The rest of the construction market is continuing to show a certain upturn in investment volume. In Denmark, too, residential construction is rising, while road and civil engineering projects – in contrast – show signs of slowdown. The Group’s construction operations in the United States are benefiting from relatively strong growth in several of their regional markets. In the Atlanta area, construction investments are at a high level even after last year’s Olympic Games. In Germany, which is the main market for several of Skanska’s industrial operations, demand for building products has stagnated.

In the Swedish rental market, demand generally developed in a positive direction. Strong demand, combined with limited new construction, has pushed up rent levels for commercial space. The market situation nevertheless varies greatly between different regional markets.

 

Order bookings and order backlog

The Group’s order bookings for the period January-June 1997 totaled SEK 32,081 M (23,185), an increase of 38 percent compared to the same period last year. The increase was mainly attributable to US operations. Shifts in exchange rates are having a positive impact on the comparisons with last year’s figures.

Order backlog at the end of the report period was SEK 51,473 M (35,313).

 

Net sales and earnings

Consolidated net sales rose by 12 percent to SEK 24,584 M (21,991). The increase was primarily related to US operations. Of the Group’s total net sales during January-June 1997, for the first time more than half – 51 percent – originated in markets outside Sweden.

The Group’s operating income amounted to SEK 1,339 M (1,512). Sale of properties was on a smaller scale than last year, with capital gains amounting SEK 64 M (251). Operating income for the period included capital gains of SEK 191 M (-) from divestments of operations etc. Operating income included SEK 161 M (223) representing Skanska’s share of income in associated companies.

Income after financial items amounted to SEK 10,402 M (3,193). Net financial items totaled SEK 9,063 M (1,681). This included SEK 9,122 M (1,755) in capital gains on shares sold, mainly related to the divestment of most of Skanska’s holding in Sandvik, the cemented carbide and specialty steels company.

The combined construction operations of the Group include the Building, Civil Engineering and Skanska USA business areas, certain units in the Industry business area and the construction operations of the subsidiary JM. Order bookings in construction operations amounted to SEK 28,845 M (18,747) during the period. Net sales amounted to SEK 20,845 M, with an operating margin of 1.0 percent (1.2) and a margin after net financial items of 1.2 percent (1.7). Calculated on a rolling 12-month basis, the operating margin was 1.5 percent and the margin after net financial items 1.7 percent, compared to 1.6 percent and 2.0 percent, respectively, for the fullyear 1996.

 

Results by business area

Building business area

The Building business area encompasses all building construction operations in the Skanska Group, except in the United States. Sweden and the other Nordic countries are its main markets. The business area also includes operations pursued on a project basis in Russia, the Baltic countries (Estonia, Latvia and Lithuania), Poland and elsewhere.

Order bookings during the report period fell by 3 percent to SEK 7,794 M (8,045), mainly as a consequence of extremely low residential construction in Sweden and an otherwise relatively weak Swedish construction market. Major orders received in Sweden during the period included television production facilities for SVT Drama and renovation of the Cirkus theater, both in Stockholm; the Mälar Valley University College in Eskilstuna; and a school building in Luleå. Order bookings from outside Sweden accounted for nearly 50 percent of the total. In Finland, a number of residential projects in the Helsinki area led to increased order bookings. In Denmark, order bookings included a major residential project, Capella Høj, in central Copenhagen. In Norway, Skanska landed two school construction projects in the Oslo area. Other international orders included a contract for an airport terminal in Budapest, Hungary and an office building project in Russia. The order backlog of the business area was SEK 9,940 M (10,560) at the close of the period.

Net sales of the Building business area rose by 5 percent, compared to the first half of 1996. One factor affecting the operating margin for the report period was the limited scale of divestments of real estate projects developed and completed for Skanska’s own account, compared to the same period last year. Calculated on a rolling 12-month basis, the operating margin of the business area was largely unchanged from the full year 1996.

 

Civil Engineering business area

The Civil Engineering business area encompasses Skanska’s construction of roads and civil works in all countries except the United States. Sweden and the other Nordic countries are its main markets, and it carries out sizable project exports to numerous international markets. The business area also operates crushed stone plants, concrete mixing plants and asphalt plants.

In Sweden, the total market for road and civil works projects is continuing to show signs of downturn. In Finland and Denmark, the strong upturn that prevailed during 1996 lost strength during the first half of this year.

Order bookings of the Civil Engineering business area rose by 2 percent during the report period to SEK 5,659 M (5,568). More than one fourth of this originated outside Sweden. Major contracts landed during the report period included the Sunningesund Bridge outside Uddevalla, Sweden; a portion of the outer ring road of the E6 European highway in Malmö, Sweden; the Helsinki-Lahti highway in Finland; and a hydroelectric power station tunnel in Sultartangi, Iceland. Order backlog was SEK 10,261 M (9,690) at the close of the period.

The net sales of the business area increased by 4 percent during the period. The operating margin was unchanged compared to the same period last year. The lower first-half margin, compared to both the full year 1996 and a rolling 12-month figure, reflects typical seasonal fluctuations in civil works in the Swedish market.

 

Skanska USA business area

The Skanska USA business area encompasses the Group’s collective construction operations in the United States, which take place through subsidiaries specializing in building construction and road and civil works, respectively. Their main geographic focus is the eastern United States.

During the first half of 1997, operations continued to benefit from positive market developments. In the Atlanta area, economic growth remains strong even after last year’s Olympic Games.

The order bookings of the Skanska USA business area for the report period totaled SEK 13,021 M (4,115). The increase included about SEK 1.2 billion due to shifts in currency exchange rates. Two major contracts related to the big Central Artery highway project in Boston contributed to the sharp increase. Among other large orders received by Skanska USA were contracts for renovation of the Williamsburg Bridge and renovation of a portion of the subway system, both in New York City; construction of a Federal Reserve Bank building in Atlanta; and construction management work related to a new Six Flags theme park in Connecticut. Order backlog was SEK 27,225 M (10,973) at the close of the period.

The net sales of the business area rose by 41 percent to SEK 6,943 M (4,940), with a largely unchanged operating margin compared to the same period last year.

 

BOT Projects business area

The BOT (Build-Own-Transfer) Projects business area is responsible for the Group’s financial involvement in the growing market for various forms of privately financed infrastructure projects. The business area was established during the first half of 1997. Its project portfolio currently includes a prison in Wales, where construction will be completed during the autumn of 1997; and the above-mentioned highway between Helsinki and Lahti, Finland, on which work began during the report period.

 

Industry business area

The Industry business area encompasses three product areas – Building Products, Building Systems and Installation Products – with sales mainly related to the construction and renovation of residential and other buildings. The business area’s main geographic markets are Sweden and Germany.

The volume of capital spending in the Swedish building construction market, especially for new residential construction, was extremely low during the first half of 1997. The German construction

market was also weak. Heavier demand in the Swedish single-family home market during the second quarter contributed to a slight increase in the Industry business area’s order bookings (3 percent for comparable units), compared to the first half of 1996. The order backlog was SEK 1,703 M (1,412) at the close of the report period.

Net sales of the business area for the period declined by 6 percent to SEK 3,883 M (4,134). The downturn is explained primarily by the low level of construction in Sweden. Low capacity utilization and keen price competition in several product areas adversely affected earnings. The business area’s share of income in associated companies is mainly related to Scancem, the building materials group. For comments on the earnings of Scancem, which are included here with a delay of one quarter, the reader is referred to Scancem’s financial reports.

Based on the strongly improved order situation during the second quarter, as well as expectations of a more favorable price trend on certain product areas, full-year income from own operations are projected to exceed their 1996 level.

 

Real Estate business area

In the Swedish rental market, demand for commercial space gained further strength during the first half of 1997. In the Real Estate business area – with its pronounced focus on major metropolitan areas – the improvement was especially evident in Kista, Solna and Sundbyberg, all located in the northwestern part of Greater Stockholm. Compared to year-end 1996, the occupancy rate in the business area’s commercial properties improved, both in Sweden and abroad. The total occupancy rate was an unchanged 93 percent at the close of the report period.

The improved rental market, as well as continued low interest rates, have contributed to a high level of activity in the Swedish real estate market. As one element in the Real Estate business area’s strategy, some properties in northern Sweden were sold to the Norrporten real estate company during the report period. Drott, a Skanska subsidiary specializing entirely in residential property management, reached an agreement in principle late in June to purchase the housing company Danderydsbostäder. This acquisition strengthens Drott’s position in the Stockholm area.

The earnings of the business area were largely unchanged compared to last year. Earnings from day-to-day property management improved. The item "Share of income in associated companies" in

creased due to the acquisition of shares in the shopping center company Piren during the second half of 1996, bringing Skanska’s stake to 49 percent. For comments on the earnings of associated companies listed on the Stockholm Stock Exchange, the reader is referred to the reports of the respective companies. The positive impact of lower interest rates is gradually appearing in the business area’s income after financial items. The ratio of operating net on investment properties to the book value of these properties improved somewhat.

Most of Skanska’s shareholdings in Pandox Hotellfastigheter AB were divested when this hotel property company was floated on the Stockholm Stock Exchange.

 

The subsidiary JM

JM’s construction operations were adversely affected by the downturn in Swedish residential construction. Both order bookings and net sales fell compared to 1996. However, the company’s operating margin remained relatively high, reflecting JM’s successful specialization in residential projects occupying attractive major metropolitan locations. Property management earnings are stable. Net financial items were favorably affected by lower interest rates.

 

Capital spending

The Skanska Group’s net investments in properties amounted to SEK 192 M and in other fixed assets excluding shares to SEK 519 M during the report period. The Group’s overall divestments during the report period totaled SEK 12,224 M. Divestments of shares, mainly in Sandvik, totaled SEK 10,073 M and sale of businesses SEK 670 M.

 

Liquidity and financing

The Group’s bank balances and short-term investments at the end of the report period amounted to SEK 2,976 M (year-end 1996: 3,202). Net interest-bearing indebtedness was essentially at zero on June 30. The ongoing redemption of shares in Skanska will require a disbursement of nearly SEK 5 billion in late August, with a corresponding effect on liquidity and net indebtedness.

 

Stock portfolio

The market value of the Group’s listed shareholdings amounted to SEK 10,093 M as of June 30, 1997. Excluding holdings in companies which are reported in Skanska’s accounts as associated companies according to the equity method (Scancem, Rörvik Timber, Norrporten, Pandox, Piren) or are consolidated as subsidiaries (JM), the market value of the portfolio amounted to SEK 2,583 M and its book value was SEK 321 M. During the report period, most of Skanska’s holding in Sandvik, as well as its holdings in Klövern and Geveko, were divested. Capital gains totaled SEK 9,122 M (1,755).

 

Personnel

The number of employees in the Skanska Group on June 30, 1997 was 35,719 (year-end 1996: 36,470).

 

Restructuring transactions

Rörvik TimberThe earlier decision to merge the sawmill operations of Skanska’s subsidiary Myresjö Trä with the sawmill division of RörviksGruppen, creating a new Stockholm Stock Exchange-listed southern Swedish sawmill group – Rörvik Timber – was implemented as planned during the second quarter. After the merger, Skanska owns 40 percent of the shares in the new company.

 

Important events after the close of the report period

Redemption of shares in SkanskaThe owners of 98.7 percent of all shares eligible for Skanska’s offer of voluntary redemption of every tenth share applied for a redemption. An extraordinary meeting of shareholders on August 4 approved the requisite resolutions to implement the redemption process. The total redemption amount was consequently SEK 4,972 M, with August 27, 1997 set as the disbursement date.

 

Danderyd, Sweden, August 28, 1997

SKANSKA AB

Claes Björk
President

 

 

 

Change in accounting principle

 

Switchover to percentage of completion method

The Group is basing revenue recognition in its contracting operations – the Building, Civil Engineering and Skanska USA business areas as well as the companies in the Industry business area that perform contracting work and the construction operations of JM – according to the percentage of completion method, in compliance with an industry-wide recommendation by the Swedish Construction Federation.

Revenue recognition on a percentage of completion basis means that operating income is reported successively as work on a project accrues over time, instead of being listed as a balance sheet item until the project is completed and a final financial settlement with the client is reached, as previously.

The percentage of completion method is employed in the consolidated financial statements. Revenue recognition in individual Swedish contracting companies, however, will continue to be based on the completed contract method. In light of this, the consolidated financial statements include provisions for deferred tax liability related to the taxation of accrued income in ongoing projects.

 

Recalculation of shareholders’ equity

The switchover to the percentage of completion method is a change in accounting principle whose effects are reported as an adjustment of shareholders’ equity. The following table shows how the recalculation of the Group’s liabilities and shareholders’ equity as of December 31, 1996 took place with respect to this.

	Recalculated accounts Dec. 31, 1996	Accounts Dec. 31, 1996
Balance, work in progress	-	4 192
Unearned revenue	3 109	-
Other liabilities	31 115	30 835
Total liabilities	34 224	35 027
Minority interests	1 581	1 546
Restricted equity	5 481	4 713
Unrestricted equity	9 938	9 938
Total shareholders’ equity	15 419	14 651
Balance sheet total	51 224	51 224

 

Recalculation of net sales and operating expenses.

Skanska has recalculated sales and operating expenses for the first half of 1996 and for the full year 1996 in compliance with the recommendation of the Swedish Construction Federation. Net sales for 1996 declined by SEK 968 M due to the switchover to the percentage of completion method, while operating expenses declined by SEK 637 M.

 

Order backlog

Order backlog, previously reported as the difference between the period’s order bookings and invoiced sales taking into account order backlog at the beginning of the period, is now reported in the financial statements of companies that employ the percentage of completion method as the difference between the period’s order bookings and accrued revenues, taking into account order backlog at the beginning of the period.

The period’s accrued revenue equals its accrued expenses plus accrued income, adjusted for changes in provisions for possible losses. Comparative figures have been recalculated accordingly.

Other companies are employing unchanged principles for calculating order backlog.

 

Intra-Group invoiced sales

Intra-Group operating revenues related to the construction of properties for the Group’s own account are eliminated effective from 1997. Comparative figures have been recalculated accordingly. As a result of this change in accounting principle, 1996 net sales declined by SEK 1,497 M.