ANNUAL REPORT 2006 - Skanska

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Skanska’s strengths • The Skanska brand, built up during more than a century of working in many different countries. One important element of the brand is the Group’s Code of Conduct, which includes policies on employee relations, health and safety, the environment and business ethics. • Skanska’s highly skilled, dedicated employees, who combine expertise with the Group’s overall focus on sustainable development in order to successfully deliver projects to customers. The Group’s ability to transfer knowledge between different geographic markets also contributes to its strength. • Financial strength, an important factor in maintaining the confidence of customers and capital markets in Skanska. It also enables the Group to invest in project development and assume responsibility for and invest in major privately financed infrastructure projects. Talent management vital A good reputation is an important factor in attracting the best employees. To achieve its long-term goals, Skanska must ensure its supply of future managers in projects as well as other parts of the organization. Identifying and developing the leaders of tomorrow is a core activity for both local units and the Group. This is why Skanska continuously measures and assesses employees with leadership potential. A substantial proportion of executive time and resources is devoted to management development (see page 10). Risk management system Construction work involves various technical and legal as well as financial and personnel-related risks. The ability to identify and manage these risks is crucial to the Group’s success and is thus an important prerequisite for achieving its strategic goals. Unforeseen risks may have a substantial adverse impact on profits. This is why the Group’s risk management system, which is continuously being refined, is of key importance (see page 8). Laying the groundwork for profitability Skanska’s earnings are achieved through well-implemented, profitable projects. The right market, the right projects and the right project employees are fundamental to success. The groundwork is laid by the Group’s strategic planning, which identifies selected markets. Skanska continuously builds up knowledge of its customers through a permanent presence in these markets. It ensures a highly skilled project organization by means of local and Groupwide talent management programs. Profitability, safety, ethics and the environment Skanska must act in ways that are sustainable and responsible in the long term and meet the demands of shareholders, customers and employees, as well as society at large. Skanska’s aim is to ensure that all projects will be profitable and will also be implemented without environmental incidents, work site accidents or ethical breaches. The market- and customer-specific expertise of local units, combined with Skanska’s corporate business and control systems, the Group’s Code of Conduct and common risk management system, provide support for achieving both financial and qualitative targets. 6 Mission, vision, goals and strategy Skanska Annual Report 2006
Ambitious financial and qualitative targets Skanska’s financial targets for the period through 2007 are based on an ambition that exceeds the industry norm in the Group’s respective geographic markets and specific segments. In each market, Skanska has established “Outperform” targets. These targets provide the basis for incentive systems at various levels of the organization. Operating margin The operating margin is an important yardstick of performance in construction and residential development. The “Outperform” margin may vary, depending on the market and what type of business is being carried out. For the Construction business stream, the target is to achieve an overall average operating margin of 3.3 percent by 2007. During 2006, the operating margin amounted to 2.8 percent, compared to a target of 3.2 percent for the year. However, several business units achieved their individual targets. In the Residential Development business stream, the target is to achieve an operating margin of 10.0 percent by 2007. During 2006, when the housing market was strong, the operating margin amounted to 12.6 percent. Return on capital employed and on equity In the Residential Development business stream, the target is to achieve a return on capital employed of 18.0 percent. During 2006, return on capital employed amounted to 27.5 percent. In the Commercial Development business stream, the target is to achieve an adjusted return on capital employed of 15.0 percent over a business cycle for the industry. This return is based on operating net, unrealized development gains and changes in market value. During 2006, return calculated in this way amounted to 17.2 percent over a nine-year business cycle. For the individual year 2006, return amounted to 17.5 percent. In the Infrastructure Development business stream, the target is to achieve an adjusted return on capital employed of 16.0 percent, including unrealized development gains and changes in market value but excluding exchange rate effects. During 2006, return calculated in this way amounted to 34.0 percent. For the Skanska Group as a whole, the target is to achieve 18 percent return on equity. In 2006, return on equity amounted to 19.3 percent, not taking into account unrealized development gains. The 4 zeros – qualitative targets In addition to these financial targets, Skanska has also adopted qualitative targets. These targets are based on a vision that operations shall take place with: • zero loss-making projects • zero environmental incidents • zero work site accidents • zero ethical breaches. Some of these targets are based on specific levels to be achieved in a given year, while others have absolutely zero tolerance. This applies, for example, to the “zero ethical breaches” target. In addition to these zero visions, there are also management development targets. Capital structure The equity requirement varies between Skanska’s business streams. In the Construction business stream, the requirement is related to business volume and to the risks inherent in the various types of construction assignments carried out. This includes taking into account the requirements that must be met in order to have access to the performance guarantees that are necessary to be able to operate in the American civil construction market. The model also takes into account the financing of goodwill. In Residential Development, the estimated equity requirement amounts to 50 percent of capital employed. In Commercial Development and Infrastructure Development, the equity requirement is based on the distribution between completed properties, ongoing projects, undeveloped land, development properties and future investment obligations. The various components each have different equity requirements. The calculation also takes into account completion and leasing level, respectively. It is the Board’s judgement that during 2007, equity needs to total about SEK 16 billion. This judgement is based on the operations that Skanska carries out but also takes into account the investments it is expected to make during 2007. This applies, for example, to land for residential development and new projects in Commercial Development and Infrastructure Development. Financial ”Outperform” targets, 2007 Group Return on equity, target 2007 18.0% Return on equity, outcome 2006 19.3% Operating margin, target 2007 3.3% 10.0% Operating margin, outcome 2006 2.8% 12.6% Construction Residential Development Commercial Development 1 Infrastructure Development 2 Return on capital employed, target 2007 18.0% 15.0% 16.0% Return on capital employed, outcome 2006 27.5% 17.5% 34.0% 1 Including unrealized development gains and changes in market value 2 Including unrealized development gains and changes in market value but excluding exchange rate effects Skanska Annual Report 2006 Financial targets 7
Page 1 and 2: ANNUAL REPORT 2006
Page 3 and 4: Business streams and organization C
Page 5 and 6: During 2007 we closed and began con
Page 7: Skanska’s core businesses Skanska
Page 11 and 12: 0—15 MUSD, 25% • 15—30 MUSD,
Page 13 and 14: expertise can be kept in projects.
Page 15 and 16: largest group, with about 60 millio
Page 17 and 18: To the left: At Norra Bantorget in
Page 19 and 20: To the left: The Palace of Justice
Page 21 and 22: CONSTRUCTION MORE THAN 200 STORES U
Page 23 and 24: During 2006 Skanska USA Civil furth
Page 25 and 26: CONSTRUCTION NEW SUCCESSES IN THE G
Page 27 and 28: To the left: In Kärra, 10 km (6 mi
Page 29 and 30: To the left: Today the former Films
Page 31 and 32: RESIDENTIAL DEVELOPMENT LIVING CLOS
Page 33 and 34: yggande, förvaltning och försälj
Page 35 and 36: Skanska is developing Norra Bantorg
Page 37 and 38: The Danish unit of Svenska Handelsb
Page 39 and 40: COMMERCIAL DEVELOPMENT THE INNER HA
Page 41 and 42: To the left: The first phase of Der
Page 43 and 44: Market risk concession, example Ava
Page 45 and 46: 0 6,7% 7,7% 8,7% 9,7% 10,7% 11,7% 1
Page 47 and 48: INFRASTRUCTURE DEVELOPMENT FIRST WI
Page 49 and 50: % Number 100 80 60 40 20 0 Environm
Page 51 and 52: Awards and achievements During 2006
Page 53 and 54: Zero tolerance to corruption At the
Page 55 and 56: Report of the Directors The Board o
Page 57 and 58: tive effect of about SEK 90 M due t
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SEK M 2006 2005 Strategic investmen
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Slovakian company. The fine in Skan
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The dilution effect during 2006 is
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Consolidated balance sheet SEK M No
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Consolidated cash flow statement SE
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Parent Company balance sheet SEK M
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Notes including accounting and valu
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income,” “Financial expenses”
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Internal profits Internal profits t
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it nor taxable profit. Also not tak
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IAS 39, “Financial Instruments: R
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Note 3 Effects of changes in accoun
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Note 4 continued Central, eliminati
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Note 4 continued C. Other informati
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Note 6 continued Liquidity reserve
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Note 7 Business combinations Busine
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Note 10 Operating income Operating
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Note 13 Impairment losses/Reversals
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Note 16 continued Deferred tax asse
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Note 18 Goodwill Goodwill is recogn
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Note 20 Investments in joint ventur
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Note 20 continued Note 21 Financial
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Note 22 continued Carrying amount P
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Note 26 continued Equity attributab
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Note 28 continued Pension obligatio
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Note 31 Specification of interest-b
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Note 33 Assets pledged Assets pledg
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Note 34 continued Effect on the Gro
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Note 35 Cash flow statement Aside f
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Note 36 Personnel Wages, salaries,
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Note 37 continued C. Benefits to th
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Note 40 Leases Skanska is a lessee
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Note 43 Five-year Group financial s
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Financial ratios etc. 5 In complian
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Parent Company notes Note 45 Financ
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Note 52 Holdings in Group companies
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Note 59 Expected recovery periods o
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Proposed allocation of earnings The
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Corporate governance report of Skan
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Attendance at Board and Committee m
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Senior Executive Team Johan Karlstr
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Curt Källströmer Head of Chairman
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More information Worldwide The Skan
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Abbreviations BOT Build Own/Operate
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Addresses Skanska AB SE-169 83 Soln
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ANNUAL REPORT 2006 - Skanska

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