Husqvarna Interim Report January - June 2011

Stockholm July 19, 2011

Hans Linnarson, Acting CEO and President: ”For the second quarter, reported sales for the Group decreased eleven percent, but adjusted for exchange rates the decrease was one percent. For the first half-year sales adjusted for exchange rates increased by two percent. Industry demand decreased in North America and together with the supply chain challenges in the Orangeburg factory sales were affected negatively. The European market started strongly but slowed down towards the end of the second quarter. Adjusted sales for Europe and Asia/Pacific increased four percent for the second quarter, which was in line with the total market. For Construction the positive development continued and market shares increased.

The production disturbances continued to hamper the output from Orangeburg as well as resulting in higher costs. As a result of measures taken, the going cost rate directly related to the disturbances gradually decreased. In the first quarter, the costs were approximately SEK 150m, whereof the majority in March. The total amount for the second quarter was SEK 180m.

Our highest priority going forward is to secure deliveries to our customers for the 2012 season in a timely manner. Further measures will be taken within the Orangeburg factory which is expected to result in SEK 100 - 150m higher costs during the remainder of 2011. We are also planning to increase our pre-season production.

As production capacity and flexibility to guarantee the highest delivery performance will be prioritized, we will also review the pace of our ongoing restructuring projects. Savings from manufacturing footprint restructuring will therefore be delayed.

The Group’s operating income declined in the second quarter. Higher selling prices and a favorable mix were not able to offset negative currency effects, costs related to the production disturbances, higher input costs and marketing expenses.”

Second quarter

Net sales amounted to SEK 10,179m (11,457) and operating income to SEK 1,012m (1,319). Income for the period amounted to SEK 681m (936), or SEK 1.18 (1.62) per share.

Net sales and operating income, adjusted for exchange rate effects and items affecting comparability, decreased by 1% and 23% respectively.

Changes in exchange rates had a negative year-on-year effect on Group operating income of approximately SEK -170m.

•       Costs related directly to production disturbances in North America amounted to approximately  SEK 180m.
•       Adjusted sales increased for Europe and Asia/Pacific and Construction but declined for Americas.
•      Hans Linnarson, Head of Sales Europe and Asia/Pacific, was appointed acting CEO and President

                 

SECOND QUARTER

NET SALES

Net sales for the second quarter amounted to SEK 10,179m (11,457). Adjusted for exchange rate effects, sales decreased by approximately 1% or by SEK 64m. Sales prices increased slightly. Europe and Asia/Pacific accounted for an adjusted sales increase of approximately 4% or SEK 246m, Americas’ adjusted sales decreased by approximately 9% or by SEK 375m and Construction’s adjusted sales increased by approximately 10% or SEK 65m.

OPERATING INCOME

Operating income for the second quarter amounted to SEK 1,012m (1,319). Costs related to the production disturbances in North America amounted to approximately SEK 180m. Adjusted for exchange rate effects and items affecting comparability, operating income decreased by 23% or by approximately SEK 294m. The second quarter of 2010 included items affecting comparability amounting to SEK -157m while there were no items affecting comparability in the second quarter of 2011.

Changes in exchange rates, including both translation and transaction effects net of hedging, had a total negative year-on-year effect on Group operating income of SEK -170m (-30). Hedging contracts had a negative effect of SEK -88m (26) in the second quarter 2011.

Adjusted operating income was positively affected by higher selling prices and a favorable mix, which were more than offset by costs related to the production disturbances in North America, higher input costs and marketing expenses. The Group operating margin declined to 9.9% (11.5).

Adjusted operating income and operating margin for Europe and Asia/Pacific and Americas decreased, while they increased for Construction.

FIRST HALF-YEAR

NET SALES

Net sales for the first half-year declined by 8% to SEK 18,953m (20,539). Adjusted for exchange rate effects, sales increased by approximately 2% or by SEK 423m. Sales prices increased slightly. Europe and Asia/Pacific accounted for an adjusted sales increase of approximately 7% or SEK 652m, Americas’ adjusted sales decreased by approximately 5% or by SEK 391m and Construction’s adjusted sales increased by approximately 13% or by SEK 162m.

OPERATING INCOME

Operating income for the first half-year decreased by 20% and amounted to SEK 1,674m (2,097). Costs related to the production disturbances in North America amounted to approximately SEK 330m. Adjusted for exchange rate effects and items affecting comparability, operating income decreased by 13% or by approximately SEK 247m. Items affecting comparability amounted to SEK -40m (-207).

Changes in exchange rates, including both translation and transaction effects net of hedging, had a total negative year-on-year effect on operating income of SEK -342m (113). Hedging contracts had a negative effect of SEK -150m (52) in the first half-year.

Adjusted operating income was positively affected by higher sales and higher selling prices, which were more than offset by costs related to the production disturbances in North America and higher input costs. The Group operating margin decreased to 8.8% (10.2).

Adjusted operating income and operating margin for Europe and Asia/Pacific and Construction increased, but decreased for Americas.

OUTLOOK FOR THE THIRD QUARTER OF 2011

Group shipments of forest and garden products in the third quarter of 2011 are estimated to be lower than in the third quarter of 2010. Inventories in the trade of the Group’s forest and garden products at the end of the second quarter were estimated to be high except for European retail where trade inventory was estimated to be on a low level. The garden season in Europe ended strongly last year, resulting in a good third quarter of 2010. Shipments of Construction products in the third quarter 2011 are estimated to be higher than in the corresponding quarter of the previous year. In total, Group shipments in the third quarter of 2011 are expected to be lower than in the third quarter of 2010.

FINANCIAL ITEMS NET

Net financial items for the second quarter amounted to SEK -115m (-69) and for the first half-year to SEK -188m (-157). The increase is primarily due to higher interest rates, higher net debt and negative mark-to-market valuation on the interest rate component of the Group’s hedge contracts. The average interest rate on borrowings at the end of the second quarter was 4.1% (3.0). Compared to year-end 2010, the average interest rate has decreased from 4.8%, mainly due to an increase in share of lower interest rate USD funding for financing of the seasonal increase in working capital.

INCOME AFTER FINANCIAL ITEMS

Income after financial items for the second quarter amounted to SEK 897m (1,250) corresponding to a margin of 8.8% (10.9). For the first half-year, income after financial items amounted to SEK 1,486m (1,940) corresponding to a margin of 7.8% (9.4).

TAXES

Taxes for the first half-year 2011 amounted to SEK -321m (-469), corresponding to a tax rate of 22% (24) of income after financial items.

EARNINGS PER SHARE

Income for the second quarter 2011 amounted to SEK 681m (936), corresponding to SEK 1.18 (1.62) per share after dilution. For the first half-year, income amounted to SEK 1,165m (1,471), corresponding to SEK 2.02 (2.54) per share.

OPERATING CASH FLOW

Operating cash flow for the first half-year amounted to SEK -1,222m (72). The change is mainly due to the lower result and lower cash flow from change in inventory and trade payables.

PERFORMANCE BY BUSINESS AREA

EUROPE and ASIA/PACIFIC

Net sales for Europe and Asia/Pacific in the second quarter decreased 2%. Adjusted for exchange rate effects, sales increased 4%. In the first half-year, sales were unchanged. Adjusted for exchange rate effects, sales increased 7%. Sales prices increased. Sales were slightly negatively affected by the production disturbances in North America, as some of the products are exported to markets in Europe and the Asia/Pacific region.

Total market demand in the Europe and Asia/Pacific region slowed down at the end of the quarter. The Group’s sales to the dealer channel developed positively while retail channel sales were weaker. Watering products had the highest sales growth and ride-on and walk-behind lawn mowers also increased. In terms of regions, Germany and Scandinavia had the best performances.

Operating income and operating margin for the second quarter decreased. Adjusted for exchange rate effects and items affecting comparability, operating income for the second quarter decreased by 4% or by approximately SEK -40m. For the first half-year, the corresponding was an increase of 9% or SEK 157 m.

Operating income was positively affected mainly by higher selling prices and higher volumes while mix, input and marketing costs and changes in exchange rates had a negative effect.

Changes in exchange rates had a negative year-on-year effect on operating income by approximately SEK -114m in the first quarter and SEK -26m in the second quarter.

AMERICAS

Net sales for Americas in the second quarter decreased by 24%. Adjusted for exchange rate effects, sales decreased by 9%. For the first half-year, sales decreased by 18% or by 5% when adjusted for exchange rate effects.

Total market demand in North America decreased during the quarter and industry shipments for the major product categories decreased, reflecting a lower sell-out in the trade.

Operating income for the second quarter decreased to SEK -98m (202) as a result of costs related to the production disturbances, negative effects from changes in exchange rates, lower volumes, unfavorable mix and higher input costs. Operating income was positively affected by lower items affecting comparability.

Changes in exchange rates had a negative year-on-year effect on operating income of approximately SEK -129m in the second quarter and SEK -50m in the first quarter. Operating income in the second quarter 2010 was charged with items affecting comparability amounting to SEK -110m and the first quarter 2010 included items affecting comparability amounting to SEK -50m. There were no items affecting comparability in the first half year of 2011.

The production disturbances led to lower shipments and therefore negatively affected sales and mix as well as leading to significantly higher costs. The higher costs directly related to the disturbances amounted to approximately SEK -150m in the first quarter and approximately SEK -180m in the second quarter.

The production disturbances are due to the increased complexity of materials, associated with the combination of the move of the production from Beatrice, Nebraska into the production facility in Orangeburg, South Carolina as well as a significantly higher number of new products being launched.

To secure the confidence of our customers, extensive measures for a competitive production set-up in Orangeburg are being implemented. The measures will result in additional costs of approximately SEK 100 – 150m during the second half of 2011.

CONSTRUCTION

Net sales for Construction in the second quarter decreased by -2%.  Adjusted for exchange rate effects, sales increased by 10%. For the first half-year, sales increased by 3% or by 13% if adjusted for exchange rate effects. Sales prices increased slightly during the first half year.

Total market demand for construction products improved in Europe and in emerging markets while the market environment in North America was more challenging with a decline in the underlying market. The business area’s sales increased on the back of a strong product portfolio with several new innovative products as well as a replacement need in the rental channel and at construction contractors. Equipment sales increased double digit while sales of consumables, such as diamond tools, was only slightly up, reflecting the lower end-user activity.

Operating income and operating margin increased. Adjusted for exchange rate effects and items affecting comparability, operating income for the second quarter increased by 80% or by approximately SEK 33m. For the first half-year, the corresponding increase was 175% or SEK 63 m. The second quarter of 2010 was charged with restructuring costs amounting to SEK -47m and the first quarter 2011 had corresponding costs amounting to SEK -40m.

Operating income was positively affected by higher sales, improved mix and higher selling prices, offsetting higher selling and administrative costs and negative currency impact.

Changes in exchange rates had a negative year-on-year effect on operating income by approximately SEK -9m in the first quarter and SEK -14m in the second quarter 2011.

PARENT COMPANY

Net sales in the first half year for the Parent Company, Husqvarna AB, amounted to SEK 6,538m (6,201), of which SEK 4,931m (4,716) referred to sales to Group Companies and SEK 1,607m (1,485) to external customers. Income after financial items amounted to SEK 797m (1,518). Income for the period was SEK 675m (1,266)

Investments in tangible and intangible assets amounted to SEK 165m (151). Cash and cash equivalents amounted to SEK 280m (1,478) at the end of June.  A dividend payment to shareholders in the amount of SEK 859m (574) was made during the period.

CHANGES IN GROUP MANAGEMENT

Magnus Yngen, CEO and President of Husqvarna, is as of June 9, 2011, absent due to illness. Hans Linnarson, Executive Vice President, Head of Sales Europe and Asia/Pacific, has been appointed acting CEO and President. Hans Linnarson will also remain as Head of Sales Europe and Asia/Pacific.

Ulf Liljedahl, previously CFO at Cardo, has been appointed Senior Vice President and CFO of Husqvarna. Ulf Liljedahl assumed his new position on June 1, 2011.

ANNUAL GENERAL MEETING 2011

The Annual General Meeting of Husqvarna AB (publ) was held on May 4, 2011. All ordinary board members were re-elected and a dividend of SEK 1.50 (1.00) per share was resolved.

LEGAL MATTERS

In a judgment of February 2010, the criminal court of Tournai in Belgium acquitted Husqvarna in a case regarding a gas explosion on Husqvarna’s property in Ghislenghien, Belgium in 2004. The ruling was appealed by the public prosecutor, as well as by other parties, to the Court of Appeal.

Seven years after the accident, the Court of Appeal in Mons has issued its verdict. The accident, when 24 people died and over 100 were injured, was caused by the bursting of a sub-surface industrial gas pipe on Husqvarna Belgium's property. Eight of the 14 parties were judged guilty, among them Husqvarna Belgium, together with the gas company, employees of two construction companies, the safety coordinators and the architect. This results in a suspended sentence (a small amount of fines) for Husqvarna Belgium. Husqvarna has appealed to the Belgian Supreme Court.

In December 2011, the Court of Appeal in Mons will commence proceedings adjudicating the damages for each victim and is also expected to rule on the distribution of liability for damages between the parties finally found guilty. Today, the damages claims are only partly known, but it cannot be ruled out that, if the verdict is upheld, this may lead to negative financial effects for Husqvarna. The damages claims are expected to become fully known latest at the commencement of the claims proceedings in the Court of Appeal in December. A final outcome of these damages proceedings may take 1 - 2 years.

Dance Studio Owner Invented Weed Eater

June 30 -- George Ballas got his big idea after a poisonous snake bit a worker who was trimming his lawn with shears. The idea turned an old popcorn can, some wires and an edger into the Weed Eater.

Mr. Ballas, who died Saturday at age 85, was a dance instructor, developer, inventor and marketer who built hotels, patented an adjustable table and marketed an early portable phone.

But it was the Weed Eater—of which he invented both the concept and the name—that made him a fortune while sparking a revolution in lawn care. Mr. Ballas introduced the device in the early 1970s and by 1976 was selling $40 million worth of them annually.

The son of Greek immigrants who ran a restaurant in northern Louisiana, Mr. Ballas served in the Air Force during World War II and the Korean War.

After getting out of the service, he married Maria Louisa Marulanda, a dance instructor whom he met when she taught him the tango. She had appeared in films, including the 1949 western "Rio Grande," and the couple went on to give performances together.

Mr. Ballas went into the dance business, managing several Arthur Murray and Fred Astaire studios.

His son, Corky Ballas, became a professional dancer, and his grandson, Mark Ballas, has appeared on seven seasons of "Dancing With the Stars," including partnering with Bristol Palin in season 11.

In the late 1960s, Mr. Ballas opened Dance City USA in a disused cinema in Houston, boasting that the 43,000-square-foot dance studio was the largest in the world. He called it "a supermarket of dancing with babes and booze and big bands all under one roof."

With his business thriving, Mr. Ballas wanted his lawn—all three acres of it—to look good. His search for an alternative to time- and labor-intensive shears gained urgency when a worker he had hired was hospitalized after being bitten by a copperhead.

Mr. Ballas said the idea for the Weed Eater came to him while he was in a car wash, contemplating the big rotating bristles that cleaned hard-to-reach corners yet somehow didn't scratch the finish.

Drawing from that inspiration, he rigged up an old popcorn can with some wires and hooked it to a rotating edger, and the first string trimmer was born.

"It made a helluva noise, but it ripped up the turf and tore away the grass," Mr. Ballas told the Los Angeles Times in 1977. 

He hired an engineer to design new models that substituted monofilament fishing line for wire and ran on electricity and gas. He dubbed it "Weed Eater" and held several patents on it.

When Mr. Ballas failed to find a company interested in distributing the device, he decided to sell it himself. He gave each new model a pet name—the first was a "Weedie" and the second a "Clippie"—and designed logos for each based on portraits of his children with unruly, grass-like hair.

He used a high-visibility ad campaign, including spots on the Super Bowl and a sponsorship role in the 1977 David Frost interviews of former President Richard Nixon.

Despite his patents on the Weed Eater, imitators soon flooded the market under names such as Weed Whip and Weed Crasher.

In 1977, Mr. Ballas sold Weed Eater Inc. to Emerson Electric Co. for an undisclosed sum that his daughter, Winkie Jamail, called "a small fortune."

Mr. Ballas also taught entrepreneurship at Rice University in Houston. He continued to tinker with new inventions, and at one point marketed a football-helmet-sized portable phone that found few takers.

"A Weed Eater," Mr. Ballas told the Houston Chronicle in 1993, "comes along once in a lifetime."

Stephen Miller      www.wsjonline.com

Engineers Mow the Competition with "MOE"

AUBURN, AL – June 30 -- The Institute of Navigation holds an annual robotic lawn mower competition, and this year, Auburn’s team placed second earning a $10,000 prize in the dynamic competition.

The purpose of the competition is to design a robotic lawn mower that can quickly and accurately cut through grass.

The eighth ION robotic lawn-mower competition was held June 2-4 in Beavercreek, Ohio.

For the dynamic competition, Auburn’s autonomous lawn mower “Moe” was navigated through a playing field avoiding a fence, a flower bed and a remote-control car while cutting grass. “Moe” was created by created by engineering students Michael Carroll, William Woodall and John Harrison.

“Moe can pretty much do anything we tell it to do,” Woodall said.

It has two electrical cutting motors for cutting grass, and it can either be driven with a remote control like a Playstation controller or autonomously using GPS coordinates.

“Just the idea that you can drive a lawn mower while sitting on your porch I think is appealing to most people,” Woodall said.

Moe can even last up to four hours on remote control and two and half on autonomous control, Harrison said. It is battery operated and can recharge using a plug.

Woodall said the sensors, which are used to detect boundaries for when the blades should be in motion, are what the team worked on the most and what helped throughout the competition.

“We were keeping track of where our cutters were,” Woodall said. “And because we knew where the robot was, as soon as the cutting blades would go over the white lines, they’d cut off immediately so that we wouldn’t cut outside because you get penalized for that.”

The group focused more on cutting than trimming, which Harrison admits they want to work on for next year because first place, Case Western Reserve University, was successful at both.

Last year Auburn placed third and this year second. The goal for next year is to win first place.

The project began as a senior design project in the summer of 2009 with the dynamics competition in mind.

“It was made mostly out of products you could buy that were premade, preassembled, with a little bit of work involved,” Harrison said.

The building process took a year to complete, Carroll said, with the assistance of 18 mechanical, electrical and software engineering students, but the three teammates continued working and focusing on electrical and software development.

The estimated cost to complete the project was between $10,000 and $15,000.

The team received support from the team’s adviser Mark Nelms, chair of Auburn’s department of electrical engineering.

Calvin Cutshaw, electrical and computer engineering technician, and Auburn engineering alumni Julian Davidson and his wife, Dorothy, also contributed to the project funds.

Currently, the lawn mower is on tour visiting various high schools.

The team has big plans within the next few months to cut a big AU on the fields at South Donahue and Lem Morrison drives and film it from a helicopter.

Next year the team will compete again with hopes of winning first place.

“It was a really great experience,” Carroll said. “It is interesting to see the other team’s approach to the competition problems. We will incorporate some of those ideas and go to compete again next year.”