Financial overview

(1) Commercial Vehicle Systems
Sales by the Commercial Vehicle Systems Division (CVS) during 2006 increased 7.6% to SEK 4,765 m (4,430). Division sales in local currency rose 3% in North America and 15% in Europe. Operating income showed continued improvement, rising SEK 41 m to SEK 232 m (excluding restructuring costs of SEK 15 m). The improvement in earnings was attributed primarily to higher volumes and the effects of various efficiency enhancement programs in the Friction products and Actuator business units. The exceptionally strong demand from truck manufacturers led to capacity problems during the year. Extra costs for production and logistics and the inability to meet demand from the aftermarket had negative effects on earnings.

(2) Hydraulic systems
A favorable growth for fuel transfer pumps contributed to an increase in net sales during 2006 of 4.9%t for Hydraulic Systems to SEK 1,331 m (1,269). The internal program of improvement measures contributed to the Division's favorable trend of earnings. Operating income amounted to SEK 90 m in 2006. The result was in line with earnings for the preceding year, since operating income in 2005 was impacted favorably by nonrecurring effects, including provisions for pensions. Rising material prices were off set largely through various measures.

(3) Garphyttan Wire
The Division's sales were at the same level as in 2005, SEK 1,049 m (1,039). Sales volumes were relatively robust in the European market but were negatively affected during the first six months by inventory adjustments made by several customers. Sales in the North American market were weakened by production cutbacks by the major US carmakers. Operating income excluding restructuring costs declined SEK 41 m to SEK 55 m (96). A large portion of the decline in operating income was because increases in raw materials prices could not be passed on to customers.

(4) Traction systems
Although Traction Systems' sales did not increase in 2006, the Division's earnings and return on capital improved compared with the preceding year. The sales trend for the VW group was favorable, while a weak trend was simultaneously noted in the SUV market. The latter trend, combined with a sharp reduction in orders from Ford North America during the year, had a negative impact on sales growth. Sales amounted to SEK 745 m (748). With the same sales, earnings improved by SEK 12 m in the preceding year to SEK 48 m in 2006.

Contracts
Order intake increased by SEK 291 million (4%) to SEK 7,883 million (7,592 million).

-At the beginning of 2006, the Company received final production approval from Volvo for the ModulX disc brakes for delivery to Volvo and Renault's medium-weight truck series. The product range, which includes compressed air-based disc brakes, is base on a modular system that provides several advantages, including fewer variations, simpler adaptation to special requirements and fewer parts. Series deliveries of the new disc brakes began in 2006 and will continue over several years.

-In January 2006, the DaimlerChrysler Group signed a development and delivery contract with Alfdex AB for the Alfdex system. The order is worth approximately SEK 250 million over a five-year period. Series deliveries began in late 2006.
In North America, two major engine manufacturers also selected Alfdex as their solution for the treatment of crankcase gases.

In April, the Company received an order for an AWD system for a global car platform. This was an add-on order from an order received during the preceding year from a leading car maker, which was valued at SEK 1,200 million. The new order increased the total order value from the original contracts by SEK 800 million to SEK 2 billion. Preparations for the start of production in the Company's new plant in Mexico proceeded as planned.

-The Company was named supplier of four-wheel drive systems for a new car model within the Ford Group. Production is scheduled to begin in 2008.

-Series delivery of AWD systems for Land Rover Freelander 2 commenced during the third quarter. This is a new variant of the third generation AWD system.

-Several development and delivery agreements were signed for fuel transfer pumps with three of the world's leading engine manufacturers. The combined order value is approximately SEK 500 million over a five-year period. Series deliveries started in early 2007.


New plant in China
-Inauguration of new facilities in Suzhou, China. Production starts for brake systems, hydraulic products and valve spring wire.

Divestitures
-One of the Commercial Vehicle Systems' plants in North America was divested. Most of the production was relocated to a plant in USA and to China. The net cost of this restructuring measure was about SEK 15 million.

R&D Expenditures

Product Developments
ModulAir
Development continued of ModulAir, a line of module-based air-drying and distribution products. In addition to reducing costs, the modular system also makes it easier to adapt the product to the needs of different vehicle manufacturers. A letter of intent was signed in 2006 with a leading vehicle maker with series deliveries scheduled to begin in 2010.

New piston type brake cylinder
Development of this product continued in close cooperation with a vehicle manufacturer. A system is also under development for electronic control of air suspension in trucks and buses. The aim is to sign a delivery agreement in 2007.

Fixed Caliper Dual Disc Brake
Vehicle manufacturers in North America and Europe are now conducting comprehensive test on the new Fixed Caliper Dual Disc Brake. SKF and the Company reached a decision in 2005 to jointly develop a complete hub and brake unit for commercial vehicles, trucks, buses and trailers. The system is based on the Company's Fixed Caliper Dual DIsc and SKF's hub technology. The goal is to develop a more compact product that improves both safety and performance. The plan is to start series deliveries in 2008.


Electrically powered diesel pumps
The next stage in development for a new generation of fuel transfer pumps will be electrically powered diesel pumps. The independent transfer from the engine provides many advantages, including improved start up properties and a controlled fuel supply. At year-end 2006, two leading manufacturers of diesel engines booked orders for prototypes of these diesel pumps.

Alfdex
This is a system for separating oil particles from crankcase gases.
It has been developed jointly by Alfa Laval and the Company. Alfdex meets the new environmental requirements that take effect in the USA in 2007 and the EU in 2008, and market potential is considered highly promising. Work has been started on development of the next product generation.

EMS
The development of a new technology for electronic control of hydraulic systems, EMS, continued during 2006. Prototype projects were started with two different vehicle manufacturers. EMS combines hydraulic and electronics in a manner that provides improved efficiency and reduced energy consumption. The technology creates opportunity for hydraulic hybrid vehicles.

AWD system
During 2006, a new variant of the third- generation of AWD system was launched for series production for the Land Rover Freelander. The fourth-generation system, which is based on totally new technology, will be launched during 2007 and will constitute a technical platform for coming customer projects over the medium-long term.
To meet future customer requirements for cost-effective AWD systems and thus increase market penetration, development of yet another generation was begun during 2006 in partnership with a carmaker. A prototype installation of the system will be evaluated in winter testing during 2007.

Capital expenditures

In January 2005, Haldex decided to establish a manufacturing facility in China that will produce several of the group's products. The capital expenditures for this facility amount to 130 million SEK split equally between 2005 and 2006. In a 5-year period the group's sales in China are targeted to grow from today's 100 million SEK to 1 billion SEK. The manufacturing facility in China will be located to Suzhou, west of Shanghai. The capital investment there includes two factories sharing a common land area. One factory will produce air brake system products and hydraulic products. The other factory will house the production of valve spring wire products. These Chinese operations are wholly owned by the Company. The production launch of certain brake products is planned to take place during 2nd quarter 2005. Thereafter, the production schedule will be successively expanded to include more brake and hydraulic products. Deliveries of valve spring wire products are planed to start towards the end of 2006.