SKF Holds Its Margin, but Cash Flow Tells a Different Story
SKF is one of the world’s largest manufacturers of bearings (mechanical components that reduce friction in everything from wind turbines to car wheels). The Swedish company is working to simplify its business by separating its Automotive division into a standalone company and focusing more closely on industrial markets with higher margins. Q1 2026 was the first quarter reported under a new structure with three segments, marking a milestone not just for its results, but also for how SKF will present its business in the future.
A steady margin despite currency pressure
The most striking aspect of the quarter was SKF’s ability to maintain its adjusted operating margin (profitability from core operations before exceptional costs) at 13.5%, exactly matching Q1 last year. This may sound unremarkable when you consider that currency headwinds (the negative effect of a stronger Swedish krona on profits earned abroad) reduced reported revenue by nearly 10%.
In other words, the underlying business performed well enough to offset substantial currency pressure. The CEO attributed this partly to savings from rightsizing activities (adjustments to staffing and operations to better match business needs), which materialized faster than expected, delivering around MSEK 500 (SEK 500 million). This is a significant contribution and suggests that the restructuring is gathering pace.
The key figures behind the results
Net sales were MSEK 21,873, which is an 8.7% decrease from a year earlier, almost entirely due to currency effects rather than underlying demand. Organic growth (sales growth excluding currency effects and changes in the business portfolio, reflecting underlying volume and pricing trends) was positive at 2.4%, a significant improvement on the negative 3.5% recorded a year earlier.
Adjusted operating profit reached MSEK 2,951, while adjusted earnings per share were SEK 4.25, compared with SEK 4.71 last year. The decline was largely driven by currency effects.
The balance sheet remains solid. Net debt to adjusted EBITDA (a measure of debt relative to adjusted earnings before interest, taxes, depreciation and amortization) stood at 0.8 times, comfortably within manageable limits. Adjusted return on capital employed (a measure of how efficiently the company generates profit from the capital invested in its business) increased to 14.4%, approaching the long-term target of 16%.
Weak cash flow needs a closer look
At first glance, the cash flow figures look concerning. Operating cash flow swung from a positive figure of MSEK 977 a year ago to a negative MSEK 446, a significant reversal.
However, a closer look, reveals that the decline is largely explainable. SKF is building inventory buffers as it separates its Automotive supply chains, paying restructuring costs and collecting receivables (payments owed by customers) later than usual following strong sales towards the end of the quarter. These are transitional effects rather than signs of a deteriorating business.
The Automotive segment also reported an operating loss of MSEK 78, but its adjusted operating margin was 5.0%. This represents an improvement on the recent trend, supported by initial efficiency gains from operating the Automotive division more independently. The business is weak, but it is not falling apart.
Specialized Industrial Solutions (SIS) also deserves attention. The segment achieved organic growth of 8.7% and increased its adjusted operating margin from 12.1% to 13.3%, driven by strength in Aerospace and Magnetic Solutions. This shift towards more profitable activities is exactly what SKF needs to support its strategy of focusing on industrial markets.
Uneven demand and tariffs complicate the picture
The industrial bearings market is highly sensitive to global manufacturing activity, which remains uneven. While Asia, particularly India and Southeast Asia, is growing strongly, while Europe is flat to slightly negative. The global automotive market remains under pressure, due to weak demand for light vehicles across most regions.
Tariffs, a growing concern for manufacturers with global supply chains, have so far been largely passed on to customers through price increases. SKF’s CEO has indicated that this trend should continue into Q2. This is reassuring, although it is not guaranteed if economic conditions change. Geopolitical uncertainty, explicitly highlighted in the report, remains a significant factor that is difficult to model.
What to watch next
SKF’s Q2 report is due on 17 July 2026. The company expects organic sales to remain roughly the same as a year earlier, despite tougher comparatives (stronger results in the corresponding period last year), so it will be challenging to meet expectations.
Key things to watch for include whether cash flow recovers as working capital (funds tied up in the daily running of the business, including inventory and receivables, less operating liabilities) normalizes following the separation, whether SIS margins remain above 13%, and whether there are any updates to the timeline for the Automotive separation.
The planned listing of SKF Vertevo, the new name for the Automotive business, remains central to the investment thesis (the reasoning behind an investment in the company). The focus is now on whether SKF can maintain its industrial profitability while completing the separation and translating its operational progress into stronger cash flow.
Source: SKF Q3 report.
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