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October 30, 1997
Continued strong trend in third quarter
The Atlas Copco Group´s revenues for the first nine months of 1997 amounted to SEK 21,577 m. (18,317), up 18 percent. Orders received increased by 19 percent to SEK 22,610 m. (19,049). For comparable units, revenues increased by 13 percent and orders received by 14 percent. The exchange-rate differences, primarily the strengthen-ing of USD, had a positive effect of approximately 7 percent on both revenues and orders received. The Atlas Copco Group´s profit after financial income and expense amounted to SEK 2,565 m. (2,232). The profit margin was 11.9 percent (12.2). For comparable units and adjusting for nonrecurring items of SEK 32 m. in the first nine months of 1997 and SEK 117 m. in 1996, profit after financial income and expense increased by 20 percent. Effective July 1, 1997, Atlas Copco acquired Prime Service, Inc., one of the largest equipment rental companies in the United States, with a total revenue in 1996 of USD 330 m. (SEK 2,500 m.). Demand for the next three to six months is expected to improve in Europe and South America while the recent development in Asia makes the outlook for that region uncertain. Demand in other markets is expected to remain largely unchanged. Earnings for the full year 1997 will be better than earnings in 1996, despite the initial negative effect of the Prime Ser-vice acquisi-tion. Structural changes Effective July 1, 1997, Atlas Copco acquired all outstanding shares of Prime Service, Inc., one of the largest equipment rental companies in the United States at an amount of approximately USD 900 m. (SEK 7,000 m.). In addition Atlas Copco assumed interest-bearing debts of approximately USD 260 m. (SEK 1,950 m.). Prime Service was listed on the New York Stock Exchange. At the acquisition date, Prime Service had 2,200 employees and operated 122 equipment rental loca-tions in 14 states with a base of more than 40,000 customers. In 1996, the total revenue was approximately USD 330 m. (SEK 2,500 m.) and the operating profit USD 66 m. (SEK 510 m.). The acquisition will affect earnings per share negatively* by a maximum of 5 percent. The negative effect is expected to disappear gradually during 1998. In the third quarter 1997 Prime Service has acquired two equipment rental companies in the U.S. with yearly sales of approximately USD 25 m. (SEK 190 m.). Prime Service has become a separate division within the Compressor Technique business area. In July 1997, the Wagner division acquired its distributor in South Africa, Hubert Davis Ltd. The company which will be integrated in the South African sales company, employs 80 people. Effective June 1, 1997, Atlas Copco acquired the French company Thomé-Crépelle, which is prim-arily manufacturing industrial reciprocating compressors. The company, which has 200 employees and is located in Lille, France, has annual sales of approximately SEK 255 m. In March 1997, Worthington Creyssensac, a company within Atlas Copco Industrial Air division, signed a joint venture agreement for production of oil-injected screw compressors with Shanghai General Machinery Group, China. The joint venture will start production during the fourth quarter 1997. Atlas Copco´s share is 58 percent. Positive market trends continue During the first nine months of 1997 orders received increased by 19 percent compared with the corresponding period in 1996. Significant increases were noted in Japan, China, Australia, Latin America, South Africa as well as in southern Europe. The demand in Germany and France improved during the third quarter. Sales of compressors and advanced industrial power tools showed the strongest volume increases. The economical/financial crisis in South East Asia, which affected sales in the region negatively, had a marginal impact on the Group. Earnings for the first nine months Operating profit for the first nine months increased by 27 percent to SEK 2,698 m. (2,123), corresponding to 12.5 percent (11.6) of revenues. Excluding nonrecurring items and the effect of the Prime Service acquisition, the operating profit margin improved to 12.4 percent (11.0). This improvement was due to volume increases and favorable exchange-rate developments, mainly the strengthening of USD. Net financial items amounted to SEK -133 m. (109), of which net interest items accounted for SEK -151 m. (102), and capital gain for SEK 32 m. from sale of shares in SAS Sverige AB. Interest expense increased due to higher net borrowing for the Prime Service acquisition. Interest income from cash holdings in Sweden and from currency hedging of foreign net assets was negatively affected by lower interest rates in Sweden compared to previous year. Profit after financial income and expense increased by 15 percent to SEK 2,565 m. (2,232), corresponding to a profit margin of 11.9 percent. For comparable units and excluding nonrecurring items, the profit for the first nine months increased by 20 percent. Net profit for the period totaled SEK 1,592 m. (1,420). Earnings per share were SEK 8.67 (7.74) and SEK 11.50 (10.38), based on earnings during the most recent 12 months. Excluding nonre-curring items earnings per share for the first nine months were SEK 8.55 (7.22). The return on capital employed during the most recent 12 months was 19.8 percent (21.0) and 17.4 percent (17.7) on shareholders´ equity. Third quarter The Atlas Copco Group´s revenues during the third quarter 1997 amounted to SEK 7,793 m., (5,943), up 31 percent compared with the corresponding quarter in 1996. For comparable units the increase was 17 percent. Operating profit increased to SEK 993 m. (632), corresponding to an improvement of 37 percent for comparable units. Profit after financial items increased to SEK 846 m. (665), up 27 percent. The profit margin was 10.9 percent (11.2). Net profit for the third quarter amounted to SEK 528 m. (397), corresponding to SEK 2.87 per share (2.17). Orders received amounted to SEK 7,785 m. (6,067). For comparable units, the increase was 15 percent compared with the corresponding quarter in 1996. Goodwill In connection with the acquisition of the American company, Prime Service, Inc., a goodwill item in the amount of approximately SEK 6,500 m. arose. This goodwill is amortized over a period of 40 years, similar to the goodwill of Milwaukee Electric Tool. For purposes of comparison, the impact on earnings resulting from the application of goodwill amortization over periods of 20 and 40 years is shown below: The equity/assets ratio is 37.9 percent. Based on a 20-year amortization period, the comparable figure should have been 37.5 percent. During 1995, the Swedish Financial Accounting Standards Council implemented a general review of its recommendation, which prescribed amortization of goodwill over a maximum of 20 years, and published a new version, which became effective on January 1, 1997. However, with regard to the maximum amortization period for goodwill, the Council has elected to delay its recommendation pending the position adopted by the International Accounting Standards Committee (IASC). Atlas Copco intends to follow the final recommendation of the Council. Net indebtedness and cash flow The Group´s net indebtedness, meaning the difference between interest-bearing liabilities and liquid assets, increased as a consequence of the Prime Service acquisition to SEK 10,449 m. (2,349), of which SEK 2,006 m. (1,928) related to pension provisions. The debt/equity ratio, meaning net indebtedness in relation to shareholders´ equity, increased to 81 percent (21). Net cash flow was SEK -8,179 m. (785), primarily due the Prime Service acquisition. Liquid assets at the end of the period totaled SEK 1,982 m. (2,394). Including minority interests, the Atlas Copco Group´s shareholders´ equity totaled SEK 12,904 m. (11,384), corresponding to SEK 70 per share (62). The equity/assets ratio was 38 percent (49). Investments Investments in machinery and buildings totaled SEK 596 m. (559). Personnel At the end of the period, the number of employees was 23,534 (20,871). Based on comparable units, the number of employees is unchanged during the period. Business areas Compressor Technique The Compressor Technique business area consists of six divisions in the following product areas: Industrial compressors, Portable compressors, Gas and process compressors and Equipment rental. Orders received during the period increased by 27 percent to SEK 10,759 m. (8,467). For compar-able units the increase was 17 percent. All divisions showed volume increases. A good order level was noted in Japan, North and South America, southern Europe and China. During the third quarter, the strong sales trend continued in most markets. Prime Service, included since July 1, 1997, recorded continued revenue and profit growth in the third quarter of 1997. Rev-enues in the third quarter in-dic-ate a yearly level of approximately USD 400 m. compared with USD 330 m. for the full year 1996. The operating margin before amort-ization of goodwill was well in line with the average for the Compressor Technique business area. Revenues increased by 25 percent to SEK 10,039 m. (8,057). For comparable units the increase was 14 percent. Operating profit increased to SEK 1,773 m. (1,306). The improvement was mainly attributable to higher volumes, favorable exchange rates and the Prime Service acquisition. Construction and Mining Technique The Construction and Mining Technique business area consists of six divisions in the following product areas: Drill rigs, Rock drilling tools, Construction tools and Loading equipment. Orders received during the period increased by 10 percent to SEK 4,920 m. (4,461). Demand for rock drilling equipment and loaders from the mining industry remained favorable. Large orders were received in South America, Australia and South Africa. The construction market continued to be weak, particularly in Europe with the exception of Norway. In the third quarter significant orders were received for underground drill rigs, particularly in China. Revenues increased by 10 percent to SEK 4,758 m. (4,329). Operating profit amounted to SEK 307 m. (284). The strengthening of USD, affected the operating margin favorably. Industrial Technique The Industrial Technique business area consists of five divisions in the Power tools, Assembly systems and Motion control product areas. Orders received during the period increased by 13 percent to SEK 6,931 m. (6,121). Sales of pneumatic power tools increased in European markets, North America, Brazil and Japan. The trend for electric power tools was positive. During the third quarter notable orders for assembly systems were received in the United States and Brazil. Revenues increased by 14 percent to SEK 6,780 m. (5,931). Operating profit totaled SEK 672 m. (614). Excluding nonrecurring items the profit for the first nine months of 1996 amounted to SEK 497 m. The improvement was due to higher sales volumes and lower operational costs. Outlook Demand for the next three to six months is expected to improve in Europe and South America while the recent development in Asia makes the outlook for that region uncertain. Demand in other markets is expected to remain largely unchanged. Earnings for the full year 1997 will be better than earnings in 1996, despite the initial negative effect of the Prime Ser-vice acquisi-tion. Stockholm, October 30, 1997 Giulio Mazzalupi President and Chief Executive Officer The Year-end Report on the Atlas Copco Group´s operations during 1997 will be published on February 13, 1998. For further information, please contact: Hans Ola Meyer, Senior Vice President, Group Treasurer, phone +46 8 743 8292, mobile +46 70 588 8292 Lennart Johansson, Senior Vice President, Controlling, Accounting & Auditing, phone +46 8 743 8570, mobile +46 70 588 8570 Corporate Communications phone +46 8 743 8222