Atlas Copco Interim Report (unaudited) Nine months ended September 30, 1998

22 okt 1998

Improved operating margin

The Atlas Copco Group increased revenues for the first nine months of 1998 to SEK 24,895 m. (21,577), up 15 percent. Orders received increased 10 percent, to SEK 24,917 m. (22,610). For comparable units, revenues were up 5 percent, while orders received were up 1 percent.  The Atlas Copco Group's profit after financial items increased to SEK 2,691 m. (2,565). The profit margin was 10.8 percent (11.9). Near term outlook  The turbulence in world financial markets that has spread over the last few months is likely to affect economic growth in most markets. The overall positive trend of demand in Europe is expected to continue but at a lower pace. Demand in the United States is expected to remain at its present level, thanks mainly to continued strong development of the equipment rental industry. Demand in Latin America is showing a downward trend. In most Asian markets, demand is expected to remain low. The recent negative trend for investments in larger industrial machinery is expected to continue. In summary, the overall outlook for demand remains flat but with a downside risk.  Earnings for the full year 1998 are expected to be higher than in 1997. Sales development  The economic and financial situation in Asia/Australia reduced sales in the region by more than SEK 900 m. during the first nine months. In the third quarter, a negative trend was also noticeable in China. Sales in South America, and more recently Russia, were negatively affected by the extended turbulence in the international financial markets.  The positive sales trend in European markets continued, particularly in Germany and Spain. Sales in the U.S. remained at steady level with increases being noted for equipment rental and power tools. Orders for large industrial compressors have been decreasing in the U.S. as well as in many other markets, while orders for underground drill rigs have increased in volume. Earnings for the first nine months  Operating profit for the first nine months increased 19 percent, to SEK 3,221 m. (2,698), corresponding to an improvement in operating margin to 12.9 percent (12.5) of revenues. Half of the increase in operating profit resulted from the acquisition of Prime Service, Inc., while the remainder was predominantly the result of higher revenue in comparable units.  Net financial items amounted to SEK -530 m. (-133), of which net interest items accounted for SEK -513 m. (-149). Interest expense expanded mainly because of higher net borrowing for the acquisition of Prime and other equipment rental businesses. Net interest from currency hedging on foreign net assets was slightly negative, at SEK -2 m., compared to a positive SEK 111 m. in the same period the preceding year. Capital gains from the sale of shares were SEK 4 m. (32).  Profit after financial items increased 5 percent, to SEK 2,691 m. (2,565), the net effect of stronger operating profit and higher interest costs. The profit margin was 10.8 percent (11.9).  Net profit for the period totaled SEK 1,699 m. (1,592), or SEK 9.26 per share (8.67), representing a gain of 7 percent. Based on net profit for the 12 months to September 30, earnings per share improved 10 percent, to SEK 12.61 (11.50).  The return on capital employed during the 12 months to September 30 was 17.6 percent (19.8), and return on shareholders' equity 16.9 percent (17.4). Third quarter  The Atlas Copco Group's revenues during the third quarter of 1998 increased to SEK 8,111 m., from SEK 7,793 m. for the third quarter of 1997; about half of the 4 percent rise was attributable to comparable units and the rest to acquisitions. Operating profit increased to SEK 1,066 m. (993) corresponding to a margin of 13.1 percent. Both Prime and comparable units improved their margins. Profit after financial items increased to SEK 867 m. (846). The profit margin was 10.7 percent (10.9). Net profit for the third quarter totaled SEK 535 m. (528), corresponding to SEK 2.92 per share (2.87). Changes in exchange rates had a negative effect on sales and profit in the quarter.  Orders received amounted to SEK 8,004 m. (7,785), up 3 percent from the same quarter in 1997. Goodwill  The acquisition of Prime Service at July 1, 1997, resulted in goodwill of approximately SEK  6,800 m. Atlas Copco is amortizing this goodwill over a period of 40 years, the same as the goodwill for Milwaukee Electric Tool (SEK 3,100 m.).  For purposes of comparison, the impact on earnings resulting from amortizing goodwill over periods of 20 and 40 years is shown below.  The equity/assets ratio was 40.3 percent. Based on a 20-year amortization period, the comparable figure should have been 39.5 percent.  In 1995, the Swedish Financial Accounting Standards Council conducted a general review of its standard that prescribed amortization of goodwill over no more than 20 years. The Council subsequently published a new version of the standard, which went into effect on January 1, 1997. However, the Council elected to delay its standard on the maximum amortization period for goodwill pending the position adopted by the International Accounting Standards Committee (IASC). The Committee has now agreed on a standard whereby goodwill is to be amortized over its economic life. This means that the amortization period can exceed 20 years. Cash flow and net indebtedness  The operating cash surplus for the first nine months (defined as revenues less non-financial operating expense after the reversal of non-cash items, such as depreciation and amortization) reached SEK 4,884 m. (3,718), corresponding to 20 percent (17) of Group revenues.  Working capital increased SEK 281 m. (January-September 1997: decrease of 434) during the period. Investment in tangible fixed assets jumped to SEK 1,683 m. (1,132), as a result of greater investment in rental equipment.  Cash flow from operations after financial items totaled SEK 1,536 m. (2,245). The decrease was mainly owing to higher interest costs and a negative cash flow from terminated equity hedges. Net cash flow for the period, including SEK 1,579 m. (10,424) for acquisitions and the dividend paid, amounted to SEK -43 m. (-8,179).  The Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) amounted to SEK 10,301 m. (10,449), of which SEK 2,086 m. (2,006) was attributable to pension provisions. The debt/equity ratio, defined as net indebtedness divided by shareholders' equity, was 71 percent (81).  Liquid assets at the end of the period totaled SEK 1,653 m. (1,982).  Including minority interests, the Atlas Copco Group's shareholders' equity totaled SEK 14,586 m. (12,904), or SEK 79 per share (70). The equity/assets ratio was 40 percent (38). Investments  Investments in property and machinery totaled SEK 529 m. (596). Investments in rental equipment reached SEK 1,154 m. (536). Total depreciation on these two asset groups during the period was SEK 1,054 m. (758). Distribution of shares  Share capital at the end of the period amounted to SEK 918 m., distributed among the following classes of share. Personnel  At the end of the period, the number of employees was 23,709 (23,534). For comparable units the number of employees decreased by 450. Structural changes affecting the reporting period  Effective July 1, 1997, Atlas Copco acquired Prime Service, Inc., one of the largest equipment rental companies in the United States. At the acquisition date, Prime Service had 2,200 employees and operated 122 equipment rental locations in 14 states. The company reported revenues of some  SEK 2,500 m. and operating earnings of SEK 510 m. in 1996. Since the acquisition, Prime Service has acquired eight equipment rental companies in the U.S. and Mexico with aggregate annual revenues of roughly SEK 900 m. Effective October 1, 1998, Atlas Copco combined the operations of its U.S. subsidiaries Atlas Copco Rental, Inc., and Prime Service, Inc., to better meet the needs of industrial firms for rental equipment. Prime Service constitutes a separate division in the Compressor Technique business area.  Effective January 1998, Atlas Copco acquired the industrial compressor business of Ceccato in Italy. The company, which manufactures and markets small and medium-sized industrial compressors, had annual sales of approximately SEK 200 m. in 1997 and employed 125 people. Ceccato is part of the Industrial Air division.  Atlas Copco's tunnel-boring machine operations in the Construction and Mining Technique business area have been phased out and sold. Approximately 80 employees were affected. Restructuring costs of SEK 50 m. were charged to 1997 earnings. 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 19 percent, to SEK 12,799 m. (10,759). The entire increase was attributable to acquired units, chiefly Prime Service. Prime reported 27 percent higher revenues than in the same period the preceding year. Orders received decreased in most Asian markets, by more than 30 percent in all. Sales continued to increase in most European markets, particularly for small and medium-sized industrial compressors. The negative trend in demand for large industrial and process compressors in Asia was also noticeable in other markets during the third quarter.  Revenues increased 28 percent, to SEK 12,803 m. (10,039).  Operating profit advanced 21 percent, to SEK 2,141 m. (1,773). The increase was mainly due to Prime Service and the higher invoicing achieved in other divisions. The operating margin was 16.7 percent (17.7), including the negative effect of amortization of goodwill. Recent unfavorable currency movements and lower demand for large industrial and process compressors, reduced the margin for comparable units in the third quarter. Construction and Mining Technique  The Construction and Mining Technique business area consists of five divisions in the following product areas: Drilling rigs, Rock drilling tools, Construction tools, and Loading equipment.  Orders received during the period were SEK 4,751 m. (4,920), down 3 percent. Changes in exchange rates and the divestment of the tunnel-boring business explained the negative difference. In Asia the order intake decreased by about 20 percent in spite of a positive development in India. Sales of equipment in North America were lower than last year. During the third quarter some markets in Europe recorded higher order intake, primarily from the construction industry.  Robust sales of rock drilling rigs and bolting for underground projects, primarily in the mining industry, continued in the third quarter.  Revenues amounted to SEK 4,787 m. (4,758).  Operating profit increased 21 percent, to SEK 372 m. (307), corresponding to a margin of 7.8 percent (6.5). The increase resulted mainly from internal efficiency gains. Industrial Technique  The Industrial Technique business area consists of four divisions in the following product areas: Electric and pneumatic power tools, Assembly systems, and Motion control products. Effective January 1, 1998, a new division, Alliance Tools, was created by the merger of the Chicago Pneumatic and Desoutter divisions.  Orders received during the period increased 6 percent, to SEK 7,367 m. (6,931). Sales of advanced industrial power tools increased in most major markets, including the U.S., Germany, Great Britain, and Italy, as order intake from the automotive industry remained high. Sales of electric power tools maintained a positive trend during the third quarter in the U.S. and in many European markets.  Revenues advanced 8 percent, to SEK 7,305 m. (6,780).  Operating profit totaled SEK 765 m. (672), thanks mainly to higher sales volumes. This corresponds to a margin of 10.5 percent (9.9).  Stockholm, October 22, 1998  Giulio Mazzalupi  President and Chief Executive Officer  The Year-end Report on the Atlas Copco Group's operations during 1998 will be published on February 12, 1999. For further information, please contact  Annika Berglund, Vice President, Corporate Communications (media),  phone +46 8 743 8070, mobile +46 70 322 8070, [email protected]  Hans Ola Meyer, Senior Vice President, Group Treasurer (analysts),  mobile +46 70 588 8292, [email protected]