Atlas Copco Interim Report (unaudited) Six months ended June 30, 1998

4 aug 1998

Operating profit increased 26 percent

The Atlas Copco Group increased revenues for the first six months of 1998 to SEK 16,784 m. (13,784), up 22 percent. Orders received increased 14 percent, to SEK 16,913 m. (14,825). For comparable units, revenues were up 7 percent, while orders received remained at the same level. Changes in exchange rates had a positive effect of approximately 1 percent on both revenues and orders received.  The Atlas Copco Group's profit after financial items increased to SEK 1,824 m. (1,719). The profit margin was 10.9 percent (12.5). Outlook  The overall positive trend of demand in Europe, with the exception of Great Britain, is expected to continue. Sales in the United States are expected to remain at the present high level. In Australia and most markets in Asia, demand is foreseen to remain low. Demand in China, which has been stable so far, is not expected to grow in the short term. Growth opportunities in the equipment rental industry are expected to remain excellent.  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 by some SEK 700 m. in the six-month period. The positive trend of sales continued in Europe, particularly in Germany, Italy and France. Russia, Brazil and South Africa also developed favorably. Sales in the U.S. remained at a steady, high level. In the second quarter, orders for large industrial compressors slowed, while orders for underground drill rigs and advanced industrial power tools increased in volume. The equipment rental business showed continuous strong growth in the quarter. Earnings for the first six months  Operating profit for the first six months increased 26 percent, to SEK 2,155 m. (1,705), corresponding to 12.8 percent (12.4) of revenues. About half of the improvement in operating profit resulted from the acquisition of Prime Service, Inc. The remainder of the increase was predominantly a result of stronger revenue in comparable units. The overall negative effect of price changes was partly offset by favorable changes in exchange rates in the first quarter.  Net financial items amounted to SEK -331 m. (+14), of which net interest items accounted for SEK -327 m. (-23). Interest expense expanded mainly because of higher net borrowing for acquisition of equipment rental businesses. Net interest from currency hedging on foreign net assets was insignificant, at SEK 1 m., compared to SEK 69 m. in the same period the preceding year. Capital gains from the sale of shares were SEK 7 m. (32).  Profit after financial items increased 6 percent, to SEK 1,824 m. (1,719), the net effect of stronger operating profit and higher interest costs. The profit margin was 10.9 percent (12.5).  Net profit for the period totaled SEK 1,164 m. (1,064), or SEK 6.34 per share (5.80), representing a gain of 9 percent. Based on net profit for the 12 months to June 30, earnings per share improved 17 percent, to SEK 12.58 (10.78).  The return on capital employed during the 12 months to June 30 was 18.8 percent (21.5), and return on shareholders' equity 17.4 percent (16.9). The second quarter  The Atlas Copco Group's revenues during the second quarter of 1998 increased to SEK 8,676 m., from SEK 7,378 m. for the second quarter of 1997; 3 percentage points of the 18 percent rise were attributable to comparable units. Operating profit increased to SEK 1,112 m. (957), up 16 percent, and profit after financial items decreased to SEK 943 m. (984), as a consequence of sharply higher financial expense. The profit margin was 10.9 percent (13.3). Net profit for the second quarter totaled SEK 603 m. (624), corresponding to SEK 3.28 per share (3.40). Changes in exchange rates had a negative effect on sales and profit in the quarter.  Orders received amounted to SEK 8,509 m. (7,610), up 12 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 38.9 percent. Based on a 20-year amortization period, the comparable figure should have been 38.2 percent.  In 1995, the Swedish Financial Accounting Standards Council conducted a general review of its recommendation that prescribed amortization of goodwill over no more than 20 years. The Council subsequently published a new version of the recommendation, which went into effect on January 1, 1997. However, the Council elected to delay its recommendation on the maximum amortization period for goodwill pending the position adopted by the International Accounting Standards Committee (IASC). Atlas Copco intends to follow the final recommendation of the Council. Cash flow and net indebtedness  The operating cash surplus for the first six months (defined as revenues less non-financial operating expense after the reversal of non-cash items, such as depreciation and amortization) reached SEK 3,264 m. (2,237), corresponding to 19 percent (16) of Group revenues.  Working capital increased SEK 514 m. (Jan-June 1997: decrease of 45) during the period. Investment in tangible fixed assets jumped to SEK 1,043 m. (590), as a result of greater investment in rental equipment.  Cash flow from operations after financial items totaled SEK 669 m. (1,260). 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 1,055 m. (881) for acquisitions and the dividend paid, ended at SEK -386 m. (+379*).  As a consequence of the Prime Service acquisition, the Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) expanded during the 12 months to June 30, 1998, to SEK 10,666 m. (2,062), of which SEK 2,041 m. (1,998) was attributable to pension provisions. The debt/equity ratio, defined as net indebtedness divided by shareholders' equity, was 76 percent (16).  Liquid assets at the end of the period totaled SEK 1,915 m. (2,759).  Including minority interests, the Atlas Copco Group's shareholders' equity totaled SEK 13,984 m. (12,583), or SEK 76 per share (69). The equity/assets ratio was 39 percent (50). Investments  Investments in property and machinery totaled SEK 338 m. (389). Investments in rental equipment reached SEK 705 m. (201). Total depreciation on these two asset groups during the period was SEK 693 m. (439). 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 23,712 (20,958). The increase was wholly attributable to operations acquired during the 12 months to June 30, 1998. Structural changes  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 seven equipment rental companies in the U.S. and Mexico with aggregate annual revenues of roughly SEK 650 m. 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 28 percent, to SEK 8,613 m. (6,740). The entire increase was attributable to acquired units, chiefly Prime Service. Sales decreased in most Asian markets, by 30 percent in all. Sales increased in all major European markets, with the exception of Great Britain, particularly for industrial compressors. Orders for portable compressors from the construction industry were weak. Prime Service reported revenue roughly 30 percent higher than in the same period the preceding year.  Revenues increased 41 percent, to SEK 8,584 m. (6,089).  Operating profit advanced 36 percent, to SEK 1,422 m. (1,043). The increase was mainly due to Prime Service and the higher sales volumes achieved in other divisions. The operating margin was 16.6 percent (17.1), including the negative effect of amortization of goodwill. For comparable units, the margin was better than the previous year. The favorable currency effects of the first quarter turned negative in the second 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 ended at SEK 3,365 m. (3,485). Developments varied between the various markets. Markets in Asia/Australia with the exception of India and China have recorded a substantial decline in orders intake. Strong sales increases were achieved in Russia and South Africa. Sales of rock drilling rigs and bolting and loading equipment for underground projects, primarily in the mining industry, were strong in the second quarter. Orders from the  construction market remained at a low level, mainly as a consequence of general economic conditions in the Asian region.  Revenues increased 3 percent, to SEK 3,295 m. (3,201).  Operating profit increased 20 percent, to SEK 259 m. (216), corresponding to a margin of 7.9 percent (6.7). 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 7 percent, to SEK 4,935 m. (4,600). Sales of pneumatic and electric power tools increased in most major markets, including the U.S., Germany, Great Britain, and Italy. Order intake from the automotive industry remained high in the second quarter. Sales of industrial power tools in Japan and China continued to advance from a low level, while demand in other parts of the region was weak.  Revenues advanced 9 percent, to SEK 4,905 m. (4,494).  Operating profit totaled SEK 524 m. (476), thanks mainly to higher sales volumes. This corresponds to a margin of 10.7 percent (10.6).  Stockholm, August 4, 1998  Giulio Mazzalupi  President and Chief Executive Officer  The Interim Report on the Atlas Copco Group's operations during the first nine months of 1998 will be published on October 22, 1998. 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),  phone +46 8 743 8292, mobile +46 70 588 8292, [email protected]