Year-end Report on 1998 Operations (unaudited)

12 feb 1999

Improved result despite weaker fourth quarter

February 12, 1999

The Atlas Copco Group increased revenues for 1998 to SEK 33,740 m. (30,032), up 12 percent. Orders received increased 7 percent, to SEK 32,979 m. (30,685). For comparable units, revenues were up 3 percent, while orders received fell 2 percent.

The Atlas Copco Group's profit after financial items increased to SEK 3,637 m. (3,520). The profit margin was 10.8 percent (11.7).

The Board of Directors proposes that a dividend of SEK 4.50 (4.25) per share be paid for the 1998 fiscal year.

Near-term outlook
Overall demand for Atlas Copco products in the first part of 1999 is expected to be lower than in 1998 because of anticipated lower investments and decreased production levels in some customer segments. Demand for equipment rental is foreseen to continue expanding.

The outlook for Europe is somewhat weaker following the economic slowdown that began towards year-end 1998. Demand in the United States is expected to remain at its present level, mainly owing to continued strong growth in the equipment rental industry. Latin American economies are foreseen to decline sharply as a result of financial instability and low metal prices. In Asian markets, demand is expected to remain low.

As a consequence of the anticipated drop in volume and related adjustments in the cost struc-ture, earnings for the first part of the year are expected to decrease relatively more than revenues.

Sales development
The economic and financial situation in Asia/Australia caused reduced sales in the region by about SEK 1,250 m. The negative trend persisted in the fourth quarter. In the second half of 1998, turbulence in international financial markets affected sales negatively, primarily in South America and Russia. The positive sales trend in European markets, particularly in Germany and Spain, continued in 1998, with the exception of Great Britain. Sales in the U.S. remained at a steady level.

Earnings in 1998
Operating profit rose SEK 532 m., or 14 percent, to SEK 4,345 m. (3,813). Accordingly, the operating margin improved to 12.9 percent (12.7). Earnings from the rental service operations of Prime Service, after amortization of related goodwill (Prime included for six months in 1997), accounted for more than half of the rise in operating profit. The rest of the rise in profit was owing to the net effect of higher sales volume and certain negative price trends.

Net financial items amounted to SEK -708 m. (-293), of which net interest items accounted for SEK -680 m. (-306). Interest expense expanded mainly because of higher average borrowings in 1998, owing to the acquisition of Prime and other equipment rental businesses. Net interest from currency hedging on foreign net assets was negative, at SEK -6 m., compared to a positive SEK 140 m. in the preceding year. Net capital gains from the sales of shares were SEK 4 m. (32).

Profit after financial items increased 3 percent, to SEK 3,637 m. (3,520), the net effect of stronger operating profit and higher interest costs. The profit margin was 10.8 percent (11.7).

Net profit for the year totaled SEK 2,283 m. (2,208), or SEK 12.44 per share (12.03), representing a gain of 3 percent.

The return on capital employed was 17.2 percent (21.1), and return on shareholders' equity 16.1 percent (17.6).

Fourth quarter
The Atlas Copco Group's revenues for the fourth quarter of 1998 increased to SEK 8,845 m., from SEK 8,455 m. in 1997, up 5 percent. Changes in exchange rates explained 3 percentage points of the increase, while volume and acquisitions accounted for 1 percentage point each.

Operating profit increased to SEK 1,124 m. (1,115), corresponding to a margin of 12.7 percent (13.2). Changes in exchange rates had a small negative effect on operating profit in the quarter. Profit after financial items were SEK 946 m. (955). The profit margin was 10.7 percent (11.3). Net profit for the fourth quarter totaled SEK 584 m. (616), corresponding to SEK 3.18 per share (3.36). Orders received amounted to SEK 8,062 m. (8,075); a 3 percent less volume was offset by a positive currency translation effect.

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, as is 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.

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 1998 (defined as revenues less non-financial operating expense after the reversal of non-cash items, such as depreciation and amortization) reached SEK 6,510 m. (5,437), corresponding to 19 percent (18) of Group revenues.

Working capital increased SEK 513 m. (1997: decrease of 267) during the year. Investment in tangible fixed assets jumped to SEK 2,447 m. (1,760), as a result of greater investment in rental equipment.

Cash flow from operations after financial items totaled SEK 2,149 m. (3,878). The figure for 1997 included large inflows (approximately SEK 800 m.) from divestments of real estate and repatriation of equity in associated companies. Net cash flow for the period, including payments of SEK 873 m. (10,639) for acquisitions and SEK 787 m. (698) for the dividend, equaled SEK
489 m. (-7,459).

The Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) amounted to SEK 10,052 m. (10,214), of which SEK 1,940 m. (2,016) was attributable to pension provisions. The debt/equity ratio, defined as net indebtedness divided by shareholders' equity, was 65 percent (75).

Liquid assets at the end of the period totaled SEK 2,118 m. (1,613).

Including minority interests, the Atlas Copco Group's shareholders' equity totaled SEK 15,465 m. (13,635), or SEK 84 per share (74). The equity/assets ratio was 42 percent (39).

Investments in property and machinery totaled SEK 853 m. (840). Investments in rental equipment reached SEK 1,594 m. (920). Total depreciation on these two asset groups during the year was SEK 1,448 m. (1,162).

Distribution of shares
Share capital at the end of the period amounted to SEK 918 m., distributed among the following classes of share.

At year-end 1998, the number of employees was 23,393 (23,923). For comparable units the number of employees decreased by 1,100.

Year 2000 readiness
In March 1996, Atlas Copco initiated a Group-wide survey of computer systems in use. Every site reported on the present status of its systems and its action plans to handle the year-2000 issue for those systems that were not judged year-2000 compliant. Year-2000 follow-up is on the agenda of the Business Board at each division and site, and status reports are mandatory items at Board Meetings.

Group Management believes that, based on the group-wide survey and the actions taken and in progress, the costs to the Group to become year-2000 compliant will not have a material effect on the Group's financial position or the results of operations. Management further believes that, with modifications to existing software and conversions to new systems, the year 2000 will not pose significant problems for its computer systems. However, the operations of Atlas Copco's computer systems are vulnerable to third parties', principally suppliers', possible failure to remedy their own year-2000 issues. To the extent that systems by third parties on which Atlas Copco's systems rely are not converted in time, there can be no assurance that such third parties' non-compliance would not have a material effect upon the Group's systems.

Structural changes affecting the reporting period
Effective January 1, 1999, Rand-Air Ltd, South Africa, was acquired by Atlas Copco. Rand-Air is a compressor rental company. The company has about 200 employees and has annual turnover of roughly SEK 90 m.

Effective November 1998, Atlas Copco acquired JKS Boyles, Canada, a manufacturer of exploration drilling rigs. The company has 79 employees and annual sales of about SEK 115 m. JKS Boyles is part of the Atlas Copco Craelius division.

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.

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 constituted a separate division in the Compressor Technique business area throughout 1998.

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. Effective January 1, 1999, Atlas Copco has created a new business area called Rental Service to which the Prime division has been transferred.

Orders received during the period increased 15 percent, to SEK 16,958 m. (14,699). The entire increase was attributable to acquired units, chiefly Prime Service. Orders received decreased in all Asian markets, by a total of some SEK 750 m. Sales increased in most European markets, particularly for small and medium-sized industrial compressors. There was a negative trend in demand for large industrial and process compressors during the latter part of the year.

Revenues increased 22 percent, to SEK 17,343 m. (14,263).

Operating profit advanced 12 percent, to SEK 2,849 m. (2,537), corresponding to an operating margin of 16.4 percent (17.8). The improved operating profit was attributable to Prime Service. The air compressor divisions all recorded lower margins than in the preceding year. This was primarily due to negative developments in the fourth quarter, resulting from lower absorption in the factories and some negative price and currency effects.

Revenues for the Prime division increased 29 percent compared to pro forma 1997 and amounted to SEK 4,010 m. Internal growth, excluding acquisitions, was approximately half of the increase.
The operating margin was 14.2 percent, including amortization of goodwill on the initial acquisition.

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 year were SEK 6,117 m. (6,652), down 8 percent. Changes in exchange rates and the divestment of the tunnel-boring business accounted for 3 percentage points of the decline. During the fourth quarter the effects of persistently low metal prices reduced order intake from the mining industry, while demand for construction equipment remained low. Overall, the order intake in the Asia/Australia region decreased by about SEK 350 m., in spite of positive development in India. Sales of equipment in North America were lower than in 1997.

Revenues amounted to SEK 6,437 m. (6,453).

Operating profit increased SEK 111 m., to SEK 498 m., corresponding to a margin of 7.7 percent (6.0). The preceding year's figure included restructuring charges of SEK 50 m. related to the closure of the tunnel-boring machine operations. The remaining 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 9,904 m. (9,334). Order intake from the automotive industry remained high, leading to increased sales of advanced industrial power tools in most major markets. Sales of electric power tools in the U.S remained buoyant partly thanks to the favorable level of activity in the U.S. commercial and residential building sector. The trend for sales of electric power tools in Europe was negative in the fourth quarter.

Revenues increased 7 percent, to SEK 9,960 m. (9,316).

Operating profit totaled SEK 1,046 m. (942), thanks mainly to higher sales volumes. This corresponded to a margin of 10.5 percent (10.1).

Parent Company
Profit after financial income and expense for Atlas Copco AB amounted to SEK 1,428 m. (1,630). Net profit for the year, after appropriations and taxes, was SEK 1,045 m. (1,296).

The board of directors proposes that a dividend of SEK 4.50 (4.25) be paid for the 1998 fiscal year. This corresponds to a total of SEK 826 m. (780).

Stockholm, February 12, 1999

Giulio Mazzalupi
President and Chief Executive Officer

The interim report on the Atlas Copco Group's operations during the first quarter of 1999 will be published on April 20, 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),
phone +46 8 743 8292, mobile +46 70 588 8292, [email protected]

Business areas

Annual General Meeting
The Annual General Meeting will be held on Tuesday, April 20, 1999, at 5:00 p.m. (Swedish time) in the Berwaldhallen, Strandvägen 69, Stockholm.

To be entitled to participate in the Meeting, shareholders must
-be recorded in the shareholders register kept by The Swedish Central Securities Depository & Clearing Organisation (Värdepapperscentralen VPC AB) not later than Friday, April 9, 1999, and
-notify the Company of their intent to participate in the Meeting not later than 4:00 p.m. (Swedish time) on Thursday April 15, 1999 in writing to Atlas Copco AB, S-105 23 Stockholm, or by telephone to +46-8-743 8000, by telefax to +46-8-644 9045 or by the internet

Shareholders whose shares are held in trust by a bank or private broker must temporarily re-register their shares in their own name to be able to participate in the Meeting. Such re-registration must be completed not later than Friday, April 9, 1999. Shareholders should notify the trustee of their desire to re-register in adequate time prior to this date.

Entrance cards will be sent to the shareholders who have notified their intention to participate.

The Board of Directors proposes that a dividend of SEK 4.50 per share be paid to the shareholders. The Board has decided to propose that the record date for payment be Friday, April 23, 1999. If the Annual General Meeting approves the proposal, the dividend is expected to be paid through VPC on Friday, April 30, 1999.

On March 23, 1999, Notice of The Annual General Meeting will appear in the Swedish newspapers Dagens Nyheter, Svenska Dagbladet, Dagens Industri, Post och Inrikes Tidningar, in the Financial Times and in Frankfurter Allgemeine Zeitung. Furthermore, the Notice will be posted on Atlas Copco's web site:

Change of address
VPC automatically records personal address changes in Sweden that are normally reported through an address change notification form filed with the National Postal Service. Shareholders, who have changed their names, addresses or bank account numbers should immediately notify their trustees or account-operating institutes of such changes.

Financial information from Atlas Copco during 1999

Atlas Copco will publish the following financial reports during 1999
Annual Report 1998, Swedish March 19, 1999
Annual Report 1998, English March 19, 1999
President's Address to Shareholders at the AGM April 20, 1999

Interim Reports
On first three months of operations April 20, 1999
On first six months of operations August 12, 1999
On first nine months of operations October 26, 1999