ATLAS COPCO Preliminary 12-month Report, 1999

14 feb 2000

Demand continues to improve in fourth quarter

The Atlas Copco Group's revenues for 1999 increased 7 percent, to SEK 36,234 m. (33,740), corresponding to a volume decrease of 2 percent. The net effect from acquisitions and divestments was an increase of approximately 8 percent. Foreign exchange fluctuations had a positive translation effect of 2 percentage points. Orders received increased 11 percent, to SEK 36,534 m. (32,979), corresponding to a volume increase of 1 percent for comparable units.  The Atlas Copco Group's profit after financial items decreased, to SEK 3,412 m. (3,637). The profit margin was 9.4 percent (10.8). Dividend  The Board of Directors proposes that a dividend of SEK 4.75 (4.32) per share be paid for the 1999 fiscal year. Near-term outlook  The healthy level of demand in North America is expected to remain at its present level. The equipment rental industry is foreseen to continue growing at a faster pace than the economy in general. The rise in interest rates may effect negatively the demand from some industry sectors.  Overall, demand in Europe is expected to increase, as higher production output will eventually trigger investment for capacity expansion. Infrastructure projects in Europe are also expected to have some positive effect on demand.  The recovery in the Asian region is foreseen to continue, leading to improved demand from most industry sectors. In South America, Africa, and the Middle East, higher commodity prices are expected to lead to a slightly higher level of activity in related industries.  In summary, the overall demand for Atlas Copco's products and services is expected to improve in the near term. Market development  Overall, demand in North America remained at a high level. Increases in oil and metal prices contributed to stronger demand from the petrochemical and mining industries, respectively. Non-residential building activity continued to be strong but showed large regional differences. At the end of the period certain sectors, such as residential construction and car sales, showed some signs of leveling off due to the rise in interest rates.  In Europe, demand improved somewhat in the last quarter, mainly owing to favorable development in France and Spain, while Germany remained at the level of the two preceding quarters.  The manufacturing industry in Great Britain and the Nordic countries continued to develop unfavorably throughout the period, affecting overall demand from this sector.  The strong recovery in many Asian markets continued in the fourth quarter, chiefly in South Korea, India, and Japan. The Chinese economy developed more slowly, while customer demand in Australia remained low.  Demand in South America was mixed, with improvements in mining countries, while Brazil recovered from its financial crisis more slowly than anticipated. In Africa and the Middle East, the strongest growth was noted in South Africa. Sales performance  Orders received were up 11 percent in 1999, at SEK 36,534 m. (32,979). Volume growth was 1 percentage point after excluding a positive currency effect of 2 percent and a net effect from acquisitions and divestments of 8 percent. The volume gain was chiefly related to strong order growth in the fourth quarter, which offset the year's weak start, partly related to the seasonality in the rental service business.  Revenues increased 7 percent, to SEK 36,234 m. (33,740), corresponding to a volume drop of 2 percent. Earnings  Operating profit increased SEK 125 m., to SEK 4,470 m. (4,345), or 3 percent compared to 1998. The profit includes non-recurring items of SEK 83 m. in the third quarter from the Industrial Technique business area. The increase in operating profit was wholly attributable to the Rental Service business area and the acquisition of RSC, in particular. For comparable units, operating profit dropped as a result of the volume decrease and an unfavorable shift in the overall composition of equipment sales. The cost adjustments made by operating units to adapt to a lower level of activity early in 1999 and an increased share of after-market revenues helped to offset part of the negative volume effect. The strength of the U.S. dollar had an overall positive effect, but the currency effect in total was limited to less than 2 percent of 1999 profit. Operating margin decreased, to 12.3 percent (12.9).  Net financial items amounted to SEK -1,058 m. (-708), of which net interest items accounted for SEK -1,034 m. (-680) and financial foreign exchange differences for SEK -26 m. (-33).  Profit after financial items decreased 6 percent, to SEK 3,412 m. (3,637). The profit margin was 9.4 percent (10.8).  Net profit for the year totaled SEK 2,247 m. (2,283), or SEK 11.50 per share (11.96).  The return on capital employed in 1999 was 14.1 percent (17.2), and return on shareholders' equity 13.6 percent (16.1). Fourth quarter  Orders received amounted to SEK 10,210 m. (8,062), corresponding to a 9 percent gain in volumes for comparable units.  The Atlas Copco Group's revenues for the fourth quarter of 1999 increased 19 percent, to SEK 10,507m., from SEK 8,845 m. in 1998. Acquisitions and divestments accounted for 16 percentage points net, while volumes for comparable units added  3 percentage points. Changes in exchange rates and prices had a negligible net effect.  Operating profit increased 25 percent, to SEK 1,400 m. (1,124), partly because of the RSC acquisition but also as a result of strong improvement in Compressor Technique. The operating margin increased to 13.3 percent (12.7). Changes in exchange rates had a neutral effect in the quarter. Profit after financial items increased 8 percent, to SEK 1,022 m. (946), and net profit for the fourth quarter totaled SEK 677 m. (584), corresponding to SEK 3.27 per share (3.06). Cash flow and net indebtedness  The operating cash surplus after tax for the year reached SEK 4,595 m. (4,162), corresponding to 13 percent (12) of Group revenues.  Working capital decreased SEK 20 m. (increased 557) during the period, with a positive effect on cash flow from operations, which increased to SEK 4,615 m. (3,605).  Net investment in tangible fixed assets was SEK 2,215 m. (1,491), the majority of the increase attributable to the Rental Service business area. Net cash flow equaled SEK -8,188 m. (489).  The Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) reached SEK 19,325 m. (10,052), of which SEK 1,450 m. (1,940) was attributable to pension provisions. The decrease in pension provisions reflected the creation of a pension trust in Sweden in the first quarter of 1999 that is not consolidated in the Group's accounts. The SEK 522 m. capitalization of the fund simultaneously reduced liquid assets and thus did not affect reported net indebtedness. The debt/equity ratio (defined as net indebtedness divided by shareholders' equity) was 92 percent (65).  Liquid assets at the end of the period totaled SEK 1,286 m. (2,118).  Including minority interests, the Atlas Copco Group's shareholders' equity totaled SEK 21,077 m. (15,465), or SEK 101 per share (84). The equity/assets ratio was 39 percent (42). Investments  Investments in property and machinery totaled SEK 939 m. (853). Investments in rental equipment reached SEK 2,342 m. (1,594). During the period, total depreciation on these two asset groups was SEK 2,121 m. (1,448), while amortization of intangible assets equaled SEK 495 m. (428). Equity rights issue  To strengthen the Group's capital base and enhance financial flexibility following the acquisition of Rental Service Corporation, an Extraordinary General Meeting held on September 6, 1999, approved the issue of new shares with preferential rights to existing shareholders.  The new shares were issued at a subscription price of SEK 160 per share at a ratio of 1:7. In October 1999, the issue provided the Company with net proceeds of approximately SEK 4.1 billion. Personnel  At December 31, 1999, the number of employees was 26,134 (23,393). For comparable units, the number of employees decreased by 928 during the year. Structural changes affecting the reporting period  In August-December 1999, Rental Service Corporation (the RSC division) completed six acquisitions of rental companies in the United States, adding a total of nine locations, with some SEK 40 m. in annual revenues.  At October 29, 1999, Tool Technics NV, Belgium, was acquired. Tool Technics, with 32 employees, specializes in the service of power tools and equipment for the industrial sector. Tool Technics is now part of the Industrial Tools and Equipment division.  At August 31, 1999, Atlas Copco divested its motion control business, Atlas Copco Controls, which was part of the Industrial Tools and Equipment division. Atlas Copco Controls had 235 employees and revenues of approximately SEK 470 m. in 1998.  At July 29, Atlas Copco acquired Rental Service Corporation (RSC), a company publicly traded on the New York Stock Exchange. For the most recent 12-month period at the time of the acquisition, RSC reported revenues of approximately SEK 5,520 m. and an operating margin of 17 percent. Total consideration included approximately SEK 5,990 m. cash paid for all shares in the company and SEK 7,790 m. of assumed debt. The acquisition is expected to have a positive impact on earnings for the first full year. Synergies are expected to yield approximately SEK 160 m. in the first full calendar year, increasing as the business grows. At the acquisition date, RSC had 3,600 employees, operated more than 270 equipment rental locations in 29 states, and served a base of more than 200,000 customers. RSC is a division in the Rental Service business area.  At July 1, 1999, ABIRD Holding BV, the Netherlands, was acquired by Atlas Copco. ABIRD is a specialty rentals company. The company has 25 employees and had annual sales of about SEK 40 m. in 1998. ABIRD is part of the Atlas Copco Portable Air division.  At 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 annual sales of roughly SEK 90 m. It is part of the Portable Air division.  At January 1, 1999, the Rental Service business area was created with Prime Service Inc. as the first division. Prime Service constituted a separate division in the Compressor Technique business area throughout 1998. Business Areas  Starting in 1999, orders and revenues reported by business area also include intercompany sales to other business areas. Figures for 1998 have been adjusted accordingly. Compressor Technique  The Compressor Technique business area consists of five divisions in the following product areas: industrial compressors, portable compressors, and gas and process compressors.  Orders received during the period declined 1 percent, both in value and volume, to SEK 12,965 m. (13,161). After a weak first quarter, volumes made good progress. The second and third quarters were almost in line with the same quarters in 1998, and the fourth quarter recorded a strong upturn. Sales of standard industrial compressors were strong during the period, driven by an increase in industrial production. In the fourth quarter, a positive trend was also noted for larger units, suggesting that the pace of capital investment was picking up. This trend was primarily seen in Asia. Sales of generators increased substantially, partly as a result of robust investment in power supplies for wireless telecommunications stations and the special back-up measures taken by many companies because of the change of millennium.  Sales in Europe were mixed during the year, with robust growth in the south offset by an overall flat or negative trend in central and northern Europe. In North America, orders were lower than in 1998, mainly owing to the drop in large investment-related compressors and expansion turbines. The market situation in Asia continued to improve and during the year South Korea, China, Taiwan and South East Asia saw a positive development.  Revenues decreased 2 percent, both in value and volume, to SEK 13,202 m. (13,540).  Operating profit fell 6 percent, to SEK 2,153 m. (2,283), resulting in an operating margin of 16.3 percent (16.9). The low volumes and unfavorable product and market mix in the first quarter caused the drop in profit. The other three quarters of 1999 showed improvement over the preceding year. The fourth quarter posted a particularly strong improvement, with an operating margin of 17.4 percent compared to 15.4 percent in the corresponding quarter of 1998. 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 6,062 m. (6,117), down 1 percent overall and down 2 percent in volume. Compared to a very slow first half, order intake in the fourth quarter was extremely strong, up 21 percent from the preceding year. Highlights included a bulk order for drilling and loading equipment from the Norilsk mine in Russia. Activity in many mining countries picked up at the end of the period, indicating a need for new investment in machinery.  Sales trends in Europe were positive in 1999, mainly because of some important infrastructure projects in the alpine and southern regions. In North America, orders increased during the year, thanks primarily to successful sales of surface drilling rigs to the construction sector. In Asia, orders for construction projects in Japan improved noticeably at the end of the period, while China remained rather weak. South Korea continued to recover strongly from the recent low levels. Sales in Australia and most African markets suffered from low demand.  Revenues equaled SEK 5,725 m. (6,437), down 11 percent in all and 12 percent in volume.  Operating profit decreased SEK 101 m., to SEK 397 m., corresponding to a margin of 6.9 percent (7.7). The negative impact of sharply lower volumes was partly offset by efficiency gains and positive currency effects. The fourth quarter ended only marginally below the same quarter the preceding year and had an unchanged operating margin of 7.7 percent. Industrial Technique  The Industrial Technique business area consists of four divisions in the following product areas: electric and pneumatic power tools and assembly systems.  Orders received in 1999 increased 5 percent, to SEK 10,553 m. (10,015), including a positive currency effect of 2 percent. Volume growth continued for professional electric tools in North America, and to a certain extent in Europe, in the fourth quarter. Orders from the motor-vehicle industry in Europe and North America for industrial tools remained strong, while demand for standard products from other industries remains weak. In Germany, however, standard products showed gradual improvement after a long period of weakness. With few exceptions - notably  Japan - sales in Asian markets remained relatively low.  Revenues increased 3 percent, to SEK 10,345 m. (10,059), compared to 1998. The corresponding volume gain was 2 percent.  At SEK 1,032 m. (1,046), operating profit was lower than in the previous year, in spite of a contribution of SEK 83 m. from nonrecurring items in the third quarter. These non-recurring items included SEK 223 m. in capital gains from the sale of Atlas Copco Controls and a restructuring provision, mainly for consolidation of the production structure in the Alliance Tools division. Profits in Alliance Tools deteriorated, and the operating profit in the electric tool business did not keep pace with the increased sales volumes. The profit margin was 10.0 percent (10.4) for the year and 9.9 percent (10.5) for the fourth quarter. Excluding nonrecurring items, the margin for 1999 was 9.2 percent. Rental Service  The Rental Service business area consists of two divisions in the equipment rental industry in the United States, providing services to construction and industrial markets.  Revenues during the period rose 85 percent, to SEK 7,434 m. (4,010), including about five months of revenues from the recently acquired Rental Service Corporation (RSC). The volume growth in the fourth quarter was about 12 percent for comparable units in total but somewhat higher for the RSC division. Demand from many sectors in the construction industry remained strong, and some large orders in the quarter were related to increased maintenance activity in the petrochemical industry. Business activity for power-related equipment in Prime Energy was also strong, because of Y2K activities as well as healthier demand from the petrochemical industry.  Operating profit, which includes all related goodwill amortization, was SEK 1,010 m. (566), corresponding to an operating margin of 13.6 percent (14.1). The fourth quarter margin was 15.0 percent (15.2), somewhat higher for Prime than for RSC. Price pressure on rental rates continued and was estimated at about 3-4 percent in the fourth quarter. The deterioration of prices was noticeable for longer rental contracts and was most apparent in the southern region. Parent Company  Profit after financial income and expense for Atlas Copco AB amounted to  SEK 1,261m. (1,428). Net profit for the year, after appropriations and taxes, was  SEK 1,037m. (1,045). Dividend  The board of directors proposes that a dividend of SEK 4.75 (4.32) be paid for the 1999 fiscal year. This corresponds to a total of SEK 996 m. (826).  Stockholm, February 14, 2000  Giulio Mazzalupi  President and Chief Executive Officer  The interim report on the Atlas Copco Group's operations for the three first months of 2000 will be published on April 27, 2000. 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, Chief Financial Officer (analysts),  phone +46 8 743 8292, mobile +46 70 588 8292,[email protected] Overhead presentations from Atlas Copco  For your convenience, an overhead presentation of Atlas Copco's preliminary report on the 1999 results will be published at Atlas Copco's Internet site. Please go to > Investor Relations > Presentations > Investor Presentations.  More information is available at Annual General Meeting  The Annual General Meeting will be held on Thursday, April 27, 2000, at 5:00 p.m. (Swedish time) in the Berwaldhallen, Strandvägen 69, Stockholm. Participation  To be entitled to participate in the General Meeting, shareholders must  · be recorded in the shareholders register kept by The Swedish Central Securities Depository & Clearing Organisation (VPC AB) on Monday, April 17, 2000, and  · notify the Company of their intent to participate in the Meeting not later than 4:00 p.m.(Swedish time) on Tuesday April 18, 2000 in writing to Atlas Copco AB, SE-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 with VPC to be able to participate in the Meeting. Such re-registration must be completed not later than Monday, April 17, 2000. Shareholders should notify the trustee of their desire to re-register in adequate time prior to this date. Dividend  The Board of Directors proposes that a dividend of SEK 4.75 per share be paid to the shareholders. The Board has decided to propose that the record date for payment be Wednesday, May 3, 2000. If the proposal is approved by the Annual General Meeting, the dividend is expected to be paid through VPC on Monday, May 8, 2000. Notice  A detailed Notice will be posted on Atlas Copco's website: and in the Swedish newspapers Dagens Nyheter and Post och Inrikes Tidningar, furthermore in the Financial Times and in Frankfurter Allgemeine Zeitung on Wednesday, March 29, 2000. Financial information from Atlas Copco during 2000  Atlas Copco will publish the following financial reports during 2000  Annual Report 1999, Swedish March 28, 2000  Annual Report 1999, English March 28, 2000  President's Address to Shareholders at the AGM April 27, 2000 Interim Reports  On first three months of operations April 27, 2000  On first six months of operations August 8, 2000  On first nine months of operations October 23, 2000