February 14, 2002 ATLAS COPCO Fourth quarter report at December 31, 2001 (unaudited)
14 feb 2002
Q4: Strong cash flow, weaker demand
The Board of Directors proposes that a dividend of SEK 5.50 (5.25) per share be paid for the 2001 fiscal year.
The current overall decline in demand is foreseen to continue in the near-term. As a consequence, lower volumes and profitability are anticipated in the first quarter, primarily in the equipment rental business.
There are some indications of an improved business environment in North America, which could positively affect demand in the latter part of the year.
Summary of full-year 2001 results
Atlas Copco Group
Orders received for the full year were up 9%, at MSEK 50,916 (46,628), corresponding to a 1% drop in volumes for comparable units. The positive translation effect from foreign exchange rate fluctuations was 10 percentage points, or about MSEK 4,500. Revenues rose 10%, to MSEK 51,139 (46,527), also corresponding to a drop in volumes of 1%.
The Group's operating profit before restructuring costs decreased slightly, to MSEK 6,390 (6,418), corresponding to a profit margin of 12.5% (13.8). Profit after financial items before items affecting comparability increased, to a record MSEK 4,960 (4,715), corresponding to a margin of 9.7% (10.1). Restructuring costs of MSEK 260 (26) reduced the reported operating profit, to MSEK 6,130 (6,392), and profit after financial items, to MSEK 4,700 (4,689). The total impact of foreign exchange rate fluctuations on profit after financial items was approximately MSEK +550 compared to full-year 2000. Earnings per share increased, to SEK 14.63 (13.95).
Operating cash flow before acquisitions and dividends reached an all-time high of MSEK 5,744 (1,276).
Review of the fourth quarter
Atlas Copco Group
Demand from most customer groups in North America remained relatively weak, still clearly below levels for the same quarter the preceding year. However, the feared negative repercussions from the September 11 events did not materialize during the quarter.
Activity in the non-residential building sector in the United States continued to decline, primarily affecting demand in the equipment rental business. Demand for new equipment from construction and industrial customers was also affected by the state of the U.S. economy. Negative inventory adjustment effects, seen in previous quarters, became less of a factor at year-end, which helped to stabilize demand for some products, such as professional electric tools.
In South America, demand trended down, primarily affected by poor conditions in Brazil. An exception in the region was Chile, where the key mining industry enjoyed a healthy level of activity.
In Europe, the former positive trend in demand turned in the fourth quarter. Demand was weak for standard equipment, particularly units serving the construction sector. At the same time, previously favorable demand for investment-related equipment in industrial applications also turned sluggish. Northern and eastern European markets experienced some growth in demand, while a trend of weakening demand was clear in southern Europe. Also, demand in the German market, the biggest in the region, softened somewhat in the quarter.
The level of demand in Africa and the Middle East remained on a healthy level.
In Asia, the picture was mixed. China experienced ongoing strong growth in demand, and the Indian market also had relatively healthy demand. Demand in Japan, on the other hand, clearly deteriorated, as did demand in certain markets in Southeast Asia.
Orders and revenues
Orders received totaled MSEK 12,343 (12,177). Order volumes were 5% lower, as the positive translation effect (resulting from the weak Swedish krona) was 6%, or approximately MSEK 800. The volume drop was most pronounced in North and South America, while Europe was slightly down. Asia recorded flat volumes, and Australia healthy volume growth.
Revenues rose 2%, to MSEK 13,117 (12,841), corresponding to a 5% drop in volumes for comparable units.
Earnings and profitability
Operating profit, before restructuring costs, declined 16%, to MSEK 1,548 (1,843), compared to the strong fourth quarter the preceding year. This corresponded to a margin of 11.8% (14.4). Compressor Technique and Industrial Technique reported somewhat lower margins in the quarter, while the main deterioration was in the U.S.-based Rental Service business area. The operating margin for Construction & Mining Technique improved from the preceding year. Restructuring charges in Industrial Technique and Rental Service of MSEK 200 reduced the reported operating profit, to MSEK 1,348 (1,823). The operating profit included a positive effect of approximately MSEK +150 from foreign exchange fluctuations, affecting operating margins by about +0.5 percentage-points.
Net interest expense of MSEK -279 (-434), foreign exchange differences on financial items of MSEK -19 (-18), and other financial income of MSEK 4 (0) gave net Financial items of MSEK -294 (-452). Strong positive cash flow throughout the preceding 12 months and lower short-term interest rates had a positive effect on net interest expense.
Profit after financial items, before restructuring charges, decreased 10%, to MSEK 1,254 (1,391), corresponding to a margin of 9.6% (10.8). Reported profit after items affecting comparability was MSEK 1,054 (1,371). The net effect of foreign exchange fluctuations was about MSEK +125.
Net profit after tax totaled MSEK 704 (864), or SEK 3.36 per share (4.12).
The return on capital employed during 2001 was 13% (15), and the return on shareholders' equity 12% (13). During the year, the Group had an average cost of capital (WACC) of about 7.5% (8), equal to a pretax cost of capital of about 11.5%.
Cash flow and net indebtedness
The operating cash surplus after tax for the fourth quarter reached MSEK 1,625 (1,745), equal to 12% (14) of Group revenues.
Working capital decreased MSEK 358 (increased 327) during the quarter, leading to cash flow from operations before investing activities of MSEK 1,983 (1,418).
Net investment in tangible fixed assets was MSEK 166 (575) for the quarter.
Operating cash flow before acquisitions and dividends equaled MSEK 1,863 (815).
At December 31, 2001, the Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) amounted to MSEK 20,078 (22,270), of which MSEK 1,736 (1,521) was attributable to pension provisions. The debt/equity ratio (defined as net indebtedness divided by shareholders' equity) was 72% (92).
Gross investments in property and machinery totaled MSEK 321 (279). Gross investments in rental equipment reached MSEK 586 (739). Depreciation on these two asset groups was MSEK 248 (240) and MSEK 789 (676), respectively, while amortization of intangible assets equaled MSEK 187 (180).
At December 31, 2001, the number of employees was 25,529 (26,772). For comparable units, there were 1,627 fewer employees than at December 31, 2000.
Breakdown of share classes
Share capital equaled MSEK 1,048 (1,048) at the end of the period. Total shares were as follows.
Previous statement on near-term development
(Published Oct 23, 2001)
Atlas Copco is basing its near-term activities on the current demand situation, which is as follows:
Still weak in North America and relatively good in Europe, the Middle East, and Africa. In South America and Asia, the demand is now declining from recent good level.
Contingency plans to cope with a more negative scenario have been implemented or are ready to be executed.
This interim report has been prepared in accordance with the Swedish Financial Accounting Standards Council's recommendation RR20, Interim reports. A number of new accounting standards were implemented in Sweden at January 1, 2001. The application of these new standards did not have any material effect on the Group's financial statements.
Compressor Technique Business Area
The Compressor Technique business area consists of five divisions in the following product areas: industrial compressors, portable compressors, generators, and gas and process compressors.
The order intake grew 3%, to MSEK 3,908 (3,785), corresponding to a 4% volume decline when adjusted for positive foreign exchange translation effects equaling 7%.
Order volumes for industrial compressors, both small standard compressors and large investment-related compressors, suffered slightly in the fourth quarter from the economic slowdown in most geographic markets. Recently introduced products with strong value-added features continued to post good sales. Orders for small portable compressors declined while orders for generators increased slightly, despite weak construction activity in many markets. The after-market business kept growing during the quarter.
In the fourth quarter, sales in Europe remained at a relatively good level. Growth was reported in the Nordic region, and Germany and neighboring countries continued to report order volumes at or above the same period in the preceding year. In southern Europe, however, there was a downturn in orders during the quarter. Sales in North and South America remained below the levels of one year previous. In the United States, orders for standard compressors stabilized after a period of weakness. In Asia, China enjoyed another quarter of good growth, which compensated for weak development in other countries, particularly Japan.
Efforts to multiply and strengthen customer contacts in Asia continued. By year-end, the business area had substantially extended its sales and service network in China. At the end of the quarter, Compressor Technique acquired the Dutch company Grassair, which manufactures small and medium-sized industrial compressors. The company has annual revenues of approximately MSEK 85.
Revenues grew 8% in the quarter, to MSEK 4,432 (4,107), corresponding to flat volumes for comparable units.
Operating profit before restructuring costs decreased 1%, to MSEK 804 (815), for an operating margin of 18.1% (19.9). The reported operating profit was MSEK 804 (795). Positive effects from foreign exchange supported profit at levels comparable to the preceding year's, while adjustments in production to a lower level of order intake had a negative effect on operating margins. The return on capital employed (preceding 12 months) increased to 69% (62).
Construction and Mining Technique Business Area
The Construction and Mining Technique business area consists of five divisions in the following product areas: drilling rigs, rock-drilling tools, exploration equipment, construction tools, and loading equipment.
Orders received increased 3%, to MSEK 1,801 (1,753), or a decrease in volumes of 2%. The translation effect was +3%, and the net effect of structural changes was +2%.
Investment in the mining industry stayed low throughout the quarter, particularly for exploration drilling equipment. However, production levels remained relatively good in many markets, benefiting sales of consumables, service, and spare parts. Strong growth in sales to this industry was recorded in Chile, South Africa, and Australia, while Canada and Mexico, in particular, experienced more sluggish business conditions.
Orders from the construction industry were weak. With the exception of the NEAT railroad tunnel project, in Switzerland, no major infrastructure projects were awarded in the fourth quarter. Sales of light construction equipment picked up again, reflecting some investment in fleet by rental companies.
Revenues from consumables, service, spare parts, and accessories continued to expand in most parts of the business, reaching 58% of total revenues for the quarter.
After the close of year-end accounts, the business area announced an agreement with the German company Thyssen-Krupp Technologies to acquire their hydraulic demolition tools company. The acquisition is subject to approval by regulatory authorities and is in line with the business area's strategy to expand its operations in demolition tools. The company has annual revenues of about MSEK 600.
Revenues were MSEK 1,831 (1,898), down 4% overall and down 8% by volume compared to the strong fourth quarter in 2000. The translation effect was +3%.
Operating profit for the quarter rose 12%, to MSEK 191 (171), corresponding to a margin of 10.4% (9.0). Efficiency improvements and the positive translation effect of a weak Swedish krona more than offset the negative effect of a lower volume of invoicing. The return on capital employed (preceding 12 months) was 23% (21).
Industrial Technique Business Area
The Industrial Technique business area consists of four divisions in the following product areas: industrial power tools, assembly systems, and professional electric tools.
Orders received increased 4%, to MSEK 2,997 (2,876), corresponding to a decrease in volumes of 1%. The positive translation effect was 7% while structural changes in India had a negative effect of 2% on orders received in the quarter.
Order volumes for industrial tools and assembly systems in Europe were somewhat higher than in the same quarter the preceding year, even though the pace of growth slowed near year-end. Sales to the motor vehicle industry remained healthy. In the United States, orders trended down, as both production-driven demand and new investment slowed.
During the quarter, sales of professional electric tools in North America stabilized following a period of weak development. The negative effects of inventory adjustment in distribution channels, seen in previous quarters, became less of a factor towards year-end and helped to stabilize demand. Sales in Europe fell short of sales for the same period the preceding year, but the gap was narrower than in recent quarters.
Outside Europe and North America (which account for more than 90% of sales), sales increased year-on-year.
During the quarter, the Milwaukee division in the United States announced a restructuring of selected assembly and manufacturing operations. The measures aim to shorten lead-times and to enhance competitiveness.
Revenues were up 2%, at MSEK 3,232 (3,161), equal to a drop in real volumes of 3% for comparable units.
Operating profit before restructuring costs dropped 11%, to MSEK 338 (378), primarily as a result of a lower level of invoicing. The profit margin was 10.5% (12.0). A restructuring charge of MSEK 100, mainly related to Milwaukee's relocation of U.S. manufacturing, reduced reported operating profit, to MSEK 238. Return on capital employed (preceding 12 months) was 13% (16).
Rental Service Business Area
Since January 1, 2001, the Rental Service business area has consisted of a single division in the equipment rental industry in North America, providing services to construction and industrial markets.
Revenues decreased 2%, to MSEK 3,776 (3,849), corresponding to a volume decrease of 10% when adjusted for the positive translation effect of 7%. Rental revenues (70% of total revenues) dropped 15% by volume. Rental rates trended down in the quarter and were slightly lower than one year earlier. Revenues from sales of new equipment, parts, and merchandise (15% of total revenues) dropped roughly 20% year-on-year, while sales of used equipment (15% of total revenues) surged more than 40%.
In the fourth quarter, demand declined much more sharply than anticipated. The drop in rental revenues in the U.S. was amplified by the loss of revenues from stores closed for consolidation. The weaker trend was most prominent in non-residential building. Industrial rentals also reported a decline in volumes, partly owing to the postponement of large maintenance and overhaul activities. Mexico recorded lower rental revenues than one year previous, while revenues in Canada inched up.
Sales of new equipment, parts and merchandise remained substantially lower than in the same period the preceding year, primarily because of weak demand for new equipment. Management continued to adjust the rental fleet, resulting in another quarter of high revenues from used equipment sales. Capital expenditure in the quarter included fleet investment for replacements but no expansion. Total net cash flow was again very strong in the quarter.
The number of store locations at December 31 was 530 (589), 17 less than at September 30. The program of store consolidation, i.e. combining and closing stores was finalized and restructuring costs of MSEK 100 were charged in the fourth quarter.
Operating profit before restructuring costs, but including all related goodwill amortization, was MSEK 219 (532), corresponding to a margin of 5.8% (13.8). Reported operating profit was MSEK 119, including the restructuring charge of MSEK 100. The drop in the operating margin reflected considerably lower fleet utilization and increased sales of under-performing rental equipment. The return on capital employed (preceding 12 months), including goodwill on acquisitions, was 4% (6).
Stockholm, February 14, 2002
President and Chief Executive Officer
Overall, achievement of these targets will ensure that shareholder value is created and continuously increased. The strategy for reaching these objectives will adhere to the Group's proven development process for all operational units, focusing on stability first, then profitability, and finally growth.
Some statements in this report are forward-looking, and the actual outcomes could be materially different. In addition to the factors explicitly discussed, other factors could have a material effect on the actual outcomes. Such factors include but are not limited to general business conditions, fluctuations in exchange rates and interest rates, political developments, the impact of competing products and their pricing, product development, commercialization and technological difficulties, interruptions in supply, and major customer credit losses.
For further information:
Senior Vice President Group Communications
Phone: +46 8 743 8070
Mobile: +46 70 322 8070
Investor Relations Manager
Phone: +46 8 743 8291
Mobile: +46 70 518 8291
Overhead presentations from Atlas Copco
For your convenience, a PowerPoint presentation of Atlas Copco's fourth-quarter results will be published on Atlas Copco's Internet site.
Please go to www.atlascopco-group.com > Investor Relations > Presentations
Internet site for the Atlas Copco Group
More information is available at www.atlascopco-group.com.
Interim report at March 31, 2002
The first quarter report will be published on April 29, 2002.