Atlas Copco Halfyear Report 1998

Operating profit increased 26 percent SEK m. January-June Change 1998 1997 % Revenues 16,784 13,784 +22 Operating profit 2,155 1,705 +26 - as a percentage of 12.8 12.4 revenues Profit after financial 1,824 1,719 +6 items - as a percentage of 10.9 12.5 revenues Earnings per share, 6.34 5.80 +9 SEK 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. Geographic distribution of orders received (%) January-June 1998 1997 Europe 41 42 North America 35 27 South America 6 7 Africa/Middle East 6 6 Asia/Australia 12 18 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. Condensed income statement Six months ended June 30, 1998 (SEK m.)Amortization period 20 40 years years Revenues 16,784 16,784 Operating expenses -14,755 -14,629 Operating profit 2,029 2,155 - as a percentage of revenues 12.1 12.8 Profit after financial items 1,698 1,824 - as a percentage of revenues 10.1 10.9 Net profit 1,038 1,164 Earnings per share, SEK 5.66 6.34 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*). Summary cash-flow analysis * (SEK m.) January-June 1998 1997 Operating cash surplus 3,264 2,237 Change in working -514 45 capital Investments in tangible -1,043 -590 fixed assets Cash flow from operations before 1,707 1,692 financial items Net financial items -341 4 Tax payments -597 -538 Other items, net -100 102 Cash flow from operations after 669 1,260 financial items Company -275 -188 acquisitions/divestment s Dividends paid -780 -693 Net cash flow -386 379 * 1997 figures have been restated to account for changes in the method for elimination of currency translation effects. 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. Class of share Shares outstanding A shares 122,497,590 B shares 61,018,330 Total 183,515,920 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, annika.berglund@atlascopco.com Hans Ola Meyer, Senior Vice President, Group Treasurer (analysts), phone +46 8 743 8292, mobile +46 70 588 8292, hans.ola.meyer@atlascopco.com Atlas Copco Group Income Statement 6 months ended 12 months ended SEK m. June 30 June 30 June Dec. June 1997 1998 1997 1997 1998 Revenues 13,784 16,784 26,531 30,032 33,032 Operating expenses -12,079 -14,629 -23,386 -26,219 -28,769 Operating profit 1,705 2,155 3,145 3,813 4,263 Financial income and 14 -331 77 -293 -638 expenses Profit after 1,719 1,824 3,222 3,520 3,625 financial items as a percentage of 12.5 10.9 12.1 11.7 11.0 revenues Taxes -639 -647 -1,215 -1,280 -1,288 Minority interest -16 -13 -28 -32 -29 Net profit 1,064 1,164 1,979 2,208 2,308 Earnings per share, 5.80 6.34 10.78 12.03 12.58 SEK Return on capital employed 21.5 21.1 18.8 before tax, % Return on equity 16.9 17.6 17.4 after tax, % Debt/equity ratio, % 16.4 74.9 76.3 Rate of equity, % 49.7 39.2 38.9 Number of employees at end of period 20,958 23,923 23,712 Balance Sheet SEK m. June 30, Dec. 31, June 30, 1997 1997 1998 Intangible fixed assets 4,245 11,051 11,032 Other fixed assets 6,680 9,794 9,888 Inventories 5,251 5,231 5,460 Receivables 6,394 7,101 7,640 Cash, bank and short-term 2,759 1,613 1,915 investments Total assets 25,329 34,790 35,935 Equity 12,398 13,453 13,801 Minority interest 185 182 183 Interest-bearing liabilities 4,821 11,827 12,581 and provisions Non-interest-bearing liabilities and provisions 7,925 9,328 9,370 Total liabilities and equity 25,329 34,790 35,935 Business areas Revenues by Business Area SEK m. (January - June) 1996 1997 1998 Compressor Technique 5,422 6,089 8,584 Construction and Mining 2,983 3,201 3,295 Technique Industrial Technique 3,969 4,494 4,905 Atlas Copco Group 12,374 13,784 16,784 1997 1998 SEK m. (by 1 2 3 4 1 2 quarter) Compressor 2,809 3,280 3,950 4,224 4,209 4,375 Technique Construction and Mining 1,458 1,743 1,557 1,695 1,479 1,816 Technique Industrial 2,139 2,355 2,286 2,536 2,420 2,485 Technique Atlas Copco 6,406 7,378 7,793 8,455 8,108 8,676 Group Earnings by Business Area SEK m. (January - June) 1996 1997 1998 Compressor Technique 861 1,043 1,422 Construction and Mining 224 216 259 Technique Industrial Technique 461 476 524 Corporate items -55 -30 -50 Operating profit 1,491 1,705 2,155 Financial income and 76 14 -331 expenses Profit after financial 1,567 1,719 1,824 items 1997 1998 SEK m. (by 1 2 3 4 1 2 quarter) Compressor 462 581 730 764 704 718 Technique Construction and Mining Technique 90 126 91 80 104 155 Industrial 218 258 196 270 260 264 Technique Corporate items -22 -8 -24 1 -25 -25 Operating profit 748 957 993 1,115 1,043 1,112 Financial income -13 27 -147 -160 -162 -169 and expenses Profit after 735 984 846 955 881 943 financial items [REMOVED GRAPHICS] CEO comments on Atlas Copco's half year report Stockholm, August 4, 1998 - For the first six months of 1998, the Atlas Copco Group achieved operating profit 26 percent stronger than in the first half of 1997. "Despite higher financial costs for our expansion into the equipment rental business in the U.S., profit after financial items was up 6 percent on last year," said Giulio Mazzalupi, President and Chief Executive Officer of Atlas Copco. Atlas Copco maintained or strengthened its strong competitive position in most markets. Revenues were up 22 percent, at SEK 16,784 m., and orders received were 14 percent higher at 16,913 m. After adjusting for acquisitions, orders received remained at last year's level. "Positive development in Europe was offset by a drop in Asia, while U.S. demand remained at a high level," Mazzalupi commented. "Comparable units were stronger than last year. In spite of market conditions, the Construction and Mining business area delivered better results, thanks to various initiatives to increase their internal efficiency. At the same time, we stepped up our R&D spending in all areas this spring to invest in tomorrow's business- product technology as well as business processes." Atlas Copco made a forceful move into the field of equipment rental by acquiring Prime Service, Inc., in the United States, one year ago. "The equipment rental market in the Unites States is estimated at USD 20 billion today and forecast to continue growing 15-20 percent a year," said Mazzalupi, "This is one of the most interesting businesses in our industry. Also, since joining the Group, Prime has acquired six rental companies in the U.S. and one in Mexico. And their revenues for the first six months of 1998 were approximately 30 percent higher than last year." "Financing costs for entering the equipment rental business somewhat diluted our net profit. This dilution was less than 5 percentage points. However, we have achieved excellent growth- even higher than anticipated. And this is what we need to help us reach our target of 8 percent volume growth per year." Mazzalupi summarized the report by saying that earnings for the full year 1998 are expected to be higher than in 1997. Atlas Copco is an international group of industrial companies with its head office in Stockholm, Sweden, and 97 percent of revenues outside Sweden. Atlas Copco companies develop, manufacture, and market electric and pneumatic tools, compressors, construction and mining equipment, assembly systems, and motion control products. Additional information about Atlas Copco is available on our World Wide Web site: www.atlascopco.com Atlas Copco Group Summary of Half Year Results SEK m. January- January- Chang June June e 1998 1997 % Atlas Copco Group Orders received 16,913 14,825 +14 Revenues 16,784 13,784 +22 Operating profit 2,155 1,705 +26 - as percentage of 12.8 12.4 revenues Profit after financial 1,824 1,719 +6 items - as percentage of 10.9 12.5 revenues Compressor Technique Orders received 8,613 6,740 +28 Revenues 8,584 6,089 +41 Operating profit 1,422 1,043 +36 - as percentage of 16.6 17.1 revenues Construction and Mining Technique Orders received 3,365 3,485 -3 Revenues 3,295 3,201 +3 Operating profit 259 216 +20 - as percentage of 7.9 6.7 revenues Industrial Technique Orders received 4,935 4,600 +7 Revenues 4,905 4,494 +9 Operating profit 524 476 +10 - as percentage of 10.7 10.6 revenues More detailed information on the financial results will be published in the interim report for the first six months of 1998. 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, annika.berglund@atlascopco.com Hans Ola Meyer, Senior Vice President, Group Treasurer, (analysts) phone +46 8 743 8292, mobile +46 70 588 8292, hans.ola.meyer@atlascopco.com