Improvements continues in the third quarter

ATLAS COPCO Interim report on the nine months ended September 30, 1999 (unaudited) The Atlas Copco Group's revenues for the first nine months of 1999 increased 3 percent, to SEK 25,727 m. (24,895), corresponding to a volume decrease of 4 percent for comparable units. The net effect from acquisitions and divestments was an increase of approximately 5 percent. Foreign exchange fluctuations had a positive translation effect of 2 percentage points. Orders received increased 6 percent, to SEK 26,324 m. (24,917), corresponding to a volume decrease of 1 percent for comparable units. Profit after financial items decreased, to SEK 2,390 m. (2,691). The profit margin was 9.3 percent (10.8). The profit includes net nonrecurring items of SEK 83 m. related to the capital gain on the sale of Atlas Copco Controls and to restructuring provisions by the Industrial Technique business area. Excluding the nonrecurring items, the profit margin was 9.0 percent. Near-term outlook In North America, the positive trend is expected to continue. The rental service business is foreseen to keep growing at a faster rate than the economy as a whole because of the outsourcing trend for equipment. Expectations for somewhat better growth in Europe remain. Due to the present low capacity utilization in the manufacturing industry, any increase in demand for capital goods would initially be marginal. Products related to industrial production levels are expected to experience relatively stronger demand. The recovery, from a low level, previously seen in some countries in the Asian region is expected to continue and now also includes India and Japan. Overall customer demand is expected to improve somewhat in the near term. Market development Demand in the United States was particularly strong in the construction and motor-vehicle industries. The demand for investment goods by other manufacturing and process industries in the same market improved somewhat but is still lower than in the previous year. Demand in Europe was mixed during the nine-month period. France and Spain delivered solid growth throughout the period, while demand in Germany and Italy was less consistent and suffered a slower third quarter. In Great Britain, the manufacturing industry showed no clear signs of a higher level of activity, and demand remained sluggish throughout the period. The Nordic countries showed a slight improvement in the third quarter compared to previous quarters. In Asia, the demand situation improved. Encouraging signs were seen in Japan and India during the third quarter as the negative trend evident in the first part of the year turned around. The strong recovery in South Korea continued throughout the period, while demand in China stayed relatively weak. Demand was very weak in Latin America during the first nine months of 1999, particularly in the beginning of the year. In the third quarter, mining countries experienced some increased activity, while Brazil, the biggest market in the region, remained at a low level, with demand substantially below the previous year's. For the full nine-month period, demand in Africa and the Middle East was low compared to the same period last year, although some countries such as South Africa showed stronger development in the third quarter. Sales development Orders received were up 6 percent in the nine-month period, at SEK 26,324 m. (24,917). Excluding a positive currency effect of 2 percentage points, orders received were 1 percent lower for comparable units than in the preceding year. Sales volumes gradually improved during the nine months, finally posting a 2- percentage-point gain in the third quarter over the same period in 1999. Revenues increased 3 percent, to SEK 25,727 m. (24,895), corresponding to a volume drop of 4 percent. Geographic distribution of orders received (%) January-September 1999 1998 Europe 38 40 North America 43 36 South America 4 6 Africa/Middle East 5 6 Asia/Australia 10 12 Earnings Operating profit decreased SEK 151 m., to SEK 3,070 m. (3,221), or 5 percent compared to the same period the preceding year. The profit includes nonrecurring items of SEK 83 m. in the Industrial Technique business area, the net effect of capital gains from the sale of Atlas Copco Controls and a restructuring provision to further consolidate the production structure of the Alliance Tools division. Operating profit excluding those items declined mainly owing to the volume decrease and an unfavorable change in the composition of sales. Changes in exchange rates had a positive effect of about SEK 50 m. The adjustments in the workforce and the overall cost structure that were initiated at the end of 1998 continued throughout the period but at a decreasing rate. These adjustments helped offset part of the negative effects of lower volumes. Operating margins dropped, to 11.9 percent (12.9). Excluding nonrecurring items and the effect of the Rental Service Corporation acquisition, the margin was about 11.4 percent. Net financial items amounted to SEK -680 m. (-530), of which net interest items accounted for SEK -671 m. (-513). Interest expense increased as a consequence of the Rental Service acquisition. Profit after financial items decreased 11 percent, to SEK 2,390 m. (2,691). The profit margin was 9.3 percent (10.8). Net profit for the period totaled SEK 1,570 m. (1,699), or SEK 8.56 per share (9.26). The return on capital employed during the 12 months to September 30, 1999, was 15 percent (18), and the return on shareholders' equity 14 percent (17). Third quarter Orders received amounted to SEK 9,424 m. (8,004), corresponding to a 2- percentage point gain in volumes for comparable units. The Atlas Copco Group's revenues for the third quarter of 1999 increased 15 percent, to SEK 9,357m. from SEK 8,111 m. in 1998. Acquisitions and divestments added 14 percentage points net. Changes in exchange rates produced an increase of 1 percentage point, while comparable volumes were unchanged from the same quarter in 1998. Operating profit increased 20 percent, to SEK 1,283 m. (1,066), because of the effect of nonrecurring items and the RSC acquisition. The operating margin increased, to 13.7 percent (13.1). Excluding nonrecurring items and the effect of acquisitions, the margin was only slightly lower than last year. Profit after financial items increased 11 percent, to SEK 965 m. (867), and net profit for the third quarter totaled SEK 635 m. (535), corresponding to SEK 3.47 per share (2.92). Changes in exchange rates had a positive effect of about SEK 30 m. Cash flow and net indebtedness The operating cash surplus after tax for the first nine months of 1999 reached SEK 2,932 m. (2,886), equal to 11 percent (12) of Group revenues. Working capital increased SEK 9 m. (258) during the period. Investment in tangible fixed assets was SEK 2,262 m. (1,683). The major part of the increase is related to investments in Rental Service Corporation after the acquisition. The acquisition of RSC itself amounted to approximately SEK 14,000 m. Net cash flow equaled SEK 13,311 m. (-43). The Group's net indebtedness (defined as the difference between interest- bearing liabilities and liquid assets) amounted to SEK 23,429 m. (10,301). The acquisition of RSC of approximately SEK 14,000 m. explained the higher net indebtedness. The debt/equity ratio (defined as net indebtedness divided by shareholders' equity) was 147 percent (71). Liquid assets at the end of the period totaled SEK 1,117 m. (1,653). Including minority interests, the Atlas Copco Group's shareholders' equity totaled SEK 15,955 m. (14,586), or SEK 87 per share (79). The equity/assets ratio was 31 percent (40). Investments Investments in property and machinery totaled SEK 696 m. (529). Investments in rental equipment reached SEK 1,566 m. (1,154). During the period, total depreciation on these two asset groups was SEK 1,370 m. (1,054). Distribution of shares Share capital amounted to SEK 918 m. at the end of the period, distributed as follows. After the end of the period, Atlas Copco AB completed an equity rights issue (1:7) resulting in 17,401,426 new A shares and 8,684,838 new B shares. Net proceeds were approximately SEK 4.1 billion. Personnel At September 30, 1999, the number of employees was 25,926 (23,709). For comparable units, the number of employees decreased by 1,100 in the nine-month period. 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. All costs for modifications to comply with the year 2000 have been charged as operational costs. Management believes that remaining modifications are very limited and not critical to operations. 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 July 29, Atlas Copco acquired Rental Service Corporation, a company publicly traded on the New York Stock Exchange. Rental Service Corporation had revenues in the last reported 12-month period 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, Rental Service Corporation had 3,600 employees, operated more than 270 equipment rental locations in 29 states, and served a base of more than 50,000 customers. Rental Service Corporation and Prime Service Inc. are now the two divisions constituting the Rental Service business area, which was created on January 1, 1999. Prime Service constituted a separate division in the Compressor Technique business area throughout 1998. Effective 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. Effective July 1, 1999, ABIRD Holding BV, the Netherlands, was acquired by Atlas Copco. ABIRD is a specialty rental 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. 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 annual sales of roughly SEK 90 m. and is part of the Portable Air division. Effective November 1998, Atlas Copco acquired JKS Boyles, a Canadian 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 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 companies for rental equipment. During 1998, the Prime Service division acquired three equipment rental companies in the U.S. and Mexico, with aggregate annual revenues of roughly SEK 340 m. Equity rights issue To strengthen the Group's capital base and enhance financial flexibility following the acquisition of Rental Service Corporation, the 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 around SEK 4.1 billion. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/10/26/19991026BIT00380/bit0001.doc The full report http://www.bit.se/bitonline/1999/10/26/19991026BIT00380/bit0002.pdf The full report