Electrolux report for the first nine months of 1999

REPORT FOR THE FIRST NINE MONTHS OF 1999 - Continued strong improvement in income, higher margin Nine months Third quarter Change, Change, 1999 1998 % 1999 1998 % Net sales, SEKm 91,144 89,391 2.0 29,070 28,516 1.9 Operating income excl. items 5,562 4,470 24.4 1,755 1,425 23.2 affecting comparability, SEKm Margin, % 6.1 5.0 6.0 5.0 Operating income, SEKm 5,346 5,275 1.3 1,539 1,675 -8.1 Income after financial 4,573 4,304 6.3 1,354 1,381 -2.0 items, SEKm Income before taxes excl. items 4,808 3,537 35.9 1,602 1,149 39.4 affecting comparability, SEKm Margin, % 5.3 4.0 5.5 4.0 Income before taxes, SEKm 4,592 4,342 5.8 1,386 1,399 -0.9 Net income, SEKm 3,124 2,882 8.4 1,024 985 4.0 Net income per share, SEK 8.55 7.90 2.80 2.70 Return on equity, % 17.0 18.7 * Income before taxes increased by 36%, excl. items affecting comparability * Provision of USD 225m (SEK 1,841m) after decision in pension litigation in US. Amount based on estimate by plaintiff PBGC * Higher operating income for all business areas * Continued strong growth in sales and income in North America, improvement in Europe and Asia * Divestment of operation in food and beverage vending machines, capital gain of SEK 1,625m Net sales and income Sales for Electrolux in the first nine months of 1999 amounted to SEK 91,144m as against SEK 89,391 for the corresponding period in 1998. This corresponds to an increase of 2%, of which -3.5% refers to changes in Group structure, +1.5% to changes in exchange rates, and +4.0% to price/mix/volume. Including items affecting comparability, operating income amounted to SEK 5,346m (5,275), corresponding to 5.9% (5.9) of sales, and income before taxes to SEK 4,592m (4,342), corresponding to 5.0% (4.9) of sales. Net income rose to SEK 3,124m (2,882), which corresponds to SEK 8.55 (7.90) per share. Items affecting comparability in 1999 include a provision of USD 225m (SEK 1,841m) in the third quarter referring to pension litigation in the US (see page 4), and a capital gain of approximately SEK 1,625m in the same quarter on divestment of the vending-machine operation. In 1998 these items comprised capital gains totalling SEK 805m on divestment of operations. Exclusive of the above items, operating income rose by 24% to SEK 5,562m (4,470), corresponding to 6.1% (5.0) of sales, and income before taxes rose by 36% to SEK 4,808m (3,537), corresponding to 5.3% (4.0) of sales. Net financial items improved as a result of increased cash flow, lower interest rates and a strong financial trading result in the third quarter. Changes in exchange rates during the period, i.e. both transactions and translations, had a positive effect on income after financial items amounting to approximately SEK 240m, mainly resulting from translation of income statements in foreign subsidiaries. In the second quarter of last year, operating income was charged with non- recurring costs totalling SEK 175m in Brazil and ASEAN. A charge was also taken in the second quarter this year, although in a considerably lower amount. Operating income by business area and region Excluding items affecting comparability, all three business areas reported higher operating income with improved margins for Household Appliances and Professional Appliances. See page 5. In geographical terms, operating income rose particularly in North America, but Europe and Asia also showed improvement on the previous year. The third quarter Group sales for the third quarter of 1999 amounted to SEK 29,070m, as against SEK 28,516m for the third quarter of 1998. This corresponds to an increase of 2%, of which -1.5% refers to changes in Group structure, -0.5% to changes in exchange rates, and +4.0% to price/mix/volume. Including items affecting comparability, operating income amounted to SEK 1,539m (1,675) corresponding to 5.3% (5.9) of sales, and income before taxes to SEK 1,386m (1,399) corresponding to 4.8% (4.9) of sales. Net income for the quarter improved to SEK 1,024m (985), which corresponds to SEK 2.80 (2.70) per share. As mentioned above, items affecting comparability in the third quarter comprised a provision of USD 225m (SEK 1,841m) for ongoing pension litigation in the US, and a capital gain of approximately SEK 1,625m on the divestment of the vending-machine operation. In the third quarter of 1998, items affecting comparability comprised a capital gain of SEK 250m on the divestment of the European operation in kitchen and bathroom cabinets. Exclusive of the above items, operating income for the third quarter rose by 23% to 1,755m (1,425), corresponding to 6.0% (5.0) of sales. A strong improvement in net financial items contributed to a rise of 39% in income before taxes to SEK 1,602m (1,149), corresponding to 5.5% (4.0) of sales. The improvement in operating income is traceable mainly to the Household Appliances business area, although Professional Appliances also reported higher operating income compared with last year. Operating income for Outdoor Products was somewhat lower than in the previous year. Cash flow The cash flow generated by the Group's business operations after investments and adjusted for exchange-rate effects improved to SEK 5,647m (3,709). The improvement is traceable mainly to reduced inventory levels and higher operating income, and by higher net proceeds on acquisitions and divestments than in the previous year. Equity and net debt/equity ratio Group equity as of September 30, 1999 including minority interests amounted to SEK 25,590m (23,664), which corresponds to SEK 69.90 (64.60) per share. The return on equity after taxes was 17.0% (18.7), and the return on net assets was 17.9% (17.6). Excluding items affecting comparability, the return on equity rose to 17.2% (14.9), and the return on net assets to 18.2% (14.4). Net borrowings declined to SEK 13,152m (17,611) and the net debt/equity ratio improved to 0.51 (0.74). Liquid funds at the end of the period amounted to SEK 11,731m (10,077). The above figures include items affecting comparability, unless otherwise indicated. Provision for pension litigation in the US At the end of July, 1999 a decision against the Electrolux US subsidiary White Consolidated Industries Inc. (WCI) was rendered by a district court in Pennsylvania, USA in litigation on pension commitments. The decision holds WCI liable for the underfunding of pension plans relating to businesses it divested in 1985, the year before it was acquired by Electrolux. The litigation was filed in 1991 and the trial was completed in April 1997. Electrolux appealed the decision on August 18, 1999. The amount of the liability is the subject of a separate administrative proceeding that is still in progress. The plaintiff is a government agency, the Pension Benefit Guaranty Corporation (PBGC), which is responsible for the payment of defaulting pension obligations. PBGC has calculated the unfunded amount at USD 120 million, which including interest to the end of 1999 could be estimated at USD 225 million. In accordance with applicable accounting standards, Electrolux has made a non- cash pretax provision of USD 225million (SEK 1,841m) in the third quarter. The amount of the provision is based on PBGC's estimate of the liability. The aftertax charge is USD 140 million (SEK 1,141 m). Management intends to pursue all available courses of action, including the appeal mentioned above, in an attempt to mitigate the effect of this issue on the Group's financial results. Operations by business area Household Appliances During the first nine months of 1999 the market for white goods in Western Europe increased in volume by about 3% in comparison with the corresponding period in 1998. In the third quarter, the market grew by about 4%. In geographical terms, the increase is traceable mainly to the UK and markets in Southern Europe. Electrolux sales of white goods in Europe increased over last year. Operating income for the European white-goods operation improved on the basis of higher volumes and greater internal efficiency. The improvement in income was achieved despite the negative impact of a fire at a central warehouse in the UK in the second quarter, with accompanying disruptions in deliveries, and by costs referring to the integration of the European white-goods operation into a new pan-european organization, Electrolux Home Products. Deliveries to Russia during the period were considerably lower than last year, although there was some improvement during the latter part of the third quarter. The white-goods market in the US increased in volume by approximately 7%, compared to the first nine months of 1998. In the third quarter the market showed an upturn of almost 6%. The white-goods operation within Frigidaire Home Products achieved continued strong growth in volume, as well as a substantial improvement in both operating income and margin. Demand for room air-conditioners in the US market increased substantially. The Group achieved higher sales volume, and operating income and margin showed a marked improvement. The total market for white goods in Brazil was largely unchanged for the period as a whole, although there was a decline in the product areas that account for the majority of Group sales. The Brazilian white-goods operation reported lower sales and operating income remained negative. An improvement in income was achieved over last year, however. Overall, operating income for the white-goods operation was considerably higher for the period as a whole as well as in the third quarter. Demand for floor-care products increased in both the European and the American markets. Group sales were higher than in 1998. Operating income and margin showed a considerable improvement as a result of higher volumes, a better product mix and improved internal efficiency. Strong growth in sales and operating income was also reported for the leisure appliances product line on the basis of good demand in both Europe and US. Demand for compressors and motors remained weak, except in the US. Both sales and operating income for the Group's component operation were lower than last year. Total sales for the Household Appliances business area were higher for comparable units. Operating income and margin improved, both for the period as a whole and in the third quarter. Professional Appliances Demand for food-service equipment in Europe increased somewhat, and Group sales in this product area rose in comparison with last year. Higher volumes and implemented restructuring led to a considerable improvement in operating income and margin. Laundry equipment reported largely unchanged sales and operating income from the previous year. Margin improved, however, mainly as a result of implemented restructuring. Demand for refrigeration equipment declined in most product areas. Lower sales, an unfavorable product mix and costs referring to continued streamlining of the organization led to a substantial drop in operating income for this product line. Overall, sales for Professional Appliances were higher than last year after adjustment for divested operations. Operating income improved for the period as a whole, as well as in the third quarter. Outdoor Products Demand for professional chain saws was lower than last year in Europe and Latin America, while the North American market remained strong. Demand also improved in South East Asia. Group sales and operating income declined, and margin was lower as a result of an unfavorable product mix. The European market for garden equipment showed higher demand and Group sales increased over last year. Operating income declined, however, due to a charge in the third quarter referring to start-up problems for new consumer products. Demand for outdoor products in the US was somewhat higher in most product areas compared to the first nine months in the previous year. Frigidaire Home Products reported higher sales, and both operating income and margin improved on the basis of higher volume and greater operational efficiency. Total sales for the Outdoor Products business area increased. Operating income improved for the period as a whole, but declined in the third quarter. Major changes in the Group Acquisitions and divestments since June 30, 1999 As of September 30, a final agreement was reached for sale of the Group's operation in food and beverage vending machines. The operation was part of the food-service equipment product line and in 1998 reported sales of approximately SEK 1,000m, with about 600 employees. The divestment generated a capital gain of approximately SEK 1,625m. As of October 6, the Group acquired Yazoo-Kees, a North American manufacturer and distributor of landscape maintenance equipment with sales of approximately USD 20m (SEK 160m) and about 100 employees. The company will be integrated into the Husqvarna outdoor operation. At the beginning of October a 50-50 joint venture with Ericsson was started, devoted to development and sales of products and services for the networked home. The company will actively drive standardization of future intelligent home products. Both Electrolux and Ericsson have already invested in this area and will jointly and as a first step invest SEK 70m in the new company. Subject to approval by EU authorities, the new company will be operational during 1999. Y2K issue As stated in the Group's half-yearly report, the original timetable calling for 100% Y2K-compliance by June 30 has been extended for several reasons, including the following: * Several office systems were not Y2K ready, although represented as such by their suppliers. * Newly established relationships with customers and suppliers required additional coordination and verification. * Y2K-driven changes by certain customers and suppliers required additional coordination and verification. Status as of September 30, 1999 At the end of the third quarter 92% of the Group's factory, office and building systems were Y2K-compliant. Compliance audits to confirm readiness have been completed or are under way. The few remaining systems are non- critical and are all scheduled for upgrading, replacement or scrapping by year-end. Cost of Y2K-compliance The cost of the changes implemented to date amounts to approximately SEK 269m. The total cost of Y2K-compliance for the Group is estimated at approximately SEK 350m. Additional information about the Group's Y2K program is available at www.electrolux.com Allocation of SPP pension surplus The Swedish insurance company, SPP has announced that it will allocate a portion of the surplus in its pension funds to participating companies. SPP has stated that Electrolux share of the surplus is SEK 358.6m. Pending approval of SPP's allocation method by the Swedish Competition Authority and a decision on the fiscal consequences by the Swedish Council for Advance Tax Rulings, it is not clear how and when the refund will be available to the participating companies. The refund has not been included in the financial statements for the first nine months of 1999. Stockholm, October 29, 1999 Michael Treschow President and CEO Consolidated income statement, SEKm Nine months, Third Full quarter, year, 1999 1998 1999 1998 1998 Net sales 91,144 89,391 29,070 28,516117,524 Cost of goods sold -66,850 -66,520-21,058-21,034-86,899 Selling expense -13,940 -13,689 -4,699 -4,575-18,058 Administrative expense -4,738 -4,575 -1,534 -1,407 -6,336 Other operating income/expense -54 -137 -24 -75 -167 Items affecting comparability -216 805 -216 250 964 Operating income* 5,346 5,275 1,539 1,675 7,028 Margin, % 5.9 5.9 5.3 5.9 6.0 Financial items, net -773 -971 -185 -294 -1,178 Income after financial items 4,573 4,304 1,354 1,381 5,850 Margin, % 5.0 4.8 4.7 4.8 5.0 Minority interests in income before taxes 19 38 32 18 76 Income before taxes 4,592 4,342 1,386 1,399 5,926 Margin, % 5.0 4.9 4.8 4.9 5.0 Taxes -1,468 -1,460 -362 -414 -1,951 Net income 3,124 2,882 1,024 985 3,975 * Including depreciation in the amount of -2,951 -3,102 -974 -995 -4,125 Consolidated balance sheet, September 30, 1999 September 30, 1998 Full year, SEKm 1998 Fixed assets 26,973 26,926 27,885 Inventories, 15,230 16,898 16,957 etc. Accounts 23,687 24,032 21,859 receivable Other 5,789 4,043 5,201 receivables Liquid funds 11,731 10,077 11,387 Total assets 83,410 81,976 83,289 Shareholders' 24,769 22,744 24,480 equity Minority 821 920 953 interests Interest-bearing liabilities 24,883 27,688 29,353 and provisions Non-interest-bearing 32,937 30,624 28,503 liabilities and provisions Total equity and liabilities 83,410 81,976 83,289 Cash-flow statement, Nine months, Nine months,Full year, SEKm 1999 1998 1998 Income after financial items 4,573 4,304 5,850 Depreciation according to 2,951 3,102 4,125 plan Capital gain/loss included in operating income -1,625 -805 -964 Provision for restructuring and PBGC, 1,441 -630 -1,122 not affecting liquidity Taxes paid -925 -1,212 -2,135 Changes in operating assets 913 -657 -1,056 and liabilities Cash flow from operations 7,328 4,102 4,698 Acquisitions/divestment of 1,798 1,465 2,105 operations Capital expenditure -3,267 -2,509 -3,756 Other -212 651 875 Cash flow from operations and investments 5,647 3,709 3,922 Change in short-term loans -2,793 -1,702 954 Change in long-term loans -887 -1,116 -2,988 Dividend payment -1,099 -915 -915 Change in minority interest - - 6 Total cash flow 868 -24 979 Liquid funds at beginning of 11,387 9,834 9,834 year Exchange-rate differences referring to liquid funds -524 267 574 Liquid funds at end of period 11,731 10,077 11,387 Total cash flow excl. change in short-term loans 3,661 1,678 25 Net liquid funds at beginning 112 46 46 of year Exchange-rate differences referring to net liquidity -127 95 41 Net liquid funds at end of 3,646 1,819 112 period Net sales by business area, Nine months, Third quarter, Full year, SEKm 1999 1998 1999 1998 1998 Household Appliances 64,70462,997 22,045 21,345 84,581 Professional Appliances 8,316 8,481 2,747 2,760 11,574 Outdoor Products 17,90216,193 4,190 3,790 19,295 Operating income by business Nine months, Third quarter, Full year, area, SEKm 1999 1998 1999 1998 1998 Household Appliances 3,604 2,749 1,327 1,057 4,065 Margin, % 5.6 4.4 6.0 5.0 4.8 Professional Appliances 588 503 187 177 723 Margin, % 7.1 5.9 6.8 6.4 6.2 Outdoor Products 1,702 1,587 334 348 1,788 Margin, % 9.5 9.8 8.0 9.2 9.3 Group common costs -303 -310 -87 -122 -436 Key ratios Nine months, Third quarter, Full 1999 1998 1999 1998 year, 1998 1) Net income per share, SEK 8.55 7.90 2.80 2.70 10.85 2) Return on equity, % 17.0 18.7 19.3 3) Return on net assets, % 17.9 17.6 17.6 4) Net debt/equity ratio 0.51 0.74 0.71 Capital expenditure, SEKm 3,267 2,509 1,283 875 3,756 Average number of employees 94,100 100,10 94,500 98,400 99,322 0 1) After a stock split of 5:1 in June 1998, the number of shares amounts to 366.2 million. 2) Annualized net income for the year, expressed as a percentage of opening equity. 3) Annualized operating income, expressed as a percentage of average net assets. The definition of net assets has been changed as of 1999, so that they now comprise only assets that generate operating income, i.e. interest-bearing financial receivables amounting to SEK 3,310m are excluded. The figures for the previous year have been adjusted accordingly. 4) Net borrowings, i.e. interest-bearing liabilities less liquid funds, in relation to adjusted equity. The latter is defined as equity including minority interests. This report has not been audited. The year-end results for 1999 will be published on February 11, 2000. Financial information from Electrolux is also available on the Internet at www.electrolux.com . Quarterly figures Net sales and income, per quarter st nd rd th 1 qtr 2 qtr 3 qtr 4 qtrFull year Net sales, SEKm 1999 29,053 33,021 29,070 1998 28,567 32,308 28,516 28,133 117,524 Operating income, SEKm 1999 1,656 2,151 1,539 Margin,% 5.7 6.5 5.3 1) 1999 1,656 2,151 1,755 Margin,% 5.7 6.5 6.0 1998 1,376 2,224 1,675 1,753 7,028 Margin,% 4.8 6.9 5.9 6.2 6.0 2) 1998 1,376 1,669 1,425 1,594 6,064 Margin,% 4.8 5.2 5.0 5.7 5.2 Income after financial 1999 1,384 1,835 1,354 items, SEKm Margin,% 4.8 5.6 4.7 1) 1999 1,384 1,835 1,570 Margin,% 4.8 5.6 5.4 1998 1,060 1,863 1,381 1,546 5,850 Margin,% 3.7 5.8 4.8 5.5 5.0 2) 1998 1,060 1,308 1,131 1,387 4,886 Margin,% 3.7 4.0 4.0 4.9 4.2 Income before taxes, SEKm 1999 1,392 1,814 1,386 1) 1999 1,392 1,814 1,602 1998 1,075 1,868 1,399 1,584 5,926 2) 1998 1,075 1,313 1,149 1,425 4,962 Net income, SEKm 1999 912 1,188 1,024 1) 1999 912 1,188 1,049 1998 667 1,230 985 1,093 3,975 2) 1998 667 862 766 940 3,235 Net income per share, SEK 1999 2.50 3.25 2.80 1) 1999 2.50 3.25 2.85 1998 1.85 3.35 2.70 2.95 10.85 2 ) 1998 1.85 2.35 2.10 2.55 8.85 1) Exclusive of items affecting comparability, which in 1999 comprised a provision of USD 225m (SEK 1,841m) in the third quarter, and a capital gain of approximately SEK 1,625m also in the third quarter. 2) Exclusive of items affecting comparability, which in 1998 comprised a total net capital gain of SEK 964m, of which SEK 555m in the second quarter, SEK 250m in the third quarter and SEK 159m in the fourth quarter. Net sales by business area, per quarter, SEKm st nd rd th 1 qtr 2 3 4 Full qtr qtr qtr year Household Appliances 1999 20,266 22,39322,045 1998 20,140 21,51221,34521,584 84,581 Professional Appliances 1999 2,563 3,006 2,747 1998 2,722 2,999 2,760 3,093 11,574 Outdoor Products 1999 6,155 7,557 4,190 1998 5,157 7,246 3,790 3,102 19,295 Operating income by business area, per quarter, SEKm st nd rd th 1 qtr 2 3 4 Full qtr qtr qtr year Household Appliances 1999 1,071 1,206 1,327 Margin,% 5.3 5.4 6.0 1) 1998 879 813 1,057 1,316 4,065 Margin,% 4.4 3.8 5.0 6.1 4.8 Professional Appliances 1999 129 272 187 Margin,% 5.0 9.0 6.8 1998 103 223 177 220 723 Margin,% 3.8 7.4 6.4 7.1 6.2 Outdoor Products 1999 574 794 334 Margin,% 9.3 10.5 8.0 1998 488 751 348 201 1,788 Margin,% 9.5 10.4 9.2 6.5 9.3 Common Group costs 1999 -109 -107 -87 1998 -95 -93 -122 -126 -436 1) Including a charge of SEK 175m in 1998 referring to Brazil and Asia. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/10/29/19991029BIT00520/bit0001.doc Full Report http://www.bit.se/bitonline/1999/10/29/19991029BIT00520/bit0002.pdf Full Report