Report for the first nine months of 2002

REPORT FOR THE FIRST NINE MONTHS OF 2002 Net income per share rose by 58% to SEK 13.10 Amounts in SEKm, Nine Nine Change Third Third Change unless otherwise months months quarter quarter stated 2002 2001 2002 2001 Net sales 102,564 103,922 -1.3% 31,760 32,793 -3.2% Operating income1) 8,294 6,330 +31% 1,781 2,442 -27% Operating income excl. items 6,384 4,973 +28% 1,756 1,085 +62% affecting comparability1) 2) Margin, % 6.2 4.8 5.5 3.3 Income after 8,104 5,453 +49% 1,728 2,202 -22% financial items1) Income after financial items excl. items 6,194 4,096 +51% 1,703 845 +102% affecting comparability1) 2) Margin, % 6.0 3.9 5.4 2.6 Net income per 18.40 12.20 +51% 3.80 5.65 -33% share, SEK3) Net income per share, excl. items 13.10 8.30 +58% 3.75 1.75 +114% affecting comparability2) Value creation 2,720 229 +2,491 636 -453 +1,089 Return on equity, 26.6 19.2 % Return on equity, excl. items 18.9 13.0 affecting comparability, % 2) 1) New accounting principle for R&D and software had positive impact of SEK 155m on income in the first nine months of 2002 (see page 2). 2) In the first nine months of 2002, income includes items affecting comparability in the amount of SEK 1,910m (1,357) (see page 2). 3) Based on the average number of shares after buy-backs (see page 10). · Marked upturn in income for North American operation, although from a low level in 2001 · Substantial improvement in income and margin for appliances in Europe · Higher income for both Professional Indoor and Outdoor Products for comparable units · Net debt/equity ratio improved to 0.13 as a result of continued strong cash flow Net sales and income Net sales for Electrolux in the first nine months of 2002 amounted to SEK 102,564m, compared with SEK 103,922m for the same period in 2001. This corresponds to a decrease of 1.3%, of which -2.2% is attributable to exchange rate fluctuations, -3.9% to changes in Group structure, and +4.8% to volume/price/mix. Operating income amounted to SEK 8,294m (6,330), corresponding to 8.1% (6.1) of sales. Income after financial items was SEK 8,104m (5,453), corresponding to 7.9% (5.2) of sales. Net income increased to SEK 6,051m (4,156), which corresponds to SEK 18.40 (12.20) per share. Items affecting comparability The above mentioned income figures for the first nine months of 2002 include items affecting comparability amounting to SEK 1,910m (1,357). See table below. Items affecting comparability, January-September, SEKm 2002 2001 Capital gain in the 1st quarter of 2002 from the divestment of the remaining part of the leisure-appliance 1,800 operation Capital gain in the 1st quarter of 2002 from the divestment of the European home-comfort operation 85 Net capital gain in the 3rd quarter of 2002 from the divestments of Zanussi Metallurgica, Mexican compressor plant and European motor operation 25 Capital gain in 3rd quarter of 2001 from the divestment of the major part of the leisure-appliance operation 3,120 Restructuring provision in 3rd quarter of 2001, referring mainly to the components product line -1,763 Total 1,910 1,357 Income excluding items affecting comparability Excluding items affecting comparability, operating income increased by 28% to SEK 6,384m (4,973), corresponding to 6.2% (4.8) of sales, and income after financial items increased by 51% to SEK 6,194m (4,096), corresponding to 6.0% (3.9) of sales. Net income increased by 52% to SEK 4,300m (2,824), corresponding to SEK 13.10 (8.30) per share. Financial net Net financial items amounted to SEK -190m (-877). The improvement is mainly due to lower interest rates and reduced net borrowings. Impact of changes in exchange rates In terms of both transaction and translation effects, changes in exchange rates during the period had a negative impact on income after financial items of approximately SEK -155m. The corresponding impact in the third quarter is estimated to approximately SEK -220m. This impact is mainly related to the strengthening of the Swedish krona against the US dollar. New accounting principle for R&D as of January 1, 2002 A new Swedish accounting standard, RR 15 Intangible assets, came into effect as of January 1, 2002. According to this standard, costs for development of products and software should be capitalized. Development costs of SEK 155m referring to projects initiated during the first nine months have been capitalized. Income for the previous year has not been adjusted in this respect. The five other Swedish accounting standards issued by The Swedish Financial Standards Council effective as of January 1, 2002 have not had any material effect on the Group's accounts. Third quarter Sales in the third quarter of 2002 declined to SEK 31,760m (32,793). Of the total decline of 3.2%, -7.8% is attributable to changes in exchange rates, -2.6% to changes in Group structure, and +7.2% to volume/price/mix. Operating income decreased to SEK 1,781m (2,442), corresponding to 5.6% (7.4) of sales. Income after financial items declined to SEK 1,728m (2,202), which corresponds to 5.4% (6.7) of sales. Net income was SEK 1,239m (1,928), corresponding to SEK 3.80 (5.65) per share. Income excluding items affecting comparability Excluding items affecting comparability, operating income increased by 62% to SEK 1,756m (1,085), corresponding to 5.5% (3.3) of sales, and income after financial items increased by 102% to SEK 1,703m (845), corresponding to 5.4% (2.6) of sales. Net income increased by 105% to SEK 1,222m (596), corresponding to SEK 3.75 (1.75) per share. Cash flow Cash flow from operations, adjusted for changes in exchange rates, amounted to SEK 7,604m (7,818). The improvement in income in the first nine months of 2002 has been offset by a lower decrease in working capital than in the previous year, as well as the final payment in the first quarter of USD 94 million (approximately SEK 990m) related to the PBGC pension litigation. Financial position Equity Equity as of September 30, 2002 amounted to SEK 30,664m (31,968), which corresponded to SEK 95.00 (93.70) per share. Return on equity was 26.6% (19.2). Excluding items affecting comparability, the return on equity was 18.9% (13.0). Net assets Average net assets for the period amounted to SEK 37,584m (45,177) excluding items affecting comparability and SEK 36,551m (43,249), including items affecting comparability. This decrease is primarily due to divestments and restructuring as well as exchange rate effects. Return on net assets was 30.3% (19.5). Return on net assets excluding items affecting comparability was 22.6% (14.7). Net assets as of September 30, 2002 in relation to sales was 25.9% (29.9). Net debt/equity and liquid funds Net borrowings decreased to SEK 4,187m (9,678). The net debt/equity ratio decreased to 0.13 (0.30). Liquid funds at the end of the period were SEK 15,038m (15,125). Deficits in pension plans The decline in the stock markets has reduced the value of the Group's pension assets. Operating income for the third quarter of 2002 has been negatively impacted by a provision of SEK 45m related to a deficit in the Swedish pension plans. As of September 30, 2002 the Group's pension funds in the US, which have previously been over-funded, were under-funded by approximately USD 87m (approximately SEK 810m). Assuming no change in market valuation and interest rates, the Group's US subsidiary would be required to either record a pension liability against equity in the fourth quarter of 2002, make a cash contribution or a combination of the two. The Group would also likely recognize an increased pension expense in 2003. Value created The total value created by the Group during the first nine months of 2002 amounted to SEK 2,720m, compared with SEK 229m in the first nine months of 2001. The improvement is mainly a result of an increase in operating margin to 6.2% (4.8), due primarily to higher volumes in Consumer Durables in the US and Europe. The capital turnover rate for the Group increased to 3.64 from 3.07 in the preceding year. The table below shows value creation for the period by business area. Value creation by Nine Nine Third Third business area, months months quarter quarter Full SEKm year 2002 2001 Change 2002 2001 Change 2001 Consumer Durables Europe 1,435 619 816 539 241 298 1,172 North America 1,137 92 1,045 77 -313 390 -297 Rest of the world -818 -853 35 -280 -338 58 -1,023 Total Consumer 1,754 -142 1,896 336 -410 746 -148 Durables Professional Products Indoor 207 313 -106 92 -33 125 250 Outdoor 881 673 208 253 182 71 914 Total Professional 1,088 986 102 345 149 196 1,164 Products Common Group costs, -122 -615 493 -45 -192 147 -754 etc. Total 2,720 229 2,491 636 -453 1,089 262 Value created is defined as operating income excluding items affecting comparability, less a weighted average cost of capital (WACC) on average net assets. As of 2002, the Group's WACC has been changed from 14% to 13% before tax. Operations by business area Consumer Durables Industry shipments of core appliances in Europe increased in volume by approximately 1% in the first nine months of 2002 compared with the same period in the previous year. Western Europe showed a decline of 2%, while the market in Eastern Europe increased by approximately 15%. Shipments in the third quarter increased by 3%, with a decline of 2% in Western Europe and a growth of approximately 20% in Eastern Europe. Group sales of appliances in Europe increased from the previous year, particularly in Eastern Europe and with respect to key accounts. Operating income showed a substantial improvement with a higher margin, both for the period as a whole and for the third quarter. This improvement is mainly a result of higher volumes, lower costs for materials and improved internal efficiency. In the US, industry shipments for core appliances increased in volume by about 7% in the first nine months and approximately 2% in the third quarter. Including air conditioners and microwave ovens, shipments increased by about 6% for the entire period, and by almost 3% in the third quarter. Group sales of appliances in North America were substantially higher than in the previous year, particularly in the refrigerator and cooker product areas. Operating income and margin showed a marked upturn, but from a low level in 2001. Income for the first nine months of 2001 was negatively impacted by non-recurring costs of approximately SEK 950m related to problems in connection with the start-up of a new generation of refrigerators. Sales of room-air conditioners were lower than in 2001 and operating income in this product area declined. Demand for appliances in Brazil increased for the period as a whole after having showed an upturn in both the second and third quarter. Group sales were in line with last year in local currency but declined in SEK. Operating income showed a substantial downturn and was negative, mainly due to higher costs for materials and a less favorable product mix. Lower exports to Argentina also had a negative impact. Group sales in China showed good growth over the previous year. Operating income for the Chinese operations declined and remained negative, mainly as a result of higher costs for marketing, a less favorable product mix and downward pressure on prices. Group sales of appliances in India were lower than in the previous year. Operating income for the Indian operation declined somewhat and remained negative. The market for appliances in Australia showed an upturn, and the Group had a positive trend in both sales and income. Overall, operating income for the appliance operation outside Europe and North America declined compared with the previous year and was negative. Demand for floor-care products in the US declined for the period as a whole after a downward trend in the third quarter. Demand in the European market showed a continued positive trend, however. Group sales of floor-care products were somewhat lower than in the previous year. Operating income was largely unchanged as a result of a more favorable product mix and productivity improvements. Demand for consumer outdoor products was slightly higher than in 2001 in both Europe and the US. The Group achieved higher sales in Europe and operating income for the European operation showed a marked upturn. Also, in the US, Group sales of consumer outdoor products were higher than in 2001, and operating income and margin improved. Overall, sales for the Consumer Durables business area were higher than in the previous year, and operating income and margin improved. Professional Indoor Products Demand for food-service equipment in Europe was somewhat weaker than in 2001. Group sales declined, mainly due to divestments. Operating income and margin improved as a result of structural changes, as well as a more favorable mix. Group sales of laundry equipment decreased due to weaker demand in several European markets, and in Japan. Operating income and margin improved as a result of higher productivity and the launch of new products in North America. Demand for compressors in Europe was higher than in the previous year. Group sales increased for comparable units. Operating income showed a marked improvement as a result of restructuring and the introduction of a new compressor. Total sales for Professional Indoor Products decreased, mainly as a result of divestments and implemented restructuring. Operating income and margin increased for comparable units. Professional Outdoor Products Demand for professional chainsaws increased, particularly in Eastern Europe. Group sales of chainsaws rose from the previous year. Strong growth in sales was reported for professional lawn and garden products, while sales for construction products declined. The integration of the newly acquired Diamant Boart operation proceeded according to plan. Overall, sales for Professional Outdoor Products were higher than in the previous year. The change in accounting principle for R&D had a significant positive impact on operating income for this business area. Income and margin improved on a comparable basis, however. Major changes in the Group since June 30, 2002 As of July 1, the Group acquired Diamant Boart International, a world- leading manufacturer and distributor of diamond tools and related equipment for the construction and stone industry. The purchase price was SEK 1,700m on a debt-free basis. In 2001, the operation had sales of approximately SEK 2,500m and approximately 2,000 employees. The operation is part of Professional Outdoor Products. In 2001, this business area had sales of approximately SEK 1,300m in power cutters and diamond tools. The acquired operation is included in the accounts for the third quarter of 2002 with sales of SEK 647m. As of July 1, the Group divested its metallurgical plant in Italy, which was part of the Components product line in the Professional Indoor Products business area. The divested operation had sales in 2001 of approximately SEK 1,300m, of which approximately SEK 600m was external sales. The operation has approximately 640 employees. Ongoing restructuring and cost adjustments The restructuring measures announced in 2001 are proceeding according to plan. The changes refer mainly to operations in components and major appliances, and include plant shutdowns as well as rationalization of sales organizations and administration. Of the total provision of SEK 3,261m in 2001, approximately SEK 2,347m had been utilized as of September 30, 2002. Savings in the first nine months of 2002 amounted to approximately SEK 704m. Changes implemented to date have involved personnel cutbacks of approximately 3,450, of which approximately 2,380 in 2002. Provisions in 2001, Utilized Savings Estimated savings SEKm Provision up to Q3 up to Q3 2002 2003 Major appliances, 997 359 181 206 552 Europe Floor care, Europe 19 16 - 9 17 Garden products, 157 101 51 51 96 Europe Major appliances, 114 98 88 157 210 North America Major appliances, 40 25 32 38 47 Rest of the world Total Consumer 1,327 599 352 461 922 Durables Food-service 168 160 79 89 89 equipment Components 1,710 1,548 240 273 343 Other 56 40 33 33 36 Total 3,261 2,347 704 856 1,390 Parent company Net sales for the parent company, AB Electrolux, in the first nine months of 2002 amounted to SEK 4,972m (5,402). Income after financial items was SEK 3,388m (2,230), including dividends from subsidiaries in the amount of SEK 4,531m (2,955). Capital expenditure for the period was SEK 91m (93). Liquid funds at the end of the period amounted to SEK 8,838m (6,907), compared with SEK 4,281m at year-end 2001. Repurchase of shares The Electrolux Board has authorized repurchase of own shares in accordance with the authorization by the Annual General Meeting in April 2002. The AGM authorized the Board of Directors to acquire and transfer own shares during the period up to the next AGM. Shares of series A and/or B may be acquired on condition that after each repurchase transaction the company owns a maximum of 10% of the total number of shares. The purpose of the share repurchase program has been to ensure the possibility to adapt the capital structure of the Group and thereby contribute to increased shareholder value, or to use the repurchased shares in connection with the financing of potential acquisitions and the Group's option program. Following the reduction of the share capital of AB Electrolux in May 2002, the company's share capital consists of 10,000,000 A-shares and 328,712,580 B-shares, totaling 338,712,580 shares. After the reduction Electrolux owned 9,148,000 previously repurchased B-shares. During the third quarter Electrolux repurchased 6,774,252 B-shares. As of September 30, 2002, the company owned a total of 15,922,252 B-shares, equivalent to 4.7% of the total number of outstanding shares. The highest price paid during the third quarter was SEK 169 per share and the lowest price was SEK 151. The average price paid was SEK 160. Total number of Number of outstanding A- and Number of shares held by B-shares shares held other by shareholders Electrolux Number of shares as of 366,169,580 36,605,000 329,564,580 January 1, 2002 Cancellation of shares and reduction -27,457,000 -27,457,000 - of share capital, as of May 14, 2002 Number of shares after cancellation 338,712,580 9,148,000 329,564,580 of shares and reduction of share capital Repurchase of shares in the 3rd quarter - 6,774,252 - of 2002 Number of shares as of September 30, 338,712,580 15,922,252 322,790,328 2002 Outlook for the rest of 2002*) Market demand for the rest of the year is estimated to be flat or slightly down in both Europe and North America compared with the previous year. Notwithstanding the above expectations for market demand, and on the basis of the ongoing restructuring measures as well as the costs related to the new refrigerator line in the US in 2001, the Group should achieve a significant improvement in operating income and value created for the full year 2002, excluding items affecting comparability. Stockholm, October 22, 2002 Hans Stråberg President and CEO *) This statement is an adjustment to the outlook included in the Group's half-yearly report issued on July 18, 2002, which stated: "Market demand during the second half of 2002 is expected to be generally flat in both Europe and North America compared with the same period in the previous year. However, there is still uncertainty regarding consumer confidence and spending in the US. During both the third and fourth quarters comparison of industry shipments of appliances will be against strong quarters in 2001. Notwithstanding expectations for flat market demand, and on the basis of the ongoing restructuring measures, as well as the costs related to the new refrigerator line in the US in 2001, the Group should achieve an improvement in operating income and value created for the second half of 2002, compared with the same period in 2001. Operating income and value creation for the full year of 2002 is thus expected to show a significant improvement, excluding items affecting comparability." Factors affecting forward-looking statements This report contains "forward-looking" statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Such statements include, among others, the financial goals or targets of Electrolux for future periods and future business and financial plans. Actual results may differ materially from these goals and targets due to a variety of factors. These factors include, but may not be limited to the following; the success in developing new products and marketing initiatives, progress in achieving operational and capital efficiency goals, the success in identifying growth opportunities and acquisition candidates and the integration of these opportunities with existing businesses, progress in achieving structural and supply-chain reorganization goals, competitive pressures to reduce prices, significant loss of business from major retailers, consumer demand, effects of currency fluctuations and the effect of local economies on product demand. 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