Interim report, Nine months ended 30 September 1998

SANDVIK AB -Interim report, Nine months ended 30 September 1998 - Invoiced sales rose 33%; excluding acquisitions and currency effects, sales were up 3%. - Continued strong operating profit, particularly for Sandvik Tooling. - Profit after financial items totaled SEK 3,102 M (3,150). Lower order intake for Sandvik Specialty Steels. Forecast for 1998: Somewhat lower profit, compared with 1997, due to further weakened business climate. Market conditions and sales The business climate deteriorated more rapidly and notably than expected during the third quarter. The rate of increase in industrial production in OECD countries, calculated as annual growth, declined to 2.5%. Western Europe and NAFTA posted continued relatively high growth, while the business climate in many countries in South America, Africa and Asia was in a downturn phase, with declining industrial production. Conditions took a dramatic turn in Russia, where the business climate became particularly weak. Prices for oil and metal raw materials continued to fall, causing negative effects on important customer segments within the mining and steel industries as well as in oil and gas operations. Sandvik's order intake amounted to SEK 31,620 M (24,395) in the first nine months of 1998, an increase of 30% compared with the corresponding period a year earlier. At fixed exchange rates and for comparable units, order intake was unchanged for the period, but declined 7% in the third quarter. Invoiced sales totaled SEK 31,270 M (23,440), an increase of 33%. Sales by comparable Group units at fixed exchange rates increased 3% and remained unchanged in the third quarter. Sales in Europe by comparable units at fixed exchange rates rose 9%. Sales remained unchanged in the NAFTA region, where the favorable trend for Sandvik Tooling was sustained, while sales by other business areas stagnated or declined. Sales at fixed exchange rates in South America declined 6%. Sales by comparable units in Asia/Australia were about SEK 600 M lower than a year-earlier (a decline of 16%). Sales by newly acquired units in the first three quarters of 1998 amounted to SEK 7,650 M. These include Tamrock, which reported an increase of 2%, and Kanthal, a decline of 6%, at fixed exchange rates and compared pro forma with the first nine months of last year. Sales by acquired units in the Asia/Australia region were down, pro forma, SEK 400 M. Earnings (see appendix 1) Q1-3 Q1-3 Change, % 1997 1998 Invoiced sales, SEK M 23 440 31 270 +33 Operating profit, SEK M 3 220 3 556 +10 as % of invoicing 14 % 11 % Profit after financial 3 150 3 102 -2 items, SEK M as % of invoicing 13 % 10 % Net profit, SEK M 2 063 1 643 -20 as % of invoicing 9 % 5 % Operating profit in the first nine months of 1998 amounted to SEK 3,556 M (3,220), 10% higher than the year-earlier period. Operating profit benefited from higher volumes, particularly in Sandvik Tooling, and increased productivity. However, lower prices for steel products and continued pressure on nickel prices had negative effects of about SEK 300 M on operating profit. Negative effects on operating profit caused by financial crises in Asia and Russia are estimated at approximately SEK 200 M. Profit after financial income and expenses amounted to SEK 3,102 M (3,150). The net of financial items after share redemption and companies acquired in 1997 declined as anticipated, amounting to an expense of SEK 454 M (expense: SEK 70 M). Net profit for the nine-month period totaling SEK 1,643 M (2,063), includes, as in the six-months report 1998, an extra tax charge of SEK 335 M related to rulings in tax cases from the 1980s. Since there are strong precedents involved, Sandvik has submitted motions for retrial to the Supreme Administrative Court of Sweden for two of the cases. Earnings per share amounted to SEK 6.35 (7.60). Earnings per share for the most recent 12 months totaled SEK 8.90 (10.15 for full-year 1997). Return on net assets during the most recent 12 months amounted to 17.4% (17.7% for full- year 1997). Return on shareholders' equity was 13.3% (14.3% for full-year 1997). Excluding the extra tax expense, earnings per share would have totaled SEK 10.20 with a return on net assets of 15.2% for the most recent 12 months. The parent Company reported invoiced sales of SEK 9,454 M (9,089) and operating profit of SEK 990 M (951). [REMOVED GRAPHICS] Business areas (see appendix 2) Sandvik Tooling's invoiced sales rose by 16% to SEK 9,078 M. The increase for comparable units at fixed exchange rates was 7%. Business development remained favorable in Europe and the NAFTA region. Operating profit improved to SEK 1,965 M on the strength of high invoicing and productivity, yielding a margin of 22% (21). A comprehensive restructuring of production was implemented as planned within Precision Twist Drill in the U.S. which had negative effects on sales and operating profit during the third quarter. Sandvik Mining and Construction's invoiced sales amounted to SEK 6,965 M. The increase for comparable units at fixed exchange rates was 1%. Demand from the construction sector remained favorable, but declined in the mining industry. Operating profit amounted to SEK 276 M, corresponding to 4% of invoicing. A decision has been made to expand and accelerate the ongoing integration between Tamrock and Sandvik Rock Tools. A new organization has been established and other structural measures identified. In addition to previous provisions, costs of SEK 100 M were charged during the third quarter. When the measures are fully implemented within 2-3 years, efficiency enhancement and coordination gains are expected to total at least SEK 400 M per year. Sandvik Specialty Steels' invoiced sales amounted to SEK 8,765 M, with favorable development for Sandvik Steel but a decline in sales by Kanthal, mainly of products for the electronics industry. Prices remained lower than a year earlier, due mainly to reduced prices for alloys. Operating profit amounted to SEK 708 M, or 8% of invoiced sales. The operating profit of associated companies also declined substantially. Kanthal reported lower earnings. A decline in order intake by Sandvik Specialty Steels will lead to lower invoiced sales in the next few quarters. Sandvik Hard Materials reported higher invoiced sales in China, Taiwan, Australia and other markets. Sales invoiced by Sandvik Saws and Tools were down 5% due to weaker sales in Southeast Asia. Invoicing by Sandvik Process Systems was down 6% compared with the first nine months of 1997, but the order backlog remains satisfactory. Capital expenditures Group investments in property, plant and equipment amounted to SEK 1,991 M (1,486). Financing and liquidity Interest-bearing liabilities less liquid funds yielded net debt of SEK 8,525 M (7,160 at 31 December 1997). Liquid funds amounted to SEK 2,033 M (2,494) and loans totaled SEK 7,570 M (6,976). Cash flow from operations amounted to SEK 3,377 M and SEK-1,069 M after dividends and net investments. The number of shares at 30 September 1998 was 258,696,000. Shareholders' equity per share was SEK 68.20 (67.30 at 31 December 1997) and the equity/assets ratio was 45% (47). Personnel The number of employees within the Group at 30 September 1998 was 38,358 (38,406 at 31 December 1997). The Board of Directors intends to propose a program of convertible debentures for employees in the beginning of 1999. Forecast for 1998 Since the business climate has deteriorated faster and more notably than previously anticipated, it is estimated that profit after financial items will be somewhat lower than corresponding earnings in 1997. Sandviken, 3 November 1998 SANDVIK AB; (publ) Clas Åke Hedström President and Group CEO Appendices: 1.Group summary 2.Invoicing and operating profit This report on the first three quarters of 1998 has not been the subject of any specific examination by the Company's auditors. The next report will be released on 18 February 1999 and will cover the full-year 1998. For additional information, please call +46 (0)26-26 10 01. Group in summary, SEK M Q1-3 Full- Q1-3 year Income statement 1997 1997 1998 Invoiced sales 23 440 34 119 31 270 Cost of goods sold -15 -22 -20 509 926 626 Gross profit 7 931 11 193 10 644 Selling, general and administrative -4 934 -7 111 -6 895 expenses Share in profits in associated companies 303 300 11 Other operating income and expenses -80 -12 -204 Operating profit 3 220 4 370 3 556 Financial income and expenses, net -70 -165 -454 Profit after financial income and 3 150 4 205 3 102 expenses Taxes -967 -1 283 -1 331 Minority interest -120 -197 -128 Net profit 2 063 2 725 1 643 Consolidated balance sheet Fixed assets 16 506 17 481 18 683 Inventories 8 087 10 039 10 626 Current receivables 8 200 10 047 9 730 Liquid assets 2 003 2 494 2 033 Total assets 34 796 40 061 41 072 Shareholders' equity 16 670 17 414 17 635 Minority interests 1 095 1 169 865 Interest-bearing provisions and 7 398 9 654 10 558 liabilities Non-interest-bearing provisions and 9 633 11 824 12 014 liabilities Total provisions, liabilities and 34 796 40 061 41 072 shareholders' equity Consolidated funds statement Profit after financial items 3 150 4 205 3 102 Reversal of depreciation 1 045 1 486 1 459 Other -233 -258 -39 Accrued taxes -738 -905 -1 045 Change in working capital 238 456 -100 Net financing from operations 3 462 4 984 3 377 Net investments -3 994 -5 089 -2 250 Dividends -1 926 -1 930 -2 198 Net cash flow -2 458 -2 035 -1 069 Key ratios Order intake, SEK M 24 395 34 603 31 620 Earnings per share*, SEK 10.00 10.15 8.90 Return on net assets* 17.6 17.7 17.4 % % % Return on shareholders' equity* 14.0 14.3 % 13.3 % % *Rolling 12 months. Invoiced sales by market area, SEK M Q3 Q1-3 Q4 Full- Q1 Q2 Q3 Q1-3 Change year 1) 1997 1997 1997 1997 1998 1998 1998 1998 % % EU 3 203 9 923 3 876 13 4 320 4 107 3 806 12 233 23 9 (exclud 799 ingSweden ) Sweden 453 1 562 669 2 231 665 701 417 1 783 13 7 ) Rest 405 1 231 657 1 888 623 634 604 1 861 51 13 of Europe Europe 4 061 12 716 5 202 17 5 608 5 442 4 827 15 877 25 9 ) total 918 NAFTA 2 006 5 439 2 756 8 195 2 700 2 730 2 627 8 057 49 0 ) South 444 1 217 486 1 703 504 481 555 1 540 27 -6 America Africa, 197 575 412 987 486 429 452 1 36713 -6 Middle 8 East 2 Asia, 1 250 3 493 1 823 5 316 1 472 1 397 1 560 4 429 27 -16 ) Australia Group 7 958 23 440 10 34 10 10 480 10 020 31 270 33 3 total 679 119 770 Change compared with year earlier excluding currency effects and acquisitions. Change including currency effects but excluding acquisitions. Adjusted after the six-months report. Invoiced sales by business area, SEK M Svk 2 615 7 830 2 973 10 3 154 3 063 2 9 078 16 7 4) Tooling 803 861 Svk 597 1 673 1 909 3 582 2 342 2 234 2 389 6 965 316 1 Mining and Construct 4) ion Svk 2 597 7 605 3 175 10 3 120 3 075 2 570 8 765 15 2 Specialty 780 4) Steels Svk Hard 311 987 374 1 361 374 343 348 1 065 8 6 Materials Svk Saws 693 2 076 711 2 787 709 632 661 2 002 -4 -5 and Tools Svk 440 1 116 757 1 873 245 332 448 1 025 -8 -6 Process Systems Seco 698 2 126 763 2 889 819 792 737 2 348 10 9 Tools Group 7 27 17 44 7 9 6 22 / / activitie s Group 7 958 23 10 34 10 10 480 10 020 31 270 33 3 total 440 679 119 770 Operating profit by business area, SEK M 4) Svk Tooling 537 1 637 457 2 094 653 705 607 1 965 Svk Mining and 46 129 105 234 110 132 34 276 4) Construction Svk Specialty 219 723 198 921 300 248 160 708 4) Steels Svk Hard 36 107 41 148 44 55 23 122 Materials Svk Saws and 62 171 68 239 69 32 39 140 Tools Svk Process 17 37 43 80 10 10 16 36 Systems Seco Tools 138 401 174 575 194 170 135 499 Group 65 15 64 79 -95 -55 -40 -190 5) activities Group total 1 120 3 220 1 150 4 370 1 285 1 297 974 3 556 Operating profit by business area, % of invoicing 4) Svk Tooling 21 21 15 19 21 23 21 22 Svk Mining and 6 7 5 6 1 4 4) Construction Svk Specialty 8 9 6 9 10 8 6 8 4) Steels Svk Hard 12 11 11 11 12 16 7 11 Materials Svk Saws and 9 8 10 9 10 5 6 7 Tools Svk Process 4 3 6 4 4 3 4 4 Systems Seco Tools 20 19 23 20 24 22 18 21 Group total 14 14 11 13 12 12 10 11 Precision Twist Drill included from 1 Sept. 1997, Tamrock from 1 Nov. 1997 and Kanthal from 1 July 1997. Including Tamrock, consolidated as an associated company until 31 Oct. 1997. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1998/11/03/19981103BIT00170/bit0001.doc http://www.bit.se/bitonline/1998/11/03/19981103BIT00170/bit0002.pdf