ANNUAL REPORT 2013 SHAPING SMART CHANGE Table of contents 2013 Summary Shaping smart change 1 Letter from the President & CEO 2 Market environment and Hexagon’s strategy 4 Hexagon’s operations 10 Hexagon’s technologies at work 16 Research and development 26 Corporate social responsibility 28 Employees 30 The share 32 Corporate Governance report 36 Comments from the Chairman of the Board 43 Board of Directors 44 Group Management 46 Board of Directors’ report 48 Managing risks 53 Consolidated income statement 59 Consolidated comprehensive income statement 59 Consolidated balance sheet 60 Changes in consolidated shareholders’ equity 61 Consolidated cash flow statement 62 Parent Company income statement 63 Parent Company comprehensive income statement 63 Parent Company balance sheet 64 Changes in parent company shareholders’ equity 65 Parent company cash flow statement 66 Notes 67 Proposed allocation of earnings 93 Audit report 94 Quarterly income statements 95 10-year summary 96 Definitions 98 Information for shareholders 100 Hexagon AB is a Swedish public limited liability company with Corporate registration number 556190-4771. All values are expressed in Euros unless otherwise stated. The Euro is abbreviated EUR, thousands of Euro to KEUR, millions of Euro to MEUR, billions of Euro to bn EUR and million US dollars to MUSD. Figures in parentheses refer to 2012 unless otherwise stated. Data on markets and competition represent Hexagon’s own assessments unless otherwise stated. Assessments are based on most recent available facts from published sources. Shaping smart change Global megatrends are pushing critical industries to rise to challenges. From safety and infrastructure to resources and manufacturing, the opportunity to address these global challenges begins with positively altering the course of change. For Hexagon, that means generating the information customers need to act with greater intelligence in a way that maximises its usefulness in real time and positions decision makers close to the action. Where they can act fast, act smarter and get by with less – less effort, less time, less risk, less resources and less waste. Whether helping to feed the expanding population, protect scarce resources, maintain infrastructure or keep people safe, customers using Hexagon technologies are making a difference every day across the globe. That’s shaping smart change. At its core, shaping smart change is about solving problems that matter to the industries that are essential to our world. Hexagon Annual Report 2013 1 2013 SUMMARY Hexagon at a glance Who we are Industries we serve Leading provider of design, From aerospace, automotive, measurement and construction and transportation to visualisation technologies energy, public safety and defence Profitability Sales % 21 per cent operating margin € 2.4 bn EUR Reach R&D Focus 14 000 employees in more 11 per cent of net sales than 40 countries invested in R&D Hexagon technologies at work around the world When it comes down to what we do and how we do it, Hexagon is about positively altering the course of change. Digital depictions that fuse reality with computer-generated data help customers see things exactly as they are, making their target – their purpose – more attainable. From sensor and metrology systems that capture and manage location- and spatial-based information to software solutions that help build and maintain vital infrastructure and derive actionable intelligence from “big data” – Hexagon technologies are at work around the world, optimising processes and increasing productivity across industries essential to our future. In short – it’s not what our technology does, but what our customers do with our technology that makes a difference. At Hexagon, one thing is clear: the key to success is not to build solutions in a vacuum, but to create value-driven solutions. The value is not just in the technology utilised, but in the purpose it serves. Another year of profitable growth % KEY FIGURES 2013 2012 % Net sales, MEUR 2,429.7 2,380.0 51 +5 Operating earnings (EBIT1), MEUR 507.7 484.9 5 Net sales Net earnings, MEUR 371.2 351.1 6 % Earnings per share, EUR 1.04 0.99 5 21 Share price, SEK 203 163 25 Operating Net debt, MEUR 1,488.7 1,638.8 -9 margin 1 Adjusted to fixed exchange rates and a comparable group structure, i.e. organic growth. Organic growth of 5 per cent despite challenging macroeconomic environment The operating margin of 21 per cent underscores the shift in business model towards software-centric solutions Strong cash flow generation enabled increased expansion activity, evidenced by nine acquisitions completed in 2013 Hexagon’s operations Reported across three application areas: GEOSYSTEMS METROLOGY TECHNOLOGY Measurement and Stationary and Portable Engineering and Geospatial Positioning Systems Industrial Metrology Systems Software Solutions per cent of per cent of per cent of 36 net sales 31 net sales 33 net sales LETTER FROM THE PRESIDENT & CEO DEAR SHAREHOLDERS, 2013 was a year in which Hexagon struck a balance between staying the course and positioning for the future. We know our continued success depends on how well we leverage our technology, leadership and expertise to create new and continued value for our customers. But what we are most proud of is that we did what we set out to do – we delivered for our shareholders, customers and partners. EXPANDING FROM THE CORE We formed a new group, Hexagon Solutions, to better guide the direction and expansion of our Smart Solutions portfolio. Comprised of targeted combinations of our geospatial and industrial technologies, the value to the customer goes well beyond what each stand-alone product offers. With emphasis on efficient and effective management on a global level, the group is well positioned to ensure that we fully leverage the synergistic opportunities across our businesses. We split Intergraph’s geospatial technology portfolio from Intergraph SG&I, creating Hexagon Geospatial, a new group that will serve multiple internal and external customers. We took these actions to better leverage our strengths as an integrated technology company, reinforcing our own business success, as well as the competitiveness of our customer base. GROWTH DESPITE HEADWINDS On the whole, the 2013 global economy was slightly disap- pointing, marked by problems in Europe, political distrac- tion in the USA and a weaker first half in China. Emerging markets had a tough year, hit by slow growth, market insta- bility and social unrest, while mature markets like the USA, Europe and Japan saw modest recovery. China shifted from its traditional reliance on exports and investment towards a slower-growing, but consumption-driven, economy. Despite macroeconomic headwinds, 2013 was a very solid year for us, with sales amounting to a record 2.4 bn EUR and EBIT margin of 21 per cent. We supported core business activities and our commitment to strengthen our product portfolio and bolster our presence in key markets through multiple acquisitions. We added deep- and shallow-water bathymetry and coastal topography capabilities with Air- borne Hydrography AB. We welcomed Devex, a Brazilian company with leading mine management software solutions. We also added several distributors to our footprint including Navgeocom, one of the largest distributors for Geosystems in the Russian Federation, Manfra, a Geosystems distributor in South America, and Pixis, a Chilean distributor of Intergraph solutions. COMPETING WITH PURPOSE Today, practically everything can be captured and mea- sured digitally. This digital footprint provides a wealth of data, but often leaves organisations challenged to make sense of it all. It’s not uncommon to be data rich, yet infor- mation poor. Never has it been more important to provide the means and support to channel big data in a way that maximises its usefulness in real time so that organisations can deliver the right information to the right stakeholder – when and where it’s needed. In the face of escalating global challenges, that is a crucial part of technology inno- vation and at the core of what we do. Letter from the President and CEO 2 Hexagon Annual Report 2013 Together, over 14,000 Hexagon employees work on behalf of our shareholders to achieve our financial targets and develop intelligent solutions that position Hexagon to lead into the future. To view an augmented reality experience of President and CEO Ola Rollén as he recaps Hexagon’s 2013 activity and discusses the future of the company visit Hexagon.com/activate. In 2013, we introduced Leica Pegasus:One, an intuitive hand over. We also introduced SmartPlant Fusion, a solution mapping solution that mobilises a customer’s existing for accessing, organising and managing unstructured legacy scanners, making the future of transportation-related engineering information, marking Intergraph’s first foray into asset management easier and more efficient. Customers brownfield legacy information acquisition. can take their business mobile – GIS tagging road signs, mapping transportation corridor clearance or documenting With regard to our Smart Solutions portfolio, several gained city compliance for outdoor advertising – all at the speed traction in 2013. We received our first orders for Smart of traffic. Modular Assembly, an innovative way to link design infor- mation to the build workflow for large-scale construction, Through an agreement with Aibotix (and the later acquisi- and Smart Agriculture, a comprehensive web-based soft- tion of the company in 2014), a manufacturer of intelligent ware solution to optimise the utilisation of land, water, multicopter systems for high-efficiency aerial applica- fertilisers, pesticides, seeds and other farming resources. tions, we now offer an end-to-end solution for the pro- We also launched several Smart H2O pilot and production fessional inspection and mapping market. It is ideal for projects across China and Russia. Smart H2O is our com- difficult infrastructure inspections – such as power lines, prehensive water infrastructure management solution, bridges and dams – as well as locally focused mapping designed to improve the construction, operability and tasks of buildings or any vertical structure.