Measurement Technologies Business

Annual Report 2007

Hexagon’s mission: To measure objects To position objects precision in everything To update objects To time processes Contents

Message from the CEO During 2007, Hexagon’s product oﬀering was strengthened through proprietary product development and 2 acquisitions. Earnings per share increased by 36 per cent. 16

Measurement technology and world-class services Hexagon’s measurement systems and services enhance our customers’ eﬃciency and productivity, increase quality and generate signiﬁcant cost savings in the production process. 22

Effective innovation generates results Successful product development is a prerequisite for companies intent on leading their industries. Hexagon has approximately 600 employees working on the development of technologies for the future. 26

Global expansion and local expertise As a local player, Hexagon capitalizes on its understanding of each particular geographical market and customer requirements, knowledge that is essential to eﬀorts to generate healthy proﬁtability on a sustainable basis.

1 2007 in brief 24 Polymer operations 50 Directors’ Report 85 Audit report 2 Message from the 26 China project 55 Consolidated income 86 Eight-year summary Chief Executive Officer 28 Corporate responsibility statement 88 Definitions 4 Strategic orientation 32 Caterpillar project 56 Consolidated balance sheet 89 Shareholder information 8 Acquisitions 34 The Hexagon share 58 Change in Group equity 10 Terminal 5 project 38 Risk management 59 Consolidated cash flow 12 Market description 40 Corporate governance statement 14 NASA project 48 Board of Directors, 60 Parent Company accounts 16 Products and Services Senior management 62 Accounting principles 22 Research and Development 66 Notes 84 Proposed allocation of earnings

This is Hexagon

Hexagon is a global measurement Hexagon’s business concept is to de- technologies group with strong market velop and market leading measurement positions. technologies products and services to measure in one, two or three dimensions, In 2007, Hexagon had net sales of position and update objects and time 14 587 MSEK. The Group has 10 100 processes. employees in 36 countries worldwide. The Hexagon share is quoted among Hexagon’s vision is to be a market Large Cap companies on the Nordic leader, ranking number one or two in Exchange and the SWX Swiss Exchange. each strategic business, in order to generate growth and shareholder value.

Cover: The altitude of Mont Blanc, the highest mountain in Europe, is constantly changing. The changes are part of the natural life of a glacier, but also the results of climate changes. Surveyors discovered that its altitude changed from 4 808.75 meters in 2005 to 4 810.90 meters in September 2007. The measurements were taken using the Hexagon measurement system Leica GPS1200.

, prim tools 17% 24% 59%

EMEA Region* Americas Region* Asia Region* In the EMEA region, Hexagon’s organic In the Americas, Hexagon’s organic growth In the Asia region, Hexagon’s organic growth rate in net sales was 13 per cent rate in net sales was 12 per cent in 2007. growth rate in net sales was 30 per cent in 2007. Th e rate of activity was favou- Demand beneﬁ ted from an increase in in 2007. During the year, Hexagon rable in engineering and construction infrastructural investments, geographical further expanded its operations in industries in Western and Eastern Euro- information systems (GIS), mining, aero- China, via acquisitions and the esta- pe and in the Middle East. Hexagon is space, construction, electronics and medi- blishment of new production facilities. investing in the expansion of distribu- cal equipment technology. Hexagon is In parallel with China, India is beco- tion and service activities in the EMEA’s investing in service and distribution activi- ming an increasingly important market new, fast-growth segments and geograp- ties and in increasing the pace at which for Hexagon. hical areas. new products are launched. * EMEA – Europe, Middle East and Africa. Americas – North, South and Central America. Asia – Asia, Australia and New Zealand.

Countries in which Hexagon has established operations, production facilities, research and development and/or sales ofﬁ ces. 2007 in brief

Water depth analysis near the San Diego coastline. 2007 in brief

2007 was a record ﬁnancial year, with considerable Key Figures organic growth, high earnings and a strong cash ﬂow. 2007 2006 Change

A total of 18 companies, with annual sales of approxi- Net sales, MSEK 14 587 13 469 15%1 mately 1 400 MSEK, were acquired in order to strengthen Operating earnings (EBIT1), MSEK 2 421 1 827 33% Hexagon’s measurement technologies business. Earnings before tax, MSEK 2 056 1 618 27% Net sales increased to 14 587 MSEK (13 469), corresponding to organic growth of 15 per cent. Net earnings, MSEK 1 811 1 280 41% Operating margin, % 16.6 13.6 3.0 Earnings before tax increased by 27 per cent to 2 056 MSEK (1 618). Return on equity, % 19.5 17.0 2.5 Earnings per share rose 36 per cent to 6.79 SEK (5.01). Return on capital employed, % 14.3 12.2 2.1 The share price increased by 39 per cent, and was Equity ratio, % 40.3 46.4 – 6.1 135 SEK (97) at year-end. Earnings per share, SEK 6.79 5.01 36% The Board of Directors proposes that the dividend to Share price, SEK 135 97 39% shareholders be increased 41 per cent to 2.35 SEK (1.67) Average number of employees during the year 8 406 7 862 7% per share. A extraordinary dividend of shares of the poly- 1 mer business is also proposed. Based on ﬁxed exchange rates and a comparable structure (organic growth).

MSEK MSEK % SEK 2007 14 587 2007 2 421 2007 16.6 2007 6.79 2006 13 469 2006 1 827 2006 13.6 2006 5.01 2005 9 637 2005 923 2005 9.6 2005 3.14 2004 8 256 2004 686 2004 8.3 2004 2.28 2003 7 103 2003 480 2003 6.8 2003 1.22 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 Net sales Operating earnings Operating margin Earnings per share In 2007, net sales increased to 14 587 Operating earnings rose 33 per cent to The Group’s operating margin was 16.6 per Earnings per share rose 36 per cent to MSEK, corresponding to organic growth of 2 421 MSEK in 2007. cent. Operating margin of the measurement 6.79 SEK in 2007. 15 per cent. technologies business was 19.6 per cent.

Hexagon Annual Report 2007 1 Message from the Chief Executive Officer

Sights set on continued growth

During 2007, we strengthened our product offering and our Strategic acquisitions and successful development operations in various parts of the world through product The past year was a very intensive period, not the least on the development and acquisitions. We increased our earnings acquisitions front. We acquired a total of 18 companies in order per share by 36 per cent and created a stable platform for to supplement our measurement technologies business. This future growth. mainly involved the acquisitions of strategically important technologies or acquisitions to enhance our distribution activities in Hexagon pursues a philosophy based on professionalism and a number of geographical markets. In addition to measurement trust. Success can only be achieved with the help of committed technologies companies, we also acquired a rubber compound- and dedicated employees. Hexagon’s slightly more than 10 000 ing company in order to strengthen our polymer operations in employees worldwide represent so much more than just a multi- the US market. tude of companies that engage in business on a parallel basis. It However, our business is not only being developed through is a global network of committed people, all working towards the acquisition of companies; we have also devoted considerable the same overall objective – creating value for Hexagon’s share- energy to strengthening our existing product portfolio through holders. Regardless of whether we are employed in China, in-house product development in the growth areas we have iden- Germany, the US, Australia, Russia or Singapore; or whether tified in the measurement technologies sector. During the past we work on the shop floor, in research and development or in year, we launched about a hundred new products. We devel- Hexagon’s management team, we are all contributing to the oped, for example, a measuring machine in China and new con- Group’s success. Everyone is contributing to our joint success, cepts within the machine control market segment. Considerable and the 2007 financial year was a period of outstanding achieve- effort was also focused on the development projects initiated as a ments. result of the acquisition of Leica Geosystems. The first of these In this Annual Report, we have chosen to highlight and de- products, which combines Hexagon’s and Leica Geosystems’ scribe in greater detail a number of the many exciting projects technologies, will be launched in stages starting in 2008. in which Hexagon participated during the year. The projects A powerful product portfolio requires an efficiently function- involved participation in the construction of the new Terminal 5 ing distribution network in geographical regions that are show- at London Heathrow Airport in the UK, our cooperation with ing growth. During the year, we established operations in six NASA in the development of the new James Webb Space Tele- new geographical markets. A favourable geographical mix is of scope, our initiatives in various parts of China and the measure- major strategic importance in efforts to balance slackening ment services we are performing at Caterpillar’s production economic conditions in certain regions with better demand in plant in Illinois, USA. We can be particularly proud of these others. Eastern Europe, the Middle East, South America and projects, which demonstrate Hexagon’s extensive expertise and Asia are regions that are growing in terms of their share of the broad product offering. Group’s total sales. Efforts to strengthen our geographical positioning included A record year financially inauguration of a number of production units during the year. Our ambition is to increase earnings per share by at least 15 per In March, we inaugurated our second production plant for cent annually. That is our overall financial objective. In 2007, we measurement instruments in China, where we also established increased our earnings per share by a full 36 per cent, thus creat- two production plants for our polymer operations: the rubber ing value for us shareholders. compounding unit was opened in April and the wheel-produc- Hexagon’s sales increased to 14 587 MSEK in 2007, corre- tion unit in November. Polymers’ rubber compounding unit in sponding to organic growth of 15 per cent. Earnings before tax Mexico was inaugurated in October and, while writing this increased 27 per cent to 2 056 MSEK. It is extremely gratifying message, we are completing the construction of a new gasket that Hexagon’s organic growth continues to rise, while we main- plant in China, which is scheduled to be deployed in August tain our high profitability and strong cash flow. 2008.

2 Hexagon Annual Report 2007 Message from the Chief Executive Officer

Ola Rollén at a construction site in Nacka Strand, Sweden. The measurement instrument in the background is a total station for construction and civil engineering measurements.

Hexagon is facing an exciting future In a slightly longer term, our goal is to represent 30 per cent of During the year, Hexagon’s Board of Directors decided to pro- the total global measurement technology market, which is grow- pose that the polymer operations be listed separately on the ing by approximately 8 per cent annually and is currently worth Nordic Exchange. According to this proposal, Hexagon will an estimated 100 billion SEK. Our ambition entails almost trip- operate as a dedicated measurement technology company as of ling our current market share of 11 per cent by means of organic the summer of 2008. Accordingly, in the years ahead, we will be growth and acquisitions. We will also expand our operations able to focus our resources on achieving rapid and profitable into exciting new and rapidly expanding segments of the market expansion of our measurement technology business through for measurement technology. We will continue to compete in organic growth and a continued high rate of acquisitions. the development of future technologies in the field of measure- In December, new financial objectives were announced for ment, positioning, updating and time optimization. Hexagon as a dedicated measurement technology company. Up The current year has begun well and by the end of 2008, we to 2010, the aim is to double our sales to 20 billion SEK and to are counting on again achieving our financial objective of growth raise the operating margin to 20 per cent. Although the objec- in earnings per share by at least 15 per cent. tives set for our organization are ambitious, the plan, which is called “20-20-10” internally, has a solid foundation based on an- Nacka Strand, Sweden, March 2008 ticipated developments throughout the Group. Our employees’ commitment will provide the organization with the power Ola Rollén necessary for achieving our objective for 2010. President and Chief Executive Officer

Hexagon Annual Report 2007 3 Strategic orientation

Doubling of core business in three years

Hexagon’s ultimate objective is to generate long-term Hexagon’s vision and operational objectives favourable value growth for the shareholders. The aims Hexagon’s vision is to be a market leader, number one or number of the strategic and financial plan are to strengthen the two, in selected technical or geographical segments. To realize Group’s market position as a world-leading measurement this vision, the following operational objectives must be fulfilled: technology company and to deliver long-term profitability and sustainable competiveness. Most cost-efficient company in the sector A competitive cost structure is a necessity, not least in order to Hexagon’s objective is to create long-term favourable value more easily handle fluctuations in demand and changes in cur- growth for its shareholders. In 2007, this entailed continued de- rency exchange rates. Cost-efficiency is also a prerequisite for velopment of the business in order to further enhance Hexagon’s being the innovator in the sector. position as a world-leading measurement technology company. The measurement technology field offers considerable potential The sector innovator for increasing market share through establishment in new geo- Hexagon’s innovative capacity is of vital significance when cus- graphical markets and in new application areas, combined with tomers choose a supplier. Since a market-leading position brings opportunities to increase the total market by introducing new with it a responsibility to develop the sector, investments in re- applications for existing products and systems. search and development are a high priority within Hexagon’s As part of the streamlining of operations, the Hexagon Board operations. of Directors decided during 2007 to propose to Hexagon’s Annual General Meeting the separate listing of the polymer The sector’s best leadership business on the Nordic Exchange in June 2008. This would Management know-how and experience are decisive factors that mean that Hexagon would operate as a dedicated measurement are essential for being able to operate successfully and realize the technology company as of the second half of 2008. objectives in the day-to-day business.

Vision To be a market leader, number one or number two,

in each strategic business to be able to generate Objective: Objective: growth and shareholder value. 20 000 MSEK 20%

MSEK % Business concept 2007 14 587 2007 16.6 To develop and market leading technologies and 2006 13 469 2006 13.6 2005 9 637 2005 9.6 services to measure in one, two or three dimen- 2004 8 256 2004 8.3 2003 7 103 2003 6.8 sions, to position and update objects and to time 03 04 05 06 07 10 03 04 05 06 07 10 processes. Net sales Operating margin In 2007, net sales increased to 14 587 In 2007, the operating margin increased MSEK, corresponding to organic growth of by three percentage points to 16.6 per 15 per cent. According to Hexagon’s finan- cent. According to the financial plan, the cial plan, sales shall amount to 20 billion operating margin at the end of 2010 shall SEK at the end of 2010. be up to 20 per cent.

4 Hexagon Annual Report 2007 Strategic orientation

When completed in 2008, Burj Dubai will be the world’s tallest building. Hexagon has together with the Chief Surveyor of Burj Dubai, developed a unique monitoring system. A complex combination of GPS antenna/receivers, Total Stations, Continuously Operating GPS Reference Stations and Software together with Leica Nivel220 dual-axis precise clinometers, accurately determines and analyzes displacement of the tower alignment from the vertical axis.

Rapid decision-making processes core business from nearly 17 per cent in 2007 to 23 per cent and Short and rapid decision processes and time-eﬃcient implemen- the acquisition of operations with an average operating margin tation enhance competitiveness and raise organizational capacity. of 15 per cent.

Hexagon’s 20-20-10 financial plan MSEK Outcome 2007 Target 2010 Since Hexagon succeeded in fulfilling the financial objectives set Non-core business 3 650 0 for the end of 2008 as early as 2007, Hexagon decided to prema- Core business 10 937 20 000 turely adjust its financial objectives. At the Capital Markets Day Sales 14 587 20 000 held in December 2007, Hexagon presented its new financial Operating margin, % 16.6 20 plan. Under the plan, the Group, as a dedicated measurement technology company, aims to achieve annual sales of 20 billion SEK and an operating margin of 20 per cent by the end of 2010. Financial objectives Hexagon currently has a stable platform for future organic Hexagon communicates the following financial objectives: growth. The Group is actively monitoring a large number of companies that represent potential acquisition candidates, so Annual increase in earnings per share of >15 per cent that it will also be able to grow non-organically. Hexagon’s sales Hexagon’s overall financial objective is to increase earnings per objective of 20 billion SEK is sought to be achieved through share by at least 15 per cent annually. Strong growth in earnings organic increases in the core business from nearly 11 billion SEK per share is the best way to produce favourable long-term return in 2007 to 16 billion SEK and the acquisition of companies with on shareholder investment. In 2007, Hexagon increased its earn- total sales of at least 4 billion SEK. ings per share by 36 per cent. Hexagon’s objective of a margin of 20 per cent is soughts to be achieved through an increase in the operating margin on the

Hexagon Annual Report 2007 5 Strategic orientation

An equity ratio between 25 and 35 per cent Net debt < 3.5 times EBITDA Hexagon shall strive to minimize the weighted average cost of Hexagon’s expansion rate is limited by the restrictions imposed capital (WACC) for the company’s financing. A strong equity by its financiers, which entail that net debt may not exceed 3.5 ratio provides opportunities for using loans to finance parts of times EBITDA, measured on a 12-month pro forma basis. At the future expansion. At the close of 2007, Hexagon had an equity close of 2007, the Group’s net debt amounted to 2.8 times ratio of slightly more than 40 per cent. The new issue effected EBITDA. during the spring of 2006 strengthened Hexagon’s equity ratio. Growth strategy A positive cash flow over a business cycle To succeed in doubling the measurement technology business’s A positive cash flow creates freedom of action for long-term ex- sales within a three-year period, in accordance with the financial pansion. It also allows Hexagon’s shareholders to govern opera- plan, growth through a combination of acquisitions and organic tions on the basis of a lower required equity ratio than if the cash growth will be required. Hexagon works on the basis of four flow was uncertain. In 2007, cash flow from continuing opera- growth strategies: tions rose 42 per cent to 2 427 MSEK. Marketing existing products in existing markets Return on capital employed > 15 per cent With a focus on core operations, growth is created through The long-term required return on capital employed over a busi- product modifications and acquisitions of competitors, which ness cycle amounts to more than 15 per cent annually. The re- creates cost benefits and thus enhanced competitiveness through quired return has been set based on an assumption of long-term the rationalization of the overall structure. The challenge is to risk-free interest of around 5 per cent and a risk premium of avoid becoming too comfortable with the existing product port- some 10 per cent. In 2007, the return on capital employed was folio and thus too slow in discovering new technologies in the 14 per cent. market.

Objective: Objective: Objective: Objective: >15% increase Positive 25–35% >15%

SEK MSEK % % 2007 6.79 2007 2 027 2007 40 2007 14 2006 5.01 2006 1 115 2006 46 2006 12 2005 3.14 2005 764 2005 30 2005 11 2004 2.28 2004 642 2004 34 2004 13 2003 1.22 2003 440 2003 39 2003 11 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07

Earnings per share Cash flow Equity ratio Return on capital employed Earnings per share in 2007 amounted to In 2007, cash flow from operating activi- At the end of 2007, the equity ratio was 40 In 2007, the return on capital employed 6.79 SEK. This increase of 36 per cent ties rose to 2 027 MSEK. This corresponds per cent. The new issue implemented in the amounted to 14 per cent, which is close comfortably exceeded the target of an to cash flow of 7.64 SEK per share. spring of 2006 strengthened the equity ratio. to the long-term return requirement of annual increase in earnings per share of at A strong equity ratio provides the ability to raise more than 15 per cent annually over a least 15 per cent. loans for continued expansion of operations. business cycle.

6 Hexagon Annual Report 2007 Strategic orientation

In 2007 Leica TITAN was introduced. This dynamic online solution allows users to share geospatial data, web services and location-based content to a variety of applications.

Introducing new products in existing markets Hexagon’s long-term ambition Th rough successful research and development and sound know- Hexagon estimates that the market for measurement technolo- ledge of customer needs, growth is created in the form of unique gies is currently worth approximately 100 billion SEK. Over a product off erings. Th e challenge is to “think outside the box” business cycle, market growth totals about 8 per cent. and create pioneering products in an already established market. Hexagon’s long-term ambition is to increase the Group’s share of the existing market from the current level of nearly 11 per cent Introducing existing products in new markets to 30 per cent. Th is is to be achieved through proprietary prod- A new application area or a new geographical market creates uct development combined with acquisitions. growth for an existing product through access to a larger customer group. Th e challenge is to have suffi cient knowledge of the new market, ensure that the product meets the market’s quality requirements and establish smoothly functioning distribution channels. Brand strategy Hexagon’s brand portfolio comprises strong brands that Introducing new products in new markets are well known in their sectors. Each brand represents a Introduction of a new product or service in new markets creates strong tradition in its geographical region and sector, growth through expansion of the total market. Th e challenge is which is why Hexagon uses diff erent brands for diff erent to have suffi cient knowledge of the new market, understand the customer groups or in diff erent markets. needs of the end customers, quality-assure the new product or Th e brands in Hexagon’s portfolio represent high qual- service and gain access to smoothly functioning distribution ity and result in high entrance barriers for Hexagon’s com- channels, thus ensuring that the new off ering reaches the market. petitors. Hexagon works continuously to develop global product platforms in order to maximize the economies of scale between the various brands.

Hexagon Annual Report 2007 7 Acquisitions

High rate of acquisitions and successful integration

Hexagon monitors a large number of companies to find nology market. The companies have contributed valuable exper- acquisitions that can strengthen the product portfolio or tise in strategically important technologies or distribution improve the distribution network in both new and exist- channels in geographic regions in which Hexagon’s presence was ing markets. An acquisition candidate must have growth previously weak. potential and strong brands. Hexagon’s expansion capacity is limited by the restriction imposed by financiers, which entail that net debt must not Hexagon continuously analyzes more than 200 acquisition exceed 3.5 times pro forma EBITDA over 12 months. At the end candidates worldwide. The acquisition candidates are regularly of 2007, this restriction meant that Hexagon had an expansion evaluated financially, technologically and commercially. Every capacity of nearly 2.2 billion SEK based on its own balance sheet. acquisition candidate’s potential place in Hexagon is determined Cash and cash equivalents, including unutilized lines of credit, on the basis of synergy simulations and implementation strate- amounted to 2 753 MSEK at the end of 2007. gies. On average, acquisition candidates have annual sales of The acquisition price varies and is determined based on approximately 200 MSEK. However, a handful of companies are factors such as the acquired company’s growth and operating significantly larger with sales of more than 1 500 MSEK. margin. With a structured and well-conceived integration During 2007, Hexagon completed a total of 18 corporate process, the acquired company’s enterprise value should be less acquisitions, with sales totalling approximately 1 400 MSEK, to than 10 times operating profit approximately 12 months after strengthen Hexagon’s leading position in the measurement tech- acquisition.

Corporate acquisitions 2007 Company name Domiciled Emphasis Consolidation Market segment* SBG Sweden Software for multi-dimensional systems for measurring, planning and machine control 15 January

Acquis USA, Ireland Web-based data editing of geospatial information 1 April

D&P Systems France Multi-dimensional systems for measuring, planning and machine control 1 May

Topolaser France Distribution and integration of systems for machine control 1 May

Allen Precision USA Distribution of surveying equipment and related products 1 May

Jigsaw USA Software for fleet management within machine control for mining 1 May

Transmetal Turkey Distribution of measurement technologies 1 June

GAMFI France Laser tools and instrumentation for the construction industries 1 July

ER Mapper Australia Server application and compression technologies within geospatial information 1 July

IONIC Belgium, USA Server application and cataloguing technologies within geospatial information 1 July

JMTC China Callipers with digital and mechanical indicators 1 July

Gesswein Germany Distribution of measurement technologies 1 August

CogniTens Israel Systems for three-dimensional optical measurement 1 September

Rost Austria Distribution of measurement technologies for the surveying and construction industries 1 October Junglas Germany Distribution of measurement technologies for the construction industry and the market for machine control 1 October Geopro Hungary Distribution of measurement technologies for the surveying and construction industries 1 December

NovAtel Canada Precision components and systems for satellite-based navigation systems 1 December

Elcome India Distribution of and system administration for measurement technologies 1 January 2008

* For a more detailed description of the macro and micro segments of the measurement technologies market, see page 12. = Macro = Micro

8 Hexagon Annual Report 2007 Acquisitions

15 January

1 July

GAMFI International is a leading provider of laser tools and Svensk ByggnadsGeodesi AB develops, instrumentation that operates under the brands AGL, QBL and manufactures and supplies complete multi- AGATEC. Th e company’s research and development and manu- dimensional systems for measuring, planning facturing sites span from USA, Europe and China. Th e acquisi- and machine control for excavators, graders, tion of GAMFI is an important step in Hexagon’s overall growth dozers and paving machines. Th e acquisition strategy in the core construction market. of SBG is part of Hexagon’s growth strategy and commitment to global expansion within the measurement market segment of machine control.

1 September 1 July

IONIC Software and IONIC Enterprise develop software products to securely catalog and serve geospatial information on the Internet. IONIC oﬀ ers products for publishing, discovery, access, integration, and application of spatial data. Th e acquisition of IONIC underlines Hexagon’s growth strategy and commitment to the geospatial market.

1 December CogniTens Ltd. provides full surface and features measurements using advanced three- dimensional optical technology especially designed for use in demanding engineering and shop fl oor environments of automotive and other manufacturing industries. Th e acquisition of CogniTens gives Hexagon an exciting new technology in the high speed, non contact, NovAtel Inc. provides precision Global Navigation Satellite shop fl oor measurement and scanning segment System (GNSS) components and subsystems. Th e company of the measurement technologies market. develops receivers, enclosures, antennas and fi rmware that are integrated into high precision positioning applications worldwide. Th e acquisition of NovAtel accelerates Hexagon’s development of new applications in markets within the GNSS area.

Hexagon Annual Report 2007 9 Terminal 5 project

World’s busiest airport

With the capacity to handle 30 million passengers and big enough to fit 50 football pitches, Heathrow’s Terminal 5 (T5) is one of the largest and most ambitious building and engineering projects in Europe. Hexagon’s measurement systems has been used in the construction of the world’s busiest airport.

The 4.3 billion GBP project consists of the main terminal building in ﬁve ﬂoors, two satellite buildings and 60 aircraft stands, and has required the diversion of two rivers, the realignment of a perimeter road, extensions to the London Underground Picca- dilly Line and Heathrow Express, a dedicated M25 spur road and a 4 000 space multi storey car park. Working in partnership with a team of contractors, Hexagon’s subsidiary Leica Geosystems has played an important role in delivering precision and accuracy to help meet the stringent standards demanded by BAA (British Airports Authority).

» Leica GeoMoS Monitoring Software was used during the construction of the new 87 metre high control tower, the tallest control tower in the UK. » To maintain the highest degree of accuracy and control on the site, two permanent dual-frequency Leica GPS Spider controlled Leica System 500 reference station receivers were erected to provide both continuous RTK measurements for site based GPS units and precise measurements for post- processing positioning. » Careful monitoring and safety measures with Leica GeoMoS and Leica TCA2003 total stations ensured that no unexpected ground movement or disruption to existing services occurred during tunnel construction works. » Leica GradeSmart 3D Machine Control Systems maximized the on-site productivity, ensured accuracy and control while excavating thousands of tonnes of earth and laying the quality surface. » High Deﬁnition Surveying technology was used to create three-dimensional object based as-built surveys.

The London Heathrow Airport Terminal 5 project in the UK is Europe’s largets construction site, employing around 6 500 people. The new airport terminal significantly boosts Heathrow Airport’s existing passenger capacity. Over Terminal 5 project

13.5 kilometers of tunnels have been constructed as part of the project including extensions to the London Underground Piccadilly Line and Heathrow Express. The terminal building is the largest single span building in the UK. Market description

Measurement technologies – a global growth market

Hexagon is a leading player in the global market for measure- rithms that comprise the synergies between the three market ment technologies, which is a growing market under constant segments, macro, micro and nano. development. Trends such as increasing investment in infrastructure and the western world’s relocation of production The macro segment eastwards, combined with climate and environmental Within the macro segment, large objects such as mountains, changes, are driving the need for three-dimensional measure- cities, roads, bridges, tunnels, buildings and other construction ment technologies. projects are measured. These measurements require a precision stretching from a deviation of 10 metres to 100 micromillimetre. Measuring, positioning and processing multidimensional data Customers in this market segment primarily comprise sur- are of major strategic and financial significance to Hexagon’s veyors, map offices and cartography companies, authorities, con- customers worldwide. Our customers demand optimal quality, struction companies, mining companies, aerospace, security and maximum productivity and efficiency, minimum tolerance levels defence industries. and scrapping, and the ability to quickly adjust processes and Hexagon estimates the size of the macro segment at approxi- projects based on changes in requirements or demand. mately 48 billion SEK, with annual growth of about 10 per cent. Hexagon estimates the value of the measurement technolo- With a market share of some 13 per cent, Hexagon is the joint gies market at approximately 100 billion SEK, with growth of market leader, together with the US NASDAQ-listed company 8 per cent annually over a business cycle. This estimate is based Trimble. The Japanese company Topcon, listed on the Tokyo on internal industry knowledge and available public statistics. Stock Exchange, is also a major player in the macro segment of Hexagon’s market share is approximately 11 per cent. the measurement technologies market.

Measurement technologies market segments The micro segment The market for measurement technologies can be divided into Within the micro segment, industrial components, from large three market segments: macro, micro and nano. The boundaries aircraft to micro-components in small electronic applications, between the three diﬀerent segments are based on the measure- are measured. These measurements require a precision that ment precision required by the customer. The smaller the object extends from a deviation of 100 to 0.3 micromillimetre. to be measured, the greater the precision required. Customers in the micro segment primarily comprise the However, the algorithms used to interpret measurement automotive, aviation, engineering and energy industries. data and mathematically describe an object are largely the same Hexagon estimates the size of the micro segment at approxi- regardless of whether a mountain chain or a component in a mately 37 billion SEK, with annual growth of about 6 per cent. microprocessor is being measured. It is these mathematical algo- Hexagon’s market share is some 12 per cent, making it number one in terms of size. Other prominent players in the micro segment of the measurement technologies market are the German company Carl Zeiss and the Japanese company Mitutoyo.

The nano segment Within the nano segment, objects such as microchips for the electronics industry, medical applications and materials with Macro Micro Nano new characteristics are measured. These measurements require Precision extreme precision. Deviations in the measurements may not exceed 0.3 micromillimetre . The nano segment is an area in which Hexagon is not yet active, but where it is planning to ultimately establish opera- <10 metres 100μm 0.3μm tions. Hexagon estimates the size of the nano segment at approx- Hexagon divides the measurement technologies market into three segments: macro, micro imately 15 billion SEK with strong growth potential. and nano. The boundaries between the three segments depend on the required measurement precision of the applications.

12 Hexagon Annual Report 2007 Market description

Industry peers Market segment systems. The trend is that industrial companies are choosing to Company Domiciled Macro Micro Nano invest in the best technology possible when new production plants are built in Asia, South America and Eastern Europe. This Hexagon Sweden trend is driving Hexagon’s business, primarily in the automotive, ESRI USA engineering and tooling industries. Intergraph USA

Pentax Japan The development of geographic markets In EMEA*, demand for Hexagon’s products and services is Sokkia Japan strong. Eastern Europe and the Middle East, in particular, have Topcon Japan driven the region’s sales growth. For 2008, Hexagon expects Trimble USA demand to remain high in EMEA, with some slowing in the Western European engineering industry. Of the sales in measure- Carl Zeiss Germany ment technologies, EMEA accounted for 54 per cent in 2007. Faro Technologies USA Hexagon’s organic growth was 17 per cent. Metris Belgium In the Americas*, Hexagon is beneﬁting from higher infra-

Mitutoyo Japan structure investment and increased demand from industries such as geospatial information systems, as well as the mining, con- Perceptron USA struction, aerospace, electronics and medical technology indus- Renishaw UK tries. However, the weak competitiveness of the domestic auto KLA Tencor USA motive industry and the decrease in new construction of housing has negatively impacted demand for Hexagon’s products and Vecco USA services. For 2008, imbalances in demand are expected in the Zygo USA housing-related construction sector in the US. However, Hexagon expects increasing export activity in the engineering Global trends accelerate market growth industry, combined with continued strong demand in South Growth in the newly industrialized regions of the world is a sig- America and Canada due to greater demand for grain, minerals nificant driving force for the measurement technologies market. and oil. Of the sales in measurement technologies, the Americas In countries such as China and India, and regions such as South accounted for 25 per cent in 2007. Hexagon’s organic growth was America, Eastern Europe and the Middle East, needs are grow- 17 per cent. ing for energy supplies, transport routes, communication lines, In Asia* rapid expansion is being driven by domestic demand construction and housing. At the same time, the need to reno- and our customers’ relocation of production units from the West vate the western world’s aging infrastructure is growing. Many to the East. Well-functioning infrastructure, which benefits de- roads, bridges, tunnels, dams, sanitation systems and water mand for Hexagon products, is required in pace with increasing mains in the western world are in substandard condition and number of western companies establishing operations and pro- require renovation and maintenance. duction in the region. Demand in the region is expected to re- The increased infrastructural investments in both emerging main strong in 2008. Of the sales in measurement technologies, economic regions and established markets in the west are driving Asia accounted for 21 per cent in 2007. Hexagon’s organic Hexagon’s business, primarily in the construction, mining, aero- growth was 39 per cent. space and electronics industries. The need for measurement technologies is also being driven * EMEA – Europe, the Middle East and Africa. by our global climate and environmental changes. Authorities Americas – North, South and Central America. Asia – Asia, Australia and New Zealand. are increasingly investing in technologies that make it possible to foresee chains of events and estimate consequences, in order to improve and secure vital infrastructure. For example, Hexagon Measurement technologies sales per geographical market, MSEK products assist authorities with measurement and decision data 12 000 to answer questions such as: How would the Veracruz area in 10 000 Asia Mexico be affected if the Cazones River overflows? How quickly 8 000 Americas is the rain forest being cleared in Brazil? How can the Louisiana 6 000 4 000 coastline in the US be rebuilt after Hurricane Katrina? EMEA The ongoing geographic relocation of operations from old 2 000 0 industrialized countries in the West to new industrialized coun- 2003 2004 2005 2006 2007 tries in the East is also driving demand for measurement tech- Of the total sales of the measurement technologies business, Asia accounted for 21 per cent nologies. New construction of production facilities is boosting in 2007. Hexagon’s organic growth was 39 per cent. India is expected to become Hexagon’s investment in state-of-the-art technologies and measurement second largest expansion market in the region after China.

Hexagon Annual Report 2007 13 NASA project

Probing the mysteries of the universe

NASA’s James Webb Space Telescope, scheduled for launch in 2013, is the replacement for the venerable Hubble orbiting observatory. The telescope, with its array of hexa- gonal mirrors, will orbit the sun in synchrony with the Earth, at a vantage point more than a million miles from here.

Hexagon has provided Leitz and Leica Geosystems products to assist in the complicated task of manufacturing what amounts to a folding telescope. The 6.5 meter mirror array is made of 18 hexagon-shaped mirrors. Each of the 18 hexagons constitutes an off- axis segment of a near parabolic mirror contour. A Leitz PMM-C coordinate measuring machine is used during the final mirror processing stages to ensure absolute precision in the contour of the mirrors. The coordinate measuring machine measures all the important dimensions of the mirrors and tracks the surface figure as it converges from a machined surface with a 150 micromillimetres* peak to valley surface figure, into and beyond optical testing. The coordinate measuring machine has a low probe force option that allows the surface of the beryllium mirrors to be physically touched without damage, allowing the mirror’s contour to be checked for absolute conformance to the design during the formative grinding and early polishing stages, where the form is established to within one-half a millionth of a meter. A Leica Laser Tracker portable coordinate measuring machine, is used to establish absolute positions of elements of an optical test which in turn lets the customer L-3 SSG Tinsley measure and establish the radius of curvature to within a tenth of a milli- meter out of 16 meter radius. The customer reports that the Leitz PMM-Cs and the Leica Laser Trackers are truly enabling technologies for producing mirror segments of this scale, precision and form. Both technologies are performing “flawlessly” and “better than specification”.

* 1 micromillimetre = 1/1 000 000th of a meter.

Called The First Light Machine, i.e. first telescope to see the first light of the first galaxies in the emerging universe, James Webb Space Telescope will orbit the Sun in synchrony with the Earth, at a vantage point more than a million miles from the Earth. The 6.5 meter mirror array is made of 18 hexagon-shaped mirrors, of highly polished beryllium, a type of metal which is light, strong and has a high degree of thermal stability around the operating temperature NASA project

of –240° C minimizing contractions and deformations resulting from temperature changes around that temperature. The entire space telescope platform folds up to fit within the payload fairing of an Ariane V Launch Vehicle, and then deploys in sections after launch. NASA’s largest astrophysics project will provide fundamental new science with insight into the origins of the universe, galaxies and planetary systems. Products and services

World-class measurement technologies and services

Hexagon is a world-leading supplier of systems for the Hexagon’s customer offering measurement of objects in one, two or three dimensions. Hexagon develops complete, high-quality and reliable measure- The measurement systems measure with great precision ment systems through proprietary research and development. and rapidly provide access to large amounts of measure- Subsequently, Hexagon purchases components from carefully ment data. For the customer, this means greater efficiency selected and proven sub-suppliers worldwide. Purchasing of and productivity, improved quality and significant material components is coordinated centrally to minimize costs, maintain and cost savings in the production process. quality and eliminate bottlenecks in component sourcing. At its own production facilities, Hexagon assembles the components Increasingly stringent demands are being placed on the ability to into complete measurement systems and integrates proprietary measure and position infrastructure and environments. The pace software. For a description of components in the measurement of new construction is increasing worldwide and the emerging system, see the illustration on page 18. economies are building new infrastructure at the same time as For certain products, Hexagon oﬀers the customer an Instal- old economies have to renovate and supplement their infra- lation, Training and Warranty (ITW) agreement as a supplement structure. to the actual measurement system. Such an agreement means For manufacturing industries, it is necessary to systematically and eﬃciently collect and process measurement data on proprie- Product areas and technologies tary production or products. Climate changes and environmen- Macro Micro tal catastrophes of various kinds are also increasing the need to accurately describe, depict and measure countries and regions. Geomatics Construction GIS Stationary Portable The measurement data collected with the help of Hexagon’s TPS M/C Scanners CMM CMM measurement systems are used as a basis for graphical and math- GPS TPS Cameras AMS Trackers GNSS GPS S/W S/W Optical ematical descriptions of an object. Such a description is used to Networks GNSS Probes Articulated Arms reconstruct an exact model or drawing of an object, map devia- Scanners Lasers S/W tions from the object’s original design or to correct the object’s S/W S/W Probes manufacturing process. For a more detailed description of the macro and micro segments, see page 12.

Measurement technologies operations

% EMEA 54 Americas 22 MSEK MSEK % Asia 24 2007 10 937 2007 2 141 2007 20 2006 9 250 2006 1 547 2006 17 2005 4 539 2005 550 2005 12 2004 2 889 2004 292 2004 10 2003 2 569 2003 237 2003 9 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07

Net sales Operating earnings Operating margin Employees per geographical market Sales increased to 10 937 MSEK during Operating earnings increased by 38 per The operating margin grew by approxi- At the end of 2007, operations had 7 296 the year, corresponding to organic growth cent to 2 141 MSEK during the year. mately three percentage points to nearly employees, mainly in Switzerland, the US of 16 per cent. 20 per cent during the year. and China.

16 Hexagon Annual Report 2007 In the high altitude area, the GPS technology is often used for monitoring the glacier movement and the changes of the greenhouse gases. Here the surveying system GPS1200 is used when measuring the mountains in Tibet.

that Hexagon installs the measurement system at the customer, Geomatics calibrates and quality assures the system in accordance with the Geomatics is the science and technology of collecting, analyzing, requirement specification, trains the measurement system opera- processing, storing, presenting and using geographical informa- tors and guarantees full service during the entire duration of the tion. Geomatics is a collective term for disciplines concerned warranty. with maps, in both digital and analogue formats. In measurements conducted in this field, measurement and Macro segment products and services positioning systems are used, such as theodolites and total stations Hexagon’s product portfolio in the measurement technologies that are positioned in the terrain to measure with a range of market’s macro segment consists of a large number of various several kilometres with optics and laser technology. technologies, systems and products for multidimensional meas- Within geomatics, GPS is used increasingly for measurement urement and positioning. The systems measure with a precision and positioning. With GPS, the user can measure easier, faster that spans a deviation of 10 metres to 100 micromillimetres. and with fewer stakeouts. To achieve sufficient precision in the measurements, signals from at least five satellites are compared.

% Surveying 29 Automotive industry 23 2007 2006 Change % Construction industry 13 EMEA 59 MSEK Aerospace, security Order intake, 11 234 9 273 19%* Americas 24 and defence industry 6 Asia 17 Engineering industry 6 Sales, MSEK 10 937 9 250 16%* Tooling industry 4 Operating earnings, MSEK 2 141 1 547 38% Other 19 Operating margin, % 19.6 16.7 2.9

Average number of employees 5 796 4 942 17%

Sales by geographic market Sales by customer category * Adjusted to ﬁxed exchange rates and comparable structures (organic growth). EMEA is the measurement technologies Surveying accounts for 29 per cent of the operation’s largest geographic market, ac- operation’s total sales, followed by the counting for 59 per cent of total sales. automotive industry.

Hexagon Annual Report 2007 17 Products and services

Hexagon’s measurement systems also have the ability to commu- nicate with multiple satellite systems, known as Global Naviga- tion Satellite System (GNSS), a collective name for satellite navigation. The satellite navigation systems currently available within GNSS are the US GPS system and the Russian Glonass system. In coming years, Hexagon’s products will also gain access to the European Galileo system, the Chinese Compass system and the Indian INRSS system, all of which are under construction. Hexagon’s product portfolio for geomatics also includes laser scanners, measurement base stations, laser trackers and monitoring systems to measure changes or movement in a structure or in the nature. The largest customer categories in geomatics are surveyors and government agencies and authorities. The main driver of de- Technology based on GPS, Total Stations or lasers to guide or control mand for products and services in this area is the need to update mobile machinery in the construction, agricultural or mining industries. terrestrial information. real-time data transmission, can monitor an entire site. Construction Another important product group in the area of construction A strongly growing segment of construction is machine control. is level meters, optical or digital, for measuring plane surfaces at, By utilizing GPS and multidimensional software, Hexagon’s for example, a construction site. products control and monitor excavators, graders, dozers and Construction lasers are another major product group. A con- pavers in order to increase the productivity and quality of the struction laser measures angles, distances and levels. Pipe lasers work performed by the machine. The individual construction constitute a sub-group within this product group. A pipe laser is machines are linked together in a high-precision ﬂeet manage- used to measure inclines, in connection with pipe laying, for ment system that, using a radio network for GPS reception and example.

Components of the measurement system

SENSOR FIRMWARE CARRIER FIRMWARE SOFTWARE

The sensor’s task is to collect The carrier is the unit on which The software processes meas- measurement data of the the sensor is mounted, which can urement data and reproduces a object. This is done through be everything from an aircraft to projection of the measured object. the sensor’s physical contact a measurement instrument in a For example, the software can with the object, called tactile production process. Accordingly, create a three-dimensional image measurement, or through tech- the carrier may be portable or of a city or a CAD drawing of a nologies such as laser, GPS, stationary. turbine blade in an aircraft engine. optics and photogrammetry. The firmware is the electronic system that ensures that the sensor, the carrier and the software function as a single integrated system, and that the control systems of the sensors and carriers function smoothly.

Service and maintenance support operation of the measurement systems and can include contract-based measurement of parts, training of measurement system operators, outsourcing of the measurement function and/or software upgrades.

18 Hexagon Annual Report 2007 Products and services

Laser meter for distance measuring and calculations of surface and volume. Natural colour versus infra-red processed image to highlight vegetation.

Hexagon’s product portfolio for construction also includes hand- Geographic Information Systems (GIS) held laser meters for short-distance measurement and calculation GIS is a computer-based system for collecting, storing, analyzing of surface and volume magnitudes. The Leica DISTO™ and and presenting position-related information. Thanks to web- Leica LINO™ products are used by such customer categories as based services such as Google Earth, GIS has become common- architects, construction workers, painters, carpenters and real place today. estate agents. Techniques used to collect data include GPS, digital image The largest customer categories are the construction industry, processing, photogrammetry, radar data, laser scanning, spectral mapping companies, government agencies and authorities and analysis, digitalization of analogue documents and field inven- security and defence-related industries. The main drivers of tories with various measurement instruments. Hexagon also demand for products and services in this area are the need for develops digital sensors and software for the interpretation of higher productivity and cost-efficiency in construction processes, images in two or three dimensions. mineral extraction, grain production, and the control of produc- The largest customer groups within GIS are the security and tion processes. defence-related industries, the national rescue services agencies, During the year, Hexagon strengthened its customer offering other government agencies and authorities and architects. The in machine control technologies through the acquisitions of main drivers of demand for products and services in this area are Swedish SBG, French D&P Systems and Topolaser, and Ameri- the need to update and plan for changes in the cityscape or the can Jigsaw Technologies. With these acquisitions, together with environment, and for mapping natural disasters. the preceding year’s acquisitions of Swedish company Scanlaser During the year, Hexagon strengthened its customer offering and Danish company Mikrofyn and proprietary product devel- in GIS through the acquisition of the software companies Acquis opment, Hexagon has taken a market-leading position in machine of America, ER Mapper of Australia, IONIC Software of Belgium control in Europe. and US company IONIC Enterprise. These acquisitions have During the year, Hexagon strengthened its customer offering made Hexagon a leading player in the ongoing transition from in construction laser technologies through the acquisition of the desktop image handling and processing applications to web en- French GAMFI International Group, thereby adding brands abled and service oriented image management, processing and such as AGL, QBL and AGATEC to Hexagon’s brand portfolio. delivery solutions.

Hexagon Annual Report 2007 19 Products and services

Contour inspection of lenses. Articulated arms for portable measurement.

Micro segment products and services aerospace, energy, medical technology and design industries. In the measurement technologies market’s micro segment, Another large area of application comprises maintenance and Hexagon can offer the customer a complete range of products inspections of structures such as wind-power plants and aircraft. and one of the world’s strongest service organizations. The The main driver of demand for products and services in this area systems measure with a precision spanning from a deviation of is the need for greater quality, productivity and cost-efficiency in 100 to 0.3 micromillimetres. the maintenance, manufacturing and design process. During the year, Hexagon strengthened its position in the Stationary measurement systems low and medium segment of the market for handheld measure- Hexagon’s product offering in the area of stationary measurement ment instruments through the acquisition of JMTC of China. systems includes vertical and horizontal coordinate measuring The acquisition of Israeli company CogniTens also complement- machines (CMM), sensors, software and aftermarket services. ed the product portfolio by adding advanced three-dimensional Stationary measurement systems are used in the measurement optical technology for the measurement of surface structures and of sheet-metal parts such as car doors, aircraft wings or the components. blades of a wind power station, as well as for control measurements directly on the workshop floor. The measurement systems Sub-suppliers of technology are also used for measurements of components or products in In addition to its product offering in the macro and micro seg- the engineering industry or complex high-precision parts such as ments, Hexagon can function as a sub-supplier of technologies, implants or prosthetics in the medical equipment industry. systems and precision components to customers outside the The largest customer categories in stationary measurement Hexagon Group. The strategy of offering Hexagon’s technologies systems comprise manufacturing companies such as the automo- to other OEMs (Original Equipment Manufacturers), and thus tive, aerospace, electronics, energy and medical technology in- ensuring that Hexagon achieves critical volumes for these tech- dustries. The main driver of demand for products and services in nologies, is a guarantee for continued cost-efficient development this area is the need for greater quality, productivity and cost- of the Group’s technologies. Hexagon’s core technologies are efficiency in the manufacturing process. listed in the table on page 23. The customers in this area primarily comprise internal and Portable measurement systems external OEMs of measurement technologies and positioning In the area of portable measurement systems, Hexagon’s product systems for civil aviation. The driver of demand for products and offering comprises handheld measurement devices, articulated services in this area is primarily the need for greater precision arms, laser trackers, software and aftermarket services. and productivity. The largest customer categories in portable measurement During the year, Hexagon strengthened its product portfolio systems comprise manufacturing companies in the automotive, of precision components and systems for satellite-based naviga-

20 Hexagon Annual Report 2007 Products and services

Three-dimensional laser scanning, more com- monly known as High Definition Surveying (HDS), delivered a complete and accurate 3D model of St. Lambertus Church in Maastricht, the Netherlands. This will help to restore this impressive monument.

tion systems through the acquisition of NovAtel of Canada. it is essential for both Hexagon and the customer to establish a NovAtel develops receivers, enclosures, antennas and firmware close relationship for continued service and future upgrades. integrated in high-precision positioning applications. Hexagon During the year, Hexagon strengthened its distribution net- also strengthened its product portfolio in this area through the work in selected geographical markets through the acquisition of launch of a five axis probing system. several distributors, including German companies Gesswein and Junglas, Austrian company Rost, Hungarian company Geopro, Proprietary sales and a broad distribution network Turkish company Transmetal, US company Allen Precision and The sales approach and distribution model for Hexagon’s prod- Indian company Elcome Technologies. ucts and services vary from one area to another. The original For Hexagon’s software, demand is growing for long-term sales process for large integrated measurement systems can take agreements through which the customer subscribes to regular up to 12 months and involve some 50 engineers, while the hand- software updates. Hexagon also offers regular upgrades of the held Leica DISTO™ laser meter is available for purchase in measurement system, in which all sub-systems, except the building supply warehouses. carrier, are replaced. For products in the measurement technologies market’s Historically, Hexagon’s sales follow a distinct seasonal macro segments, sales are largely made through distributors. For pattern, in which the fourth quarter is the quarter generating the sale of products in the micro segment, Hexagon has its own the most sales. The second quarter of the year is historically sales organization with approximately 50 demonstration centres Hexagon’s second best quarter, since it is during this period that, worldwide, at which the measurement systems are demonstrated for example, the construction industry in the Group’s largest by Hexagon’s personnel and the customer is given the opportu- geographical markets buys equipment for the projects to be nity to make test measurements on site. Since the measurement completed during the summer. system often involves a significant investment for the customer,

Hexagon Annual Report 2007 21 Research and development

Efficient innovation generates results

Innovation and successful product development are pre- managed from a central research unit in Heerbrugg, Switzerland, requisites for a company that wants to lead and develop where fundamental development takes place. The Group also has its industry. Approximately 600 Hexagon employees work a number of product development units, which jointly form a to develop the technologies of tomorrow that will further worldwide network for knowledge exchange and close coopera- strengthen Hexagon’s leading position in the market for tion. These units, located in Sweden, Denmark, Switzerland, measurement technologies. Germany, France, Italy, Israel, the US, Canada, Singapore, India, China, Japan and Australia, base their work on joint plans and Hexagon’s vision is to be a market leader, number one or number processes. two, in selected technical and geographic segments. Since a market-leading position demands products and services on the Carefully selected focus areas absolute cutting-edge of technology, one of Hexagon’s overall In order to maintain its position as the industry’s innovator and operational targets is to be the industry’s most innovative also ensure efficient innovation that generates improved sales supplier. and profitability, Hexagon works closely with its customers and Through successful research and development, combined has excellent knowledge of the market’s development and trends. with strong knowledge of the customer’s needs, growth is created Hexagon continuously monitors closely related business seg- through unique product offerings. The challenge is to think big ments to find technologies that can be applied in the Group’s and develop pioneering technologies that cost-effectively provide existing customer segments, or suitable business segments for the customer with greater efficiency, productivity and quality. Hexagon’s existing technologies. As a supplement to the development of new technologies, Product development efforts are conducted with a high level Hexagon’s research and development team works continuously of intensity. Individual products in Hexagon’s product portfolio on improving existing products and services, and finding new have an average lifecycle of 18 months. Product development is areas of application for already established technologies. continuously pursued to update the measurement system’s various components as new technology becomes commercially avail- Global innovation team able. Extensive development work is a prerequisite for Hexagon’s The entrepreneurial spirit and down-to-earth approach that are ability to be at the forefront of the commercialization of techno- the primary characteristics of Hexagon’s corporate culture create logical development. a favourable climate for successful research and development. In Strategic development areas within research and development order to succeed, people must first dare to risk failure. Within include software development, sensor technology, distance meas- Hexagon, creativity and innovativeness are encouraged. urement and calibration and compensation technology. During Today, a total of approximately 600 graduate engineers are the year, development of sensors for products in the micro engaged in research and development at Hexagon. The work is segments and new software modules continued to dominate

INTERNAL CONCEPT DEVELOPMENT, PRODUCT IDEA HEXAGON’S DEVELOPMENT RESEARCH UNIT NEW LAUNCH OF IDEA FROM NEEDS NEW PRODUCT CUSTOMER CONCEPT DEVELOPMENT, ORGANIZATIONAL IDEA FROM ACQUIRED COMPANY INTEGRATION OTHER INTERESTED PARTY

22 Hexagon Annual Report 2007 Research and development

Hexagon’s product development. The research unit’s focus areas in 2007 also included new software modules for three-dimensional imagery and new products that provide higher precision and productivity when using GPS or GNSS positioning systems.

Investments in research and development Hexagon assigns investments in research and development a high priority. Meeting customer demands and continuously providing the market with new and improved products require The TESA Star Linear wrist, a five axis probing system, was developed in 2007. Ideal for measuring complex applications such as gears, cams, blades, turbines and sheet metal. resources. Hexagon’s research and development costs for 2007 totalled 1 005 MSEK, corresponding to approximately 7 per cent of consolidated sales. Development costs are capitalized, that is taken up as an asset in the balance sheet, only if they pertain to new products, if the On the management consulting ﬁrm Booz Allen Hamilton’s list cost is signiﬁcant and if the product is assessed to have earnings of the world’s most research and development intensive listed potential. During the year, about 39 per cent of the development companies, Hexagon is ranked among the top companies. In the cost was capitalized. Global Innovation 1000 report, Hexagon is mentioned as one of Hexagon believes that the current level of Group investments the companies in the world that generates the most from its in- in research and development are reasonable and in line with vestments in research and development. those of other leading market players in the industry.

Patent Portfolio Product Groups

NUMBER OF ARTICULATED LASER TOTAL CON- PROBE Technology PATENTS CMM ARMS TRACKERS STATIONS DISTO™ HDS STRUCTION HANDTOOLS SYSTEMS Linear distance measurement 330 Optics 220 Sensors 300 Calibration and compensation 90 GPS and GNSS 210 Machine control 60 Laser 50 Mechanical structures 170 Components 90 Signal and image processing 130 Control systems 40 Software 10 Total 1 700

To protect investments in research and development, Hexagon submits approximately 200 patent applications annually. The patent portfolio currently consists of more than 1 700 active patents worldwide. Hexagon carefully monitors its competitors in the measurement technologies market to ensure that its patents are respected. The Group views patent infringement seriously and has established a principle of legally defending its rights.

Hexagon Annual Report 2007 23 Polymer operations

Rapidly growing global operations

Hexagon’s polymer operations holds a market-leading The rubber compounds operation has a total capacity of approx- position within rubber compounds, gaskets for plate heat imately 190 000 tonnes of rubber per year. During 2007, capaci- exchangers and plastic and rubber wheels. During 2007, ty utilization was high in existing facilities and new production Polymers’ operations were strengthened through acquisi- units were inaugurated in China and Mexico. Today, production tions and investments in new production facilities, and the facilities are located in Sweden, Belgium, Germany, the Czech process of listing the business on the Nordic Exchange Republic, the US, Canada, China and Mexico. commenced. Hexagon’s potential to offer a global concept is exceptionally strong compared with local and regional competitors or with the In recent years, Polymers has developed from a local Nordic customer’s own ability to product rubber compounds in a cost- player to a rapidly growing global Group with manufacturing on efficient manner. four continents. Polymers is currently a world leader in rubber compounds and gaskets for plate heat exchangers, and also one Gaskets of the leading players in the global market for the manufacture Polymers is a world-leading supplier of gaskets for all major of plastic and rubber wheels. OEM manufacturers of plate heat exchangers. The market is experiencing strong growth, particularly the segment for heat Rubber compounds exchangers intended for energy, ethanol, oil and gas applications. Polymers develops and supplies rubber compounds to customers The market segments for air conditioning and district heating, worldwide. By combining first-class raw materials with optimal which are both driven by higher living standards in developing and cost-efficient manufacturing processes, Polymers develops countries, have also experienced strong growth in recent years. and produces high-quality solutions. Polymers’ customers use Larger volumes are manufactured in Polymers’ production these rubber compounds for applications such as profiles for ad- facility in Sri Lanka and small volumes of advanced material vanced sealing functions, primarily for the automotive industry grades are made in Sweden. A new gasket factory in China is and for the electrical and construction industries. under construction and scheduled to be deployed in August 2008.

Polymer operations

% Asia 56 EMEA 31 MSEK MSEK % Americas 13 2007 2 730 2007 310 2007 11 2006 2 488 2006 223 2006 9 2005 2 205 2005 258 2005 12 2004 1 615 2004 228 2004 14 2003 873 2003 99 2003 11 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07

Sales Operating earnings Operating margin Employees per geographical market Sales increased to 2 730 MSEK during the Operating earnings increased by 39 per The operating margin grew by more than At the end of 2007, polymer operations year, corresponding to organic growth of cent to 310 MSEK during the year. two percentage points to slightly more had 2 327 employees, mainly in Sri Lanka, 6 per cent. than 11 per cent during the year. Sweden and the US.

24 Hexagon Annual Report 2007 Polymer operations

Polymer operations to be listed on the Nordic Exchange Polymers has reached a size and level of proﬁ tability that makes the business attractive as an independent listed company. Accordingly, Hexagon’s Board of Directors has decided to propose that the Annual General Meeting re- solve to list the polymer operations on the Nordic Exchange. Th e listing is scheduled to occur during June 2008. As a listed company, the polymer operations can continue to grow through new establishments and acquisitions. A listing prospectus will describe the business and its strategies in more detail. Th e prospectus will be available on www.hexagon.se as of early June 2008.

Wheels Operations during the year Polymers is one of the leading players in the global market for During the past year, Hexagon’s polymer operations developed the manufacture of plastic and rubber wheels. Th e major cus- favourably after being negatively aff ected in 2006 by price in- tomers in this product area are manufacturers of electric forklift creases and capacity defi ciencies, primarily in the production of trucks, hand-pallet trucks and track drive applications. Th e com- oil-based raw materials such as carbon black and EPDM. Th e petition primarily comprises family-owned companies. effi ciency of production was enhanced and more cost-effi cient Polymers’ production facilities for the manufacture of wheels compound formulas were developed. are located in Sweden, the US, Sri Lanka and China. In April 2007, Polymers inaugurated a new production facility for rubber compounds in Qingdao, China, to meet demand Product development from automotive industry sub-suppliers in Europe, the US and Polymers’ global material and product development take place Korea, which is also increasing its volumes in China. In October, at each respective production facility to maximize the benefi t of a new production facility was inaugurated in Aguascalientes, close cooperation between the customer and the sales personnel, Mexico, to meet the North American automotive industry’s development engineers and production. Th e polymer operations extensive capacity expansion in Mexico. currently invest approximately 1 per cent of sales in research and During 2007, the US rubber compound company Gold Key development. Processing Inc., which produces rubber compounds for industri- At a central development department connected to the pro- al applications and the automotive, construction, pharmaceuti- duction unit in Belgium, well-trained and experienced polymer cal and aerospace industries, was acquired. Th e company’s technicians develop and test the functional performance and production plant in Ohio in the US has an annual capacity of commercial strength of rubber compounds. Information on new approximately 40 000 tonnes. In addition to strengthening the compound formulas and raw materials is distributed to all of market position in the US, the acquisition of Gold Key has pro- Polymers’ units through an internal database and regular prod- vided the business with new product lines, knowledge and com- uct development meetings. Th e objective is to optimize product petence in new materials technology. quality, fi nancial profi le and reliability.

% Automotive industry 45 2007 2006 Change Engineering industry 13 % Construction Order intake, MSEK 2 824 2 542 4%* EMEA 67 industry 11 Americas 30 Goods handling 10 Sales, MSEK 2 730 2 488 6%* Asia 3 Process industry 7 MSEK Food processing Operating earnings, 310 223 39% industry 1 Other 14 Operating margin, % 11.4 9.0 2.4 Average number of employees 2 120 1 933 10%

* Adjusted to ﬁ xed exchange rates and comparable structures (organic growth). Sales by geographic market Sales by customer category EMEA is the polymer operation’s largest The automotive industry accounts for 45 per geographic market, accounting for 67 per cent of Polymers’ total sales, followed by the cent of total sales. engineering industry with 13 per cent.

Hexagon Annual Report 2007 25 China project

Global reach and local competence

It is Hexagon’s strategy to achieve global reach with local competence. The Group’s experience in China is a typical example. As a local player, Hexagon benefits from its understanding of the Chinese market, culture and customer needs, knowledge that is essential for generating sustainable profitability.

Hexagon has grown rapidly in recent years on the basis of advanced technology and market leadership, as well as through strategic mergers and acquisitions. Hexagon made its debut in China in 2001 with one single CMM production facility and 157 employees. At the end of 2007, Hexagon had four production facilities in different parts of China and over 1 100 employees. Since 2001, Hexagon’s total sales in China have increased six-fold. Hexagon works proactively to engage people who are interested in or affected by Hexagon’s innovative products and pioneering activities. Active engagement with business partners, community institutions and employees creates long-term value and generates a positive return for shareholders. As a local player, Hexagon has a good understanding of the Chinese market, culture and customer needs. At the same time, Hexagon is cultivating a global mentality. Common research and development, sourcing and communication link all business units closely to the global network of Hexagon that features maximum resource sharing and diversified culture. “An appropriate strategy is not the sole success factor for Hexagon’s operations in China. The strategy has to be carried out loyally and thoroughly by qualified people”, says Hongquan Li, President of Hexagon’s measurement technologies operations in China. “In China, Hexagon’s core competence is the young professional team with its dynamic strength and high productivity. Having benefited from unprecedented rapid growth of the economy and comprehensive process of opening up to the outside world, this young generation of Chinese has access to the best education and a global vision. Hexagon’s focus has always been to provide quality products and services to customers, as well as to give employees a high quality of life. It is our ambition to fulfill this mission for Hexagon’s operations in China.”

China has a population of more than 1.3 billion people. The land area is 9.6 million square kilometres and the coastline 18 000 kilometres long. The Chinese economy has grown six-fold in over the past 20 years. The country has had an annual GDP growth rate of 10 per cent for the past five years. China project

The picture shows some of the 1 100 Hexagon employees in China. The company culture is based on competence, innovative thinking, loyalty and trust. Corporate responsibility

Responsibility and respect in relations with Hexagon’s interested parties

Hexagon has a long history of corporate responsibility. It Employees comprises an important part of the company’s capacity to Hexagon’s slightly more than ten thousand employees work generate long-term favourable profitability and value for within the areas of research and development, marketing, sales, the Group’s shareholders. production, installation, customer training, service and administration. The company culture is based on competence, innovative Throughout the world, in all markets, the need to measure with thinking, loyalty and trust. To increase profitability and achieve great precision in one, two or three dimensions is increasing. the financial targets, strong leadership and motivated employees Demand is driven by growth in the world’s new industrial are required. It is the task of management to preserve and main- regions, rebuilding of the western world’s aging infrastructure tain Hexagon’s favourable work environment. Hexagon’s opera- and climate and environmental changes. Add to this the reloca- tions are conducted based on a common platform of values and tion of operations from old industrial countries in the west to attitudes: a focus on earnings, professionalism, entrepreneurship, new industrial countries in the east. High-quality measuring drive, commitment and a down-to-earth approach. systems are contributing to improved quality, increased produc- As part of the work to further strengthen cooperation and tivity and efficiency, decreased scrapping and, as a result, reduced solidarity within Hexagon, the Group’s global intranet was consumption of materials and raw materials. Hexagon has made launched in 2007. The intranet is a platform for all employees, at it its mission to meet these needs in a dedicated, professional and all levels and in all countries, where they can establish contacts, responsible manner. exchange ideas and receive information about exciting projects For Hexagon, corporate responsibility is about responsibility and news within the Group. and respect in its relationships with the Group’s interested parties: In the spring of 2008, an employee engagement survey will be employees, their families and society as a whole; customers that performed in all Hexagon companies throughtout the world for use Hexagon’s products and services with confidence and trust; the first time. The goal is to receive better insight into employees’ suppliers that produce the components Hexagon needs to devel- commitment and map out the basic driving forces that affect the op, manufacture and market its products; investors who entrust individual’s job satisfaction and productivity. From the results of Hexagon with their capital; and the environment and future the survey Hexagon will derive top-down actions and, if and generations. where necessary, appropriate bottom-up actions.

Legislation and guidelines Equality, health and safety Hexagon conducts business operations in 36 countries and is Hexagon’s work environment must be stimulating and facilitate subject to a wide range of legal requirements. However, as a development. Needless to say, it must also comply with existing market leader, Hexagon is responsible not only for complying legal requirements. No employee shall be discriminated against with laws and regulations, but also for acting as a role model in on the basis of gender, religion, age, disability, sexual orienta- its industry. tion, nationality, political views or ethnic origin. For Hexagon, The Group must comply with all applicable laws, rules and equality and diversity are a matter of mutual respect. regulations in all of its business activities. In international busi- Measures to ensure employees’ health and safety are estab- ness transactions, there must be compliance with export and lished on the basis of local conditions and regulations. Hexagon’s import regulations, anti-boycott provisions, trade embargos and efforts to improve the work environment are pursued in coop- economic sanctions in the countries affected. Hexagon’s repre- eration with labour unions. Most work-related accidents occur sentatives are not permitted to demand, accept or offer bribes, on stairs or falls elsewhere on the premises. Statistics and follow- kickbacks or any other unlawful or unethical benefits. up concerning work-related accidents are generated within each Hexagon’s code of conduct supports and embodies the core company. values expressed in the United Nations Global Compact’s ten principles in the areas of human rights, labour law, the environ- Competence and remuneration ment and anti-corruption. Hexagon’s code of conduct is appli- At Hexagon, career-oriented competence development is geared cable to all employees and everyone is encouraged to report any toward the needs of the company and the individual. Senior non-compliance with the code of conduct. management within each company undertakes individual leader-

28 Hexagon Annual Report 2007 Hexagon employees work within such areas as research and development, marketing, sales, production, installation, customer training, service and administration. The advanced technical level of this work requires skilled and highly educated employees. ship development programmes in cooperation with leading Customers and competitors companies in the field. Hexagon works to continuously improve its product portfolio, To further utilize Hexagon’s combined competence, Group particularly through its own research and development, in order employees work in a network that spans division and geographic to satisfy customer requirements. Professionalism and a high boundaries. An example of this is Hexagon’s network for em- level of service characterize the company’s customer relations. ployees within research and development, which meets regularly Business decisions are based on the best interest of Hexagon to discuss Group-wide development projects. Another is the rather than on personal considerations or relationships. annual Contact Conference, in which the Group’s approximately Hexagon competes honestly for business and upholds the 40 most senior managers participate for the purpose of coopera- highest standards with regard to business ethics. Hexagon also tion and exchanging experiences. adheres to its business ethics in its marketing and advertising The level of remuneration at Hexagon is market-based and activities. Naturally, the Group complies with the local competi- competitive. Performance-based remuneration, linked to the tion rules in effect in each geographic market. individual’s contribution to earnings, is the standard in certain parts of the Group. Further information about salaries and other Suppliers remuneration is available in Note 4a on page 69. When choosing suppliers, the competiveness of the supplier’s offering is the most decisive factor. In addition, Hexagon aims to Recruitment cooperate with suppliers and subcontractors whose procedures For a global company like Hexagon, local expertise is a necessary and business ethics correspond with Hexagon’s code of conduct. and decisive factor for success in specific geographic markets. For Hexagon’s supplier policy also stipulates that preference be this reason, most recruitment is carried out locally. given to suppliers that are environmentally aware. This includes To bring competence and up-to-date knowledge to the com- following Hexagon’s environmental policy. pany, Hexagon cooperates with a wide range of universities and colleges throughout the world. An example of this is the newly Owners and investors established Centre of Excellence in photogrammetry and remote Hexagon aims to supply the capital market, investors and other sensing at Wuhan University in China. Wuhan University will stakeholders with relevant information that provides the basis incorporate Hexagon’s products into its curriculum and research for a fair assessment of the company. The goal is to apply open- activities. In addition to providing funding and software, ness, objectivity and a high level of service in the company’s Hexagon will also initiate special research projects. financial reporting to enhance the market’s trust in the company and increase the interest of current and potential shareholders.

Hexagon Annual Report 2007 29 Corporate responsibility

Hexagon carefully follows accounting principles and utilizes Environment internal controls and processes to ensure that its accounting and Hexagon implements processes with regard to sustainability and financial reporting comply with laws, regulations and listing the pursuit of an ecological product development. A fundamen- requirements. Hexagon applies transparency in its financial tal principle for Hexagon’s environmental initiatives is the environ- reporting and, in accordance with the Group’s information policy, mentally friendly use of resources in its manufacturing whenever provides the market with comprehensive and well-founded possible. information. Questions regarding activities that may have an environmen- Hexagon’s corporate governance is described in the Corporate tal impact are to be guided by what is ecologically motivated, Governance Report on page 40 and is available on the company’s technically possible and financially defensible. In accordance website. All published financial information is also available on with Hexagon’s overall environmental policy, the Group: Hexagon’s website, including press releases, financial reports, annual reports and presentations. » Complies with laws, regulations and directions which relate to environmental protection. Society » Limits the use of natural resources by minimizing consump- Hexagon strives to use its market-leading position responsibly. tion of materials and maximizing reuse. Accordingly, the company supports and participates in a number » Utilizes safe and environmentally friendly installations in of projects that aim to improve the society in which Hexagon Hexagon’s manufacturing processes. operates. These projects are decided and organized at a local level » Uses energy in an economical and cost-efficient manner in its and by each company. buildings, production plants and the services that Hexagon One example is the African Geodetic Reference Frame performs. (AFREF) project. As a global acting company it is the interest of » Educates its employees in the fundamentals of environmental Hexagon to help establish a geodetic network for Africa – whose issues to enable them to actively work in a creative and purpose is to provide a precise survey of the land – with the most environmentally conscious manner. advanced technology. AFREF will serve both the sub-Saharan » Aims for environmentally friendly transports. region and the international community. It will increase capacity, modernize and harmonize geodetic reference networks The environmental work of the operations is decided and in the region, thus strengthening survey work and providing organized at a local level and by each company. The goals of this accurate data to support the private sector a well as business environmental work are determined based on the individual and policy makers. companies’ operations and impact on the environment. Follow- Another example is Amnesty International’s request for an up also takes place at company level. Further information is analysis of high-resolution satellite imagery to asses violations in available on each company’s website. Dafur, Sudan. Staffmembers of the American Association for the Advancement of Science (AAAS) analyze the images in Leica Certification and directives Geosystems ERDAS IMAGINE, a software tool providing the To be able to conduct profitable operations, it is absolutely AAAS image processing and multi-spectral classification analysis. essential to meet international quality standards and specific

Number 1. Switzerland 1 421 2. USA 1 346 3. Sri Lanka 1 161 4. Sweden 995 Number 5. China 899 EMEA Americas Asia 6. Germany 458 7. Italy 358 2007 4 290 1 557 2 559 8. France 266 2006 4 515 1 378 1 969 9. UK 202 2005 3 868 941 1 302 10. Singapore 197 2004 4 106 687 1 142 11. Other 1 103 2003 4 040 488 873 1234567891011 03 04 05 06 07

Geographic distribution of average number of employees Geographic distribution of average number of employees 2003–2007 Based on the average number of employees in 36 countries during 2007, Switzerland, EMEA is the geographic region in which Hexagon has the highest number of employees. the US and Sri Lanka had the highest number of employees. Following the listing of the During the period from 2003 to 2005, the average number of employees in EMEA re- polymer operations, the Group will no longer have employees in Sri Lanka and the number mained more or less constant, while the average number of employees in Asia and the of employees in Sweden will decrease significantly. Americas tripled.

30 Hexagon Annual Report 2007 Corporate responsibility

during the lifetime of its products. The company selects materials and components that can be reused or recycled. An example of recycling within Hexagon is Leica Geosystems’ commitment to take care of old measuring instruments free-of-charge and ensure that they are recycled correctly.

Hexagon’s responsibility as an innovator Hexagon addresses the issue of sustainability at the beginning of every product development and design process. As an integrated part of Hexagon’s research and development work, continuous discussions are held and tests performed concerning product improvements and whether they are ﬁnancially, technologically and ecologically justiﬁable. For Hexagon, sustainable product development includes:

» Controlling and striving to reduce the size and weight of its The African Geodetic Reference Frame (AFREF) is conceived as a unified geodetic refer- products to minimize the use of materials such as metals and ence frame for Africa. In March 2007, the first permanent GNSS reference station was launched in Kenya. Leica Geosystems supports the project with its knowledge, as well as plastics. via donation of a complete system. » Using recyclable materials, such as aluminium and brass, whenever possible. » Facilitating upgrades of products and services to extend the customer demands. This is a minimum requirement made lifecycle of the product. explicit by customers. Hexagon has been awarded a number of » Increasing compatibility with other measuring systems or certificates that attest to the quality of its products, manufactur- components, thereby broadening the functionality of the ing processes and customer satisfaction and that are reviewed measuring system. and examined regularly. » Designing ergonomic products that are easy to use. All Hexagon products and plants are certified in accordance » Reducing the consumption of hazardous materials in its with ISO 9001 and ISO 14001 where this is warranted. Certi- product design. fication allows customers to feel secure in the knowledge that Hexagon follows high-level quality and environmental standards A continuous process and that Hexagon’s operations are conducted in accordance with Updating and developing the description of the manner in defined and, as a result, measurable processes. which Hexagon works for its interested parties is a continuous In accordance with the European Union’s Waste Electrical process. At present, an initiative is under way within Hexagon to and Electronic Equipment (WEEE) and RoHS directives, review and update all Group-wide guidelines pertaining to cor- Hexagon strives to reduce the amount of waste that is produced porate responsibility.

% Men Women 2007 2006 Change Number Number of employees 10 062 8 170 23% 2007 81 19 2007 8 406 Average number of employees 8 406 7 862 7% 2006 82 18 2006 7 862 2005 84 16 2005 6 111 Number of countries 36 30 6 2004 84 16 2004 5 935 Average number of employees outside Sweden, % 88 83 5 2003 84 16 2003 5 401 03 04 05 06 07 03 04 05 06 07 Remuneration as a share of sales, % 22 22 0

Share of men and women Average number of employees At year-end 2007, the share of female In 2007, the average number of employees employees within Hexagon was 19 per cent, was 8 406. At year-end 2007, the number an increase of one percentage point. of employees was 10 062, an increase of 1 893 employees.

Hexagon Annual Report 2007 31 Caterpillar project

Integrated metrology services

Outsourcing of metrology services is a growing part of the Hexagon service offering. Full-time Hexagon employees are embedded right at the point of production, providing direct support to manufacturing customers on a real-time collaborative basis.

When many companies outsource parts of their operations, it often means sending work to a far flung location away from the core factory. Hexagon provides outsourced metrology services of a different kind. Dimensional measurement validation of parts often means the difference between “go” and “no-go” in production, and having third party experts from Hexagon permanently on-site provides an extra measure of reliability in test results. Cost savings in the form of improved production uptime and reduced scrap are tangible benefits to this type of integrated services. Hexagon has signed a long term contract with the diesel engine manufacturing unit of Caterpillar Inc. in Mossville, Illinois, USA, to provide in-house metrology support services to the construction equipment company. A staff of 31 Hexagon employees provide round the clock, seven days a week, support on-site at Mossville providing complete inspection support including dimensional and surface finish checks. Caterpillar Mossville has multiple production lines producing engine heads, crankshafts, cylinder heads and engine blocks. Hexagon inspectors work closely with Caterpillar staff to identify and assist in corrective actions and continuous improvements from the first production step to final product. The Hexagon staff also programs, services and maintains Caterpillar’s onsite metrology equipment, the majority of which are Hexagon brands such as Brown & Sharpe and DEA.

Service and maintenance provided to secure the measurement system’s operation comprise a key component in Hexagon’s customer offering. Service and maintenance activities include contract-based measurement, Caterpillar project

training of measurement system operators, outsourcing of the measurement function and software upgrades. Technical measurement advice and measurement assignments ensure that Hexagon stays abreast of the daily use the Group’s products. The Hexagon share

Favourable value growth for the Hexagon share

Hexagon’s share price rose a full 39 per cent during 2007. Trading At year-end, the share price was 135.50 SEK and market A total of 90 669 787 shares (117 276 492) were traded in 2007, capitalization totalled about 36 billion SEK. Earnings per including after-hour trading, for a total value of 16 344 MSEK share increased 36 per cent compared with 2006. (9 692). An average of 364 136 shares (465 384) were traded per trading day. The number of shares traded was 34 per cent (44) of Hexagon’s class B shares are traded on the Nordic Exchange’s the total number of shares. Large Cap List under the HEXA B code. A trading lot comprises 100 shares. The Hexagon share also has a secondary listing on the Shareholder structure SWX Swiss Exchange under the HEXN code. At year-end 2007, Hexagon had 10 069 registered shareholders, compared with 7 443 at year-end 2006. At year-end, the foreign Value trend ownership share was 24 per cent (25). Shareholders in the US During the year, the price of the Hexagon share rose by 39 per accounted for the largest foreign holdings, representing 10 per cent to 135.50 SEK (97.30). During the corresponding period, cent (9) of total shares. the Nordic Exchange’s OMXS index declined by 7.5 per cent. The highest closing price paid during the year was 157.50SEK Split of the Hexagon share on 7 November 2007. The low for the year, 87.17SEK , was re- During the year, the Hexagon share was split, whereby each corded on 5 March 2007. Market capitalization at year-end was share was divided into three shares of the same class. The record 35 955 MSEK (25 855). date for the split was 13 June 2007.

Share capital Separate listing of Polymers Hexagon’s share capital amounts to 530 699 970 SEK, represent- Hexagon’s Board of Directors decided during the year to propose ed by 265 349 985 shares. Total shares at year-end 2007 com- to the Annual General Meeting that it approve a separate listing prised 11 812 500 class A shares, each carrying ten votes, and of the polymer operations on the Nordic Exchange. The listing is 253 537 485 class B shares, each carrying one vote. All shares planned to be eﬀected during June 2008. For Hexagon’s share- confer equal rights to participate in the company’s assets and holders, this corresponds to an extraordinary dividend in the earnings. form of shares in this future listed company.

Symbols and codes Key data per share 2007 2006 Change The Nordic Exchange HEXA B Share price, SEK 135 97 39% ISIN code SE0000103699 Shareholders’ equity, SEK 37.69 32.00 18% SWX Swiss Exchange HEXN Earnings, SEK 6.79 5.01 36% Trading lot 100 shares Cash flow, SEK 9.32 6.84 36% Reuters Ticker HEXAb.ST Dividend, SEK 2.35* 1.67 41% Bloomberg Ticker HEXAB SS Dividend yield, % 1.7 1.7 0.0 Pay-out ratio, % 35 33 2

Distribution of shares * According to the Board of Directors’ proposal. Number of Type of share shares % of votes % of capital Class A shares 11 812 500 31.8 4.5 Class B shares 253 537 485 68.2 95.5 Total 265 349 985 100.0 100.0

34 Hexagon Annual Report 2007 The Hexagon share

Options programmes Share performance 2000–2007 Hexagon currently has three outstanding option programmes SEK thousands with the overall objective of harmonizing the incentives applying 160 120 to key employees with shareholder interests, by oﬀ ering these employees the opportunity to participate in the Group’s value 80 growth. 60 Hexagon’s subsidiary Leica Geosystems has two options 40 25 000 programmes outstanding. Th ese options have been transferred 20 000 free on charge on allotment. Following Hexagon’s acquisition 20 15 000 of Leica Geosystems, the terms and conditions were adapted so that the options apply to Hexagon shares plus a cash considera- 10 000 tion. Th e remaining 29 940 options confer rights to subscribe for 5 000

449 100 class B Hexagon shares, insofar as Hexagon elected not 5 to redeem the options for cash. 2000 2001 2002 2003 2004 2005 2006 2007 (c) OMX AB Class B share SIX General Index Total number of traded shares in thousands In December 2007, an Extraordinary General Meeting (incl. after-hour entries) authorized Hexagon to implement a subscription warrant programme for approximately 80 identiﬁ ed senior executives and 13 June, key employees of the Group through a directed issue of 2 May, First- record date for 2 500 000 subscription warrants for a price of 20 SEK per quarter Report 26 October, 3:1 split warrant. Each subscription warrant shall entitle the holder to Third-quarter Share performance 2007 Report subscribe for one class B Hexagon share during the period from SEK thousands 2 July 2011 up to and including 2 January 2012. When exercising 160 the subscription warrants, the price paid for the subscription of 150 new shares shall be based on a market valuation considering the 140 established price for the warrants, based on the Black-Scholes 130 model. 120 16 000 Upon full exercise of remaining parts of Hexagon’s three 110 option programmes outstanding, the dilutive eﬀ ect would be 12 000 1.1 per cent of the share capital and 0.8 per cent of the voting 100 8 000 rights. 90 4 000

80 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec (c) OMX AB Class B shares SIX General Index Total number of traded shares in thousands (incl. after-hour entries)

Shareholder information Dividend policy Dividend Financial information regarding Hexagon’s earnings performance and Th e dividend proposed by the Board of Hexagon and current share-price infor- equity ratio determine the size of the Directors for 2007 is 2.35 SEK (1.67) mation is available on the company’s dividend. Hexagon’s dividend policy per share, corresponding to 624 MSEK website at www.hexagon.se. stipulates that 25–35 per cent of earn- (442). Th e dividend corresponds to 35 Questions will be answered by ings per share after tax should be paid per cent (33) of earnings per share after Sara Kraft, IR Manager as dividend to shareholders, assuming tax and 5.5 per cent (5.1) of consolidated Telephone +46 8 601 26 27 the company satisﬁ es its equity ratio shareholders’ equity. It is also proposed E-mail [email protected] objective. that the polymer operations be listed on the Nordic Exchange, which will correspond to a dividend of shares in the future listed company.

Hexagon Annual Report 2007 35 The Hexagon share

Changes in shares outstanding and share capital Change in Change in Nominal number, number, Total number, Total number, Share capital, Year Transaction value, SEK class A shares class B shares class A shares class B shares total, SEK 2000 10 – – 840 000 13 953 182 147 931 820

2002 Rights issue 10 210 000 3 488 295 1 050 000 17 441 477 184 914 770

2004 New issue, options exercised 10 – 10 170 1 050 000 17 451 647 185 016 470

2005 New issue, options exercised 10 – 722 635 1 050 000 18 174 282 192 242 820

2005 Bonus issue 12 – – 1 050 000 18 174 282 230 691 384

2005 Split 3:1 4 2 100 000 36 348 564 3 150 000 54 522 846 230 691 384

2005 New issue, options exercised 4 – 154 500 3 150 000 54 677 346 231 309 384

2005 Private placement* 4 – 11 990 765 3 150 000 66 668 111 279 272 444

2005 Private placement* 4 – 82 000 3 150 000 66 750 111 279 600 444

2006 Rights issue 4 787 500 16 687 527 3 937 500 83 437 638 349 500 552

2006 New issue, options exercised 4 – 508 933 3 937 500 83 946 571 351 536 284

2006 Compulsory redemption, Leica Geosystems 4 – 198 635 3 937 500 84 145 206 352 330 824

2006 New issue, options exercised 4 – 309 119 3 937 500 84 454 325 353 567 300

2007 New issue, options exercised 4 – 58 170 3 937 500 84 512 495 353 625 470

2007 Bonus issue 6 – – 3 937 500 84 512 495 530 699 970

2007 Split 3:1 2 7 875 000 169 024 990 11 812 500 253 537 485 530 699 970

31 December 2007 2 11 812 500 253 537 485 530 699 970

* Issues in kind in connection with the acquisition of Leica Geosystems.

% USA 43 UK 16 % Luxembourg 16 Sweden 76 Portugal 7 Foreign Switzerland 4 SEK SEK ownership 24 Germany 3 2007 6.79 2007 2.35 France 2 2006 5.01 2006 1.67 Other 9 2005 3.14 2005 0.92 2004 2.28 2004 0.61 2003 1.22 2003 0.47 03 04 05 06 07 03 04 05 06 07

Swedish and foreign ownership Proportion of foreign ownership Earnings per share Dividend per share The share distribution is based on where Of the foreign owners, 43 per cent were Earnings per share increased by 36 per The Board of Directors proposes that the the shareholding is registered. At the end registered in the US and 16 per cent in the cent to 6.79 SEK, which surpassed the dividend be increased by 41 per cent to of 2007, foreign ownership corresponded UK at the end of 2007. objective of an annual increase of at least 2.35 SEK, corresponding to 35 per cent of to 24 per cent. 15 per cent. earnings after tax.

36 Hexagon Annual Report 2007 The Hexagon share

The 20 largest shareholders in Hexagon AB Number of shares per shareholder Class A Class B Number of Number of Number of shares shares Capital, % Votes, % shareholders class A shares class B shares Melker Schörling AB 11 812 500 50 415 654 23.5 45.4 1–500 4 510 – 885 929

Maths O. Sundqvist, 501–1 000 1 593 – 1 249 774 through companies 39 000 000 14.7 10.5 1 001–2 000 1 408 – 2 058 006 Swedbank Robur Funds 17 161 625 6.5 4.6 2 001–5 000 1 252 – 4 006 272 AFA Insurance 14 177 792 5.3 3.8 5 001–10 000 564 – 4 054 227 Columbia Wanger Asset 10 001–20 000 310 – 4 275 309 Management 10 950 000 4.1 2.9 20 001–50 000 171 – 5 137 889 Mellon Omnibus 5 801 210 2.2 1.6 50 001–100 000 82 – 5 835 641 JP Morgan 4 881 543 1.8 1.3 100 001–500 000 111 – 26 321 386 Handelsbanken Funds 4 368 729 1.7 1.2 500 001–1 000 000 32 – 22 790 421 Fidelity Funds 4 195 582 1.6 1.1 1 000 001–5 000 000 32 – 63 920 561 SEB Investment Management 3 942 425 1.5 1.1 5 000 001–10 000 000 – – – AMF Pensionsförsäkrings AB 3 900 000 1.5 1.1 10 000 001– 4 11 812 500 113 002 070 Handelsbanken 3 804 908 1.4 1.0 Total 10 069 11 812 500 253 537 485 Simon Bonnier 3 227 430 1.2 0.9

Second AP Fund 2 946 165 1.1 0.8 Source: Direct and nominee-registered holdings with VPC at 31 December 2007.

Didner & Gerge Mutual Fund 2 770 000 1.0 0.8 Analysts monitoring Hexagon AB Ola Rollén 2 731 152 1.0 0.7

Fourth AP Fund 1 904 087 0.7 0.5 ABG Sundal Collier Tobias Ottosson [email protected] Northern Trust 1 815 809 0.7 0.5 CAI Chevreux Patrik Sjöblom [email protected] SIS Segaintersettle AG 1 788 044 0.7 0.5 Carnegie Björn Enarson [email protected] Deutsche Bank Johan Wettergren [email protected] AMF Pension Funds 1 646 900 0.6 0.4 Handelsbanken Markus Almerud [email protected] Total, largest 20 shareholders 11 812 500 181 429 055 72.8 80.7 Kaupthing Joakim Höglund [email protected] Total, others – 72 108 430 27.2 19.3 SEB Enskilda Daniel Schmidt [email protected]

Total number of shares 11 812 500 253 537 485 100.0 100.0 Swedbank Mats Larsson [email protected] Source: Direct and nominee-registered holdings with VPC at 31 December 2007, grouped into owner categories.

SEK SEK billion 2007 7.64 2007 36.0 2006 4.39 2006 25.8 2005 3.92 2005 16.5 2004 3.54 2004 5.9 2003 2.43 2003 3.6 03 04 05 06 07 03 04 05 06 07

Cash flow per share Market capitalization More than 100 analysts, investors and journalists participated in Hexagon’s Capital Mar- Cash flow from operating activities in- Hexagon’s market capitalization increased kets Day on 4 December 2007 in Stockholm, Sweden, at which Hexagon presented new creased to 2 027 MSEK, corresponding by 40 per cent during the year to 36 billion financial objectives for the coming three-year period. Hexagon’s geospatial imaging and 7.64 SEK per share. SEK at the end of 2007. machine control operations were presented, as were the Group’s operations in China.

Hexagon Annual Report 2007 37 Risk management

Limited and controlled risk assumption

Risks are a natural feature of international operations. The To manage country-specific risks, Hexagon observes local legisla- risks may be operational or financial. Hexagon deploys a tion and monitors political developments in the countries where structured approach to limiting both short and long-term the Group is active. risks. Price risk Hexagon’s risk-management activities are designed to identify, Some of Hexagon’s operations are pursued in competitively control and reduce risks associated with its business. Operational exposed industries that are affected by pressure on prices and risks are primarily managed within each subsidiary and business rapid technological change. To reduce these risks, Hexagon’s area, while other risks are managed at Group level. ability to compete in a market environment by introducing new products with greater functionality, while simultaneously reduc- Operational risks ing costs for new and existing products, is of major significance. Since the majority of operational risks are attributable to Hexagon’s customer and supplier relations, Hexagon conducts Raw materials risk ongoing risk analyses of customers and suppliers to assess busi- The raw materials risk relates to the supply of and price forma- ness risks. tion for necessary production inputs. During the past year, the Hexagon’s business activities are conducted in a large number price of most of the Group’s raw materials has stabilized, com- of geographical markets, with numerous customer categories. pared with prior years. To minimize the risk of shortages in the The largest customer represents about 1 per cent of the Group’s supply of raw materials or of excessive price variations among total sales. The same applies to the Group’s suppliers, where suppliers, Hexagon works actively to identify alternative suppli- the major supplier accounts for some 2 per cent of net sales. ers for strategic materials and, in close cooperation with custom- Hexagon believes it has a favourable risk diversification and that ers, to identify alternative raw materials. dependence on a single customer or supplier is not decisive for the Group’s success. Sales by customer category are presented in Legal risks diagrams on pages 17 and 25. To avert legal risks, Hexagon closely monitors regulations and ordinances applicable in each market and works to rapidly adapt Political risk the company to identified future changes in the area. Operations may be limited by changes to regulatory structures, While it occasionally occurs that Hexagon becomes a party to customs duties and other trading obstacles, pricing and currency legal disputes relating to its business operations, no Group com- controls and other central government guidelines in the coun- pany is party to any legal process or dispute whose outcome is tries where Hexagon is active.

% % CHF 46 EUR 35 CAD 18 USD 25 USD 16 CHF 11 EUR 11 SEK 10 CZK 3 GBP 4 Sensitivity analysis CNY 3 CNY 4 Change Outcome Other currencies 3 Other currencies 11 Sales price 1 per cent 146 MSEK Payroll expenses 1 per cent 38 MSEK Market interest rates 1 percentage point 70 MSEK

Net assets per foreign currency Sales per currency CHF is the foreign currency in which the EUR is the currency in which Hexagon has Group has the largest amount of its net most of its net sales, followed by USD, assets, followed by CAD and USD. CHF and SEK.

38 Hexagon Annual Report 2007 Risk management

anticipated to have a material impact on consolidated earnings when sales and purchases are made in different currencies (trans- and financial position. action exposure) and, in part, when the income statements and To secure a return on Hexagon’s investments in research and balance sheets of foreign subsidiaries are translated to Swedish development, the Group protects its technological innovations kronor (translation exposure). In accordance with the finance against infringement and plagiarism. Hexagon protects its intel- policy, transaction exposure is eliminated as soon as it is identified, lectual property through legal proceedings when warranted. mainly through forward currency contracts. Other currency risks are subject to exchange rate hedging via loans or forward contracts Human capital risk in the net asset currency. Since future successes are largely dependent on the capacity to retain, recruit and develop skilled staff, being an attractive Financing risk employer is an important success factor for Hexagon. Group Financing risk refers to the risk that Hexagon cannot meet its need and business area management jointly handle risks associated for external capital. Securing these requirements demands a strong with human capital. financial position in the Group, combined with active measures to ensure access to credit. Cash and cash equivalents, including un- Insurable risks utilized credit limits, totalled 2 753 MSEK on 31 December 2007. To ensure well-balanced insurance cover and financial economies of scale, the Hexagon Group’s insurance includes Group-wide Interest rate risk non-life and liability insurance, travel insurance and transport The interest rate risk is the risk that changes in interest rates will insurance. In pace with the Group’s development and the com- adversely affect the Group’s net interest expenses and/or the cash pletion of damage-prevention programmes, the insurance pro- flow. gramme is periodically amended so that own risk and insured risk are optimally balanced. Credit risk The primary credit risk to which Hexagon is exposed is that a Environmental risk customer cannot settle its transactions with Hexagon. There is no Hexagon does not believe that changed environmental require- substantial concentration of credit risks geographically or in terms ments could affect demand for the Group’s products or the use of a particular customer segment. of the Group’s tangible fixed assets to any major degree. Certain Group companies pursue operations that require permits or are Sensitivity analysis notifiable pursuant to the Swedish Environmental Code and are The Group’s earnings are affected by changes in certain key factors, under the supervision of the appropriate authority. Hexagon has as reviewed below. The calculations proceed from the conditions received permits and has fulfilled the applicable notification prevailing in 2007 and the effects are expressed on an annualized obligations. basis. Earnings in foreign subsidiaries are converted to Swedish kronor based on average exchange rates for the period the earnings Financial risks arise. In its capacity as a net borrower and due to its extensive opera- During the year, the average exchange rate for CHF deterior- tions outside Sweden, Hexagon is exposed to various financial ated by slightly more than 4 per cent. Since Hexagon has negative risks. The Group’s finance policy indicates guidelines for finan- exposure in terms of CHF, the decline had a favourable impact on cial exposure and how these should be managed in the Group. earnings. This was offset by Hexagon’s positive exposure in terms The Board formulates a finance policy for each year. of USD, for which the average exchange rate deteriorated by Hexagon’s financial operations are centralized to the Group’s slightly more than 8 per cent. internal bank, which is in charge of coordinating currency and During 2007, total net cash flow from operations in foreign interest rate exposure. The internal bank is also responsible for currencies amounted to an equivalent of 2 154 MSEK. An apprecia- the Group’s external borrowing and its internal financing. Cen- tion in the exchange rate for SEK by 1 per cent against all other tralization entails substantial economies of scale, lower financing foreign currencies, would have an adverse effect on operating costs and better control and management of the Group’s finan- earnings of approximately 21 MSEK. cial risks. The internal bank has no mandate to conduct inde- A 1 per cent change in sales prices would affect revenues and pendent trading in currencies and interest rate instruments. The operating earnings by approximately 146 MSEK. A 1 per cent credit risk at the customer level is managed in each subsidiary. change in payroll expenses including social security contributions A more detailed description of the Group’s financial risks is would affect operating earnings by approximately 38 MSEK. presented in Note 17 on page 80. Based on the average interest fixing period in the Group’s total loan portfolio as of year-end 2007, a simultaneous 1 percentage Currency risk point change in interest rates in all of Hexagon’s funding curren- Pursuing operations outside Sweden entails currency risks. cies would exert an impact of about 70 MSEK on pre-tax full-year Changes in exchange rates affect Hexagon’s earnings, in part earnings.

Hexagon Annual Report 2007 39 Corporate governance

Hexagon’s corporate governance

Hexagon applies a transparent approach to the dissemina- Hexagon’s Corporate Governance Report for 2007 and the tion of information to shareholders and capital markets. Board of Directors’ report on internal control have not been The company is governed in accordance with Hexagon’s examined by the company’s auditors. These reports are not part Articles of Association, the Swedish Companies Act, the of the formal annual report documents. Hexagon’s corporate listing agreement and other applicable Swedish and inter- governance process is described schematically below. national rules and regulations. Articles of Association Hexagon complies with the Swedish Code of Corporate Govern- Hexagon’s current Articles of Association were adopted on 2 May ance (the Code). During 2007, deviations from the Code were as 2007, and state that the company’s operations are to own and follows: manage shares in manufacturing, trading and service companies, and to own and manage real estate and securities, conduct administrative operations for subsidiaries, and to engage in Rule Rule from the Code Comments related activities. The Articles of Association also formalize issues 2.1.2. Neither the Chairman of the Board nor To facilitate an efficient nomination such as shareholders’ rights, the number of Board Members and any other Member of the Board shall process, the Chairman of the Board be the chairman of the Nomination also serves as chairman of the auditors, that the Annual General Meeting should be held with- Committee. Nomination Committee. in six months of the end of the ﬁnancial year, the structure of the notice convening the Annual General Meeting and the fact that 3.8.2. The Board of Directors must establish In order to ensure active and efficient an audit committee that must work by the Board of Directors, the company’s Board has its registered oﬃce in Stockholm, comprise at least three Members of Hexagon has decided to have a Sweden. The current Articles of Association are available on the the Board. limited number of Board Members. company’s website. Accordingly, the Audit Committee has fewer members than the recom- mended number. Annual General Meeting The Annual General Meeting is Hexagon’s supreme executive body in which all shareholders may participate. The AGM is the

SHAREHOLDERS

ANNUAL GENERAL MEETING NOMINATION COMMITTEE

REMUNERATION COMMITTEE AUDITORS BOARD OF DIRECTORS

AUDIT COMMITTEE CEO/GROUP MANAGEMENT

OPERATIONS

40 Hexagon Annual Report 2007 Corporate governance

Comments from the Chairman of the Board My principal role in Hexagon, together with the other Members of the Board and in the best interests of the shareholders, is to work for the Group’s long-term development. Th e function of the Board is, jointly with Group Management, to establish a strategy and a direction, to determine the operating and fi nancial objectives and make General Shareholder Meeting at which the Board presents the overall decisions con- annual report, the consolidated accounts and the audit report. cerning how the com- Hexagon issues the notice convening the AGM no earlier than pany’s assets are to be six weeks and no later than four weeks prior to the meeting. Th e used for investments, AGM is usually held in May in Stockholm, Sweden. acquisitions, divest- Th e progress of the company and its operations is addressed ments and dividends. at the AGM, which resolves on a number of issues of vital im- Th e year 2007 will portance such as discharging the Board and Chief Executive be noted in our history Offi cer from personal liability for the fi nancial year, dividends, as another successful remuneration for the Board and auditors, appointment of new and strategically impor- Members of the Board for the period up to the following AGM tant year for Hexagon. and any amendments to the Articles of Association. A resolution In the past year, we concerning the election of auditors is made at the AGM every implemented a large fourth year. Wherever applicable, such matters as incentive pro- number of strategic grammes and new issues are also addressed. acquisitions of companies in various parts of the world. We continued to develop Hexagon into a leading global Annual General Meeting 2007 measurement technologies group with strong market Th e AGM was held on 2 May 2007 in Stockholm, Sweden, and positions. was attended by a total of 111 shareholders, who jointly repre- As a part of this process, we made the decision to list sented 65.5 per cent of the total number of shares and 75.3 per the polymer operations as a separate group on the Nordic cent of the total number of voting rights. Melker Schörling was Exchange. We are of the opinion that Polymers has elected chairman of the AGM. Th e following main resolutions achieved the size and profi tability that make the business were passed: attractive as an independent, listed company. As a listed company, Polymers can continue to grow through new » Th e AGM resolved to re-elect Board Members Melker establishments and acquisitions. Schörling, Maths O. Sundqvist, Ola Rollén, Marianne During 2007, Hexagon continued to develop beyond Arosenius and Mario Fontana, and to newly elect Ulf all expectations and in December we established the new Henriksson. Melker Schörling was re-elected Chairman fi nancial direction for Hexagon as a dedicated measure- of the Board. ment technologies company. In the next three years, the » Total director fees of 2 425 000 SEK were resolved for the fi nancial target is to double sales through organic growth Board, divided as follows: 650 000 SEK for the Chairman of and a continued high pace of acquisition and to further the Board and 350 000 SEK to each of the other Board Mem- increase the Group’s operating margin. It will continue to bers elected by the Annual General Meeting that are not em- be an exciting journey and I look forward to participating ployed by the company. It was resolved that the chairman of in it. the Remuneration Committee would receive 75 000 SEK and I would like to take this opportunity to thank all that each member of this Committee would receive 50 000 Hexagon employees for their excellent work during the SEK and that the chairman of the Audit Committee would past year. Th anks to you, Hexagon is today a successful receive 150 000 SEK and that each member of this Commit- innovator with world-class products and services. tee would receive 100 000 SEK. » Th e AGM adopted the Income Statement and Balance Sheet Stockholm, Sweden, March 2008 and the Consolidated Income Statement and Balance Sheet. Th e AGM also resolved to appropriate earnings in accordance melker schörling with the adopted Balance Sheet, and discharged the Board Chairman of the Board Members and CEO from personal liability.

Hexagon Annual Report 2007 41 Corporate governance

» The AGM approved the Board’s motion to pay a dividend of » The EGM resolved in accordance with the Board’s motion 5.00 SEK per share. Monday 7 May 2007 was approved as the to implement a subscription warrant programme for senior record date for dividends. executives and key employees in the Group by means of a » The AGM resolved to re-elect Melker Schörling, Maths O. directed issue of 2 500 000 subscription warrants. The war- Sundqvist, Henrik Didner (Didner & Gerge Funds) and rants shall be transferred to approximately 80 senior execu- Anders Algotsson (AFA Försäkring) and to newly elect tives and key employees identified by the Board, at a price Marianne Nilsson (Swedbank Robur) as members of the of 20 SEK per warrant and the remaining warrants shall be Nomination Committee ahead of the AGM in 2008, with reserved for future recruitment of senior executives and key Melker Schörling appointed chairman of the Nomination employees in the Group. Committee. » The AGM resolved on the establishment of guidelines for the Nomination Committee remuneration of senior executives, essentially entailing that At the AGM, a nomination committee is elected with the task of such remuneration should comprise a basic salary, variable representing proposals at the following AGM concerning the elec- muneration, other benefits and pension, and that in total this tion of Chairman and other Members of the Board, the election remuneration should be commercially viable and competitive of chairman of the AGM, director fees divided among the in the market. The variable remuneration should be maxi- Chairman and other Members of the Board and any related mized in relation to the basic salary, connected to the earn- issues. The Nomination Committee also presents proposals ings trend that the individual can influence and be based on regarding the election and fees to be paid to the auditors. In the outcome in relation to individually established targets. order to facilitate an efficient nomination process, the Nomina- » The AGM resolved to implement a non-cash issue, whereby tion Committee includes Board Members who also represent the the company’s share capital would be increased by a maxi- principal shareholders. mum of 520 000 SEK through the issue of a maximum of The members of the Nomination Committee ahead of the 130 000 class B shares. The background to this non-cash issue 2008 AGM, presented on the company’s website, are as follows: was that in connection with Hexagon’s acquisition of Leica Geosystems in October 2005, there were approximately » Melker Schörling (Chairman) 90 000 issued and unredeemed options in Leica Geosystems » Maths O. Sundqvist that had been granted to employees of the former Leica » Henrik Didner, Didner & Gerge Funds Geosystems Group. » Anders Algotsson, AFA Försäkring » The AGM resolved to implement changes in the company’s » Marianne Nilsson, Swedbank Robur share capital in the Articles of Association and to carry out a split. The AGM also resolved to specify the location of the In the event that a replacement is required for a member who registered office of the Board. leaves the Nomination Committee before its work has been » The AGM resolved to increase the company’s share capital completed, the Nomination Committee is entitled to replace through a bonus issue, without issuance of new shares. After such a member with another representative elected from among registration of the aforementioned non-cash issue, the com- the major shareholders in terms of voting rights. During the pany’s share capital will amount to 353 799 980 SEK, with year, the Nomination Committee held one minuted meeting at 176 899 990 SEK to 530 699 970 SEK through transfer of which the chairman made a presentation of the evaluation pro- the said amounts from the statutory reserve. The aim of the cess. The Committee discussed desirable changes and decided bonus issue was to create a nominal value for the shares that on proposals to submit to the 2008 AGM concerning the elec- was equally divisible by three prior to the proposed split. tion of chairman of the AGM, the election of Chairman and » The AGM resolved to divide the company’s shares in such a other Members of the Board, directors fees, remuneration for way that each share would be split into three shares of the committee work and the election of auditors. same share class. Shareholders wishing to submit proposals have been able to do so by contacting the Nomination Committee by post. The notice and the documents presented at the 2007 AGM are No remuneration was paid to the members of the Nomination available in Swedish and in English on the company’s website. Committee for their work.

Extraordinary General Meeting in 2007 Board of Directors An Extraordinary General Meeting was held on 14 December The Articles of Association stipulate that Hexagon’s Board must 2007 in Stockholm, Sweden, and was attended by a total of comprise a minimum of three and maximum of nine regular 48 shareholders, who jointly represented 54.7 per cent of the total members. These members are elected annually at the AGM for number of shares and 67.7 per cent of the total number of voting the period until the following AGM has been held. At the 2007 rights. Melker Schörling was elected chairman of the EGM. The AGM, six members were elected, including the CEO. The Board EGM made the following principal resolution:

42 Hexagon Annual Report 2007 Corporate governance

Number of meetings and attendance 2007 Audit Remuneration Board Name Function Elected Committee Committee Meetings Independence Shares 1 Melker Schörling Chairman 1999 – 1 14 In relation to the company and A: 11 812 500 2 management B: 50 415 654 2

Marianne Arosenius 3 Member 2004 1 – 6 In relation to the company, management and the B: 2 886 company’s major shareholders

Mario Fontana Member 2006 3 – 11 In relation to the company, management and the B: 60 195 company’s major shareholders

Ulf Henriksson 4 Member 2007 – – 10 In relation to the company, management and the – company’s major shareholders

Ola Rollén Member 2000 – – 14 In relation to the company’s major shareholders B: 2 731 152 President and CEO Maths O. Sundqvist Member 1991 – 1 12 Not independent 5 B: 39 000 000

1 At 31 December 2007. 2 Shares owned through Melker Schörling AB. 3 Resigned from the Board at her own request in August 2007. 4 Elected in May 2007. 5 Member of the Board for more than 12 years.

Members possess excellent financial know-how and broad inter- Board activities in 2007 national experience of the engineering technology business. In 2007, the Board held 14 minuted meetings, including the Chairman of the Board Melker Schörling is the principal statutory Board meeting. At all scheduled Board meetings, the owner of Melker Schörling AB, which controls slightly more CEO and representatives of company management present to than 45 per cent of the voting rights in Hexagon. The company’s the Board information concerning the Group’s financial position second largest owner, Maths O. Sundqvist, who controls slightly and important events affecting the company’s operations. more than 10 per cent of the voting rights in Hexagon through The company’s auditors attended the first Board meeting of companies, is also Member of the Board. The other Board Mem- the year and reported their observations from their examination bers, with the exception of one Member, also have direct or in- of the Group’s internal controls and financial statements for 2006. direct shareholdings in the company, which ensures considerable The major matters addressed by the Board during 2007 included personal commitment to Hexagon’s development. the following: All Board Members are presented in greater detail on page 48 and can be reached at the address of Hexagon’s Head Office. 12 February Financial statements for 2006

19 April Decisions concerning acquisition of Jigsaw, ER Mapper and JMTC Responsibilities of the Board of Directors The Board is responsible for determining the overall objectives 2 May Interim report, first quarter for the company’s operations, developing and monitoring the 2 May Statutory Board meeting company’s overall strategy, decisions concerning major company 11 May Decision concerning acquisition of IONIC acquisitions, divestments and investments, and ongoing monitoring of operations during the year. The Board is also responsi- 22 May Decisions concerning allotment of shares, non-cash issue ble for ongoing evaluation of the company’s management, the 8 June Decision concerning listing of Polymers and acquisition of Gold Key presence of effective systems for monitoring and internal control 9 August Interim report, second quarter, decision concerning acquisition of CogniTens of the company’s operations and financial position, the Group’s organizational structure and administration pursuant to the 24 September Decisions concerning acquisition of Rost, Geopro and Junglas Swedish Companies Act. 1 October Decision concerning acquisition of NovAtel Inc. Procedural rules and instructions have been formulated for 25 October Interim report, third quarter, decision concerning acquisition of Elcome the Board and the CEO, which govern those issues requiring Technologies Board approval, and for the financial information and other re- 13 November Decision concerning Extraordinary General Meeting and proposal concerning porting to be submitted to the Board. These issues are addressed warrants programme and resolved on an annual basis. 29 November Adoption of proposal concerning warrants programme The Chairman of the Board is appointed by the AGM. The 20 December Budget 2008 and strategic discussion Chairman directs the Board’s activities to ensure that they are conducted pursuant to the Swedish Companies Act, the prevailing regulations for listed companies and the Board’s internal control instruments.

Hexagon Annual Report 2007 43 Corporate governance

Director fees The Audit Committee continuously obtains information and Pursuant to a resolution by the AGM, the Chairman of the supporting data from the Board Members, CEO, CFO and the Board and other Board Members received remuneration total- company’s external auditors. The Committee also familiarizes ling 2 425 000 SEK for 2007. The Chairman received 650 000 itself with all reports from the external auditors and follows up SEK and the other Board Members each received 350 000 SEK, these reports internally and with the auditors. apart from the CEO, who does not receive any director fees. During the year, the Audit Committee comprised Marianne The chairman of the Remuneration Committee received Arosenius (Chairman) and Mario Fontana. In August, after 75 000 SEK and each member of this Committee received Marianne Arosenius had resigned from the Board at her own 50 000 SEK. The chairman of the Audit Committee received request and thus also from the Audit Committee, Mario Fontana 150 000 SEK and each member of this Committee received was appointed chairman. The Committee’s member is independ- 100 000 SEK. ent of the company, its management and the company’s major shareholders. Evaluation of Board activities During 2007, the Audit Committee held four minuted meet- The Board continuously evaluates its work and the forms for ings: conducting its activities. This evaluation considers factors such as how the Board’s work can be improved, whether the character 5 February Annual accounts 2006 of meetings stimulates open discussion, and whether each Board Member participates actively and contributes to discussions. 20 September Focus of the audit in 2007 Since the Board comprises a small number of members, this 23 October Auditors’ fees in 2007 and procurement of audit for 2008–2011 evaluation is effected through ongoing discussions between the 19 December Preparation of annual accounts members. The evaluation is coordinated by the Chairman of the Board, who also continuously evaluates each individual member’s input and skills. The Board is also evaluated within the Auditors framework of the Nomination Committee’s activities. The AGM appoints auditors every fourth year. On behalf of the shareholders, the auditors’ task is to examine the company’s Board committees Annual Report and accounting records and the administration Remuneration Committee of the Board of Directors and the CEO. On behalf of the Board, the task of the Remuneration Commit- At the AGM on 5 May 2004, the accounting firm Ernst & tee is to consider issues regarding the remuneration of the CEO Young AB, Sweden, was appointed for the period up to the and the executives that report directly to the CEO, and other AGM in 2008. Ernst & Young AB possesses the requisite exper- similar issues assigned by the Board for consideration. The tise and is a member of FAR. Authorized Public Accountant Remuneration Committee obtains supporting data and views Hamish Mabon (born in 1965) serves as auditor in charge. from, among others, other Board Members, the CEO and the Hamish Mabon has participated in the assignment of auditing CFO. The Committee also obtains comparable supporting data Hexagon since 2001. In addition to Hexagon, he conducts audit- from external consultants. ing assignments for such companies as If Skadeförsäkring, During the year, the Remuneration Committee comprised Relacom and Delaval International. Hamish Mabon has no active Melker Schörling (Chairman) and Maths O. Sundqvist. assignments in companies that are closely related to Hexagon’s During 2007, the Remuneration Committee held one major shareholders or CEO. minuted meeting: During 2007, in addition to the audit, the auditors had other assignments in the form of work connected to acquisitions and divestments of operations. 10 January Terms of employment for the CEO and Group Management The company’s auditors attended the first Board meeting of the year, at which they reported observations from their exami- Audit Committee nation of the Group’s internal controls and the annual financial On behalf of the Board, the purpose of the Audit Committee is statements. Moreover, the auditors met the Board’s Audit Com- to consider issues relating to the procurement and remuneration mittee on four occasions during the year. of auditors, to consider plans for auditing work and the reports The address of Hexagon’s auditors is Ernst & Young AB, made by the auditors, to quality assure the company’s financial P. O. Box 7850, SE-103 99, Stockholm, Sweden. A complete reporting and other information, and to meet the company’s statement of remuneration to the auditors over the past two auditors on an ongoing basis to keep itself informed of the orien- years is published in Note 13 on page 79. tation and scope of the audit. The Audit Committee’s tasks also include monitoring the activities of the external auditors and the Group Management company’s internal control systems, monitoring the current risk The CEO is responsible for leading and controlling Hexagon’s situation and the company’s financial information, and monitor- operations in accordance with the strategy determined by the ing other issues the Board assigns the Committee to consider. Board. The CEO has appointed a Group Management compris-

44 Hexagon Annual Report 2007 Corporate governance

ing the CEO, the CFO and the Vice President of Strategy. variable remuneration, other benefits and pension, which when Group Management is responsible for overall business develop- considered on the whole are regarded as competitive in the mar- ment, and apportioning financial resources between the business ket. The variable remuneration shall be maximized in relation to areas, as well as matters involving financing and capital structure. the basic salary, be connected to the Group’s earnings trend in Where necessary, specialist know-how from leading experts is terms of what the particular individual can affect and be based also commissioned. on individually established goals. Members of Hexagon’s Group Management are presented in The executive must normally provide six-months notice of greater detail on page 49, and can be reached via the address of termination of employment. If the company terminates the Hexagon’s Head Office. executive’s employment, the period of notice and severance pay In addition to members of Group Management, Hexagon’s should not exceed a total of 24 months. Pension benefits shall be management comprises key personnel each with responsibility based on either defined-benefit or defined-contribution plans, for one of the Group’s product segments and geographical or a combination of such plans, with individually set retirement regions. Regular management team meetings constitute the ages, although never lower than 60 years. Group’s forum for implementing Group Management’s overall In order to create the conditions for recruiting and retaining controls down to a particular business operation and geographi- valuable skills within the company, an option programme has cal region, and in turn, down to individual company level. been formulated that provide the option holder with the right In financial terms, Hexagon’s business operations and subsid- to participate in the potential future value growth in company’s iaries are controlled on the basis of the parameter that they can share. This programme also aims to enhance interest in the com- influence themselves, namely the return on capital employed. pany’s progress and stimulate continued loyalty to the company. This requires that they focus on maximizing operating earnings, In connection with the acquisition of Leica Geosystems, the and minimizing their working capital. Hexagon’s organizational Leica Geosystems Group already had existing option programmes structure is distinctly characterized by decentralization. Individ- targeted at the company’s senior executives. The design of the ual managers assume overall responsibility for their business, and programme that is still outstanding is described in the section pursue clearly stated objectives. on the Hexagon share, on page 35. An EGM held during the year resolved to implement a sub- Remuneration scription warrant programme for senior executives and key em- Hexagon’s guidelines concerning the remuneration of executives ployees in the Group by means of a directed issue of 2 500 000 essentially entail that the remuneration comprise basic salary, subscription warrants. These warrants shall be transferred to

Hexagon’s Group Management Class B Employed shares Ola Rollén, President and Chief Executive Office 2000 2 731 152

Håkan Halén, Chief Financial Officer 2001 1 275 441

Gert Viebke, Vice President of Strategy 2000 1 277 667

Remuneration, SEK 000s Basic Variable Other Other Year Salary Pay Benefits Pension Remuneration Total Chief Executive Office 2006 8 311 4 000 – 1 247 – 13 558

2007 9 111 4 000 – 1 370 – 14 481

Other Senior Executives 2006 10 132 4 091 511 2 550 – 17 284

2007 6 747 3 677 78 1 515 – 12 017

Hexagon Annual Report 2007 45 Corporate governance

approximately 80 senior executives and key employees identifi ed The Board of Directors’ report on internal by the Board, at a price of 20 SEK per warrant and the remaining controls pertaining to financial reporting for warrants shall be reserved for future recruitment of senior execu- the 2007 financial year tives and key employees in the Group. Th e Code stipulates that the Board of Directors must Information to the capital market submit a report on the way the company’s internal Hexagon provides the market with ongoing information on the control, insofar as it pertains to fi nancial reporting, is company’s progress and fi nancial position. Hexagon aims to organized and how well it worked during the year. Th e utilize openness, objectivity and a high level of service in its Code states that the report must be examined by the fi nancial reporting, in order to enhance the market’s trust in the company’s auditor. However, the company’s Board has company and increase the interest of current and potential invest- decided to comply with the statement issued by the ors in the Hexagon share. During 2007, Hexagon regularly met Council of Swedish Corporate Governance on 5 Septem- investors and capital market players, in Scandinavia and interna- ber 2006. Th is statement stipulates that for 2006 and tionally, with the aim of explaining and clarifying the value of until further notice it is suffi cient, when writing the the Group’s operations. corporate governance report, for the Board to limit the Th e company’s information policy was adopted by the Board report on internal control to a description of how intern- on 2 May 2007 and is updated annually. Th e policy satisfi es the al control, insofar as it pertains to fi nancial reporting, is communication standards set by the stock market, and is de- organized. Accordingly, the report needs not include any signed in accordance with the Nordic Exchange’s recommenda- statement on how well the internal control process tions that complement the listing agreement. Th e information worked during the year. Nor does the report have to be policy addresses such matters as who may represent the company examined by the company’s auditor. Internal control as a spokesperson, who is to decide on matters that constitute pertaining to fi nancial reporting is a process that involves share price sensitive information, how share price sensitive infor- the Board, company management and other personnel. mation should be dealt with, and the information content and Th e process has been designed so that it provides reason- methods used for communication with the fi nancial market. able assurance of the reliability of the external reporting. Hexagon regularly publishes fi nancial information in According to generally accepted frameworks that have Swedish and English in the form of Interim Reports, the Annual been established for this purpose, internal control is usu- Report and press releases on news and share price sensitive events, ally described from fi ve diff erent perspectives. Th ese fi ve arranges presentations and telephone conferences for fi nancial perspectives serve as subheadings below. Th is section, analysts, investors and the media when interim/year-end reports like other parts of the corporate governance report, has are published and/or publishes other signifi cant information not been examined by the company’s auditor. Th e report disclosures. does not constitute a part of the formal annual report. Published information on the Group’s progress, other information intended for the stock market and other important data Control environment is available on the company’s website. Hexagon’s organization is designed to facilitate rapid decision-making. Accordingly, operational decisions are taken at the business area or subsidiary level, while decisions concerning strategies, acquisitions and company- wide fi nancial matters are taken by the company’s Board and Group Management. Th e organization is characterized by well-defi ned allocation of responsibility and well- functioning and well-established governance and control systems, which apply to all Hexagon units.

46 Hexagon Annual Report 2007 Corporate governance

Th e basis for the internal controls pertaining to fi nan- ment is conducted by means of manual controls in the cial reporting comprises an overall control environment form of, for example, reconciliations and audits, auto- in which the organization, decision-making routes, matic controls using IT systems and general controls authorities and responsibilities have been documented conducted in the underlying IT environment. Detailed and communicated in control documents, such as in analyses of fi nancial results and follow-ups in relation to Hexagon’s fi nance policy and reporting instructions and budget and forecasts supplement the business-specifi c in accordance with the authorization arrangements controls and provide general confi rmation of the quality established by the CEO. of the fi nancial reporting. Hexagon’s fi nancial-control functions are integrated by means of a Group-wide reporting system. Th e Group’s Information and communication fi nancial control unit engages in close and well-functio- To ensure the completeness and correctness of fi nancial ning cooperation with the subsidiaries’ controllers in reporting, the Group has formulated information and terms of the fi nancial statements and the reporting communication guidelines designed to ensure that rele- process. Th e Board’s monitoring of the company’s vant and signifi cant information is exchanged within assessment of its internal control includes contacts with the business, within the particular unit and to and from the company’s auditor. Hexagon has no internal audit management and the Board. Guidelines, handbooks function, since the functions described above satisfy and job descriptions pertaining to the fi nancial process this need. All of Hexagon’s subsidiaries report complete are communicated between management and personnel fi nancial statements on a monthly basis. Th is reporting and are accessible electronically and/or in a printed for- provides the basis for the Group’s consolidated fi nancial mat. Via the Audit Committee, the Board receives regu- reporting. Each legal entity has a controller responsible lar feedback in respect of the internal control process. for the business area’s fi nancial control and for ensuring To ensure that the external communication of informa- that the fi nancial reports are correct, complete and tion is correct and complete, Hexagon complies with a delivered in time for consolidated fi nancial reporting. Board-approved information policy that stipulates what may be communicated, by whom and in what manner. Risk assessment Th e signifi cant risks aff ecting the internal control of Follow-up fi nancial reporting are identifi ed and managed at Th e effi ciency of the process for risk assessment and the Group, business area, subsidiary and unit level. Within implementation of control activities are followed up the Board, the Audit Committee is responsible for continuously. Th e follow-up pertains to both formal ensuring that signifi cant fi nancial risks and the risk of and informal procedures used by the offi cers responsible error in fi nancial reporting are identifi ed and managed at each level. Th e procedures incorporate the follow-up in a manner that ensures correct fi nancial reporting. of fi nancial results in relation to budget and plans, analy- Special priority has been assigned to identifying pro- ses and key fi gures. Th e Board obtains ongoing reports cesses that, relatively speaking, give rise to a higher risk on the Group’s fi nancial position and performance. At of signifi cant error due to the complexity of the process each Board meeting, the company’s fi nancial position is or of the contexts in which major values are involved. addressed and, on a monthly basis, management analyzes the company’s fi nancial reporting at a detailed level. Control activities Th e Audit Committee follows up the fi nancial Th e risks identifi ed with respect to the fi nancial report- reporting at its meetings and receives reports from the ing process are managed via the company’s control auditors describing their observations. activities, which are designed to prevent, uncover and correct errors and non-conformities. Th eir manage-

Hexagon Annual Report 2007 47 Board of Directors and Group Management

Ola Rollén Melker Schörling

Board of Directors

Melker Schörling Mario Fontana Ulf Henriksson Stockholm, Sweden, born in 1947 Herrliberg, Switzerland, born in 1946 Oxshott, UK, born in 1963 Chairman of the Board since 1999 Board Member since 2006 Board Member since 2007 Other assignments: Chairman of Melker Other assignments: Board member of SBB Other assignments: CEO of Invensys plc. Schörling AB, Aarhus-Karlshamn AB, (Schweizerische Bundesbahnen) and four Education: Master of Engineering Securitas AB and Securitas Systems AB. exchange-listed companies: Swissquote, Independent of the company, its manage- Deputy Chairman of Assa Abloy AB. Board Inficon, Dufry and X-Rite. ment and major shareholders member of Hennes & Mauritz AB. Education: M.A., Georgia Institute of Hexagon shareholding: – Education: B.Sc. (Econ.) Technology and ETH Zurich Hexagon Committees: Chairman of Hexagon Committees: Audit Committee Nomination Committee and Remuneration Independent of the company, its manage- Committee ment and major shareholders Independent of the company and its Hexagon shareholding: management 60 195 class B shares Hexagon shareholding: 11 812 500 class A shares and 50 415 654 class B shares, through Melker Schörling AB

Maths-Olov Sundqvist Ola Rollén Lit, Sweden, born in 1950 London, UK, born in 1965 Board Member since 1991 President and CEO since 2000 Other assignments: CEO of AB Skrindan. Board Member since 2000 Chairman of Jämtlamell AB and Fabös AB. Education: B.Sc. (Econ.) Board member of Investment AB Öresund Independent of the company major and Fabege AB. shareholders Education: Economist In 2007, Marianne Arosenius, was also a Member of Hexagon shareholding: Hexagon’s Board of Directors until she resigned at her Hexagon Committees: Nomination and 2 731 152 class B shares own request in August. Remuneration Committees Not independent, Board Member for more than 12 years Hexagon shareholding: 39 000 000 class B shares

48 Hexagon Annual Report 2007 Board of Directors and Group Management

Mario Fontana Ulf Henriksson Maths-Olov Sundqvist

Ola Rollén Håkan Halén Gert Viebke

Group Management

Ola Rollén Håkan Halén Gert Viebke London, UK, born in 1965 Sollentuna, Sweden, born in 1954 London, UK, born in 1951 President and CEO Chief Financial Officer Vice President of Strategy Employed in 2000 Employed in 2001 Employed in 2000 Education: B.Sc. (Econ.) Education: B.Sc. (Econ.) Education: B.Sc. (Econ.) Hexagon shareholding: Hexagon shareholding: Hexagon shareholding: 2 731 152 class B shares 1 275 441 class B shares 1 277 667 class B shares

Hexagon Annual Report 2007 49 Directors’ Report

Directors’ Report

Hexagon AB (publ) corporate identity number control over the company changes due to a public tender offer for 556190-4771 the company. The Board of Directors and Chief Executive Officer of Hexagon Melker Schörling and Maths O. Sundkvist indirectly own AB (publ), with its registered office in Stockholm, Sweden, hereby shares corresponding to more than 10 per cent of the total number submit the Annual Report and consolidated financial statements of voting rights in the company. for the financial year 2007. The following Income Statements and Balance Sheets, Specifi- Divestments cations of Shareholders’ Equity, Cash Flow Statements and review Johnson Metall AB and its subsidiaries were sold on 31 January. of accounting principles and notes constitute Hexagon’s formal The divested companies’ sales during 2006 amounted to 477MSEK . financial report. Eurosteel AB and its subsidiaries were sold on 26 March. The companies’ sales during 2006 totalled 657 MSEK. Tidamek AB was Financial year 2007 sold on 1 December. The company’s sales during 2006 amounted Hexagon is a global technology group with strong positions in to 112 MSEK. selected market segments. Hexagon’s business concept is to Overall, the divestments of Johnson Metall AB, Eurosteel AB conduct global operations that develop and market leading and Tidamek AB generated total capital gains of 114 MSEK. technology-oriented products and services within measurement Divested companies are not of such a size that Hexagon chose technologies and polymers. The Group is organized in two busi- to recognize them as discontinued operations. ness areas: Hexagon Measurement Technologies and Hexagon Polymers. Business activities are conducted through 134 operating Listing of Hexagon Polymers companies in 36 countries throughout the world. Hexagon’s Board of Directors decided on 8 June to propose that Demand remained strong in EMEA, and organic growth (sales Hexagon’s AGM approve the public listing of the polymer opera- at fixed exchange rates and comparable structure) amounted to tions as a separate company on the Nordic Exchange. The listing, 13 per cent. In the Americas, the negative trend continued in the planned to be in the form of a spinoff to Hexagon’s shareholders, US construction and domestic automotive industries during the is expected to be completed during the first half of 2008. year. However, the decline was offset by increased demand within infrastructure investments and stronger demand for Hexagon’s Acquisitions products from non-automotive related segments such as mining, Effective 15 January 2007, Hexagon acquired all of the shares in aerospace and electronics industries. Organic growth in the Ameri- Svensk ByggnadsGeodesi AB (SBG), which develops, manufac- cas was 12 per cent. Growth in Asia continued to increase, with tures and supplies complete multidimensional systems for measur- organic growth amounting to 30 per cent. Hexagon’s overall organ- ing, planning and machine control for excavators, graders, dozers ic growth during 2007 was 15 per cent. and paving machines. The systems combine software and hardware The Hexagon share is listed on the Nordic Exchange and has a in the surveying, construction and contracting industries. Sales by secondary listing on the SWX Swiss Exchange. Earnings per share SGB in 2006 amounted to 40 MSEK. before dilution increased 36 per cent to 6.79 SEK (5.01). SwePart Transmission AB, a subsidiary of Hexagon, entered into a three-year supply agreement in January whereby, as of 1 Sep- Structural changes tember 2007, it will take over Scania’s component manufacturing A high level of divestment and acquisition activity was noted dur- in Sibbhult of cog-wheels and axles for Scania’s gearboxes, repre- ing 2007. The acquisitions were concentrated mainly on increasing senting total sales of approximately 250 MSEK. the Group’s distribution power and developing new technologies All the technology assets in the US software accompany Acquis, within Hexagon Measurement Technologies. Other changes should Inc. were acquired on 1 April. Acquis is a leading player in the de- be regarded as a reflection of the efforts to create a focused measure- velopment of web-based data editing, with annual sales of about ment technologies company. 3 MUSD. The company operates from Palo Alto, CA, in the US, and Dublin, Ireland. Significant agreements and shareholders Effective 1 May, the Group acquired all of the shares in the There are no significant agreements to which the company is a French companies D&P Systems s.a.s. and Topolaser System s.a.s. party that will have an impact or be amended or cease to apply if D&P Systems develops and supplies multidimensional systems for

50 Hexagon Annual Report 2007 Directors’ Report

measuring, planning and machine control of construction machin- products in the measurement technologies market’s macro segment ery and equipment. Topolaser main operations are distribution of in southwest Germany. Gesswein’s sales in 2006 was 1 MEUR. surveying and construction equipment and integration of machine Gold Key Processing, Ltd., a US rubber compounding compa- control systems in the French market. Combined, the operations ny headquartered in Middlefield, OH, was acquired on 1 Septem- have annual sales of 5 MEUR, excluding sales of Hexagon prod- ber. Gold Key produces rubber compounds for the automotive, ucts. The operations are conducted from Le Pecq, near Paris, as industrial, construction, pharmaceutical and aerospace industries. well as Merignac, outside Bordeaux, and Orléans, France. The capacity of the company’s production plant is 35 000 tonnes All of the shares in Allen Precision Equipment, Inc., a US com- per year. Gold Key has annual sales of approximately 75 MUSD. pany based in Duluth, GA, were acquired on 1 May. Allen Preci- Effective 1 September, Hexagon acquired CogniTens Ltd., a sion is a distributor that represents several major suppliers and measurement technologies company specializing in non-contact, markets surveying equipment and related products to engineers, three-dimensional measurement applications. CogniTens provides surveyors, contractors and government agencies. Allen Precision’s full surface and features measurements using advanced three- sales in 2006 totalled slightly more than 24 MUSD. dimensional optical technology. Headquartered in Israel, Effective 1 May, Hexagon acquired all shares in Jigsaw Technol- CogniTens had annual sales of approximately 8 MUSD and about ogies, Inc., a US company based in Tucson, AZ. Jigsaw develops 50 employees supporting the company’s growing installed base at and supplies software for fleet management, the largest sector of the worldleading automotive OEMs and their sub-suppliers. the measurement technologies market segment machine control During November, four European distribution companies for for mining. Its products are used mainly for coal and mineral open surveying and construction equipment were acquired, namely: pit mining applications. Jigsaw has annual sales of about 9 MUSD. R&A Rost Vertriebs GmbH and R&A Rost Produktions GmbH, Effective 1 June, Hexagon acquired all of the assets of Trans- both based in Austria, Junglas GmbH of Germany and Geopro Kft metal, the leading distributor of measurement technologies prod- in Hungary. The four companies had combined sales during 2007 ucts and equipment in Turkey. The company is headquartered in of approximately 100 MSEK, or about 60 MSEK excluding internal Ankara and has annual sales totalling some 40 MSEK. sales. The two Rost companies and Junglas were consolidated on All of the shares in the French group of companies GAMFI 1 October 2007 and Geopro on 1 December. International s.a.s, based in Mesnil le Roi, were acquired on 1 July. During October and November, Hexagon acquired all of the GAMFI is a global leading supplier of laser tools and instrumenta- shares outstanding in the NASDAQ-listed Canadian company tion marketed under brands such as AGL, QBL and AGATEC. NovAtel Inc. for 50 USD per share. NovAtel is a leading supplier The Group has research and development units in the US, Europe of precision Global Navigation Satellite System (GNSS) compo- and China. GAMFI’s consolidated sales in 2006 was 32 MEUR. nents and subsystems. The company develops quality products for Earth Resource Mapping Ltd. (ER Mapper), an Australian soft- OEMs, including receivers, enclosures, antennas and firmware ware company based in Perth, was acquired on 1 July. ER Mapper integrated in high-precision positioning applications worldwide. supplies “Image Web Server” (IWS) – a specialized, high-perform- These applications include surveying, Geographic Information ance server application designed to manage and distribute large Systems (GIS) mapping, machine control, port automation, min- image datasets at very high speeds. ER Mapper is also a world-class ing and marine industries. NovAtel reported sales of 77.6 MCAD provider of geospatial imagery processing solutions used to pre- in 2006, with after-tax earnings of 21.5 MCAD. Headquartered in pare, manage, compress and deploy imagery. The company is also Calgary, Canada, the company has about 300 employees. NovAtel a leader in the development of image compression technology. was consolidated on 1 December 2007. ER Mapper has annual sales of about 8 MAUD. Elcome Technologies Pvt. Ltd. of India was acquired on 1 Janu- IONIC Software, a Belgian software company, and IONIC ary 2008. Elcome is a distributor and systems integrator of prod- Enterprise of the US were acquired on 1 July. IONIC develops ucts and systems for positioning, navigation, alignment, measure- software that securely catalogues and serve geospatial information ments and surveying. The company is a market leader in India in in the Internet. IONIC markets products for the publishing, its targeted application segments, has more than 80 employees and discovery, access, integration, and application of spatial data. operates from 12 locations throughout India. The company’s sales IONIC’s annual sales amounted to 10 MEUR. The head office of during 2007 totalled about 100 MSEK, or some 35 MSEK exclud- the European company is situated in Liège, Belgium, and the US ing internal sales. operations are headquartered in Alexandria, VA. Effective 1 July, an additional 60 per cent of the shares in Jin- Order intake and net sales gjiang Measuring Tool Company (JMTC) were acquired, increas- Consolidated order intake grew 10 per cent during the year to ing Hexagon’s ownership in the company to 90 per cent. JMTC 15 139 MSEK (13 720). Consolidated net sales rose by 8 per cent to develops, manufactures and supplies a complete range of calipers 14 587 MSEK (13 469). Based on fixed exchange rates and a compar- for both digital and mechanical display. Headquartered in Jin- able structure, order intake grew by 16 per cent and net sales by gjiang, China, JMTC’s sales during 2006 amounted to 80 MSEK. 15 per cent. Hexagon acquired all of the assets of Gesswein of Germany on Hexagon Measurement Technologies’ net sales grew by 18 per 1 August. Gesswein is a well-established distributor of surveying cent in 2007 to 10 937 MSEK (9 250). The growth in net sales was

Hexagon Annual Report 2007 51 Directors’ Report

due in part to the companies acquired during the year. Based on Order intake, net sales and operating earnings (EBIT1) for fixed exchange rates and a comparable structure, net sales increased Hexagon’s various business areas for 2007 are presented in the 16 per cent. table below. Hexagon Polymers’ net sales grew by 9 per cent in 2007 to 2 730 MSEK (2 488). The growth in net sales was due partly to the Intangible fixed assets acquisition of GoldKey. Based on fixed exchange rates and a com- As of 31 December 2007, Hexagon’s carrying value for intangible parable structure, net sales grew 6 per cent. fixed assets was 14 151 MSEK (10 041). Amortization of intangible Net sales from the Group’s other operations decreased during fixed assets for the 2007 financial year was to 305 MSEK (261). 2007 to 922 MSEK (1 734). The decline in sales is attributable to operations divested during the year. Based on fixed exchange rates Financial revenue and expenses and a comparable structure, net sales grew 24 per cent. Consolidated financial net expenses decreased to 214 MSEK (222).

Consolidated gross earnings Effective tax rate Consolidated gross earnings rose 19 per cent in 2007 to 6 097 The consolidated tax expense was 245MSEK (338), equivalent to an MSEK (5 119). The gross margin improved to 42 per cent (38). effective tax rate of 12 per cent (21). The tax expense was influenced by a significant portion of earnings being generated by foreign Consolidated operating earnings subsidiaries in countries where tax rates differ from that in Sweden Consolidated operating earnings (EBITDA) grew by 26 per cent and by the fact that capital gains were essentially exempt from tax. to 3 054 MSEK (2 429). The operating margin (EBITDA margin) In addition, tax expenses in 2007 benefited from revaluations of improved to 21 per cent (18). deferred tax assets and liabilities due to changes in the Group’s Consolidated operating earnings (EBIT1) grew by 33 per cent legal and tax structures. Disregarding the taxation effects of non- to 2 421 MSEK (1 827), corresponding to an operating margin of recurring items, the effective tax rate during the year would have 17 per cent (14). The margin improvement was mainly attributable been 15 per cent (22). to the measurement technologies operations. Hexagon Measurement Technologies’ operating earnings Minority share of net earnings (EBIT1) increased by 39 per cent during the year to 2 141 MSEK The minority share of net earnings was 11MSEK (7) in 2007. (1 547), corresponding to an operating margin of 20 per cent (17). The strong improvement in earnings derived primarily from a Net earnings favourable product mix and a healthy volume trend. Consolidated earnings after tax grew by 41 per cent to 1 811 MSEK Hexagon Polymers’ operating earnings (EBIT1) rose by 39 per (1 280), corresponding to earnings per share of 6.79 SEK (5.01). cent during 2007 to 310 MSEK (223), corresponding to an operating margin of 11 per cent (9). Investments Operating earnings (EBIT1) from the Group’s other operations Hexagon’s net investments, excluding acquisitions of companies, decreased during 2007 to 30 MSEK (109), corresponding to a mar- amounted to 825 MSEK (834) in 2007 and consisted mainly of gin of 3 per cent (6). The decline was due to the operations divest- investments in production facilities, production equipment and ed during the year. intangible assets. Investments corresponded to 6 per cent (6) of net As a result of the divestment of Johnson Metall AB, Eurosteel sales. Depreciation and amortization for the year, including 195 AB and Tidamek AB, capital gains totalling 114 MSEK were real- MSEK (16) for impairment losses, amounted to 803 MSEK (602). ized. In addition, impairment losses and restructuring expenses of 98 MSEK, expenses of 16 MSEK related to the listing of polymer Cash flow operations and expenses of 151 MSEK related to the acquisition Cash flow from operating activities before change in working capi- analysis for NovAtel were recorded. Overall, this resulted in total tal grew by 42 per cent to 2 472 MSEK (1 737), corresponding to non-recurring items amounting to an expense of 151 MSEK. 9.32 SEK (6.84) per share. Including changes in working capital, In total, operating earnings rose by 30 per cent to 2 270 MSEK cash flow from operating activities increased by 82 per cent to (1 743).

Distribution by business area Order intake Net sales Operating earnings (EBIT1) MSEK 2007 2006 2007 2006 2007 2006

Hexagon Measurement Technologies 11 234 9 273 10 937 9 250 2 141 1 547

Hexagon Polymers 2 824 2 542 2 730 2 488 310 223

Other operations 1 081 1 905 922 1 734 30 109

Group costs and adjustments – – –2 –3 –60 – 52 Total 15 139 13 720 14 587 13 469 2 421 1 827

52 Hexagon Annual Report 2007 Directors’ Report

2 027 MSEK (1 115), corresponding to 7.64 SEK per share (4.39). over 12 months. Implementation of the company’s strategy, as well Operating cash flow after normal investments amounted to 1 202 as its financial position and other financial objectives are taken into MSEK (281). Other investments, new share issues and the change account in connection with annual decisions concerning dividend in external borrowings influenced cash flow by 343 MSEK (50). payments. Dividends to shareholders for financial year 2006 amounted to 442 MSEK (264), corresponding to 1.67 SEK per share (0.92). Financial risk management A significant portion of Hexagon’s revenues and expenses is gener- Profitability ated in foreign currencies. This means that fluctuations in exchange Consolidated capital employed, defined as total assets less non- rates affect Hexagon’s revenues, operating earnings, shareholders’ interest bearing liabilities, amounted to 20 630 MSEK (15 427). equity and other items. Hexagon is also affected by fluctuations in The return on average capital employed was 14.3 per cent (12.2). interest rates. Hexagon’s Treasury function is responsible for coord- The return on average shareholders’ equity was 19.5 per cent (16.9). inating currency and interest exposure. The Treasury function is The rate of capital turnover was 0.90 times (0.88). also responsible for the Group’s external and internal financing. Guidelines for managing financial exposure are determined annu- Financial position ally by the Board in a Group-wide finance policy. Shareholders’ equity, including minority interests, increased to 10 046 MSEK (8 609). Consolidated total assets increased to Financing 24 940 MSEK (18 548). The equity ratio at 31 December 2007 In order to ensure that Hexagon can satisfy its needs for external was 40 per cent (46). capital, it is necessary for the Group to maintain a strong financial As a consequence of goodwill no longer being amortized position and to take active measures to ensure its access to credit. according to a plan, regular tests are made to determine whether On 7 June 2006, Hexagon entered into a new seven-year (five the value of goodwill and/or similar fixed assets is justifiable or years with an option for two additional years) syndicated credit whether there is any impairment need in full or in part. Such a facility in the amount of 1 000 MEUR. This financing is based test was conducted at the end of 2007 and no impairment require- upon customary covenants drawn up by Hexagon’s financiers. ment arose. The unused portion of all funding facilities, together with exist- Consolidated goodwill at 31 December 2007 amounted to ing liquidity, meant that access to funds at 31 December 2007 9 523 MSEK (5 973), corresponding to 38 per cent (32) of total amounted to 2 753 MSEK (5 067). assets. The table below shows the business areas to which the goodwill is attributable. Interest rate risk

Goodwill Interest rate risk is the risk of a negative impact on consolidated earnings as a result of changes in market interest rates. The Group’s MSEK 2007 2006 interest risk is managed by the Parent Company. Interest risk Hexagon Measurement Technologies 8 390 5 071 primarily arises because of the Group’s borrowing. Standardized Hexagon Polymers 1 122 826 derivative instruments are utilized to control interest exposure,

Hexagon Engineering 11 76 through means such as extending or shortening interest fixing periods without renegotiating underlying loans. Total 9 523 5 973 Currency risk and currency policy Consolidated net debt was 8 887 MSEK (6 032) and the net debt/ Hexagon’s transaction exposure pertains to currency exposure equity ratio was 0.88 times (0.70). The interest coverage ratio was due to its subsidiaries’ international trade. Exposure derives from 8.8 times (7.4). The change in net debt was mainly attributable to changes in exchange rates in connection with buying and selling in the companies acquired and divested during the year. currencies other than local currency. Contracted currency flows are fully hedged. Between 40 and 100 per cent of forecast flows over Management of the Hexagon Group’s capital and above contracted flows are hedged with a horizon of 12 months. The Hexagon Group’s capital comprises reported shareholders’ Hedging is primarily arranged through currency forward contracts. equity, including minority interest, which totalled 10 046 MSEK The Group’s finance policy states that the effect of currency (8 609) at year-end. Hexagon’s overall objective is to increase earn- changes on shareholders’ equity should be alleviated through ings per share by at least 15 per cent annually and to achieve a hedging via loans or forwards contracts in the currency in which return on capital employed of at least 15 per cent. Another Group net assets are denominated. objective is to achieve an equity ratio of 25–35 per cent because Hexagon is endeavouring to minimize the weighted average cost Operational risks of capital for the company’s financing. Hexagon’s expansion rate is The Group faces a variety of operational risks, including relations limited by covenants made to the company’s financiers, whereby to customers and suppliers and political, price, raw material, legal, net debt is not permitted to exceed 3.5 times EBITDA, pro forma human capital, insurable and environmental risks. Hexagon works

Hexagon Annual Report 2007 53 Directors’ Report

in a structured manner in its efforts to control both short-term Decisions regarding operations that affect the environment are and long-term risks and in order to limit their impact on business guided by what is ecologically justifiable, technically feasible and operations. economically viable. All of Hexagon subsidiaries must satisfy international environmental requirements in relation to local legisla- Research and development tion, which may vary from country to country. In addition, all of Being the most innovative supplier necessitates major product and the subsidiaries are obliged to have ISO quality accreditation, process development, partly to improve and adapt existing prod- wherever this is warranted. ucts but also to identify new application areas and thereby to increase the total market for Hexagon’s products and services. Total Guidelines expenditure for research and development during 2007 amounted The AGM held on 2 May 2007 resolved on the establishment of to 1 005 MSEK (894), corresponding to approximately 7 per cent guidelines concerning the remuneration of senior executives essen- (7) of net sales. tially entailing that such remuneration should comprise a basic Capitalization of the Group’s development expenses only occurs salary, variable remuneration, other benefits and pension, and that with regard to new products where significant development costs in total this remuneration should be commercially viable and com- are involved, where the products have likely earnings potential petitive in the market. The variable remuneration should be maxi- that is expected to accrue to the company and where the costs are mized in relation to the basic salary, connected to the earnings clearly distinguishable. trend that the specific individual can influence and be based on the outcome in relation to individually established targets. The Board Parent Company of Directors’ proposal to the 2008 AGM is that these guidelines The Parent Company reported a loss of 155MSEK (loss: 126) after remain unchanged for 2008. financial items. The Parent Company’s equity ratio was 34 per cent (44). Shareholders’ equity amounted to 6 656 MSEK (7 103). Cash Outlook and cash equivalents including unutilized credit facilities amount- During 2007, Hexagon continued to strengthen its market posi- ed to 2 026 MSEK (4 668) as of 31 December 2007. tion, product portfolio and structure to enable further growth in sales and earnings. Hexagon’s long-term financial target of an in- Employees crease in earnings per share after tax by at least 15 per cent annually The average number of Group employees during the year was stands firm. 8 406 (7 862). At year-end, the number of employees was 10 062 At its Capital Markets Day in December 2007, Hexagon (8 170). This increase was due mainly to the acquisitions completed launched new financial targets. Under the new financial plan, the during the year. The share of employees located outside Sweden Group, after the spin-off of the polymer operations, will aim to increased to 88 per cent (83). The average number of employees in achieve annual sales of 20 billion SEK and an operating margin the Parent Company was 10 (12). of 20 per cent by the end of 2010. Remuneration of the CEO and other senior executives comprises basic salary, variable remuneration, other benefits and pen- Significant events after the balance sheet date sion. The variable portion of salary is connected to the Group’s Effective 1 February 2008, Hexagon has acquired all the assets and earnings trend, comprises a maximum amount in relation to the all of the shares, respectively, in Surveyors Service Company and fixed salary and is not pensionable. Pension benefits are based on Haselbach Surveying Instruments. The two companies, headquar- defined contribution plans. tered near Los Angeles and San Francisco, respectively, are leading distributors and service providers for surveying equipment in Environment South Western USA. Surveyors Service Company and Haselbach Hexagon’s research and development work generates products and Surveying Instruments had combined annual sales of about 110 systems that comply with customer requirements for being able to MSEK in 2007, or of about 75 MSEK excluding internal sales. measure with considerable precision in one, two or three dimen- Effective 1 March 2008, Hexagon has acquired all outstanding sions. High-quality measurement systems contribute to increased shares of the Spanish company Santiago & Cintra Ibérica S.A. quality, productivity and efficiency and reduced waste and thus to Santiago & Cintra is a leading distributor and service provider for a decrease in the consumption of materials and raw materials. positioning solutions in applications such as geomatics, geographic When Hexagon implements processes, it takes the environ- information systems and machine control for agriculture and con- ment into account and endeavours to achieve ecological product struction. The company currently has 48 employees operating out development. A fundamental requirement for environmental of the headquarters in Madrid and three sales offices in Valencia, efforts is to use environment-friendly resources in production, to Barcelona and Seville. The company had annual sales of approxi- the extent possible. Hexagon satisfies environmental requirements mately 140 MSEK in 2007. pursuant to legislation, ordinances and international accords.

54 Hexagon Annual Report 2007 Consolidated Income Statement

Consolidated Income Statement

MSEK Note 2007 2006

Net sales 1 14 587 13 469 Cost of goods sold 4, 6 –8 490 – 8 350 Gross earnings 6 097 5 119

Sales expenses 4, 6 –1 990 – 1 850 Administration expenses 4, 6, 13 –1 080 – 859 Research and development expenses 4, 6 –811 – 547 Other operating revenues 5 59 58 Other operating expenses 5, 6 –88 – 180 Share in associated company earnings 6, 7, 12 –31 2 Capital gain/loss from sale of shares in Group companies 7 114 – Operating earnings 1 2 270 1 743

Financial revenues and expenses Earnings from other securities classified as fixed assets 7 –97 Other interest income 7 48 29 Interest expenses 7 –262 – 251 Earnings before tax 1 2 056 1 618

Tax on earnings for the year 8 –245 – 338 Net earnings 2 1 811 1 280

1 Of which, nonrecurring items 6 –151 – 84 2 Of which, minority share 11 7

Average number of shares, thousands 265 278 254 019 Average number of shares after dilution, thousands 266 034 256 323

Earnings per share, SEK 6.79 5.01 Earnings per share after dilution, SEK 6.77 4.97

Earnings include depreciations and write-downs of –803 – 602

Hexagon Annual Report 2007 55 Consolidated Balance Sheet

Consolidated Balance Sheet

MSEK Note 2007 2006

ASSETS 17 Fixed assets Intangible fixed assets Capitalized expenditure on research and development 10 665 632 Patents and trademarks 10 3 194 3 130 Goodwill 10 9 523 5 973 Other intangible fixed assets 10 769 306 Total intangible fixed assets 14 151 10 041

Tangible fixed assets Buildings 10 761 721 Land and other real estate 10 210 209 Machinery and other technical plants 10 976 864 Equipment, tools and installations 10 250 199 Construction in progress and supplier advances 10 80 108 Total tangible fixed assets 2 277 2 101

Financial fixed assets Shares in associated companies 11, 12 10 50 Other long-term securities holdings 11 11 1 Other long-term receivables 11 55 52 Total financial fixed assets 76 103

Deferred tax assets 8 492 442 Total fixed assets 16 996 12 687

Current assets Inventories, etc. Raw materials and consumables 1 072 1 002 Work in progress 258 286 Finished goods and goods for resale 1 256 1 023 Total inventories 2 586 2 311

Current receivables Customer receivables 3 075 2 544 Receivables, associated companies 20 2 Current tax receivables 8 11 7 Other receivables – non-interest bearing 434 355 Prepaid expenses and accrued revenue 14 206 161 Total current receivables 3 746 3 069

Short-term investments 781 3 Cash and bank balances 831 478 Total current assets 7 944 5 861 TOTAL ASSETS 24 940 18 548

56 Hexagon Annual Report 2007 Consolidated Balance Sheet

MSEK Note 2007 2006

SHAREHOLDERS’ EQUITY AND LIABILITIES Shareholders’ equity 15 Share capital 354 354 Other capital contributions 5 724 5 722 Hedging reserve –2 – 1 Translation reserve –716 – 795 Retained earnings 4 642 3 284 Shareholders’ equity attributable to Parent Company shareholders 10 002 8 564

Minorities 44 45 Total shareholders’ equity 10 046 8 609

Long-term liabilities 17 Provisions for pensions 4a 433 487 Deferred tax liabilities 8 668 389 Other provisions 16 192 101 Liabilities to credit institutions 9 762 5 688 Other long-term liabilities – interest-bearing 27 1 Other long-term liabilities – non-interest bearing 17 58 Total long-term liabilities 11 099 6 724

Current liabilities 17 Liabilities to credit institutions 163 391 Other provisions – current portion 208 133 Advance payments from customers 89 53 Accounts payable 1 473 1 212 Current tax liabilities 236 157 Other liabilities – interest-bearing 71 Other liabilities – non-interest bearing 432 321 Accrued expenses and deferred income 14 1 187 947 Total current liabilities 3 795 3 215 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 24 940 18 548

MEMORANDUM ITEMS Collateral pledged 19 41 107 Contingent liabilities 19 186 145

Hexagon Annual Report 2007 57 ChangesFÖRÄNDRINGAR in Consolidated AV KONCERNENS Shareholders’ EGET Equity KAPITAL

Changes in Consolidated Shareholders’ Equity Other Total Total capital Hexagon share- Share contri- Hedging Translation Retained shareholders’ 2007 capital butions reserve reserve earnings holders Minorities equity

Opening shareholders’ equity 354 5 722 –1 –795 3 284 8 564 45 8 609 Year’s change in translation reserve 1 Gross – – – 221 – 221 3 224 Effect of hedging – – – –177 – –177 – –177 Year’s change in hedging reserve (cash flow hedging) – – –1 – – –1 – –1 Tax attributable to items recognized directly in shareholders’ equity – – – 35 – 35 – 35 Total revenues and expenses recognized directly in shareholders’ equity, excluding trans actions involving company shareholders – – –1 79 – 78 3 81 Net earnings ––––1 8001 800 11 1 811 Total revenues and expenses, excluding transactions involving company shareholders – – –1 79 1 800 1 878 14 1 892 Benefit pertaining to options recognized as operating expenses 2 –8–––8 – 8 Effect of the acquisition of Leica Geosystems 3 ––27––––27 – –27 Effect of acquisitions and divestitures of subsidiaries –––––– –9 –9 New share issue 021–––21 – 21 Dividend –––––442–442 –6 –448 Closing shareholders’ equity, Dec. 31, 2007 354 5 724 –2 –716 4 642 10 002 44 10 046

2006

Opening shareholders’ equity 280 3 072 – 7 – 147 2 275 5 473 46 5 519 Year’s change in translation reserve 1 Gross –––– 892–– 892 – 3 – 895 Effect of hedging – – – 339 – 339 – 339 Year’s change in hedging reserve (cash flow hedging) – – 8 – – 8 – 8 Tax attributable to items recognized directly in shareholders’ equity – – – 2 – 95 – – 97 – – 97 Total revenues and expenses recognized directly in shareholders’ equity, excluding trans actions involving company shareholders – – 6 – 648 – –642 –3 –645 Net earnings ––––1 2731 273 7 1 280 Total revenues and expenses, excluding transactions involving company shareholders – – 6 – 648 1 273 631 4 635 Benefit pertaining to options recognized as operating expenses 2 –6–––6 – 6 Effect of the acquisition of Leica Geosystems 3 –– 89–––– 89 – – 89 New share issue 74 2 733 – – – 2 807 – 2 807 Dividend ––––– 264– 264 – 5 – 269 Closing shareholders’ equity, Dec. 31, 2006 354 5 722 – 1 – 795 3 284 8 564 45 8 609

1 Currency hedging pertains to net assets in foreign subsidiaries. to the shares that were to be issued was adjusted, insofar as the shares were con- 2 Corresponds to the value of the services that are estimated to be received during sidered as already issued equity instruments in the 2005 accounts, which is why no the period in terms of the original benefit value that accrued to option holders in liability need be reported. Accordingly, subsequent changes in the Hexagon share Leica Geosystems at the date of allotment. price up to the date of compulsory redemption or exercise of the options will not 3 Leica Geosystems was acquired through a public tender offer comprising a affect consolidated shareholders’ equity. The compulsory redemption was implemented combination of cash and new Hexagon shares. The offer was directed to all in 2006, at which time the cash portion of the public offer was increased, due to a shareholders and indirectly to all option holders. Since more than 98 per cent of decision by a Swiss court. The number of shares issued was not affected by the the shareholders in Leica Geosystems accepted the public offer, it was possible to court ruling. Also in 2006, Hexagon exercised the opportunity to complete the public acquire the remaining shares by means of compulsory redemption. In 2005, the offer to option holders by only making a cash payment, rather than the aforementioned value of the future compensation to option holders and the shares subject to combination. Since this has been reported as a repurchase of already issued equity compulsory redemption was accounted for as a liability, both the cash portion instruments, consolidated shareholders’ equity has not been reduced. In 2007, (less amounts that option holders were to pay when the options were exercised) Hexagon exercised the opportunity to only make cash payments to a minor extent. and the value of the shares that were to be issued. In 2006, the liability pertaining To a greater extent, it paid using Hexagon shares and cash in accordance with the original offer. This resulted in a reduction in total equity by 6 MSEK.

58 Hexagon Annual Report 2007 Consolidated Cash Flow Statement

Consolidated Cash Flow Statement

MSEK Note 2007 2006

Cash flow from operating activities Net sales 14 587 13 469 Operating expenses –12 317 – 11 726 Operating earnings 2 270 1 743 Adjustments for items in operating earnings not influencing cash flow Depreciation and amortization 608 586 Impairment losses 195 16 Change in provisions –62 – 204 Capital gains on divestment of fixed assets –35 – 6 Capital gains on shares in Group companies –114 – Earnings from shares in associated companies 31 – 2 Interest received 39 24 Dividend received 00 Interest paid –255 – 245 Tax paid –205 – 175 Cash flow from operating activities before changes in working capital 2 472 1 737 Cash flow from changes in working capital Change in inventories –300 – 279 Change in current receivables –595 – 410 Change in current liabilities 450 67 Cash flow from changes in working capital –445 – 622 Cash flow from operating activities 2 027 1 115 Cash flow from ordinary investing activities Investments in intangible fixed assets –416 – 355 Investments in tangible fixed assets –508 – 502 Divestments of tangible fixed assets 99 23 Cash flow from ordinary investing activities –825 – 834 Operating cash flow 1 202 281 Cash flow from other investing activities Investments in subsidiaries 9 –3 592 – 361 Divestments of subsidiaries 9 569 – Investments in financial fixed assets –8 – 12 Divestments of financial fixed assets – 111 Cash flow from other investing activities –3 031 – 262 Cash flow from financing activities Borrowings 3 374 – Repayments –– 2 443 New share issue –2 755 Dividend to Parent Company shareholders –442 – 264 Dividend to minority interests in subsidiaries –6 – 5 Cash flow from financing activities 2 926 43 Cash flow for the year 1 097 62 Cash and cash equivalents, beginning of year 1 481 439 Effect of translation differences on Cash and cash equivalents 34 – 20 Cash flow for the year 1 097 62 Cash and cash equivalents, end of year 1 1 612 481 Net debt Pension obligations, net, and other interest-bearing provisions and liabilities 10 499 6 617 Cash and cash equivalents 1 –1 612 – 481 Net debt 8 887 6 136

1 Cash and cash equivalents include short-term investments and cash and bank balances.

Hexagon Annual Report 2007 59 Parent Company Accounts

Parent Company Income Statement

MSEK Note 2007 2006

Net sales 2 24 19 Administration expenses 4, 6, 13 –51 – 40 Operating earnings –27 – 21 Financial income and expense Earnings from shares in Group companies 7 –– 5 Earnings from other securities classified as fixed assets 7 –101 Other interest income 7 222 179 Interest expenses 7 –350 – 380 Earnings before tax –155 – 126

Tax on earnings for the year 8 48 58 Net earnings –107 – 68

Parent Company Balance Sheet

MSEK Note 2007 2006 MSEK Note 2007 2006

ASSETS SHAREHOLDERS’ EQUITY Fixed assets AND LIABILITIES Intangible fixed assets Shareholders’ equity 15 Patents and trademarks 10 00Restricted equity Share capital 531 354 Tangible fixed assets Statutory reserve 2 814 2 991 Buildings 10 021 Total restricted equity 3 345 3 345 Land 10 08 Equipment 10 11Non-restricted equity Total tangible fixed assets 1 30 Premium reserve 2 754 2 733 Non-restricted equity 556 1 025 Financial fixed assets Total non-restricted equity 3 310 3 758 Shares in Group companies 11 12 840 11 827 Total shareholders’ equity 6 655 7 103 Receivables from Group companies 11 6 076 2 800 Provisions Total financial fixed assets 18 916 14 689 Pension provisions 0 0 Other provisions 8 8 Deferred tax asset 79 62 Total provisions 8 8 Total fixed assets 18 996 14 719 Long-term liabilities Current assets Liabilities to credit institutions 9 808 5 852 Current receivables Total long-term liabilities 9 808 5 852 Receivables from Group companies 152 905 Current liabilities Current tax receivable 0 0 Liabilities to credit institutions 0 346 Other receivables 68 71 Accounts payable 34 3 Prepaid expenses and accrued Liabilities to Group companies 3 089 2 612 revenue 14 34 29 Other liabilities 2 3 Total current receivables 254 1 005 Accrued expenses and deferred income 14 24 32 Cash and bank balances 370 235 Total current liabilities 3 149 2 996 Total current assets 624 1 240 TOTAL SHAREHOLDERS’ TOTAL ASSETS 19 620 15 959 EQUITY AND LIABILITIES 19 620 15 959

MEMORANDUM ITEMS Collateral pledged 19 None None Contingent liabilities 19 146 98

60 Hexagon Annual Report 2007 Parent Company Accounts

Change in Parent Company Shareholders’ Equity

Premium Premium Unrestricted Total Share reserve Statutory reserve shareholders’ shareholders’ MSEK capital (restricted) reserve (unrestricted) equity equity

Closing balance Dec. 31, 2005 280 2 771 220 – 1 318 4 589

Re-allocation – – 2 771 2 771 – – – Dividend – – – – – 264 – 264 Group contributions issued and received, net – – – – 39 39 New share issue 74 – – 2 733 – 2 807 Net earnings – – – – – 68 – 68 Closing balance Dec. 31, 2006 354 – 2 991 2 733 1 025 7 103

Dividend – – – – – 442 – 442 Group contributions issued and received, net – – – – 80 80 New share issue 0 – – 21 – 21 Bonus issue 177 – –177 – – 0 Net earnings – – – – – 107 – 107 Closing balance Dec. 31, 2007 531 – 2 814 2 754 556 6 655

Parent Company Cash Flow Statement

MSEK Note 2007 2006

Cash flow from operating activities Net sales 24 19 Operating expenses –51 – 40 Operating earnings –27 – 21 Adjustment for operating earnings items not influencing cash flow Depreciation 00 Interest received 213 177 Interest paid –329 – 283 Cash flow from operating activities before changes in working capital –143 – 127 Cash flow from changes in working capital Change in current receivables 816 – 177 Change in current liabilities 498 1 275 Cash flow from changes in working capital 1 314 1 098 Cash flow from operating activities 1 171 971 Cash flow from investing activities Investments in tangible fixed assets 0– 14 Divestments of tangible fixed assets 29 – Investments in financial fixed assets –1 013 – 126 Divestments of financial fixed assets –106 Change in long-term receivables, Group companies –3 418 – 1 075 Group contributions received 54 – Cash flow from other investing activities –4 348 – 1 109 Cash flow from financing activities Borrowings 3 733 – Repayments –– 2 357 New share issue 21 2 755 Dividend to shareholders –442 – 264 Cash flow from financing activities 3 312 134 Cash flow for the year 135 – 4 Cash and cash equivalents opening balance 1 235 239 Cash and cash equivalents closing balance 1 370 235

1 Cash and cash equivalents include cash and bank balances.

Hexagon Annual Report 2007 61 Accounting policies

Accounting policies

The consolidated accounts have been prepared in accordance with or if the shareholders provide the necessary equity instruments. the International Financial Reporting Standards (IFRS) issued by the IFRIC 11 is to be applied for financial years starting 1 March 2007 or International Accounting Standards Board (IASB) and interpretation later. The statement is not adjudged to have any material impact on statements by the International Financial Reporting Interpretations Hexagon’s earnings or financial position. Committee (IFRIC), which have been approved by the EC Commis- sion for application within the EU. IFRIC 12 Service Concession Arrangements* Furthermore, the recommendation RR30 Supplementary The statement pertains to operators who have concessions for social accounting rules for corporate groups issued by the Swedish services and describes the way commitments and rights obtained Financial Accounting Standards Council has been applied. through concession agreements for social services are to be recog- The Parent Company applies the Annual Accounts Act and RR nized. IFRIC 12 is to be applied for financial years starting 1 January 32:06. This means that the Parent Company applies the same 2008 or later. The statement does not apply to Hexagon. accounting policies as the Group, except as outlined below. IFRIC 13 Customer Loyalty Programmes* Changed accounting policies The statement requires that rewards deriving from customer loyalty The applied accounting policies comply with those applied in the programmes be reported as a special component of the sales trans- Annual Report for 2006, with the following exceptions. action from which they are awarded and that their shares of payments During the year, the Group introduced the following EU-approved received, calculated at fair value, be reported as prepaid income and new or amended standards and interpretations from IFRIC: recognized as income over the periods during which the obligation is • IFRS 7 Financial Instruments – Disclosures fulfilled. IFRIC 13 is to be applied for financial years starting 1 July • Amendments to IAS 1 Presentation of Financial Statements 2008 or later. The statement does not apply to Hexagon. • IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum • IFRIC 8 Scope of IFRS 2 Share-based Payment Funding Requirements and their Interaction* • IFRIC 9 Reassessment of Embedded Derivatives The statement addresses the matter of how the limit on assets and • IFRIC 10 Interim Financial Reporting and Impairment minimum funding requirements in accordance with defined-benefit pension schemes are to be calculated pursuant to IAS 19 Employee These new standards and statements had no impact on Hexagon’s Benefits. IFRIC 14 is to be applied for financial years starting 1 earnings and financial position. January 2008 or later. The standard is not adjudged to have any The new standards and interpretations that will be applied as of material impact on Hexagon’s earnings or financial position. the 2008 calendar year or later are specified below. Basis of reporting for the Parent Company and the Group IFRS 8 Operating Segments The functional currency of the Parent Company is Swedish kronor as This standard contains disclosure requirements pertaining to the is the reporting currency for the Parent Company and the Group. Group’s operating segments and replaces the requirement to define Assets and liabilities are reported at historical cost with the excep- primary and secondary segments for the Group based on lines of tion of certain financial instruments (derivatives), which are reported business and geographical areas. IFRS 8 is to be applied for financial at fair value. years starting 1 January 2009 or later. Due to the ongoing comprehensive changes of the Group’s composition, Hexagon has not yet Consolidated Financial Statements decided on the segment division that will be applied under IFRS 8. The consolidated financial statements consolidate the Parent Company and the other companies in which the Parent Company IAS 1 (Revised) Presentation of Financial Statements has a controlling influence. The standard has been revised in order to increase the value of the The consolidated financial statements have been prepared in information contained in financial statements. For example, equity accordance with the purchase method, which means that the Parent transactions with shareholders are presented in a separate statement, Company’s acquisition value of shares in subsidiaries is eliminated while other transactions recognized directly in equity are presented against subsidiaries’ shareholders’ equity at the time of acquisition. either as a continuation of the income statement or in a separate The shareholders’ equity of acquired subsidiaries is determined on statement. The revised IAS 1 is to be applied for financial years the basis of a market valuation of assets and liabilities at the time of starting 1 January 2009 or later. Although the standard will have no acquisition including those not reported earlier by the acquired impact on Hexagon’s earnings or financial position, it will affect the company. In those cases where the acquisition value of shares in way such transactions are presented. subsidiaries exceeds the acquired shareholders’ equity as stated above, the discrepancy is accounted as goodwill in the balance IAS 23 (Revised) Borrowing Costs sheet. In the event of an acquisition of minority interests, any differ- The standard requires capitalization of borrowing costs when they ences between the acquisition price and the minority interest in the pertain to assets that of necessity will take considerable time before subsidiary’s equity value are recognized as goodwill. In accordance they are ready for their intended use or for sale. The revised IAS 23 is with IFRS, goodwill amortization on a straight-line basis has been to be applied for financial years starting 1 January 2009 or later. The discontinued. Reported goodwill values are impairment tested at standard is not adjudged to have any material impact on Hexagon’s each reporting date. earnings or financial position. In accordance with the stated principles for consolidated accounting, divested companies are consolidated up to their date of divestiture, IFRIC 11 IFRS 2 – Group and Treasury Share Transactions while acquired companies are consolidated from the time of acquisi- The statement requires that agreements under which an employee is tion onwards, meaning from the time when a controlling interest was awarded entitlement to a company’s equity instruments must be attained. recognized as share-based payment settled with equity instruments even if the company purchases the instrument from an external party * Not yet adopted by the EU.

62 Hexagon Annual Report 2007 Accounting policies

The current method is used for the translation of foreign subsid- Sales of services/contracts and similar assignments iaries, meaning that balance sheets are translated at year-end ex- Income from the sale of services is recognized on the basis of the change rates, and income statements are translated at average degree of completion at the balance sheet date, when all the exchange rates for the period. The resulting translation differences following conditions are satisfied: are recognized directly in consolidated shareholders’ equity. • Income attributable to the assignment can be reliably calculated; The value of the net assets of foreign subsidiaries, including good- • It is likely that the financial benefits to the contractor associated will and other intangible assets, is hedged, mainly through foreign- with the assignment will arise for the contractor; currency loans. Currency forward contracts are used to a lesser • The percentage of completion can be reliably calculated; extent. In the consolidated financial statements, the after-tax effects • The expenditure that has arisen and the expenditure that remains of hedging are offset against those translation differences that were to complete the assignment can be reliably calculated. recognized directly in shareholders’ equity regarding the foreign subsidiaries. The percentage of completion is determined by dividing the expenditure that has arisen in relation to the total estimated expenditure for Divested operations the assignment. If the degree of completion cannot be reliably deter- According to the applicable accounting rules, the earnings from mined, only those amounts corresponding to the expenditure that certain divested operations, in terms of both operating profit and has arisen are recognized as revenues, and then, only to the extent capital gains, must be separate from the earnings from continuing that it is likely that they will be remunerated by the buyer. If it appears operations. However, a corresponding adjustment for acquired likely that all the expenditure for an assignment will exceed total rev- operations is not shown in the income statement but is provided, enues, the probable loss is accounted immediately, and fully, as an to the extent possible, as a supplementary disclosure. expense.

Associated companies and joint ventures Research and development expenditure Hexagon applies the equity method for accounting associated com- Expenditure for research is expensed as incurred, while expenditure panies and joint ventures. Associated companies are those compa- for development is capitalized as follows: Capitalization of develop- nies over which Hexagon, directly or indirectly, has a material influ- ment expenses in the Group are only applied to new products where ence. Joint ventures are defined as companies over which Hexagon, significant development costs are involved, where the products have through partnership agreements with one or more parties, exercises a probable earnings potential that the company may benefit from, a joint controlling influence over the operational and financial control. and the costs are clearly distinguishable from ongoing product Any differences between the acquisition value and equity value development expenditure. at the time of acquisition are termed goodwill, and is included in the acquisition value. In the consolidated balance sheet, holdings in Leasing associated companies are recognized at acquisition value adjusted The Group has entered into both capital and operational leases. for dividends, share in earnings and losses during the holding period, The agreements are classified in accordance with their financial and accumulated impairment losses. The consolidated income implication when they were entered into. Capital leases are not statement includes share in associated companies’ earnings after material and primarily relate to vehicles. For operational leases, the elimination of any inter-company gains. Associated company taxes lease payments are expensed straight-line over the shorter of the are included in the Group’s tax expenses. asset’s useful life period and the lease period. For capital leases the At the close of every reporting period, the carrying amounts for leased asset is carried on the balance sheet with a corresponding associated companies and joint ventures, including implicit goodwill liability for future lease payments. The leased asset is depreciated values, are impairment tested. over the same period as for assets of the same kind owned by the Group. The liability for future lease payments is interest bearing. Segment reporting Business areas represent the primary segments within the Group Other operating revenues/expenses and geographical areas the secondary segments. Internal billings Other operating revenues/expenses primarily consist of gains/losses between business areas are negligible and, where they occur, are from sales of fixed assets, currency exchange gains and losses re- made at market value. lated to operating assets and liabilities and revenues for sub-letting of premises. Revenues Hexagon applies the following principles for revenue recognition: Financial instruments Financial instruments are measured and recognized in accordance Sales of goods with the rules of IAS 39. Revenues from sales of goods are recognized when all the following With certain exceptions, financial assets and liabilities are entered conditions are satisfied: at acquisition value applying settlement-date accounting. Financial • The company has transferred the essential risks and benefits derivative instruments are recognized at fair value, with changes in associated with the ownership of the goods to the buyer; fair value recognized in profit and loss, apart from cases where the • The company does not retain any commitment in ongoing derivative fulfils the requirement for cash flow hedging, in which case management usually associated with ownership, and nor does the change in value is recognized directly in shareholders’ equity until the company exert any actual control over the goods that have the hedged transaction has been recognized. been sold; Balances and transactions are hedged, and hedge accounting is • Revenues can be reliably calculated; applied if the hedging actions taken have the stated objective of con- • It is likely that the financial benefits for the seller associated with stituting a hedge, have a direct correlation to the hedged item and the transaction will arise for the seller; effectively hedge the item. An effective hedge generates financial • The expenditure that has arisen or is expected to arise as a effects that offset those that arise through the hedged position. When consequence of the transaction can be reliably calculated. hedging fair value, the change in the fair value of the hedging instru- • Installation revenues comprise an insignificant portion of total ment is recognized in the income statement together with the change revenues for equipment sold with a commitment to install the in the value of the liability or asset to which the risk hedging applies. equipment. Hexagon did not hedge fair value in 2006 and 2007.When hedging cash flow, the change in value of the hedging instrument is recognized directly in shareholders’ equity until the hedged transaction has been recognized.

Hexagon Annual Report 2007 63 Accounting policies

When establishing fair value, official market listings on the balance- goods, are recognized at the lower of cost and fair value. Manufac- sheet date are used. If no such listings are available, a valuation is tured finished and semi-finished goods are recognized at the lower conducted based on the discounting of future cash flows to the listed of manufacturing cost (including a reasonable portion of indirect market interest rate for the particular maturity. Currency swaps and manufacturing costs) and fair value. currency forward contracts are valued at the listed market rate. Translation to SEK is based on the listed exchange rate on the Goodwill and other intangible fixed assets balance-sheet date. Goodwill comprises the difference between the acquisition cost and Receivables resulting from own lending and assets held to fair value of the Group’s share of acquired companies’ identifiable maturity are valued at the accrued acquisition value, applying the net assets on the date of acquisition. Goodwill is recognized at acqui- effective interest rate method. No financial instruments were classi- sition value less accumulated impairment losses. Other acquisition- fied in this category during 2006 and 2007. related intangible assets primarily comprise various types of intellec- Hexagon considers listed holdings of securities as being available tual rights such as brands, patents and customer relations. for sale, which means that the change in value up to the selling date Acquisition-related intangible assets are recognized at fair value on is recognized directly in shareholders’ equity. Unlisted shares and the date of acquisition. participations whose value cannot be determined reliably are recog- Both acquisition-related and other intangible assets are reported nized at acquisition cost. Hexagon had no listed holdings in 2006 at acquisition value less accumulated amortization and impairment and 2007. losses. Acquisition-related intangible assets with an indefinite life are Accounts receivable and accounts payable are recognized at not amortized. acquisition value. Financial liabilities are mainly measured at accrued acquisition Tangible fixed assets value, applying the effective interest rate method. Tangible fixed assets are recognized at acquisition value less accu- Borrowing costs in the form of interest expense are charged mulated depreciation and impairment losses. Acquisition value against earnings during the period to which they apply, and is normally includes expenditure that is directly attributable to acquisition of the not included in an asset’s acquisition value, since Hexagon normally asset. does not construct the types of assets that would permit this. Costs Gains/losses on the divestment of a tangible fixed asset are recog- for raising loans are accrued over the maturity of the loan. nized in the income statement as other operating income/cost and comprise the difference between the sales revenue and the carrying Pension and similar commitments amount. Expenditure for defined contribution plans are expensed as incurred. Amounts that can be depreciated comprise acquisition value less Expected expenditure under defined benefit plans are recognized as estimated residual value. The assets’ carrying value and useful life are a liability calculated in accordance with actuarial models. Differences impairment tested on every balance-sheet date and adjusted if between expected and actual development of this liability are not necessary. expensed as long as the deviations remain within the so-called corridor. Pension expense for the year consists of pensions vested, Depreciation/amortization according to plan interest expense during the period and – if applicable – accrued Depreciation/amortization according to plan is calculated on the actuarial gains and losses. A deduction is made for the yield on plan original acquisition value and based on the asset’s estimated assets intended to cover the obligation. The net cost is recognized in economic life; the depreciation terms for various asset classes are: the income statement. Obligations related to defined benefit plans are recognized net in the balance sheet, meaning after a deduction Capitalized development expenditure 3–8 years of the value of any plan assets. Patents and trademarks* 20 years Defined benefit plans for which the insurer (Alecta) cannot specify Other intangible assets 3–10 years Hexagon’s share of the total plan assets and pension obligations, Computers 3–8 years pending this information becoming available, are recognized as Machinery and equipment 3–15 years defined contribution plans. Office buildings 20–50 years Industrial buildings 20–50 years Income taxes Land improvements 5–30 years Income taxes comprise: • Current tax, meaning the tax calculated on taxable earnings for * The value of trademarks obtained via acquired operations is determined by the period, and adjustments regarding prior periods; means of the acquisition analysis. If the trademark can be used without any • Deferred tax, meaning the tax attributable to taxable temporary time limitations, it is not subject to amortization according to plan. The right differences to be paid in the future, and the tax that represents a to use the name Leica derives from a contractual useful life under an agree- reduction of future tax attributable to deductible temporary ment that expires in 95 years time. The agreement contains clauses stipul- differences, deductible loss carry-forwards and other tax ating extension opportunities. Since Hexagon is of the opinion that there is deductions. reason to believe that it will be possible to extend the agreement without considerable expenditure, the value of the right to use the name Leica is The income tax expenses for the year consist of current and deferred not subject to amortization according to plan. tax, and shares in associated companies’ tax. Impairments Receivables and liabilities Goodwill and other intangible assets with an indefinite life are subject Provisions for loss risks are made on a case-by-case basis; foreign- to annual impairment testing. Other tangible and intangible assets are currency receivables and liabilities are translated at the exchange impairment tested if indications of an impairment requirement arise, rates prevailing on the balance-sheet date. The difference between meaning if the recognized value of an asset exceeds its recoverable acquisition value and the value on the balance-sheet date is recog- value. If an impairment need is identified, the item is impaired to an nized as income. amount corresponding to the recoverable value. The recoverable value is the higher of the asset’s net realizable Inventories value and the value in use, meaning the discounted present value of Inventories are accounted according to the FIFO (first-in first-out) future cash flows. Previous impairments are reversed by relevant principle. Market terms are applied for intra-Group transactions. The amounts matching the degree to which the impairment is no longer necessary provisions are made for obsolescence and intra-Group warranted, although goodwill impairments are never reversed. gains. Raw materials, and purchased finished and semi-finished

64 Hexagon Annual Report 2007 Accounting policies

The basic assumptions used to determine whether or not there is an management and the Board of Directors regard as reasonable impairment requirement are as follows: under the current circumstances. The conclusions based on these accounting estimates constitute the foundation for the carrying Basic assumptions used for determining discount amounts of assets and liabilities, in the event that they cannot be rate per currency established through information from other sources. The actual Risk-free interest rate 3.8–4.2 % outcome may differ from these accounting estimates and assump- Tax rate 9–31 % tions. Beta value 0.6 – 0.9 Applied discount rate before tax 8.0–10.1 % Income recognition Parts of Hexagon’s sales derive from major, complex customer con- Forecasting method tracts. In order to establish the amounts that are to be recognized as Forecast period 5 years income and whether any loss provision should be posted, company Growth after forecast period 2 % management makes estimates of completed performance in relation to the contractual terms and conditions, the estimated total contract- Cash-generating units ual costs and the proportion of the contract that has been completed. The definition of cash-generating units complies with the Group’s organization, whereby assessments of whether there are any impair- Intangible assets ment requirements are made at the sub-segment level within each Intangible assets within the Hexagon Group concern essentially particular business area. Intangible assets that are common to a pertain to patents, trademarks and goodwill. Goodwill and other specific business area are allocated to this business area. The total acquired intangible assets with an indefinite life are not subject to value of intangible fixed assets that are not subject to amortization annual amortization, while other intangible assets are amortized. was 12 182 MSEK (8 569) at 31 December 2007. The recoverable Insofar as the underlying operations develop negatively, an impair- value is generally set at the value in use. ment requirement may arise. Such intangible assets are subject to annual impairment testing, which is essentially based on the Accounting policies in the Parent Company recoverable value, making assumptions about the sales trend, the The Parent Company applies the same accounting policies as the Group’s profit margins, ongoing investments, changes in working Group with the following exceptions: capital and discount interest rate. The assumptions made by the • The Parent Company does not apply IAS 39. Board of Directors are presented above. Company management • In the Parent Company all leases are treated as operational considers the assumptions applied to be compatible with the data leases. received from external sources of information or from previous • The Parent Company normally recognizes Group contributions experience. Hexagon’s goodwill at 31 December amounted to issued and received, and the corresponding tax effect, directly in 9 523 MSEK. Implemented impairment tests did not give rise to shareholders’ equity. However, in those cases where Group a cause to impair this amount. contributions received can be considered as dividends, the Group contribution is recognized as financial income, and the tax effect Valuations of tax assets is included in income tax for the year in the income statement. The Board of Directors and company management continuously • In the Parent Company, the shares in subsidiaries are recognized assess the carrying amount of both current and deferred tax assets/ at acquisition value less any impairment. tax liabilities. For deferred tax assets, Hexagon has to assess the probability of whether it will be possible to utilize the deductible The Parent Company applies hedge accounting for assets in foreign temporary differences that give rise to deferred tax assets to offset currencies that are effectively hedged by borrowings in foreign curren- future taxable profits. In addition, in certain situations, the value of the cies. Accordingly, changes in exchange rates are not reported for deferred tax assets may be uncertain due to ongoing tax processes, loans raised to finance acquisitions of foreign subsidiaries. for example. Accordingly, the fair value of deferred tax assets may Fixed assets acquired in foreign currency are recognized at the deviate from these estimates due to a change in future earning capa- historical exchange rate. Other assets and liabilities in foreign currency city, changed tax regulations or the outcome of examinations by are recognized at the exchange rate prevailing on the balance-sheet authorities or tax courts of issued or not yet issued tax returns. When date. assessing the value of deferred tax liabilities, Hexagon has to form an In December 2007, the Swedish Financial Accounting Standards opinion of the tax rate that will apply at the time of the reversal of tax- Council issued revised versions of RR 30 Supplementary Accounting able temporary differences. Hexagon recognized deferred tax liabil- Regulations for Groups and RR 32 Accounting for Legal Entities. The ities in an amount of 176 MSEK, net, at the end of 2007. At the same revised versions are designated RFR 1.1 and RFR 2.1, respectively, date, the Group had tax-loss carry-forwards with a tax value of 308 and will be applied for financial years starting on 1 January 2008 or MSEK that were not recognized as assets. These assets could not later. Advance application is encouraged. During 2007, Hexagon be capitalized based on assessments of the opportunity to utilize the opted to continue to apply RR 30:06 and RR 32:06, respectively, tax deficits. In comparison with the final outcome, the estimates made and not to apply RFR 1.1 and RFR 2.1 in advance. concerning both deferred tax assets and liabilities could have either a positive or a negative impact on earnings. Approval of accounts The Parent Company’s and the consolidated financial statements will Pension obligations be presented to the Annual General Meeting for approval on 5 May Within the Hexagon Group, there are defined-benefit pension schemes 2008. based on significant assumptions concerning future benefits pertaining to either the current or prior workforce. When calculating the Critical accounting estimates and assumptions pension liability, a number of actuarial assumptions are of major The critical accounting estimates and assumptions that are address- significance to the outcome of the calculation. The most critical ed in this section are those that company management and the pertain to the discount interest rate on the obligation and the anti- Board of Directors regard as the most important for understanding cipated return on the plan assets. Other significant assumptions Hexagon’s financial reporting. The information is limited to areas that include the rate of pay increases, employee turnover and estimated are significant considering the degree of impact and underlying un- length of life. A reduced discount interest rate increases the recog- certainty. Hexagon’s accounting estimates and assumptions are nized pension liability. The actual outcome could deviate from the based on historical experience and assumptions that company recognized amount if the applied assumptions prove to be wrong.

Hexagon Annual Report 2007 65 Notes

Notes Amounts in MSEK (SEK millions), unless stated otherwise.

NOTE 1. Business areas and geographical markets

A detailed description of the operations conducted by the various business areas is presented on pages 16–21 and 24–25 of this Annual Report.

Hexagon BUSINESS AREAS Measurement Hexagon Other Group-wide and 2007 Technologies Polymers operations adjustments Eliminations Group

Net sales 1 10 937 2 730 922 – –2 14 587

Operating earnings (EBIT1) 2 141 310 30 –60 – 2 421

Capital gain – – –114–114 Other non-recurring items ––––265––265 Earnings before net interest expense 2 141 310 30 –211 – 2 270

Net interest income/expenses ––––214––214 Earnings before taxes 2 141 310 30 –425 – 2 056

Operational assets 19 441 2 599 692 80 –110 22 702 Operational liabilities 3 012 359 306 0 –110 3 567 Net operating assets 16 429 2 240 386 80 – 19 135

Of which share in associated companies earnings 40––35––31 Shares in associated companies 200–––20

Cash flow from operating activities 2 114 360 17 –526 – 1 965 Cash flow from ordinary investment activities –576 –172 –64 –13 – –825 Operating cash flow 1 538 188 –47 –539 – 1 140

Average number of employees 5 796 2 120 480 10 – 8 406 No. of employees at year-end 7 296 2 327 428 11 – 10 062 Depreciation/amortization and impairment losses –515 –70 –42 –176 – –803

Hexagon Measurement Hexagon Other Group-wide and 2006 Technologies Polymers operations adjustments Eliminations Group

Net sales 1 9 250 2 488 1 734 – – 3 13 469

Operating earnings (EBIT1) 1 547 223 109 –52 0 1 827

Capital gain –––97–97 Other non-recurring items – – – –84 – – 84 Earnings before net interest expense 1 547 223 109 –39 0 1 840

Net interest income/expenses – – – –222 – – 222 Earnings before taxes 1 547 223 109 –261 0 1 618

Operational assets 14 082 1 941 1 190 252 – 48 17 417 Operational liabilities 2 121 280 344 54 – 48 2 751 Net operating assets 11 961 1 661 846 198 – 14 666

Of which share in associated companies earnings 2 – – 0 – 2 Shares in associated companies 14036––50

Cash flow from operating activities 1 382 233 43 –543 – 1 115 Cash flow from ordinary investment activities – 6 6 3 – 124 – 4 3 – 4 – – 8 3 4 Operating cash flow 719 109 0 –547 – 281

Average number of employees 4 942 1 933 975 12 – 7 862 No. of employees at year-end 5 133 2 016 1 008 13 – 8 170 Depreciation/amortization and impairment losses –470 –68 –64 0 – –602

1 Since inter-company invoicing among the business areas is negligible, only gross invoicing is stated.

66 Hexagon Annual Report 2007 Notes

Note 1, cont.

Liabilities 1 Cash flow from Net sales per ordinary investment recipient country Assets Assets Net activities GEOGRAPHICAL MARKETS 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006

EMEA 8 646 8 329 15 774 14 499 –2 711 –2 078 13 063 12 421 –498 –432 Americas 3 551 3 261 6 228 2 421 –1 062 –813 5 166 1 608 –188 –292 Asia 2 390 1 879 1 447 1 105 –541 –468 906 637 –139 –110 Elimination of intra-Group items – – –476 –423 476 423 – – – – Group 14 587 13 469 22 973 17 602 –3 838 – 2 936 19 135 14 666 –825 – 834

1 Net operating assets are equivalent to operating earnings inasmuch as items such as cash and cash equivalents, tax, interest and interest-bearing liabilities and provisions are not included.

NOTE 2. Intra-group purchases and sales

Other Group companies account for 100 per cent (100) of the Parent Company’s sales and for none of the Parent Company’s purchases.

NOTE 3. Average number of employees

2007 2006 Men Women Total Men Women Total

Parent Company 64108412 Subsidiaries 6 758 1 638 8 396 6 422 1 428 7 850 Total, Group 6 764 1 642 8 406 6 430 1 432 7 862

2007 2006 Average number of employees by location in Sweden Men Women Total Men Women Total

Eskilstuna 75 15 90 65 12 77 Gislaved 119 153 272 106 148 254 Göteborg 213 527 Karlskoga 101 8210 Laxå 74 13 87 76 15 91 Malmö 112 7310 Mölndal 325 325 Nacka 64108412 Nybro 16 2 18 95 9 104 Olofström 130 41 171 118 42 160 Oskarshamn 11 0 11 65 2 67 Sollentuna 51 8 59 44 7 51 Stockholm ––– 1–1 Tidaholm 75 8 83 90 10 100 Trollhättan ––– 26329 Uddevalla 101 1–1 Värnamo 415 26430 Älmhult 118 18 136 96 18 114 Örebro 15 2 17 181 19 200 Östra Göinge 21324––– Total Sweden 723 272 995 1 021 302 1 323

Hexagon Annual Report 2007 67 Notes

Note 3, cont. 2007 2006 Average number of employees by country Men Women Total Men Women Total

Sweden 723 272 995 1 021 302 1 323 Norway 34 4 38 34 7 41 Denmark 67 37 104 61 37 98 Finland 909 87592 Nordic region and Baltic states 833 313 1 146 1 203 351 1 554

UK 162 40 202 154 37 191 Germany 395 63 458 384 64 448 Netherlands 18 2 20 17 3 20 Belgium 98 10 108 89 10 99 France 201 65 266 178 59 237 Switzerland 1 192 229 1 421 1 139 228 1 367 Italy 289 69 358 295 68 363 Portugal 9 3 12 9 3 12 Spain 100 32 132 75 22 97 Russia 10313516 Czech Republic 112 6 118 97 9 106 Turkey 14216––– Austria 101 ––– Poland 17 2 19 12 3 15 Rest of Europe 2 618 526 3 144 2 454 507 2 961 Total, Europe 3 451 839 4 290 3 657 858 4 515

USA 1 082 264 1 346 958 254 1 212 Canada 99 26 125 94 19 113 Mexico 36 6 42 17 3 20 North America 1 217 296 1 513 1 069 276 1 345

Brazil 36 8 44 29 4 33 South America 36 8 44 29 4 33

Australia 83 15 98 80 13 93 Australia 83 15 98 80 13 93

China 587 312 899 302 132 434 United Arab Emirates 101 ––– Hong Kong 16 10 26 14 9 23 India 19 2 21 14 1 15 Israel 415 ––– Japan 83 14 97 77 14 91 Korea 32 6 38 31 6 37 Malaysia 426 ––– Thailand 55102–2 Singapore 86 111 197 91 94 185 Sri Lanka 1 140 21 1 161 1 064 25 1 089 Asia 1 977 484 2 461 1 595 281 1 876 Total, Group 6 764 1 642 8 406 6 430 1 432 7 862

68 Hexagon Annual Report 2007 Notes

NOTE 4a. Employee benefits

Board and CEO Other employees At year-end, all Board members were men. The Chief Executive Officer and other senior executives were men. Salaries and Remuneration 2007 2006 2007 2006 Of all the Group’s Board members, Chief Executive Officers and other corpor- Parent Company 15 14 17 14 ate executives, 24 were women and 300 were men. (of which performance-related Sickness absence in the Parent Company totalled 0 per cent (0) of the pay and bonus) (4) (4) (4) (3) employees combined ordinary working time. No part of sickness absence pertained to a connected period of 60 days or more. Subsidiaries in Sweden 18 20 325 416 Total 33 34 342 430 Defined-benefit pension schemes 2007 2006

Australia 4– 5543Actuarial assumptions (%) Austria 0– 3–Discount interest rate 3,7 3,3 Belgium 76 3426Expected return on plan assets 5,0 4,8 Brazil 32 86Inflation 1,5 1,5 Canada 53 6044Employee turnover 7,6 8,0 China 84 7147OVERVIEW Czech Republic 11 1210Provisions Denmark 33 4723Pension obligation 3 080 3 253 Finland –1 128Fair value of plan assets – 3 018 – 2 907 France 75 11389Pension obligation less plan assets 62 346 Germany 98 228190 Unrecognized costs for prior-year service 25 – Hong Kong –– 2– Actuarial gains (+)/losses (–) 331 128 India 00 11 Pension provision 418 474 Israel –– 8– Italy 38 139132Expenses Japan 64 3740Pensions vested during the year 112 123 Korea 11 1110Interest on pension provision 112 117 Malaysia 0– 1–Expected return on plan assets – 144 – 143 Mexico 11 84Amortization of unrecognized actuarial gains(+)/losses(–) 1– Netherlands 24 95Employees’ own contribution – 31 – 28 Norway 12 2019Pension expenses – defined-benefit plans 50 69 Poland 10 42 Pension expenses – defined-contribution plans 84 77 Portugal –– 43 134 146 Russia 10 21Total pension expenses Singapore 53 3735SPECIFICATIONS Spain 44 4033Pension obligations Sri Lanka 11 2015Opening balance 3 253 3 655 Switzerland 49 47 782 762 Change in terms and conditions – 31 – Thailand 10 10Pensions vested during the year 112 123 Turkey 0– 1–Interest expense 112 117 UK 66 10480Benefits paid – 155 – 249 United Arab Emirates 1– 1–Early retirements – – 3 USA 24 16 772 730 Obligations in acquired/divested subsidiaries – 23 1 Total 187 164 2 975 2 808 Settlement of pension obligations –– 20 (of which performance-related Expenses for prior-year service – 1 – pay and bonus) (46) (36) (248) (215) Actuarial gains (+)/losses (–) – 216 – 146 Currency translation differences 29 – 225 All Employees Closing balance 3 080 3 253 Social security expenses 2007 2006 Plan assets Parent Company 15 11 Opening balance 2 907 3 070 (of which pension expenses) (4) (4) Expected return on plan assets 144 143 Subsidiaries 664 684 Funds contributed 113 104 (of which pension expenses) (130) (142) Amounts refunded – 159 – 230 Total 679 695 Acquired/divested subsidiaries 00 (of which pension expenses) (134) (146) Actuarial gains (+)/losses (–) – 16 24 Currency translation differences 29 – 204 Pension expenses for Boards of Directors and Chief Executive Officers in the Closing balance 3 018 2 907 Group amounted to 14 MSEK (13). Pension commitments to Boards of Direct- ors and Chief Executive Officers in the Group were 13 MSEK (15).

Hexagon Annual Report 2007 69 Notes

Note 4a, cont.

Defined-benefit pension schemes 2007 2006 Defined-benefit pension schemes 2007 2006

Return on plan assets Acquired subsidiaries Expected return on plan assets 144 143 Increase in pension obligations (+) 41 Actuarial gains (+)/losses (–) – 16 24 Increase in plan assets (–) 00 Actual return on plan assets 128 167 Total – net 41

Provision for pensions Divested subsidiaries Opening balance 474 551 Decrease in pension obligations (–) – 31 – Pension expense, defined-benefit schemes 80 97 Change in actuarial gains (–)/losses(+) 7– Benefits paid –155 – 249 Total – net – 24 0 Funds contributed – 113 – 104 Repayments 159 230 Fair value of plan assets Premature retirements –– 3Equities and similar financial instruments 827 835 Expenses for prior-year service – 6 – Interest-bearing securities, etc. 1 900 1 491 291 581 Settlement of pension obligations 2– 20Real estate Acquired/divested subsidiaries – 23 1 Total 3 018 2 907 Currency translation differences 0– 29 Closing balance 418 474 Pension obligations, Pension 31 December 2007 Plan assets obligations Net Actuarial gains/losses Sweden ––49–49 Opening balance, actuarial gains (+)/losses (–) 128 – 34 Italy ––71–71 Redemption of pension obligations 4– 3 Switzerland 2 723 –2 561 162 Pension obligations, actuarial gains (+)/losses (–) 216 146 Germany 24 –83 –59 Plan assets, actuarial gains (+)/losses (–) – 16 24 UK 231 – 230 1 Acquired/divested companies 2– USA 37 – 44 – 7 Currency translation differences – 3 – 5 Other minor commitments 3– 42– 39 Closing balance, actuarial gains (+)/losses (–) 331 128 Total (fair/present value) 3 018 – 3 080 – 62 Unrecognized expenses for prior-year service Capitalized actuarial gains/ Opening balance ––losses/unrecognized expenses Recognized this year – 6 – for prior-year service –356 Unrecognized this year 31 – Pension provisions –418 Currency translation differences 0– Any shortfall in the scheme in Switzerland must be covered by the employer, Closing balance 25 – while surpluses can only become due to the beneficiaries. The value of plan assets has been reduced accordingly.

NOTE 4b. Remuneration to senior executives

Pursuant to resolutions by the Annual General Meeting, the Chairman of the Remuneration to the President and Chief Executive Officer, as well as other Board and Board members were paid remuneration totalling 2 425 000 SEK senior executives, comprises basic salary, variable remuneration, other bene- (1 950 000). Due to changes in the Board of Directors, the Board fee paid fits and pension. Other senior executives are the two people presented on amounted to 2 200 000 SEK. The Chairman of the Board received 650 000 page 49. Variable remuneration is based on outcome in relation to individ- SEK and other Board members 350 000 SEK each (the Chief Executive ually set targets. Officer of Hexagon AB did not receive any director fees). In addition to direct- or fees, remuneration is paid for work on committees. The chairman of the Pensions and other benefits received by the President and other senior Remuneration Committee received 75 000 SEK and each member received executives are paid as part of their total remuneration. 50 000 SEK. The chairman of the Audit Committee received 150 000 SEK and each member received 100 000 SEK. No Board member received any remuneration in addition to director fees.

REMUNERATION AND OTHER BENEFITS DURING THE YEAR Basic salary/ Variable Other Pension Other SEK 000s Director fees remuneration benefits expenses remuneration Total

Chairman of the Board, Melker Schörling 725––––725 Maths O. Sundqvist 400––––400 Mario Fontana 475––––475 Marianne Arosenius 250––––250 Ulf Henriksson 350––––350 Chief Executive Officer, Ola Rollén 9 111 4 000 – 1 370 – 14 481 Other senior executives (two people) 6 747 3 677 78 1 515 – 12 017 Total 16 583 7 677 78 2 885 – 27 223 Other benefits primarily comprise company cars.

70 Hexagon Annual Report 2007 Notes

Note 4b, cont. PENSION process, a third party submitted a competing bid for Leica Geosystems. As a Pension expense comprises defined-contribution pension schemes, and is consequence of this competing bid, Hexagon raised its initial bid, submitting the expense affecting earnings for the year. The Chief Executive Officer’s pen- an additional bid premium comprising five Hexagon class B shares in addition sionable age is 65. Pension premiums are payable at 15 per cent of pension- to the 440 CHF that had been offered per share. Hexagon’s initial bid and the able salaries. The pensionable age of other senior executives is 65. Pension revised bid were targeted at existing shareholders, and those individuals hold- premiums are 20–25 per cent of pensionable salary. Pensionable salary ing Leica Geosystems’ employee stock options. The value of the additional means basic salary. bid premium, i.e. the market value of the five class B Hexagon shares, has been accounted as a portion of the acquisition value of the acquired shares SEVERANCE PAY and options of Leica Geosystems. In connection with the new issue of Hexa- Only if the Chief Executive Officer’s employment is terminated by the Com- gon shares effected in 2006 (compulsory redemption), the cash portion was pany will severance pay, corresponding to 18 months’ salary, be paid. No adjusted to 462 CHF by a Swiss court. Following a bonus issue and the share salary during the period of notice will be paid in addition to the severance pay. split implemented in 2007, the bid premium corresponds to 15 Hexagon class Notice periods for other senior executives are 12 to 18 months. During the B shares shares. notice period, only ordinary salary is payable, with the exception of one person, for whom additional severance pay corresponding to six months Because the value of the additional bid premium stated above is not consid- ordinary salary will be paid if notice is served by the Company. ered to correspond to remuneration for services, it has been regarded as a portion of the acquisition value of Leica Geosystems. Thus the expenses for FINANCIAL INSTRUMENTS the employee stock options in the Hexagon Group comprise the expense ori- Stock option plans, Leica Geosystems ginally calculated regarding the services to which the benefits were consid- At the date of acquisition on 14 October 2005, Leica Geosystems had a ered to correspond at the date of allotment. These employee stock options are number of stock option plans targeted at Leica’s senior executives. These charged against the income statement until the earliest possible exercise date options conferred these employees with the right to subscribe for one new pursuant to the original calculation. For 2007, this expense was 8 MSEK (6). Leica share at a price predetermined at allotment. These stock options are associated with certain terms and conditions, such as a specified length The Chief Executive Officer and other senior executives (two people) are not of service, before the employee is permitted to redeem his/her options for participating in this stock option plan. shares. The options were allotted free of charge. During the acquisition

Number of subscription-qualifying shares To receive in cash less Exercise period, Number of in Hexagon to be re- exercise price per Share price WARRANTS until options/warrants ceived free of charge Hexagon share on exercise

Warrant plan in Leica Geosystems Opening balance 2007 2010-04-07 4 066 60 990 144.53 2009-04-08 1 531 22 965 107.74 2011-04-08 14 682 220 230 99.11 2012-04-08 27 828 417 420 46.17 2008-04-04 247 3 705 36.04 2008-07-12 449 6 735 32.66 Total closing balance 2007 48 803 732 045 72.05

Changes in 2007 Warrants exercised for cash – 4 561 – 120.00 Warrants exercised for cash and Hexagon shares –11 634 – 126.00 Forfeited warrants –2 668 – Closing balance 2007 2010-04-07 1 281 19 215 146.26 2009-04-08 821 12 315 109.03 2011-04-08 8 633 129 495 100.29 2012-04-08 19 176 287 640 46.73 2008-04-04 29 435 36.47 Total closing balance 2007 29 940 449 100 68.13

Warrants in Leica Geosystems The CEO and other senior executives (two people) did not hold any warrants WARRANTS, 31 DECEMBER 2007 Number Acquisition price at 31 December 2007. Upon full exercise of the non-terminated warrant plans, dilution would be 0.2 per cent of the share capital and 0.1 per cent of the vot- CEO ––ing rights. Where applicable, the figures in the table have been restated to Other senior executives (two people) ––take into account the bonus issue and share split implemented in 2007. Other employees 29 940 – An Extraordinary General Meeting held on 14 December resolved to intro- Total 29 940 – duce a new warrant scheme for senior executives and key personnel within the Group.

Drafting and decision model Salary and other terms and conditions for the Group’s senior executives are processed by a Remuneration Committee appointed by the Board of Directors.

Hexagon Annual Report 2007 71 Notes

NOTE 5. Other operating revenues and operating expenses

Group Parent Company 2007 2006 2007 2006

Operating revenues Capital gains on divestment of fixed assets 34 8 – – Exchange rate gains 04 –– Other 25 46 – – Total 59 58 – –

Operating expenses Capital losses on divestment of fixed assets 12 –– Depreciation/amortization and impairment 76 51 – – Other 11 127 – – Total 88 180 – –

NOTE 6. Non-recurring items

Business area 2007 2006

Capital gain from divestment of subsidiaries Other operations 114 – Capital gain from divestment of shareholdings in Tradimus AB, etc. Other operations –97 Restructuring costs for integration of Leica Geosystems Hexagon Measurement Technologies – – 84 Acquisition of NovAtel Hexagon Measurement Technologies Impairment of value of overlapping technologies –91 – Impairment of value of NovAtel’s customer relations relating to Leica Geosystems –60 – Impairment of value of the associated company Outokumpu Nordic Brass AB Other operations –35 – Costs related to preparations for the listing of Hexagon Polymers in 2008 Hexagon Polymers –16 – Legal costs pertaining to completed dispute concerning patent infringement Hexagon Measurement Technologies –20 – Other restructuring costs Hexagon Measurement Technologies –43 – Total –151 13

NOTE 7. Earnings from financial investments

Group Parent Company 2007 2006 2007 2006

Earnings from shares in Group companies Capital gain 140 – – – Capital loss –26 – – – 5 Total 114 – – – 5

Earnings from other securities classified as fixed assets Capital gain –97–101 Total –97–101

Other interest income Interest income, Group companies –– 212166 Other interest income 48 29 10 13 Total 48 29 222 179

Interest expense Interest expense, Group companies – – 111 61 Other interest expense 262 251 239 319 Total 262 251 350 380

Earnings from shares in associated companies Impairment –35––– Capital gain 3– –– Profit shares, etc. 12 –– Total –31 2 – –

72 Hexagon Annual Report 2007 Notes

NOTE 8. Taxes

Group Reconciliation of the year’s change in current and Group 2007 2006 deferred tax assets/liabilities, cont. 2007 2006

Tax on earnings for the year Completion of acquisition analysis of Leica Geosystems* –260 215 Income tax –286 – 242 Change via acquisitions and divestments –65 – 13 Total current tax –286 – 242 Changes recognized directly in shareholders’ equity, etc. 35 – 37 Translation difference 19 18 Deferred tax on earnings for the year 41 – 96 Closing balance, net –176 53 Share of tax in associated companies 00 Total tax on earnings for the year –245 – 338 CURRENT TAXES Opening balance, net –150 – 77 Non-accounted deferred Parent Company tax liabilities for untaxed reserves amount to – MSEK (–). Change via income statement: DEFERRED TAX Current tax on earnings –286 – 247 Deferred tax, meaning the difference between, on the one hand, income tax Change in tax rates and items pertaining to prior years 05 actually recognized as current tax in current and prior-year income statements Total –286 – 242 and, on the other hand, the income tax the company will finally be charged as a consequence of business conducted in the current and prior financial years Change via acquisitions and divestments 12 – 11 amounted to: Payments, net 205 175 Group Translation difference –6 5 2007 2006 Closing balance, net –225 – 150

Deferred tax assets (liabilities) comprise: Group Fixed assets –532 – 414 The Group’s unutilized loss carry-forwards and similar deductions mature as follows: 2007 Inventories 105 45 Customer receivables 16 23 Year Provisions 36 13 2008 12 Other –47 – 69 2009 35 Unutilized loss carry-forwards and similar deductions 554 535 2010 2 2011 31 Less items not satisfying criteria for being recognized as assets –308 – 80 2012 and later 508 Total –176 53 Indefinitely 1 203 Total 1 791 According to the balance sheet: Deferred tax assets 492 442 Group The difference between nominal Swedish tax rate and Deferred tax liabilities –668 – 389 effective tax rates arises as follows: 2007 2006 Total, net –176 53 Earnings before tax 2 056 1 618 Unutilized loss carry-forwards and similar deductions not satisfying criteria for Tax pursuant to Swedish nominal tax rate –575 – 453 being recognized as assets have not been recognized at any value. Deferred tax assets that depend on future taxable surpluses have been valued on the Difference in tax rates in foreign businesses 228 96 basis of both historical and forecast future taxable earnings. Hexagon is striv- Revaluation of loss carry-forwards, etc. –67 66 ing for a corporate structure that enables tax exemption when companies are Non-deductible expenses –64 – 65 divested and favourable taxation of dividends within the Group. However, certain potential taxes on dividends and divestments remain within the Group. Non-taxable revenue 93 39 The principal internal interface pertaining to potential income tax conse- Change in tax rates, etc., in foreign operations 140 – 21 quences from share divestments is the American company Brown & Sharpe Tax, income statement –245 – 338 International Capital Corporation’s ownership of the Swiss company Tesa SA. With respect to dividends, the principal internal interface is between the * During 2006, Leica Geosystems’ acquisition analysis was completed whereby consider- Group’s Chinese companies that are owned in the US. able deferred tax assets pertaining to tax-loss carry-forwards were reported. During 2007, it was established that deferred tax liabilities of 260 MSEK pertaining to temporary Group Reconciliation of the year’s change in current and differences that existed at the time of the acquisition of Leica Geosystems had not been deferred tax assets/liabilities 2007 2006 reported. The counter-item for reporting this liability within the time limit permitted by IFRS 3 would have been goodwill. Hexagon has reported tax liability against this counter-item DEFERRED TAXES despite the time limit permitted by IFRS 3 having expired. After studying all the relevant factors, Hexagon has concluded that reporting the item in this way is the most suitable Opening balance, net 53 – 34 solution and that it does not constitute a significant deviation from IFRS 3.

Change via income statement: Deferred tax on earnings –26 – 134 Change in reserve for deductions not satisfying criteria for being recognized as assets –67 66 Change in tax rates and items pertaining to prior years 135 – 28 Total 42 – 96

Hexagon Annual Report 2007 73 Notes

NOTE 9. Acquisitions and divestments of subsidiaries

NET ASSETS IN ACQUIRED SUBSIDIARIES EXCLUDING ACQUIRED CASH NET ASSETS IN DIVESTED SUBSIDIARIES EXCLUDING DIVESTED CASH AND BANK BALANCES AND BANK BALANCES The market value of assets and liabilities in subsidiaries taken over and total Market value of transferred assets and liabilities of subsidiaries and the total cash flow from acquisitions is divided as follows: cash flow from divestments is divided as follows:

2007 2006 2007 2006

Goodwill 3 503 79 Goodwill 25 – Other intangible fixed assets 627 89 Other intangible fixed assets 1– Tangible fixed assets 244 21 Tangible fixed assets 196 – Financial fixed assets 59 – Financial fixed assets –– Current receivables, inventories, etc. 552 118 Current receivables, inventories, etc. 540 – Cash and cash equivalents 1 101 6 Cash and cash equivalents 3– Provisions –526 –51 Minority share –11 – Long-term liabilities –161 –9 Provisions –58 – Current liabilities, etc. –702 –84 Long-term liabilities –8 – Net assets 4 695 169 Current liabilities, etc. –230 – Net assets 458 – Acquisition price 4 819 203 Acquisition cost 59 1 Selling price 593 – Selling costs –21 – Total acquisition expenditure 4 878 204 Total sales revenue 572 – Less cash and cash equivalents in acquired Divested net assets –458 – Group companies –1 101 – 6 Capital gain 114 – Less unpaid transaction costs –7 – Less unpaid portion of acquisition price –211 –35 Total sales revenue 572 – Plus payment of unpaid portion of acquisition price from Less cash and cash equivalents in divested units –3 – prior years 13 – Cash flow from divested Group companies, net 569 – Plus payment for Leica Geosystems 20 198 Cash flow from acquired Group companies, net 3 592 361

DESCRIPTION OF THE ACQUISITION OF NOVATEL INC. IN 2007 Acquisition cost

Cash 3 257 Costs 28 Total acquisition expenditure 3 285 The acquisition of NovAtel was carried out in several steps. Initially, Hexagon acquired for cash a convertible debenture and newly issued shares from NovAtel. Subsequently, a public offer was directed to all shareholders. After the necessary number of shareholders had accepted the offer, a redemption procedure could be implemented for the remaining shares. Finally, NovAtel repaid the convertible debenture in cash to Hexagon. Balance sheet according to IFRS Cash Acquisition Acquisition Acquisition before acquisition Acquired net assets flow costs balance sheet adjustments adjustments

Goodwill 2 055 –28 2 027 1 998 29 Other intangible fixed assets 426 – 426 354 72 Tangible fixed assets 54 – 54 5 49 Financial fixed assets 67 – 67 – 67 Current receivables, inventories, etc. 156 – 156 –18 174 Cash and cash equivalents 979 – 979 – 979 Provisions – 101 – – 101 –95 –6 Current liabilities, etc. –351 – –351 18 –369 Subtotal 3 285 – 28 3 257 2 262 995

Less cash and cash equivalents – 979 – –979 Plus acquisition costs –2828 Cash flow according to cash flow statement 2 306 0 2 306

Most of the acquisition analyses pertaining to the year’s acquisitions have been completed using definitive figures. However, the acquisition analyses pertaining to a few of the acquisitions may require calibration during 2008, although only by minor amounts. In 2007 and 2006, Hexagon carried out a very large number of acquisitions. The acquired companies apply IFRS as of the acquisition date, although the accounting norms previously applied are usually based on local legislation and/or tax legislation. Accordingly, historical figures are not comparable with the financial results reported after the acquisition. For this reason, Hexagon is not issuing any estimates of what the Hexagon Group’s earnings and financial position would have been if the acquisitions had occurred at the beginning of the year or any similar information.

74 Hexagon Annual Report 2007 Notes

NOTE 10. Intangible and tangible fixed assets

Capitalized GROUP expenditure for Intangible fixed assets development Patents and Other intangible 2007 work trademarks Goodwill fixed assets Total

Acquisition value, opening balance 1 088 3 166 6 191 401 10 846 Translation differences –14 35 72 15 108 Investments 389 – – 14 403 Investments via acquisitions of subsidiaries 29 57 3 503 625 4 214 Sales/disposals –32 – – –4 –36 Sales via divestments of subsidiaries –––29–1–30 Reclassification –93 –3 – 3 –93 Acquisition value, closing balance 1 367 3 255 9 737 1 053 15 412

Amortization, opening balance –292 –36 –218 –95 –641 Translation differences 6–1––14 Investments via acquisitions of subsidiaries –16 – – –68 –84 Amortization for the year –229 –24 – –52 –305 Sales/disposals 32 – – 4 36 Sales via divestments of subsidiaries ––4–4 Reclassification 91 – – – 91 Amortization, closing balance –408 –61 –214 –212 –895

Impairments, opening balance –164 – – – –164 Translation differences 1–––8–7 Impairments for the year –131 – – –64 –195 Impairments, closing balance –294 – – –72 –366 Carrying value 665 3 194 9 523 769 14 151

Capitalized expenditure for development Patents and Other intangible 2006 work trademarks Goodwill fixed assets Total

Acquisition value, opening balance 860 3 465 6 662 258 11 245 Translation differences – 104 – 235 – 453 – 28 – 820 Completion of acquisition analysis, Leica Geosystems – – – 104 – – 104 Investments 347 – – 8 355 Investments via acquisitions of subsidiaries 38 41 79 10 168 Sales/disposals – 2 – – – – 2 Reclassification – 51 – 105 7 153 4 Acquisition value, closing balance 1 088 3 166 6 191 401 10 846

Amortization, opening balance – 131 – 68 – 219 – 4 – 422 Translation differences 2921537 Amortization for the year – 198 – 29 – – 34 – 261 Sales/disposals 1–––1 Reclassification 759–– 624 Amortization, closing balance – 292 – 36 – 218 – 95 – 641

Impairments, opening balance – 162 – – – – 162 Translation differences 13–––13 Impairments for the year – 15 – – – – 15 Impairments, closing balance – 164 – – – – 164 Carrying value 632 3 130 5 973 306 10 041

Capitalized expenditure for development work pertains mainly to software for sale. With the exception of goodwill, the right to use the name “Leica” is the largest value in terms of intangible fixed assets. This right is not subject to amortization. During 2005, development work was added through the acquisition of Leica Geosystems, which was recognized in an amount of 540 MSEK. The revaluation of assets and liabilities that resulted from the acquisition did not result in any change in this value. Following completion of the acquisition analysis, the value of software within Hexagon Metrology and Leica Geosystems was impaired by a combined amount of 162 MSEK via the income statement, due to overlaps. During 2007, a corresponding analysis was performed in connection with the acquisition of NovAtel Inc. The analysis led to an impairment of overlapping capitalized development work by 91 MSEK and of the value of the customer portfolio by 60 MSEK via the income statement. At 31 December 2007, trademarks accounted for 2 757 MSEK of the total carrying value of patents and trademarks.

Hexagon Annual Report 2007 75 Notes

Note 10, cont.

Construction in progress and GROUP Land Equipment, advance Tangible fixed assets and other Plant and tools, fixtures payments to 2007 Buildings real estate machinery and fittings suppliers Total

Acquisition value, opening balance 1 114 217 2 338 489 108 4 266 Translation differences 52131–21 Investments 70 3 265 111 59 508 Investments via acquisitions of subsidiaries 74 29 217 73 1 394 Sales/disposals –41 –16 –36 –14 – –107 Sales via divestments of subsidiaries –123 –15 –391 –47 –1 –577 Reclassification 36 – 35 –2 –87 –18 Acquisition value, closing balance 1 135 220 2 441 611 80 4 487

Depreciation, opening balance –393 –8 –1 474 –290 – –2 165 Translation differences –7 0 –18 –3 – –28 Investments via acquisitions of subsidiaries –9 –3 –100 –38 – –150 Depreciation for the year –40 –1 –187 –75 – –303 Sales/disposals 3–336–42 Sales via divestments of subsidiaries 70 2 271 38 – 381 Reclassification 2–101–13 Depreciation, closing balance –374 –10 –1 465 –361 – –2 210 Carrying value 761 210 976 250 80 2 277

Construction in progress and Land Equipment, advance and other Plant and tools, fixtures payments to 2006 Buildings real estate machinery and fittings suppliers Total

Acquisition value, opening balance 1 037 232 2 307 609 48 4 233 Translation differences – 53 – 15 – 122 – 39 – 7 – 236 Investments 144 5 202 76 75 502 Investments via acquisitions of subsidiaries 13215–21 Sales/disposals – 27 – 3 – 58 – 24 – – 112 Reclassification –– 48– 138– 8– 142 Acquisition value, closing balance 1 114 217 2 338 489 108 4 266

Depreciation, opening balance – 377 – 8 – 1 399 – 270 – – 2 054 Translation differences 15 – 63 12 – 90 Depreciation for the year – 38 – 1 – 196 – 90 – – 325 Sales/disposals 7–5817–82 Reclassification –1–41–42 Depreciation, closing balance – 393 – 8 – 1 474 – 290 – – 2 165

Impairment, opening balance 2–2––4 Translation differences – 2 – – 2 – – – 4 Impairment, closing balance –––––– Carrying value 721 209 864 199 108 2 101

The taxable value of properties in Sweden was 30 MSEK (81) for buildings and 6 MSEK (17) for land.

76 Hexagon Annual Report 2007 Notes

Note 10, cont.

PARENT COMPANY Patents and 2007 trademarks Buildings Land Equipment Total

Acquisition value, opening balance 2218233 Investments 23 8 – 0 31 Sales/disposals –23 –29 –8 0 – 60 Acquisition value, closing balance 20024

Depreciation, opening balance – 20 0– 1– 3 Depreciation for the year –0––0 Sales/disposals –0––0 Depreciation, closing balance – 20 0– 1– 3 Carrying value 000 11

Patents and 2006 trademarks Buildings Land Equipment Total

Acquisition value, opening balance 288220 Investments –13– 114 Sales/disposals –––– 1– 1 Acquisition value, closing balance 2218 233

Depreciation, opening balance – 20 –– 2– 4 Depreciation for the year –0–00 Sales/disposals –––11 Depreciation, closing balance – 20 –– 1– 3 Carrying value 0218 130

The taxable value of properties in Sweden was 2 MSEK (2) for buildings and 1 MSEK (5) for land.

NOTE 11. Financial fixed assets

Participations in Other long-term Other long-term associated companies securities holdings receivables GROUP 2007 2006 2007 2006 2007 2006

Opening balance 50 36 1 11 52 44 Translation differences 0– 20 0 2– 2 Investments –5 –– 714 Investments via acquisitions of subsidiaries –– 10– –– Capital contributions –10– – – – Earnings participations, etc. 12 –– –– Impairment –35 – 1 – – –1 – Sales –6 – – –10 –5 – 4 Closing balance 10 50 11 1 55 52

Participations in Receivables from Participations in Group companies Group companies associated companies PARENT COMPANY 2007 2006 2007 2006 2007 2006

Opening balance 11 827 11 649 2 800 1 725 – – Purchases 1 013 178 – – 0 – Increase/decrease in receivables –– 3 2761 075–– Sales –0 –– –– Closing balance 12 840 11 827 6 076 2 800 0 –

Other long-term securities holdings PARENT COMPANY 2007 2006

Opening balance –10 Sales ––10 Closing balance ––

Hexagon Annual Report 2007 77 Notes

Note 11, cont.

Group Parent Company

OTHER LONG-TERM SECURITIES HOLDINGS 2007 2006 2007 2006

Others 11 1 – – Total 11 1 – –

Portion of share Carrying amount No. capital and Corp ID. No. Reg. Office/Country of shares voting rights, % 2007 2006

Subsidiaries of Hexagon AB Leica Geosystems AG – Switzerland 2 512 450 100 10 367 10 340 SwePart AB 556046-3407 Stockholm, Sweden 8 662 500 100 218 218 Hexagon Förvaltning AB 556016-3049 Stockholm, Sweden 200 000 100 206 206 Hexagon Polymers AB 556108-9631 Gislaved, Sweden 100 100 726 726 Johnson Industries AB 556099-2967 Örebro, Sweden 3 000 100 133 133 Röomned AB 556394-3678 Stockholm, Sweden 1 439 200 100 100 100 Hexagon Metrology AB 556365-9951 Stockholm, Sweden 1 000 100 78 78 Tecla AB 556068-1602 Stockholm, Sweden 160 000 100 14 14 Kramsten Food and Drink Suppliers AB 556083-1124 Stockholm, Sweden 100 000 100 12 12 NovAtel Inc. 1 –Canada 953 864 9 311 – Hexagon Acquistion Inc. – Canada 1100675– Hexagon Metrology SrO 2 – Czech Republic 11000 Other companies, mainly dormant – – –1000 0 Total 12 840 11 827

1 Remaining 91 percent of the shares are owned by Hexagon Acquisition Inc. 2 Remaining 90 percent of the shares are owned by Hexagon Metrology AB.

NOTE 12. Shares in associated companies

Share in associated companies’ earnings Carrying amount Before Before Portion of Portion of, % Group tax Tax tax Tax sharehol- Number of Share Voting ders’ equity Type of ownership shares capital rightsMSEK 2007 2006 2007 2007 2006 2006

Outokumpu Nordic Brass AB Joint venture 10 500 50.0 50.0 24 0 35 0 0 0 0 Megufo AB Associated company 50050.050.00 00 00 00 Jingjiang City Linghuan Measuring Tools Co Ltd Associated company – – – – –6 00 20 AED-SICAD AG Associated company 67 246 20.0 20.0 7 7 9 –1 0 0 0 Point Inc. Joint Venture 73 549 49.0 49.0 2 2 – 6 0 – – Geonova AG Associated company 134 91020.020.01 10 00 00 Total 34105050 20

Outokumpu Nordic Brass AB, corporate identity no. 556499-3979, has its registered office in Valdemarsvik, Sweden. Megufo AB, corporate identity no. 556421-2453, has its registered office in Gislaved, Sweden. Jingjiang City Linghuan Measuring Tools Co Ltd has its registered office in China. During the year, an additional 60 per cent of the company was acquired and the company then became a subsidiary and is consolidated. AED-SICAD AG, corporate identity no. 008102, has its registered office in Bonn, Germany. Point Inc. has its registered office in Kansas, USA. Geonova AG, corporate identity no. CH 280.3003.179-8, has its registered office in Muttenz, Switzerland.

Since these holdings are insignificant in relation to the Group as a whole, no further disclosures are provided.

78 Hexagon Annual Report 2007 Notes

NOTE 13. Remuneration of NOTE 14. Prepaid expenses and accrued income/accrued expenses the Group’s auditors and deferred income

Group Parent Company Group Parent Company 2007 2006 2007 2006 2007 2006 2007 2006

Auditing Prepaid expenses and accrued income Ernst & Young 18 16 1 1 Accrued invoicing 93 59 – – Other 11 –– Prepaid rent 13 11 0 0 Total 19 17 1 1 Accrued interest income 12 3 4 1 Assignments other Prepaid acquisition costs 68 12 than auditing Other items 82 80 29 26 Ernst & Young 32 10 Total 206 161 34 29 Other 86 –– Total 11 8 1 0 Accrued expenses and deferred income Accrued personnel-related expenses 594 526 3 4 Received goods and services, not invoiced 74 81 – – Prepaid service revenues 77 53 – – Accrued interest expenses 20 18 20 18 Accrued sales commission 85 53 – – Accrued installation and 39 33 – – educational expenses Other items 298 183 1 10 Total 1 187 947 24 32

NOTE 15. Share capital and number of shares

Number of shares Par value Share capital PARENT COMPANY per share, SEK Class A Class B Total MSEK

Opening balance 2006 4 3 150 000 66 750 111 69 900 111 280 New issues – cash rights issue 4 787 500 16 687 527 17 475 027 70 Contribution in kind – compulsory redemption of shares in Leica Geosystems Holdings AG 4 – 198 635 198 635 1 New issues – exercise of warrants 4 – 818 052 818 052 3 Closing balance 2006 4 3 937 500 84 454 325 88 391 825 354 New issues – exercise of warrants 4 – 58 170 58 170 0 Bonus issue and split 3:1 2 7 875 500 169 024 990 176 899 990 177 Closing balance 2007 2 11 812 500 253 537 485 265 349 985 531

In 2007, the Parent Company effected a new issue and conversion of options to shares. In addition, a bonus issue and 3:1 split were conducted.

In 2006, the Parent Company conducted two new issues by converting options to shares. In addition, a cash rights issue and a contribution in kind pertaining to compulsory redemption of the remaining shares outstanding in Leica Geosystems Holdings AG were conducted.

AVERAGE NUMBER OF SHARES BEFORE AND AFTER DILUTION, THOUSANDS 2007 2006

Average number of shares before dilution 265 278 254 019 Estimated average number of potential shares pertaining to warrants plans 756 1 482 Estimated average number of potential shares pertaining to compulsory redemption of shares in Leica Geosystems holdings – 393 Estimated average number of potential shares pertaining to new issue –429 Average number of shares after dilution 266 034 256 323

The average number of shares has been calculated after taking the bonus issue and 3:1 split implemented in 2007 into account, as well as the rights issue implemented in 2006.

For more information on the Hexagon share, reference is made to page 34.

Hexagon Annual Report 2007 79 Notes

NOTE 16. Other Provisions

Estimated supplemen- Restructuring Other tary payments for GROUP measures provisions acquired companies 1 Total 2

Closing balance, 2005 130 291 0 421 Adjustment pertaining to accounting for fulfilment of warrants plans –– 81–– 81 Opening balance after adjustment, 2006 130 210 0 340 Completion of acquisition analysis of Leica Geosystems – 139 – 139 Provision 92 100 – 192 Present value adjustment –4–4 Increase through acquisition of businesses – – 36 36 Payment through fulfilment of warrants plans – – 64 – – 64 Utilization – 192 – 204 – – 396 Reclassification – 3 – 2 – – 5 Translation difference – 5 – 7 0 – 12 Closing balance, 2006 22 176 36 234

Provision 15 85 53 153 Present value adjustment –336 Increase through acquisition of businesses 720159186 Payments of supplementary acquisition considerations – – – 20 – 20 Utilization – 17 –137 – –154 Reclassification – 12 –12 0 Translation difference – 1 0 –4 – 5 Closing balance, 2007 26 159 215 400

1 Supplementary purchase prices that cannot be calculated reliably have not been provided for. 2 Of which, current portion: 208 (133).

NOTE 17. Financial instruments and financial risk management

FINANCIAL RISK their entirety. Forecast flows in addition to contracted flows are hedged at Because a significant portion of consolidated revenues and expenses is gen- 40 to 100 per cent with a horizon of 12 months. Hedging is primarily effected erated in foreign currencies and the Group is established in a large number of using currency forwards and currency clauses. countries, exchange rate variations influence the Group’s revenues, operating earnings, shareholders’ equity and other items. Bond market fluctuations also INTEREST EXPOSURE affect Hexagon. Hexagon’s Treasury function is responsible for coordinating Interest risk is the risk of an adverse impact on consolidated earnings from currency and interest exposure. The Treasury function is also responsible for changes in yields. Consolidated interest risk is managed by the Parent Com- most of the Group’s external and internal funding. The guidelines for manag- pany. Interest risk primarily arises as a consequence of the Group’s borrowing financial risks are determined annually by Hexagon’s Board in a Group- ings. Standard derivative instruments are used to control interest exposure, wide policy. A sensitivity analysis is presented on page 38. through means such as extending or shortening interest-fixing periods without renegotiating the underlying loan. CURRENCY EXPOSURE Translation exposure COUNTERPARTY RISK The Group’s funding policy states that the effects of exchange rate varia- Customer credits account for the main counterparty risk. There is no signifi- tions on shareholders’ equity should be minimized through hedging via loans cant concentration of such risks. and forwards contracts in the currency in which the net assets are denominated. Value changes on such loans and financial instruments are recognized FUNDING RISK directly in shareholders’ equity on an ongoing basis as an adjustment of the The funding risk is the risk that Hexagon will be unable to satisfy its need for differences in shareholders’ equity that arose from currency translation of the external capital. Satisfying this requires a secure consolidated financial foreign subsidiaries’ financial statements. When subsidiaries are divested, the position, and active measures to ensure access to credits. In August 2005, accumulated value changes are included in the capital gain that arises from Hexagon raised a five-year syndicated loan of 303 MEUR and raised a short- the divestment. term loan of 2 700 MSEK in connection with the acquisition of Leica Geosys- tems. The 2 700 MSEK loan was repaid when a new issue of the same amount Transaction exposure was conducted in spring 2006. Subsequently, facilities totalling 703 MEUR Hexagon’s transaction exposure is the currency exposure resulting from were replaced by a new facility of 1 000 MEUR, which is subject to customary the subsidiaries’ international trading. This exposure is due to the fact that covenants. The principal covenant pertains to net debt/EBITDA, which must exchange rates can change when sales and purchases are carried out cur- be lower than 3.5. rencies other than local currency. Contracted currency flows are hedged in

80 Hexagon Annual Report 2007 Notes

Note 17, cont.

NET ASSETS PER FOREIGN CURRENCY FINANCIAL INSTRUMENTS 31 DECEMBER 2007 Hedging rate Carrying amount and fair value on Carrying Fair 31 December 2007 amount value CHF 8 342 100% Assets CAD 3 256 – Other long-term securities holdings 11 11 USD 2 919 25% Long-term receivables 40 40 EUR 1 962 – Accounts receivable 3 075 3 075 CNY 515 – Other current receivables 434 434 CZK 473 – Short-term investments 781 781 Other 688 – Cash and bank balances 831 831 Total 18 155 50% Total 5 172 5 172 NET SALES PER CURRENCY 2007 Liabilities EUR 5 048 Long-term liabilities to credit institutions 9 762 9 765 USD 3 711 Other long-term interest bearing liabilities 27 27 CHF 1 662 Long-term interest-free liabilities 17 17 SEK 1 499 Current liabilities to credit institutions 163 163 GBP 646 Other current interest-bearing liabilities 77 CNY 596 Accounts payable 1 473 1 473 CAD 286 Other current interest-free liabilities 521 521 JPY 253 Total 11 970 11 973 NOK 236 DKK 148 All financial assets, apart from derivative instruments, are included in the category “loan receivables and accounts receivable.” All financial liabilities, Other 502 apart from derivative instruments, are included in the category “financial liabil- Total 14 587 ities valued at accrued acquisition value.” Derivative instruments are reported on the accounts receivable line in the table above. INTEREST INCOME AND EXPENSE 2007 Interest-free financial instruments, such as accounts receivable and accounts payable are reported at acquisition value, which does not deviate Income 48 from fair value. Pension commitments, which are encompassed by special accounting Expense –262 policies, are not entered here. Net –214 For 2006, in a corresponding to manner, the differences between the carrying amounts and fair value are negligible. ACCESS TO FUNDS AND CASH FLOW

Access to funds, 1 January 2007 5 067 Change in credit limits – 494 Cash flow excluding repayments/borrowing –2 277 Other change in cash and cash equivalents and borrowings 457 Access to funds, 31 December 2007 2 753

In the table, access to funds is defined as unutilized credit facilities plus cash and bank balances.

Dates for re-fixing the interest and capital due dates pertaining to interest-bearing liabilities with related financial instruments, 31 December 2007 Maturing amounts 2008 2009–2011 2012 and later Total Capital Interest Capital Interest Capital Interest Capital Interest

Liabilities to credit institutions Syndicated loan CHF – 8 309 8 309 – – – 8 309 8 309 Syndicated loan USD – 860 860 – – – 860 860 Bond loan SEK – 100 430 330 – – 430 430 Other lenders 163 326 163 – – – 326 326 Total liabilities to credit institutions 163 9 595 9 762 330 – – 9 925 9 925 Other interest-bearing liabilities 7 34 – – 27 – 34 34 Total interest-bearing liabilities 170 9 629 9 762 330 27 – 9 959 9 959 Total effective currency and interest rate exposure 170 9 629 9 762 330 27 – 9 959 9 959

The interest rate columns state the corresponding capital that is subject to interest re-fixing. There were no currency or interest rate derivatives pertaining to borrowing at 31 Dec 2007.

Hexagon Annual Report 2007 81 Notes

Note 17, cont. Currency composition pertaining to interest-bearing liabilities at 31 December 2007

CHF 8 396 SEK 430 USD 866 Other 267 Total 9 959

CURRENCY DERIVATIVES USED FOR HEDGING OPERATING CASH FLOWS 2008 2009 2010 and later Total Currency Sold Bought Sold Bought Sold Bought Sold Bought Net

CAD – 267––––– 267– 19 CHF – 87 514 – – – – – 87 514 427 CZK – 48 – – – – – 48 48 DKK – 7–––––– 7––7 EUR – 488 65 –41 – – – –529 65 –464 GBP – 469––––– 469–37 JPY – 132–––––132–11 NOK – 11 – – – – – – 11 – – 11 SEK – 10 174 – 41 – – – 10 215 205 SGD –74–––––7474 USD – 228 17 – – – – – 228 17 – 211 Total –916 910 –41 41 – – – 957 951 – 6

AGE ANALYSIS OF RECEIVABLES, 31 DECEMBER 2007 Status Less than Between Between Between Older than Not due 30 days 30–60 days 61–90 days 91–120 days 120 days Total

Current receivables, net of impairment losses 2 242 755 200 106 114 83 3 500 Long-term receivables, net of impairment losses 71345929 Total 2 249 756 203 110 119 92 3 529

AGE ANALYSIS OF RECEIVABLES, 31 DECEMBER 2006 Status Less than Between Between Between Older than Not due 30 days 30–60 days 61–90 days 91–120 days 120 days Total

Current receivables, net of impairment losses 2 004 567 133 56 48 72 2 880 Long-term receivables, net of impairment losses 13––––821 Total 2 017 567 133 56 48 80 2 901

Reserve for doubtful receivables 2007 2006

Opening balance 111 106 Reserve for anticipated losses 31 11 Adjustment for definitive losses –7 –5 Acquired/divested companies 40 Translation differences 0–1 Closing balance 139 111

NOTE 18. Related-party disclosures NOTE 19. Events after the balance-sheet date

Remuneration of senior executives, meaning both the Board of Directors In 2008, Hexagon completed acquisitions of, primarily, distribution operations and management, is presented in Note 4b. The Group’s holdings in associ- in India, the US and Spain. The acquisitions have no significant impact on the ated companies and receivables from and liabilities to associated compa- Hexagon Group’s earnings and financial position. In other respects, Hexagon nies are immaterial. There were no significant transactions between Hexagon estimates that no significant events occurred during the period from the and its associated companies. Similarly, there were no significant transactions balance-sheet date up to the date upon which the Annual Report was between Hexagon and Melker Schörling AB or the companies through which published. Maths O. Sundqvist holds shares in Hexagon.

82 Hexagon Annual Report 2007 Notes

NOTE 20. Rented assets NOTE 21. Memorandum items

Group Parent Company

Leasing/rental Machinery, Machinery, Pledged assets to credit Group Parent Company agreements of an equipment, equipment, institutions for loans, bank operational nature etc. Premises etc. Premises overdrafts and guarantees 2007 2006 2007 2006

Expenses due for payment in Real estate mortgages –77– – 2008 77 106 – 2 Floating charges –5 –– 2009–2012 107 256 – 7 Other 41 25 – – 2013 and later 266– 0 Total 41 107 – – Total 186 428 – 9 Group Parent Company The amounts are un-discounted minimum undertakings pursuant to contract. Costs for leasing/rents for the financial year were 173 MSEK (138). Contingent liabilities 2007 2006 2007 2006

Group Parent Company Guarantees in favour of Group companies – – 80 32 Leasing/rental Machinery, Machinery, agreements of a equipment, equipment, Letters of credit 114 72 – – financial nature etc. Premises etc. Premises Other contingent liabilities 72 73 66 66

Expenses due for payment in Total 186 145 146 98 2008 12 2 – – 2009–2012 12 2 – – 2013 and later 00 –– Total 24 4 – –

The amounts are un-discounted minimum undertakings pursuant to contract.

There are no individual leasing agreements of material importance. Nor are there any individual sale/leaseback agreements of material importance.

NOTE 22. Quarterly income statements

2007 2006 Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4

Net sales 3 499 3 516 3 448 4 124 3 335 3 377 3 196 3 561

Gross earnings 1 364 1 472 1 450 1 811 1 257 1 291 1 211 1 360

Sales expenses –448 –484 –491 –567 – 467 – 462 – 426 – 495 Administration expenses –250 –208 –213 –409 – 235 – 230 – 197 – 197 Research and development expenses –183 –192 –175 –261 – 162 – 100 –141 – 144 Other operating revenues/expenses –28 13 –11 –3 – 89 – 15 – 40 22 Share in associated companies’ earnings –330020110 Capital gains from sale of shares in Group companies 120–––6–– –– Operating earnings 1 542 601 560 567 304 485 408 546

Earnings from other securities 1 ––– 97––– Other financial revenue and expenses –46 –46 –60 –62 – 79 – 51 – 46 – 46 Earnings before tax 496 555 500 505 322 434 362 500 Tax –60 –44 –63 –78 – 59 – 106 – 91 –82 Net earnings 2 436 511 437 427 263 328 271 418

1 of which non-recurring items 22 – – –173 13 – – – 2 of which minority shares 2 2 3 4 2 1 2 2

Earnings include depreciation and impairments of –167 –145 –152 –339 – 172 – 112 – 145 – 173

Earnings per share, SEK 1.64 1.92 1.64 1.59 1.14 1.27 1.02 1.57 Earnings per share after dilution, SEK 1.63 1.91 1.63 1.59 1.12 1.26 1.01 1.56

Average number of shares, thousands 265 176 265 235 265 350 265 350 228 546 258 006 264 348 265 176 Average number of shares after dilution, thousands 266 223 265 902 266 013 265 999 233 007 260 394 265 692 266 196

Operating earnings (EBIT1) 520 601 560 740 388 485 408 546 Operating earnings (EBIT1) per share (SEK) 1.96 2.27 2.11 2.79 1.70 1.88 1.54 2.06

Quarterly figures are not examined by the company’s auditors.

Hexagon Annual Report 2007 83 Proposed allocation of earnings

Proposed allocation of earnings

The following earnings in the Parent Company are at the disposal of the Annual General Meeting (KSEK):

– Premium reserve 2 754 130 – Earnings brought forward from previous year 5 82 879 – Group contribution, net after tax 80 095 – Net earnings – 106 563 Total 3 310 541

The Board of Directors proposes that these funds are allocated as follows:

– That a cash dividend of 2.35SEK per share be paid to shareholders – That all of the shares in Hexagon Polymers AB be spun oﬀ to the shareholders

In the following manner:

– That the shares in Hexagon Polymers AB be spun oﬀ via the premium reserve 725 596* – That the cash dividend to shareholders be paid via the premium reserve 67 161** – That the cash dividend to shareholders be paid via retained earnings 556 411** – Balance remaining in the premium reserve 1 961 373 Total 3 310 541

* Pertains to the carrying amount in the Parent Company. The consolidated value at 31 December 2007 was 1 157 277KSEK . ** The amount is based on the number of shares issued on 31 December 2007, namely 265 349 985.

The undersigned certify that the consolidated accounts and the annual report have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as adopted by the European Union, and generally accepted accounting principles, respectively, and give a true and fair view of the ﬁnancial position and earnings of the Group and the Company, and that the Directors’ Report for the Group and the Company give a fair review of the development of the operations, ﬁnancial position and earnings of the Group and the Company and describes substantial risks and uncertainties that the Group companies faces.

Stockholm, Sweden, 14 March 2008

Melker Schörling Maths O. Sundqvist Chairman Member of the Board

Mario Fontana Ulf Henriksson Member of the Board Member of the Board

Ola Rollén Member of the Board President and Chief Executive Oﬃcer

Our Audit Report was submitted on 14 March 2008.

ERNST & YOUNG AB

Hamish Mabon Authorized Public Accountant

84 Hexagon Annual Report 2007 Audit report

Audit report

To the annual meeting of the shareholders of Hexagon AB Corporate identity number 556190-4771

We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the managing director of Hexagon AB for the year 2007. The company’s Annual Report is included in the printed version of this document on pages 50–84. The board of directors and the managing director are responsible for these accounts and the administration of the company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of international ﬁnancial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit.

We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the managing director and signiﬁcant estimates made by the board of directors and the managing director when preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined signiﬁcant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the managing director. We also examined whether any board member or the managing director has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below.

The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company’s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with the international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the group’s financial position and results of operations. The statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts.

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the proﬁt of the parent company be dealt with in accordance with the proposal in the administration report and that the members of the board of directors and the managing director be discharged from liability for the ﬁnancial year.

Stockholm, Sweden, 14 March 2008

ERNST & YOUNG AB

Hamish Mabon Authorized Public Accountant

Hexagon Annual Report 2007 85 Eight-year summary

Establishment of a measurement technologies group

Hexagon underwent a powerful transformation during Th e foundation for measurement technologies operations was 2000–2007. Th is transformation has resulted in Hexagon being laid in May 2001, in connection with the acquisition of American a company with a direction that diﬀ ers completely to that of measurement technologies company Brown & Sharpe, Inc. eight years ago. In 2000, the Group had sales of slightly more Gislaved Gummi AB, which has been part of Hexagon since than 4 600 MSEK, of which Hexagon’s polymer operations 1994, forms the foundation for the polymer operations. accounted for 600 MSEK. Today, measurement technologies, During the period, Hexagon focused on growing the opera- a business that was not part of the Group in 2000, accounts for tions organically. Organic growth beneﬁ ted from successful in- approximately 75 per cent of sales. house product development and expansion of the proprietary About 50 acquisitions were completed during 2000–2007. distribution network to new geographical markets.

Income statement, MSEKMSEK 2000 2001 2002 2003 2004 2005 2006 2007

Net sales 5 099 6 204 6 997 7 103 8 256 9 637 13 469 14 587 Operating earnings (EBITDA) 440 531 719 711 929 1 272 2 429 3 054 Operating earnings (EBITA) 281 350 511 480 686 923 1 827 2 421 Operating earnings (EBIT1) 234 287 421 406 686 923 1 827 2 421 Operating earnings 267 310 400 406 634 844 1 743 2 270 Earnings before tax 223 227 319 323 541 705 1 618 2 056 – of which non-recurring items 33 23 15 – – 52 – 79 13 –151 Net earnings 139 144 187 221 420 618 1 280 1 811 – of which minority share ––––75711

Balance sheet, MSEK 2000 2001 2002 2003 2004 2005 2006 2007

Current assets 2 000 3 391 3 118 3 060 3 600 5 251 5 861 7 944 Fixed assets 1 541 3 096 3 100 2 866 3 798 13 391 12 687 16 996 Non-interest bearing liabilities and provisions 975 1 877 1 713 1 626 1 950 3 533 3 322 4 310 Interest-bearing liabilities and provisions 874 2 825 2 275 1 981 2 952 9 590 6 617 10 584 Minority interests 13303647–––– Shareholders’ equity 1 679 1 755 2 194 2 272 2 496 5 519 8 609 10 046 Total assets 3 541 6 487 6 218 5 926 7 398 18 642 18 548 24 940

Figures for 2000–2003 have not been restated to comply with IFRS.

The operations of US listed measurement Measurement technology company C E Boliden and Hexagon formed a joint Hexagon increased its ownership to technology company Brown & Sharpe Inc, Johansson, rubber compounding company venture comprising their respective 90 per cent of the companies software developer Wilcox, GFD Technology Gmbh, measurement brass operations, Nordic Brass AB Qingdao Brown & Sharpe Quinshao Cubic Tavleproduktion and technology company Quality Ltda and and Boliden Gusum AB. Technology Co Ltd. and Qingdao ACQUISITIONS HTR Hydrauliikka Oy were acquired. software developer Mirai Srl were acquired. Brown & Sharpe Trading Co Ltd. 2000 2001 2002 2003 DIVESTMENTS The Norfood business Gustaf Fagerberg AB, Tecla, Johnson Metal area was divested. Bearing Components and the Hexagon Wireless business area were divested.

86 Hexagon Annual Report 2007 Eight-year summary

Key figures 2000 2001 2002 2003 2004 2005 2006 2007

Annual net sales growth (%) 922132161740 8 Operating margin, % 55668101417

Return on capital employed (%) 12 9 10 10 13 11 12 14 Return on capital employed excluding goodwill amortization (%) 14 10 12 11 13 11 12 14 Return on equity (%) 8 8 9 10 18 18 17 20 Return on equity excluding goodwill amortization (%) 11 12 14 13 18 18 17 20

Investments, MSEK 150 202 267 226 299 442 834 825 Equity ratio (%) 48 28 36 39 34 30 46 40 Share of risk-bearing capital (%) 48 28 37 41 35 32 49 43 Interest coverage ratio (multiple) 4.3 2.9 3.4 4.2 5.0 5.1 7.4 8.8 Net debt/equity ratio (multiple) 0.38 1.35 0.97 0.78 1.11 1.66 0.70 0.88

Cash flow before changes in working capital, MSEK 381 358 388 534 723 956 1 737 2 472 Cash flow, MSEK 274 310 307 440 642 764 1 115 2 027

Earnings per share, SEK 0.89 0.92 1.10 1.22 2.28 3.14 5.01 6.79 Earnings per share after dilution, SEK 0.89 0.92 1.10 1.22 2.27 3.10 4.97 6.77 Earnings per share excluding goodwill amortization, SEK 1.19 1.32 1.62 1.63 2.28 3.14 5.01 6.79 Cash flow per share before changes in working capital, SEK 2.43 2.28 2.27 2.94 3.99 4.90 6.84 9.32 Cash flow per share after change in working capital, SEK 1.75 1.98 1.80 2.43 3.54 3.92 4.39 7.64 Shareholders’ equity per share, SEK 11 11 12 13 13 24 32 38 Closing share price, SEK 11 14 14 20 32 72 97 135 Cash dividend per share, SEK 0.47 0.47 0.47 0.47 0.61 0.92 1.67 2.35 1 Average no. of shares, in thousands 156 925 156 925 170 714 181 376 181 386 195 125 254 019 265 278 Average no. of shares after dilution, in thousands 156 925 156 925 170 714 181 376 182 259 197 960 256 323 266 034 Number of shares – closing balance, in thousands 156 925 156 925 181 376 181 376 181 484 228 547 265 176 265 350

Average number of employees 4 078 5 061 5 428 5 401 5 935 6 111 7 862 8 406

The share-related key financial ratios have been calculated considering the 3:1 split conducted in May 2005 and the rights issues conducted in June 2002 and 2006, as well as the 3:1 split implemented in 2007. Figures for 2000–2003 have not been restated to comply with IFRS. 1 Board of Directors’ proposal.

The measurement technology operations of Korea ErFa The Wheels division of Trostel Scanlaser AB, Scanlaser AS, assets in Read about Hexagon’s Systems Eng. Co, the measurement technology operations SEG, Inc. and listed measurement Thaimach Sales & Service Co., Ltd. and acquisitions in 2007 on of Sheffield Automation LLC, polymer group Thona Group technology company Leica Mikrofyn A/S were acquired. page 8. and measurement technology companies Romer S.A of Geosystems were acquired. France and Romer Inc. were acquired. 2004 2005 2006 2007 The shares in listed corporation Metodsvets i Kungälv AB and The Hexagon Automation business An industrial property in Västerås, a Johnson Metall AB and Eurosteel AB, VBG AB were spun off to Tjust Mekaniska Verkstads AB area and tool company SwePart business sector within Tidamek AB and including subsidiaries, and Tidamek AB Hexagon’s shareholders. were divested. Verktyg AB were divested. the shareholding in Tradimus AB were were divested. divested.

Hexagon Annual Report 2007 87 Definitions

Definitions

Financial definitions OPERATING MARGIN ANNUAL NET SALES GROWTH Operating earnings (EBIT1) as a percentage of net sales for the Percentage change in net sales on previous year. year.

CAPITAL EMPLOYED P/E RATIO Total assets less non-interest-bearing liabilities. Share price divided by earnings per share.

CAPITAL TURNOVER RATE PROFIT MARGIN BEFORE TAX Net sales for the year divided by average capital employed. Earnings after financial items as a percentage of net sales for the year. CASH FLOW Cash flow from operating activities after change in working RETURN ON CAPITAL EMPLOYED capital. Earnings after financial items plus financial expenses as a percentage of average capital employed. CASH FLOW PER SHARE Cash flow from operating activities after change in working capi- RETURN ON CAPITAL EMPLOYED EXCLUDING GOODWILL AMORTIZATION tal, divided by average number of shares. Earnings after financial items plus financial expenses and goodwill amortization as a percentage of average capital employed. DIVIDEND PAYOUT RATIO Dividend divided by earnings per share. RETURN ON EQUITY Net earnings as a percentage of average shareholders’ equity. DIVIDEND YIELD Dividend as a percentage of share price. RETURN ON EQUITY EXCLUDING GOODWILL AMORTIZATION Net earnings excluding goodwill amortization as a percentage of EARNINGS PER SHARE average shareholders’ equity. Net earnings, excluding minority interests, divided by average number of shares. SHAREHOLDERS’ EQUITY PER SHARE Shareholders’ equity excluding minority interests divided by the EARNINGS PER SHARE EXCLUDING GOODWILL IMPAIRMENT number of shares at year-end. Net earnings, excluding minority interests and goodwill amortization, divided by average number of shares. SHARE OF RISK-BEARING CAPITAL The total of shareholders’ equity including minority interests and ENTERPRISE VALUE tax provisions as a percentage of total assets. Market capitalization less interest-bearing liabilities plus cash and bank balances. SHARE PRICE Last settled transaction on the Nordic Exchange on the last busi- EQUITY RATIO ness day for the year. Shareholders’ equity including minority interests as a percentage of total assets.

INTEREST COVER RATIO Business definitions Earnings after financial items plus financial expenses divided by AMERICAS financial expenses. North, South and Central America, plus the Caribbean islands.

INVESTMENTS ASIA Purchases less sales of tangible and intangible fixed assets, Asia, Australia and New Zealand.

excluding those included in acquisitions and divestitures of CMM subsidiaries. Coordinate Measuring Machine.

NET DEBT/EQUITY RATIO EMEA Interest-bearing liabilities less liquid assets divided by share- Europe, Middle East and Africa. holders’ equity excluding minority interests. EPDM OPERATING EARNINGS (EBIT1) Ethylene-Polypropylene Rubber. Operating earnings excluding capital gains from participations in Group companies and non-recurring items. GIS Geographical Information System. OPERATING EARNINGS (EBITA) Operating earnings excluding capital gains from participations GNSS in Group companies, non-recurring items and amortization of Global Navigation Satellite System. goodwill and similar fixed assets. GPS

OPERATING EARNINGS (EBITDA) Global Positioning System. Operating earnings excluding capital gains from participations OEM in Group companies, non-recurring items and amortization and Original Equipment Manufacturer. depreciation of fixed assets.

88 Hexagon Annual Report 2007 Shareholder information

Annual General Meeting Financial Information 2008 The Annual General Meeting will be held on Monday, 5 May 2008 Hexagon will issue financial information concerning fiscal year at 5 p.m. at IVA, Grev Turegatan 16, Stockholm, Sweden. 2008 on the following dates:

Those who wish to participate and vote at the Annual General First quarter Report 5 May 2008 Meeting must be registered as shareholders in the share register 2008 Annual General Meeting 5 May 2008 maintained by VPC no later than 28 April 2008 and notify Second quarter Report 8 August 2008 Hexagon of their intention to attend the Annual General Meeting Third quarter Report 28 October 2008 no later than 12 noon on 30 April 2008. Year-End Report 2008 February 2009

Notification of attendance should be sent to: Financial information is available on www.hexagon.se Hexagon AB, P. O. Box 1112, SE-131 26 Nacka Strand, Sweden Telephone + 46 8 601 26 20 If you have any questions, Fax + 46 8 601 26 21 please contact: E-mail [email protected] Sara Kraft Investor Relations Applications should state the shareholder’s name, personal/ Hexagon AB corporate identity number, address and telephone number. P. O. Box 1112 Shareholders wishing to be represented by proxy should send a SE-131 26 Nacka Strand power-of-attorney to Hexagon before the Annual General Sweden Meeting. Telephone + 46 8 601 26 27 E-mail [email protected] Dividend The Board of Directors proposes that the dividend for fiscal year 2007 be increased by 41 per cent to 2.35 SEK per share. In addition to the cash dividend, a spin-off of all of the shares in Hexagon Polymers AB is proposed.

The Board proposes 8 May 2008 as the record day for the payment of dividends. Dividends should be in the possession of shareholders by 13 May 2008, assuming that the Annual General Meeting approves the Board of Directors’ motion.

Address Hexagon AB Registered Office: Stockholm Corp. Reg. No. 556190-4771

Cylindervägen 12 P. O. Box 1112 SE-131 26 Nacka Strand Sweden Telephone + 46 8 601 26 20 Fax + 46 8 601 26 21 [email protected] www.hexagon.se

Production: Hexagon AB in cooperation with Sund Kommunikation AB. Printing: Strokirk-Landströms AB, Lidköping 2008. Photography of President & CEO, Board of Directors and Management: Linus Meyer. Photography of products and operations: Hexagon’s subsidiaries. www.hexagon.se