Directors’ Report Effective Tax Rate The consolidated tax expense was MSEK –87 (–121), equivalent to an effective tax rate of 12 per cent (22). The tax expense is influenced by a significant portion of earnings being generated in foreign subsidiaries, in countries where tax rates differ from that in Sweden, the valuation of some foreign loss carry-forwards and capital gains from the divestment of Hexagon Automation, which essentially is free of tax. Minority Share of Net Earnings The minority share of net earnings was MSEK 5 (7) in 2005. Net Earnings Consolidated earnings after tax grew by 47 per cent to MSEK 618 (420), corresponding to earnings per share of SEK 10.27 (7.44). Business Areas The order intake, net sales and operating earnings of Hexagon’s business areas in 2005 are stated in the following table. Investments Hexagon’s net investments, excluding acquisitions of companies, were MSEK 442 (299) in 2005, mainly including production machinery and intangible assets. Investments were 5 per cent (4) of net sales. Depreciation and amortisation in the year including MSEK 180 of write-downs, was MSEK 529 (243). Cash Flow Cash flow from operating activities before change in working capital grew by 32 per cent to MSEK 956 (723), or SEK 16.02 (13.03) per share. Including changes in working capital, cash flow from operating activities increased by 19 per cent to MSEK 764 (642), or SEK 12.80 per share (11.57). Operating cash flow was SEK 322 (343). No abnormal write-downs on inventories occurred in the year. Other investments and the change in external borrowings exerted an SEK –15 (–233) cash flow effect. Dividends to shareholders for the financial year 2004 were MSEK –120 (–85) or SEK 2.00 per share (1.53). Profitability Consolidated capital employed, defined as total assets less non-interest bearing liabilities, was MSEK 14,992 (5,448). BUSINESS AREAS The return on average capital employed was 10.8 per cent (13.2). The return on average equity was 18.0 per cent (17.8). The rate of capital turnover was 1.19 (1.61). Financial Position Shareholders’ equity including minority interests increased to MSEK 5,402 (2,496). Consolidated total assets grew to MSEK 18,642 (7,398). The main explanation for the change in total assets is the divestment of Hexagon Automation, the acquisition of Leica Geosystems, and the appreciation of the USD and EUR by 20 and 5 per cent respectively since year-end 2004/2005. The equity ratio was 29 per cent (34) as of 31 December 2005. As a consequence of goodwill not being amortised according to plan any more, regular examinations of whether the value of goodwill and/or similar fixed assets is defensible, or whether there is any need for partial or total write-downs, are conducted. Such an examination was conducted as of yearend 2005, and no need for write-downs arose. Consolidated goodwill at 31 December 2005 was MSEK 6,443 (1,734), equivalent to 35 per cent (23) of total assets. The table on the next page illustrates the business area to which the goodwill is attributable. Consolidated net debt was MSEK 9,139 (2,715) and the net debt/equity ratio was a multiple of 1.71 (1.11). The interest coverage ratio was a multiple of 5.1 (5.0). Financial Risk Management A significant portion of Hexagon’s revenues and expenses are generated in foreign currencies. This means that fluctuations in exchange rates affect Hexagon’s revenues, operating earnings, shareholders’ equity and other items. Hexagon is also influenced by variations on the bond market. Hexagon’s Treasury function is responsible for coordinating currency and interest exposure. The Treasury function is also responsible for the group’s external and internal funding. Guidelines for managing financial exposure are determined annually by the Board in a group finance policy. Financing For Hexagon to satisfy its need for future capital, the group needs a strong financial position, and active measures to ensure its access to credit. In 2004, Hexagon was refinanced through a new five-year MEUR 400 loan agreement, a three-year MSEK 240 bond loan and a five-year MSEK 430 bond loan. Order intake Net sales Operating earnings (EBITA) 2004 2004 MSEK 2005 2004 2003 2005 2004 2003 2005 (IFRS) (RR) 2003 Hexagon Measurement Technologies 4,525 2,960 2,505 4,539 2,889 2,569 550 292 293 237 Hexagon Polymers 2,213 1,669 889 2,205 1,615 873 258 228 233 99 Hexagon Engineering 1,649 1,594 1,533 1,665 1,499 1,461 80 91 91 52 Hexagon Automation 1,362 2,324 2,199 1,248 2,277 2,227 64 107 107 102 Group costs and adjustments – – – –20 –24 –27 –29 –32 –32 –10 Total 9,749 8,547 7,126 9,637 8,256 7,103 923 686 692 480