This is Hexagon

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A N N U A L R E P O R T 2 0 0 6

CONTENTS

OPERATIONS

2006 in brief 1

CEO’s statement 2

Strategic orientation 4

Research and development 8 Hexagon Measurement Technologies 10

Hexagon Polymers 16

Hexagon Engineering 20

Corporate Responsibility 22 Risk and sensitivity analysis 25

The Hexagon share 28

Corporate governance 32

Board of Directors, senior

management 40

ANNUAL REPORT

Directors’ Report 42

Consolidated income statement 47 Consolidated balance sheet 48 Change in the Group’s

Consolidated cash flow statement 51 Parent Company accounts 52

Accounting principles 54

Notes 58

Proposed allocation of earnings 76

Audit report 77

Seven-year summary 78

Definitions 80

Shareholder information 81

This is Hexagon

Hexagon is a global technology group with strong market positions in measurement technologies, polymers and key components. In 2006, net sales amounted to MSEK13,469 (9,637).

The Group has 8,170 (7,601) employees in 30 countries.

Hexagon’s class B share is quoted among Large Cap companies on the Stockholm Stock Exchange’s Nordic List and has a secondary listing on the SWX Swiss Exchange.

The Group is organized in three business areas:

• Hexagon Measurement Technologies

• Hexagon Polymers

• Hexagon Engineering

HEXAGON’S VISION is to be a market leader, ranking number one or number two, in each strategic business in order to generate growth and shareholder value.

HEXAGON’S BUSINESS CONCEPT is to operate busi nes- ses on a global basis that develop and market leading engineering technology products and services within measurement technologies, polymers and key components.

HEXAGON’S STRATEGY is to be the most cost-efﬁ cient and innovative supplier, have the best management skills in the business and short and rapid decision processes.

Surveying is an adventure. One of Hexagon’s customers surveying in the Gibston Valley, New Zealand.

View of the Swiss Gotthard Base Tunnel site at the south portal at Bodio.

The primary survey data for its construction were established and are

Hexagon Annual Report 2006

www.hexagon.se

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A N N U A L R E P O R T 2 0 0 6

CONTENTS

OPERATIONS

2006 in brief 1

CEO’s statement 2

Strategic orientation 4

Research and development 8 Hexagon Measurement Technologies 10

Hexagon Polymers 16

Hexagon Engineering 20

Corporate Responsibility 22 Risk and sensitivity analysis 25

The Hexagon share 28

Corporate governance 32

Board of Directors, senior

management 40

ANNUAL REPORT

Directors’ Report 42

Consolidated income statement 47 Consolidated balance sheet 48 Change in the Group’s

Consolidated cash flow statement 51 Parent Company accounts 52

Accounting principles 54

Notes 58

Proposed allocation of earnings 76

Audit report 77

Seven-year summary 78

Definitions 80

Shareholder information 81

This is Hexagon

Hexagon is a global technology group with strong market positions in measurement technologies, polymers and key components. In 2006, net sales amounted to MSEK13,469 (9,637).

The Group has 8,170 (7,601) employees in 30 countries.

Hexagon’s class B share is quoted among Large Cap companies on the Stockholm Stock Exchange’s Nordic List and has a secondary listing on the SWX Swiss Exchange.

The Group is organized in three business areas:

• Hexagon Measurement Technologies

• Hexagon Polymers

• Hexagon Engineering

HEXAGON’S VISION is to be a market leader, ranking number one or number two, in each strategic business in order to generate growth and shareholder value.

HEXAGON’S BUSINESS CONCEPT is to operate busi nes- ses on a global basis that develop and market leading engineering technology products and services within measurement technologies, polymers and key components.

HEXAGON’S STRATEGY is to be the most cost-efﬁ cient and innovative supplier, have the best management skills in the business and short and rapid decision processes.

Surveying is an adventure. One of Hexagon’s customers surveying in the Gibston Valley, New Zealand.

Hexagon Annual Report 2006

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69 %

85 %

18 %

12 %

13 %

6 %

ANNUAL GENERAL MEETING

The Annual General Meeting will be held on 2 May 2007 at 5 p.m. at IVA, Grev Turegatan 16, Stockholm, Sweden.

Notification of attendance should be sent by mail to Hexagon AB, P. O. Box 1112, SE-131 26 Nacka Strand, Sweden, by telephone + 46 8 601 26 20, by fax

+ 46 8 601 26 21, or by e-mail bolagsstamma@hexagon.se.

Applications should state the shareholder’s name, perso nal/corporate identity number, address and telephone number.

Those who wish to participate and vote at the Annual General Meeting must be registered as shareholders in the share register maintained by VPC (Swedish Securities Register Centre) no later than 25 April 2007 and notify the Company of their intention to attend the Annual General Meeting no later than 12 noon on 25 April 2007.

PAYMENT OF DIVIDENDS

The Board of Directors proposes a dividend of SEK 5.00 per share for the 2006 fiscal year.

The Board proposes 7 May 2007 as the record day for dividends. If the Annual General Meeting approves the Board’s proposal, dividends should be in the possession of shareholders on 10 May 2007, assuming that the Annual General Meeting approves the Board of Directors’

proposal.

Shareholder information

ADDRESS

Hexagon AB

Registered Office: Stockholm Reg. No. 556190-4771

Cylindervägen 12 P. O. Box 1112

SE-131 26 Nacka Strand Sweden

Tel + 46 8 601 26 20 Fax + 46 8 601 26 21 info@hexagon.se www.hexagon.se

Contact information concerning Hexagon’s business areas and subsidiaries is available at www.hexagon.se.

Production: Hexagon AB in cooperation with Sund Kommunikation AB.

Printing: Strokirk-Landströms AB.

Photography: Linus Meyer.

Product images from the relevant business areas.

3-FOR-1 SHARE SPLIT

The Board proposes a 3-for-1 share split, whereby each Hexagon share will be divided into three shares of the same class.

FINANCIAL INFORMATION 2007

Hexagon will issue financial information concerning the 2007 fiscal year on the following dates:

Interim Report on the first quarter 2 May 2007 2007 Annual General Meeting 2 May 2007 Interim Report on the second quarter 10 August 2007 Interim Report on the third quarter 26 October 2007 Year-end Report 2007 February 2008

Financial information is available in Swedish and English on Hexagon’s website. Financial information can also be ordered from Hexagon AB, P. O. Box 1112, SE-131 26 Nacka Strand, Sweden, by telephone + 46 8 601 26 20, or by e-mail ir@hexagon.se.

INVESTOR RELATIONS

The Hexagon officer responsible for investor relations and financial information is Sara Kraft, IR Manager, telephone + 46 8 601 26 27, or e-mail ir@hexagon.se.

BUSINESS AREA

HEXAGON ENGINEERING

Hexagon Engineering comprises a number of companies that focus on supplying high-quality components, mainly to the heavy vehicle industry. The product range also includes key components for industrial robots and car bodywork spare parts. While customers are primarily found in the engineering industry, the shipbuilding, offshore, medical, forest products and automotive industries are other major customer segments.

Hexagon Engineering is mainly active in the Nordic region, with Swedish customers accounting for most of its sales. The business area has 1,008 employees, primarily in Sweden.

BUSINESS AREA HEXAGON POLYMERS

Hexagon Polymers is active in three product areas: rubber compounds as semi-ﬁ nished goods, gaskets for PHEs (plate heat exchangers) and plastic and rubber wheels for truck and track drive applications. The business area mainly serves major multinational OEM customers in the PHE, truck production, materials handling equipment and automotive industry market segments.

Hexagon Polymers has eleven established production plants worldwide. An additional production plant, in Mexico, will become operational during the third quarter of 2007. The business area has 2,016 employees, mainly in Sri Lanka, Sweden and the United States.

BUSINESS AREA

HEXAGON MEASUREMENT TECHNOLOGIES

Hexagon Measurement Technologies is the world leader in multidimensional measurements within the macro and micro segments of the measurement and positioning market. Operations encompass hand tools, ﬁ xed and portable coordinate measuring machines, GPS systems, level meters, laser meters, total stations, sensors for airborne measurement, aftermarket services and software systems for one, two or three-dimensional measurements. Customers are active in the aerospace, security and defence-related industries, the automotive industry, government departments and authorities, the engineering industry, the construction industry, the mining and oil industries, and electronics, computing and medical industries.

Hexagon Measurement Technologies is active globally. Asia is the geographical market in which the business area is achieving the greatest organic growth. The business area has 5,133 employees, mainly in Switzerland, the United States and China.

During 2006, the business area also included Högmans Industri Verktyg AB, Johnson Metall AB and Eurosteel AB.

PORTION OF GROUP NET SALES

69 %

PORTION OF GROUP OPERATING PROFIT

85 %

18 %

12 %

13 %

6 %

On 1 April 2007, GFD Technology in Germany, Thona in Belgium, Thona in Canada, Thona in the Czech Republic and Thona in the US will be renamed Hexagon Polymers Compounding.

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69 %

85 %

18 %

12 %

13 %

6 %

ANNUAL GENERAL MEETING

The Annual General Meeting will be held on 2 May 2007 at 5 p.m. at IVA, Grev Turegatan 16, Stockholm, Sweden.

Notification of attendance should be sent by mail to Hexagon AB, P. O. Box 1112, SE-131 26 Nacka Strand, Sweden, by telephone + 46 8 601 26 20, by fax

+ 46 8 601 26 21, or by e-mail bolagsstamma@hexagon.se.

Applications should state the shareholder’s name, perso nal/corporate identity number, address and telephone number.

Those who wish to participate and vote at the Annual General Meeting must be registered as shareholders in the share register maintained by VPC (Swedish Securities Register Centre) no later than 25 April 2007 and notify the Company of their intention to attend the Annual General Meeting no later than 12 noon on 25 April 2007.

PAYMENT OF DIVIDENDS

The Board of Directors proposes a dividend of SEK 5.00 per share for the 2006 fiscal year.

The Board proposes 7 May 2007 as the record day for dividends. If the Annual General Meeting approves the Board’s proposal, dividends should be in the possession of shareholders on 10 May 2007, assuming that the Annual General Meeting approves the Board of Directors’

proposal.

Shareholder information

ADDRESS

Hexagon AB

Registered Office: Stockholm Reg. No. 556190-4771

Cylindervägen 12 P. O. Box 1112

SE-131 26 Nacka Strand Sweden

Tel + 46 8 601 26 20 Fax + 46 8 601 26 21 info@hexagon.se www.hexagon.se

Contact information concerning Hexagon’s business areas and subsidiaries is available at www.hexagon.se.

Production: Hexagon AB in cooperation with Sund Kommunikation AB.

Printing: Strokirk-Landströms AB.

Photography: Linus Meyer.

Product images from the relevant business areas.

3-FOR-1 SHARE SPLIT

The Board proposes a 3-for-1 share split, whereby each Hexagon share will be divided into three shares of the same class.

FINANCIAL INFORMATION 2007

Hexagon will issue financial information concerning the 2007 fiscal year on the following dates:

Interim Report on the first quarter 2 May 2007 2007 Annual General Meeting 2 May 2007 Interim Report on the second quarter 10 August 2007 Interim Report on the third quarter 26 October 2007 Year-end Report 2007 February 2008

Financial information is available in Swedish and English on Hexagon’s website. Financial information can also be ordered from Hexagon AB, P. O. Box 1112, SE-131 26 Nacka Strand, Sweden, by telephone + 46 8 601 26 20, or by e-mail ir@hexagon.se.

INVESTOR RELATIONS

The Hexagon officer responsible for investor relations and financial information is Sara Kraft, IR Manager, telephone + 46 8 601 26 27, or e-mail ir@hexagon.se.

BUSINESS AREA

HEXAGON ENGINEERING

Hexagon Engineering comprises a number of companies that focus on supplying high-quality components, mainly to the heavy vehicle industry. The product range also includes key components for industrial robots and car bodywork spare parts. While customers are primarily found in the engineering industry, the shipbuilding, offshore, medical, forest products and automotive industries are other major customer segments.

Hexagon Engineering is mainly active in the Nordic region, with Swedish customers accounting for most of its sales. The business area has 1,008 employees, primarily in Sweden.

BUSINESS AREA HEXAGON POLYMERS

Hexagon Polymers is active in three product areas: rubber compounds as semi-ﬁ nished goods, gaskets for PHEs (plate heat exchangers) and plastic and rubber wheels for truck and track drive applications. The business area mainly serves major multinational OEM customers in the PHE, truck production, materials handling equipment and automotive industry market segments.

Hexagon Polymers has eleven established production plants worldwide. An additional production plant, in Mexico, will become operational during the third quarter of 2007. The business area has 2,016 employees, mainly in Sri Lanka, Sweden and the United States.

BUSINESS AREA

HEXAGON MEASUREMENT TECHNOLOGIES

Hexagon Measurement Technologies is the world leader in multidimensional measurements within the macro and micro segments of the measurement and positioning market. Operations encompass hand tools, ﬁ xed and portable coordinate measuring machines, GPS systems, level meters, laser meters, total stations, sensors for airborne measurement, aftermarket services and software systems for one, two or three-dimensional measurements. Customers are active in the aerospace, security and defence-related industries, the automotive industry, government departments and authorities, the engineering industry, the construction industry, the mining and oil industries, and electronics, computing and medical industries.

Hexagon Measurement Technologies is active globally. Asia is the geographical market in which the business area is achieving the greatest organic growth. The business area has 5,133 employees, mainly in Switzerland, the United States and China.

During 2006, the business area also included Högmans Industri Verktyg AB, Johnson Metall AB and Eurosteel AB.

69 %

85 %

18 %

12 %

13 %

6 %

On 1 April 2007, GFD Technology in Germany, Thona in Belgium, Thona in Canada, Thona in the Czech Republic and Thona in the US will be renamed Hexagon Polymers Compounding.

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0 2,000 4,000 6,000 8,000 10,000 12,000 14,000

2002 2003 2004 2005 2006

MSEK

0 400 800 1,200 1,600 2,000

2002 2003 2004 2005 2006

MSEK

2002 2003 2004 2005 2006

%

0 4 8 12 16 HEXAGON ANNUAL REPORT 2006

2006 in brief

KEY FIGURES 2006 2005 CHANGE

Net sales, MSEK 13,469 9,637 14 %*

Operating earnings (EBIT1), MSEK 1,827 923 12 %*

Earnings before tax, MSEK 1,618 705 130 %

Net earnings, MSEK 1,280 618 107 %

Operating margin, % 13.6 9.6 4.0

Return on equity, % 17.0 17.9 – 0.9

Return on capital employed, % 12.2 10.7 1.5

Equity ratio, % 46.4 29.6 16.8

Earnings per share, SEK 15.03 9.42 60 %

Share price 31 December 2006, SEK 292 217 35 %

Average number of employees 7,862 6,111 29 %

*Adjusted for currency effect and comparable structure (organic growth).

• The 2006 ﬁ nancial year was a successful period, with high growth and more than a doubling of pre-tax earnings.

• Scanlaser AB of Sweden, Scanlaser AS of Norway and Mikrofyn A/S of Denmark were acquired in order to enhance Hexagon’s market position in the rapidly growing machine automation segment.

• Net sales increased to MSEK13,469 (9,637), corresponding to organic growth of 12 per cent.

• Earnings before tax increased by 130 per cent to MSEK1,618 (705).

• Earnings per share increased by 60 per cent to SEK 15.03 (9.42).

• The share price increased by 35 per cent, and was SEK 292 (217) at year-end.

• The Board of Directors proposes that the dividend be increased to SEK 5.00 (3.00) per share. If last year’s new issue is taken into account, the 2005 dividend was SEK 2.75.

NET SALES

OPERATING EARNINGS (EBIT1)

OPERATING MARGIN

2006 IN BRIEF

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HEXAGON ANNUAL REPORT 2006 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER

A successful year paves the way for continued growth

During 2006, we achieved considerable success. The work tempo was high and the strategic focus was clear.

Hexagon’s sales increased by 12 per cent to MSEK13,469, and earnings more than doubled.

During 2006, we continued to focus Hexagon towards the goal established six years ago. Th e company grew during the year. Sales amounted to MSEK 13,469, of which our two core areas, measurement technologies and polymers, accounted for MSEK 11,738. Earnings totalled MSEK 1,618 before tax, more than double the level reported in 2005. As a result of the focus on core operations, the operating margin improved sharply from an average of 7 per cent in recent years to 14 per cent in 2006. During the year, we launched more than 100 new products and established operations in a number of new geographic markets. Hexagon’s expansion into geographic areas and sectors experiencing high growth continued.

Th e principal objective when focusing Hexagon’s operations is to ensure stable long-term growth for our owners.

To generate this increase in value, we must ﬁ rst become very skilled at satisfying customer requirements. By having satisﬁ ed customers, we can ensure continuous volume growth in our business. Our vision is to be ranked number one or two in our strategic businesses. In several areas, we have achieved a position whereby we are currently a global leader.

To achieve a market-leading position, we pursue four fun- damental Group-wide strategies that, when realized, will also help us satisfy our ﬁ nancial targets.

Th e fi rst strategy is to be the most cost-effi cient supplier in our industry. If we combine our market focus with cost- effi ciency, we will not just grow but also grow profi tably.

Th e second strategy is to be innovative. By investing greater resources than our competitors in strategic and focused research and development, we will continuously develop new and improved solutions for our customers, which in turn enhances our market position. Our fourth strategy is to have the best management in our industry. Th e best managers usually have a strong theoretical background and a true entrepreneurial spirit. We believe that people play a decisive role in a company’s success. Although this goal may be perceived as a cliché committed to paper, it is perhaps the most diﬃ - cult strategy to achieve in practice. Good managers demand

clear responsibilities, a ﬂ at organization and a minimum of bureaucracy. Accordingly, the fourth strategy to achieve our vision is short and rapid decision paths.

Th is leads us back to the overriding and principal objective , which is value growth for our shareholders. By realizing our strategies, we will grow quickly and proﬁ tably. We will be able to increase earnings per share, sustainably, by at least 15 per cent per year. We do not want to complicate the concept of shareholder value. Shareholder value can only mean increasing the value of the owners’ shares. By increasing earnings per share by more than 15 per cent year after year, we will achieve a healthy valuation for our share.

Business area performance during 2006 Hexagon Measurement Technologies

Th is business area’s greatest achievement during 2006 was the successful consolidation of the Swiss measurement technologies company Leica Geosystems. Since this company was acquired in October 2005, 2006 was the ﬁ rst full ﬁ nancial year for Leica Geosystems as part of the Hexagon Group.

Th e acquisition has developed fantastically well. Th e earnings targets that we established for the various Leica Geosystems divisions were exceeded by a broad margin. At the same time, the cost synergies promised for the coming four years were achieved — in a single year!

Over the coming years, we will focus on developing new products for the growth areas that have been identiﬁ ed in the measurement technologies sector. Th ese products are based on a combination of Hexagon’s and Leica Geosystems’ technologies. During 2006, seven development projects were initiated.

Th e ﬁ rst products from these eﬀ orts will be launched succes- sively starting in 2008.

Hexagon Measurement Technologies had a successful year with organic growth of 13 per cent. We have identiﬁ ed a number of market segments in the measurement technologies sector in which organic growth is particularly attractive. Th ese are also sub-markets in which Hexagon can further strengthen its market position through acquisitions.

In 2006, Hexagon Measurement Technologies had already achieved the goal established for the business area’s operating margin for 2008. Operating margin was 17 per cent. Th e ambition for the future is an operating margin for the business area of 15 to 20 per cent. In addition to these ﬁ nancial targets,

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HEXAGON ANNUAL REPORT 2006 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER

which in themselves are ambitious, we see excellent opportunities for continued expansion through acquisitions.

Hexagon Polymers

Th e Hexagon Polymers business area had a tough year with accelerating prices for raw materials and productivity problems in a number of units. Th e operating margin for the business area declined from 12 per cent in 2005 to 9 per cent in 2006. At the same time, underlying growth in the polymers business was favourable. All production units for rubber compounding, with the exception of the Canadian production unit that supplies components to the US auto industry, noted production that was close to maximum capacity. To be able to continue expansion during 2007, Hexagon Polymers invested in two new production plants in 2006; one in Qingdao, China, and the other in Aguascalientes, Mexico. Th ese two plants become operational during the second and third quarters of 2007, respectively.

During the autumn of 2006, we focused all of our energy on eliminating bottlenecks in the production process, while simul- taneously adjusting product prices due to the price increases for raw materials during the year. As a result of these measures, together with continued growth for the business area, we aim to restore the operating margin during 2007.

Hexagon Engineering

Th e Hexagon Engineering business area had a strong year. In 2006, a number of minor operations were divested and, during the ﬁ rst quarter of 2007, Johnson Metall and Eurosteel were divested. Th e aim is to have divested the remaining units by the end of 2008.

Outlook

Hexagon will continue to grow in measurement technologies.

Top of the agenda for 2007 is to pursue the attractive business opportunities identiﬁ ed over the past year. Growth in Hexagon Measurement Technologies will be achieved through geographic market growth and continued investment in proprietary product development, as well as via strategic acquisitions.

Hexagon Polymers will focus on the growth areas that have been identiﬁ ed within rubber compounds, as well as gaskets and wheels.

Hexagon Engineering will be divested over the years ahead.

When this business area has been divested, Hexagon’s Board of

Directors will consider whether the Group should be split into two separately listed companies or if there is additional value to be realized in the current structure.

Hexagon has got oﬀ to a strong start in 2007. Accordingly, we expect that our ﬁ nancial goal of an increase of earning per share by at least 15 per cent will also be achieved this year.

Nacka Strand, March 2007

Ola Rollén

Chief Executive Oﬃ cer and President

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HEXAGON ANNUAL REPORT 2006 STRATEGIC ORIENTATION

Distinct focus with ambitious targets

Being a market leader is a prerequisite for developing long-term profitability and sustainable competitiveness.

Hexagon has made substantial progress towards its target of achieving annual net sales of MSEK 15,000 and an operating margin of 15 per cent by the end of 2008.

Th e thrust of Hexagon’s strategic plan is to create favourable long-term value growth for the shareholders. By the end of 2008, the aim is that Hexagon will be focused on two strategic operations, measurement technologies and polymers, to be conducted in the Hexagon Measurement Technologies and Hexagon Polymers business areas. Both of these strategic operations have considerable potential to increase their market shares by becoming established in new geographic markets and new application areas.

Hexagon’s vision is to be a market leader, number one or number two, in selected technical or geographical segments.

By the end of 2008, the Group’s target is to have sales of at least MSEK 15,000, with approximately MSEK 12,000 deriving from measurement technologies. Hexagon’s operating margin shall amount to at least 15 per cent.

As part of the programme aimed at focusing on two strategic businesses, Hexagon has initiated divestment of the Hexagon Engineering business area. Th e goal is to have divested all parts of this business area by the end of 2008.

In the longer term, Hexagon’s Board will consider opportunities, as a further step in the Group’s streamlining, to divide the Hexagon Measurement Technologies and Hexagon Polymers business areas into two separate companies. Th ese two business areas currently represent diﬀ erent types of operations, which means that synergies between them are limited.

OUTCOME 2006 TARGET 2008

Net sales, MSEK 13,469 > 15,000

Operating margin, % 13.6 > 15

Number of strategic businesses 3 2

Operational strategy

In order to develop long-term proﬁ tability and sustainable competitiveness, Hexagon attaches great importance to each operation’s market position. To realize its vision, Hexagon applies the following business strategies:

Most cost-efficient company in the sector

A competitive cost structure is an essential prerequisite for being able to operate successfully in the long term and to more easily handle ﬂ uctuations in demand and currency exchange relationships. Cost-eﬃ ciency is also a prerequisite for being the innovator in the sector.

The sector innovator

Hexagon’s innovative capacity is of key importance for customers’ choice of a supplier. Since a market-leading position brings with it a responsibility to develop the sector, investments in research and development are a high priority within Hexagon’s operations.

The sector’s best leadership

Management know-how and experience are critical factors that are essential for being able to operate successfully and realize objectives in the day-to-day business.

Speed management

Short and rapid decision processes and time-eﬃ cient implementation enhance competitiveness and raise organizational capacity.

Growth strategy

Hexagon generates growth by combining acquisitions with organic growth. Hexagon aims to achieve growth through four growth strategies:

Marketing existing products in existing markets

With a focus on core operations, growth is created through product modiﬁ cations and acquisitions of competitors.

Th is creates cost beneﬁ ts and thus enhanced competitiveness through the rationalization of the aggregate structure.

Th e challenge is to avoid being blind to limitations in existing operations and thus too slow in discovering new technologies in the market.

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Introducing new products in existing markets

With the support of successful research and development and sound knowledge of customer needs, growth is created through unique product oﬀ erings and enhanced competitiveness. Th e challenge is to “think outside the box” and create pioneering products in an already established sector.

Introducing existing products in new markets

A new application area or a new geographical market creates 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.

Introducing new products in new markets

Introduction of a new product or service in new markets creates growth through expansion of the total market. Th e challenge is to have suﬃ cient knowledge of the new market, quality-assure the new product and gain access to distribution channels.

Hexagon’s acquisition strategy

Hexagon continuously analyzes more than 200 acquisition candidates worldwide, primarily to complement operations in Hexagon Measurement Technologies. An acquisition candidate should have:

• its own production and sales

• its own research and development

• a focus on the end user and/or OEM

• global potential

• growth potential

• synergies

• strong brands

Acquisition candidates are regularly followed up, both ﬁ nan- cially, technically and commercially. Every acquisition

Vision

Hexagon’s vision is to be a market leader, number one or number two, in each strategic business in order to generate growth and shareholder value.

Business concept

Hexagon’s business concept is to globally operate businesses that develop and market leading engineering technology products and services within the measurement technologies, polymers and key components segments.

At 3,071 meters, jiangyin Yangtze River Highway Bridge in China is the fourth- longest suspension bridge in the world.

The satellite-based monitoring system uses GPS.

Janicki Industries, Inc., in the state of Washington, US, uses laser trackers to measure and inspect every aspect of large yacht hull moulds.

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candidate’s potential place in Hexagon is determined on the basis of synergy simulations and implementation strategies.

Hexagon plans to make four to ten acquisitions per year up to the end of 2008. On average, acquisition candidates have annual sales of MSEK 200. A few are considerably larger companies, however, with sales of more than MSEK 1,500. During 2006, Hexagon made ﬁ ve company acquisitions, with total sales of MSEK 250.

Hexagon’s expansion capacity is calculated on the basis of a restriction imposed by the Group’s ﬁ nanciers, which entail that net debt must not exceed 3.5 times pro forma EBITDA over 12 months. At the end of 2006, this restriction meant that Hexagon had an expansion capacity of MSEK 2,500 based on its own balance sheet. Cash and cash equivalents, including unutilized lines of credit, amounted to MSEK 5,067 at the end of 2006.

Th e price tag for potential acquisition targets varies depending on such factors as the acquired company’s growth and operating margin. Th e aim is that 12 months after the acquired company has been consolidated, the acquired company’s enterprise value divided by operating earnings (EV/EBIT) should be less than a multiple of 10. Th is aim is achieved through a well-designed integration process, during which synergy eﬀ ects are utilized.

Hexagon’s brand strategy

Hexagon’s brand portfolio comprises strong brands that are well known in their sectors. Each brand represents a strong

tradition in its geographical region and sector, which is why Hexagon uses diff erent brands for diff erent customer groups or in diff erent markets. Th e brands in Hexagon’s portfolio symbolize high quality and represent high entrance barriers for Hexagon’s competitors. Hexagon works continuously to develop global product platforms to maximize the economies of scale between the various brands.

Financial objectives

Th e Group communicates four ﬁ nancial objectives:

Earnings per share to increase by more than 15 per cent per year

Earnings per share (EPS) after tax are the most crucial measure of Hexagon’s success and constitute the Group’s deﬁ nition of growth and shareholder value. High EPS growth is the best guarantee that shareholders will receive a healthy long-term return on their investment.

An equity ratio between 25 and 35 per cent

Hexagon strives to minimize the weighted average cost of capital (WACC) for the company’s ﬁ nancing. Hexagon considers that loans will continue to be a more advantageous source of funding than shareholders’ equity.

A positive cash flow over a business cycle

A positive cash ﬂ ow creates freedom of action for Hexagon to expand in the long term. A stable positive cash ﬂ ow also allows

EXPANSION VIA ACQUISITIONS Hexagon will continue to expand within machine automation for the construction industry. Hexagon’s products guide and control excavators, graders, dozers, and paving machines via GPS technology and multidimensional software, thus increasing the machines’

productivity. Hexagon’s goal for 2007 is to become Europe’s leading supplier by continuously developing its product offering while building up a pan-European network of installers.

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0 4 8 12 16

2002 2003 2004 2005 2006

%

2008 0

3,000 6 ,000 9,000 12,000 15,000

2002 2003 2004 2005 2006 MSEK

2008

0 4 8 12 16

2002 2003 2004 2005 2006

% 0 10 20 30 40 50

2002 2003 2004 2005 2006

%

0 200 400 600 800 1,000 1,200

2002 2003 2004 2005 2006

MSEK 0 4 8 12 16

2002 2003 2004 2005 2006

SEK

HEXAGON’S FINANCIAL OBJECTIVES IN SUMMARY

RETURN ON CAPITAL EMPLOYED

During 2006, the return on capital employed was 12.2 per cent (10.8), which was a step closer to the target of 15 per cent.

EQUITY RATIO Target: 25–35%

The equity ratio was 46.4 per cent (29.4) at 31 December 2006. The new issue implemented during spring 2006 strengthened the equity ratio. A strong equity ratio gives Hexagon the opportunity to finance elements of its future expansion through borrowings.

OPERATING MARGIN

By focusing on its core businesses, Hexagon has strongly increased the operating margin. Before the end of 2008, Hexagon shall achieve an operating margin of at least 15 per cent. The operating margin for 2006 was 13.6 per cent.

SALES

Before the end of 2008, Hexagon shall achieve net sales of at least MSEK 15,000 within measurement technologies and polymers. During 2006, net sales for these two core businesses totalled MSEK 11,738, while Group net sales amounted to MSEK 13,469.

CASH FLOW

In 2006, cash flow from operating activities increased by 46 per cent to MSEK 1,115 (764). After changes in working capital and ordinary investing activities, operating cash flow was MSEK 281 (322).

EARNINGS PER SHARE

Adjusted for nonrecurring items and 28 per cent standard tax, the average increase in earnings per share over the past five years has been 32 per cent, which exceeds the target of an annual increase of 15 per cent.

Leica LINO™ L2 is the perfect alignment tool with outstanding optics. The tool is the most precise device in its class using perfectly visible laser lines.

Hexagon’s shareholders to govern the Group on the basis of a lower required equity ratio than if cash ﬂ ow were uncertain.

Return on capital employed exceeding 15 per cent

Th e long-term required return of more than 15 per cent annually over a business cycle is intended to measure the eﬃ ciency of each business. Th e target level is based on an assumption of long-term risk-free interest of around 5 per cent and a risk pre- mium of some 10 per cent.

TARGETS FOR 2008

Target: MSEK 15,000

Target: 15%

Target: increase > 15% per year

Target: positive cash flow Target: >15%

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HEXAGON ANNUAL REPORT 2006 RESEARCH & DEVELOPMENT

Innovation vital for the leading player in the sector

Research and development is a success factor and a crucial prerequisite for a company that aims to lead and develop its sector. Hexagon works purposefully to develop new technologies to enable it to maintain and further strengthen its market-leading position. One of Hexagon’s strategies is to be the sector’s most innovative supplier.

Th e purpose of Hexagon’s research and development work is to create products and services that cost-eﬀ ectively improve productivity and raise quality in its customers’ operations.

Hexagon’s research and development activities also aim at continuously improving existing products and services and at ﬁ nding new application areas.

Global innovation team

Th e corporate culture plays a key role in achieving success in research and development. It is a question of having the right approach and attitude. Individuals must be prepared to fail in order to succeed. Management’s task is to create a favourable work climate based on a genuine entrepreneurial spirit that encourages creativity and new thinking.

Within Hexagon Measurement Technologies, more than 500 engineering graduates, some with doctorates, work in research and development. Basic development work in measurement technologies is conducted at a central research unit in Heerbrugg, Switzerland, and the results are subsequently used by the business area’s product-development units in the US, Australia, China, Singapore and most countries in Europe.

Within Hexagon Polymers, product development takes place at each production unit, while a central technology func- Hexagon’s innovativeness is of crucial importance for ensuring that the Group achieves market-leading posi- tions. One of Hexagon’s key operational strategies is to be the innovator in its sector. Accordingly, investments in research and development have a high priority within the Group.

tion in Belgium serves the rubber compounds product area.

Hexagon’s global research and development team bases its work on joint processes and plans. In addition, Hexagon maintains close cooperation with universities and technical colleges throughout the world.

Strategic areas

To develop the next generation of products and services, Hexagon’s research units closely track market developments and trends. Th e research units closely monitor related business segments in order to ﬁ nd technology that could be applicable within Hexagon’s existing customer segments, as well as suit- able business segments for its existing technology.

Th e strategic development areas in measurement technologies include software development, sensor technology, distance measurement and calibration and compensation technology.

Within polymer technology, the focus is on securing optimal solutions in terms of performance, economy and operational reliability.

Product development work is highly intensive. Within Hexagon Measurement Technologies, more than 100 product launches during the year were based on in-house product development.

Investment in research and development Th e ability to constantly supply the market with new and improved products requires resources. Hexagon’s total expend- iture for research and development during 2006 amounted to MSEK 894, which corresponds to about 7 per cent of the Group’s sales.

Development costs are capitalized, meaning they are entered as an asset in the balance sheet, only if they relate to new products, if the costs involved are substantial and if the product concerned has probable earnings potential.

During the year, some 39 per cent of development costs were capitalized. For more information, see page 55.

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I N T E R N A L I D E A

N E W N E E D S I D E A F R O M

C U S T O M E R

I D E A F R O M C O M P E T I T O R

HEXAGON’S INNOVATION TEAM CONCEPT DEVELOPMENT

A C Q U I S I T I O N C O N C E P T D E V E L O P M E N T

O R G A N I Z AT I O N A L I N T E G R AT I O N

L A U N C H O F N E W P R O D U C T P R O D U C T

D E V E L O P M E N T

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HEXAGON ANNUAL REPORT 2006 RESEARCH & DEVELOPMENT

R&D MULTIPLIES SOFTWARE TECHNOLOGY VALUE With offices in Europe, North America and Asia, the software engineers and metrology specialists are working around the clock in researching and developing new capabilities for the software product family. The typical employee has an advanced degree in a technological discipline and the software engineers have over ten years of experience in

programme development. A team of engineering, marketing and applications specialist determines which customer requests become development projects. Detailed specification, solution requirements and confirmation that design meets the customer requirements are developed. Projects run from six months to two years and teams can consist of as many as ten members.

PRODUCT GROUPS NUMBER OF

TECHNOLOGY PATENTS CMM*

ARTICU- LATED ARMS

LASER TRACKERS

TOTAL

STATIONS DISTO™ HDS

CON- STRUCTION

HAND- TOOLS

PROBE SYSTEMS

Linear distance measurement 280 • • • • • • •

Optics 130 • • • • • •

Sensors 250 • • • • • • • • •

Calibration and compensation 140 • • • • • • • • •

GPS and GNSS 100 • • •

Machine guidance 100 •

Laser 140 •

Mechanical structures 150 • • • •

Components 50 • •

Signal and image processing 160 • • • • •

Control systems - • • • •

Software - • • • • • • •

Total 1,500

To protect innovations from the exposure that generally arises from a patent application, it has become customary in the business not to patent software. However, this approach is beginning to change, which is why Hexagon will henceforth apply for patents involving software. The same principle applies to control systems, since large parts of the functionality are based on software.

* CMM = Coordinate Measuring Machines

HEXAGON MEASUREMENT TECHNOLOGIES’ PATENT PORTFOLIO

Hexagon considers that the Group’s investments in research and development are at a reasonable level and in line with other leading market players in the industry.

Acquisitions complement in-house development Innovation is generated both by Hexagon’s own organization and by other companies. As a complement to its own concept- development work, company acquisitions are used as a tool to vitalize and strengthen the Group’s product portfolio.

Solid patent portfolio

To protect its investments in research and devolopment, Hexagon submits around 200 patent applications every year.

Hexagon Measurement Technologies’ patent portfolio consists of more than 1,500 active patents worldwide.

Hexagon carefully monitors the sector to ensure that the Group’s patents are being respected. Hexagon takes a serious view of patent infringement and adheres to the principle of legally defending the Group’s rights.

Wilcox Associates’ product development team for PC-DMIS Vision in Telford, UK.

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HEXAGON ANNUAL REPORT 2006 HEXAGON MEASUREMENT TECHNOLOGIES

Measuring systems at the leading edge of technology

Increasing demands are being imposed on the ability to accurately measure and position infrastructure and environ- ment. Roads, bridges, sewers and new power cables are being designed and constructed at an ever-faster pace. Th e emerg- ing economies are constructing new infrastructure, while old structures need to be renovated. Climate change and various environmental disasters are also increasing the need to accurately describe, image and measure countries and regions.

For manufacturing companies, it is necessary to compile and process measurement data on production and products systematically and eﬃ ciently. Measurement data is used to graphically and mathematically describe an object. Th is description is used to identify deviations from the object’s ori- ginal drawing and correct the object’s manufacturing process.

Hexagon Measurement Technologies is a world- leading supplier of systems for measuring objects in one, two or three dimensions. Th ese measuring systems oﬀ er customers the potential to measure with considerable accuracy and high quality, and to quickly gain access to substantial measurement data. In 2006, the business area accounted for 69 per cent of Hexagon’s total net sales.

Market description

Th e measurement market is divided into three segments — macro, micro and nano. Th e smaller the object, the greater the required measurement accuracy.

Hexagon Measurement Technologies develops sensors and software, along with aftermarket services, for all market segments. In brief, essentially the same mathematical algorithms are used irrespective of whether the measured object is a mountain chain or a component in a microprocessor.

According to Hexagon, the total measurement market is worth about MSEK 60,000, with an annual growth rate of some The Hexagon Measurement Technologies business area is a world leader in multidimensional measurements in the macro and micro segments of the measuring and positioning market. The Group’s customers are active worldwide and in different segments of the market. In 2006, the business area reported sales of MSEK 9,250 with an operating margin of 17 per cent.

5–7 per cent. Estimates of the total market and market segments are based on in-house industry knowledge and publicly avail able statistics.

Macro segment

Th e macro segment involves the measurement of mountains, cities, roads, tunnels, bridges, other construction projects and so forth. Measurements in this segment require an accuracy ranging from a divergence of 10 metres to 100 micro millimetres.

According to Hexagon, the macro segment is worth about MSEK 28,000, with Hexagon’s market share totalling some 15 per cent. Growth in the macro segment is estimated to be about 10 per cent annually.

Hexagon’s product oﬀ ering is divided into ﬁ ve growth areas:

geospatial imaging, construction exterior, construction interior, civil engineering and surveying.

In the area of geospatial imaging, airborne measurement of objects is performed using camera technology, referred to as photogrammetry, or laser measurement from an aircraft.

Hexagon develops digital sensors and software programmes for the interpretation of images in two or three dimensions.

Th e primary customers are map oﬃ ces and cartography companies.

In the area of construction exterior, machine automation in the construction industry is a steadily growing sub- market.

Hexagon’s products guide and control excavators, graders, dozers, and paving machines via GPS technology and multidimensional software, thus increasing the productivity and quality of the work performed by the machines. Monitoring systems for measuring, for example, the movement of a sky- scraper and level meters for measuring ﬂ at surfaces are also included in this area.

Hexagon’s oﬀ ering in construction interior consists primarily of Leica DISTO™, a handheld laser for short- distance measurement and calculation of surface and volume magni- tudes. Architects, construction technicians, painters, car- penters, real estate brokers and others use the product. Th e ﬁ rst quarter of 2007 marked the launch of Leica LINO™ L2, a cross-line laser reader for vertical and horizontal laser measurement, which can be used in measuring check patterns.

Within civil engineering and surveying, Hexagon’s products have access to the Global Navigation Satellite System (GNSS). GNSS is a positioning system that is

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SmartStation, the world’s first high performance total station with integrated GPS, combines TPS and GPS

in one instrument. This saves time in planning and executing the survey.

compatible with both the US GPS and the Russian Glonass system. In the next ﬁ ve years, Hexagon’s products will also have access to the European satellite system, Galileo, as well as to a Chinese satellite system. Hexagon’s product portfolio includes theodolites and total stations that are positioned in the terrain using GNSS, whereby optics and laser technology enable measure ment with a range of several kilometres. GNSS is now so accurate that it can also be used as a measuring system. Hexagon’s product portfolio includes measurement base stations and mobile units that oﬀ er the user measurement applications aided by satellites.

Micro segment

Th e micro segment involves the measurement of industrial components, covering everything from large aircraft to micro components in small electronic applications. Measurements in this segment require an accuracy ranging from 100 micromillimetres to 0.3 micromillimetres.

According to Hexagon, the micro segment is worth some MSEK 22,000, with Hexagon’s market share amounting to about 15 per cent. Growth in the micro segment is estimated at 6 per cent annually.

Hexagon’s product oﬀ ering may be divided into four growth areas: sheet metal applications, hand tools, general purpose and prismatic parts applications.

Within sheet metal applications, sheet metal parts are mainly measured for the automotive and aerospace industries.

In hand tools, Hexagon can off er eff ective measuring for research and development programmes, and time-effi cient control measurement on the factory fl oor. Customers are mainly manufacturing companies.

Th e general purpose of growth area measures components, such as for engineering equipment or mobile telephone frames.

In prismatic parts, complex parts are measured with high precision, such as cogwheels or cylinder blocks. Th ese applications are used primarily in the automotive and aerospace industries as well as in the energy sector.

Nano segment

Th e nano segment involves the measurement of objects such as new microcircuits for the electronics industry, medical applications and materials with new properties. Measurements in this

segment require extreme precision. Divergence in measurements must not exceed 0.3 micromillimetres. Th e technology required to permit such accuracy diﬀ ers slightly from the technology used in the macro and micro segments.

Hexagon values the nano segment at about MSEK 10,000 and it is a segment oﬀ ering excellent growth potential.

Hexagon currently pursues only marginal operations in this segment but intends to establish operations in the nano area in the future.

COMPETITION OVERVIEW MARKET SEGMENT

COMPANY HOME COUNTRY MACRO MICRO NANO

Hexagon Sweden • •

ESRI US •

Intergraph US •

Sokkia Japan •

Topcon Japan • •

Trimble US •

Carl Zeiss AG Germany • •

Faro Technologies US •

Mitutoyo Japan •

Perceptron US •

Renishaw UK •

KLA Tencor US •

Vecco US •

Zygo US •

The table shows the primary players in the macro, micro and nano segments of the measurement technologies market. Hexagon’s total market share is about 15 per cent.

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Product development

During the year, Hexagon Measurement Technologies launched a number of key new technologies in all market segments, resulting in 13 per cent organic growth in net sales.

Individual products in the business area’s product portfolio have an average life of 18 months. Product development is conducted continually, as part of eﬀ orts to update the various parts of the measuring system to match the commercial availability of new technology. Extensive research work is a prerequisite for keeping Hexagon at the leading edge in terms of commercializing technological innovations.

During 2006, Hexagon Measurement Technologies’ product portfolio was strengthened in a number of strategic areas.

Th e development of sensors for products in the micro segment and new software modules continued to dominate product development. In addition, new software modules for three- dimensional graphics and new products that provide higher precision and productivity in the use of GPS or GNSS positioning systems were launched during the year.

Sales and distribution

Th e sales approach and distribution model for the business area’s products vary from product to product and from project to project. Th e sale of large integrated measuring systems can take up to 12 months and involve some 50 engineers, while a Leica DISTO™ laser meter can be bought in a building supplies

warehouse. Hexagon sells products through its own sales force and via distributors worldwide. Certain products are licensed to large OEMs who market them under their own brand.

Th ere is growing demand for long-term agreements for Hexagon’s software, which permit customers to subscribe to software updates. Hexagon also oﬀ ers regular upgrades of measuring systems in which all component systems, except the carrier, are replaced.

Historically, the business area’s sales have moved in a def- inite seasonal pattern, with the majority of sales occurring during the fourth quarter. Following the acquisition of Leica Geosystems, however, the second quarter has increased its signiﬁ cance, since this is when the construction and other industries purchase equipment for projects to be implemented in the six-month period ahead.

Operations in 2006

Th e business area’s earnings progressed favourably during the year. Order intake increased to MSEK 9,273 (4,525) and sales advanced to MSEK 9,250 (4,539). Organic growth was 14 per cent for order intake and 13 per cent for net sales. Operating earnings (EBIT1) increased to MSEK 1,547 (550), corresponding to an operating margin of 16.7 per cent (12.1). Th e average number of employees during the year was 4,942 (2,688), with the increase primarily due to acquisitions during 2006.

Th e progress of Hexagon Measurement Technologies tracks

FLEET MANAGEMENT AT DAWSON MINE

A machine production monitoring and integrated fleet management solution has been installed across the 48 kilometre mine site of Dawson Mine, Australia. The machine automation modules include dragline monitors, drill navigation systems, dozer guidance systems, fleet monitoring systems and software.

The mine is covered by a radio network to give coverage for GPS corrections and real time data exchange over the mine site.

“With credible data on vehicle location, delays, breakdowns, and the efficiency of the site, we can swap trucks around the site ensuring better utilisation,” says Dawson Dispatcher Mr Neil Pollard.