Inms networks

ANNUAL REPORT 2015

Connecting Devices™

Key figures • HMS in brief • CEO's comments

CEO'S COMMENTS...2
THE MARKET...4-7
Trends give a boost...4
Connecting Devices™ – more relevant than ever...6
INNOVATIVE PRODUCTS...8-15
Anybus® Embedded...8
Anybus® Gateways...10
Netbiter®...12
IXXAT®...14
OUR BUSINESS...16-29
A value-creating business model...16
HMS strategies for profitable growth...18
Established sales channels in more than 50 countries...20
Many professional roles create dynamics...24
More focus on our sustainability...26
THE HMS SHARE...30
CORPORATE GOVERNANCE...32-41
Chairman's comments...32
Corporate governance report...33
The Board's report on internal controls...37
Board of Directors...40
Group management...41
GLOSSARY...42
FINANCIAL DEFINITIONS...43
DIRECTORS' REPORT...46-50
FINANCIAL STATEMENTS...51-57
NOTES...58-80
BOARD AFFIRMATION...81
AUDIT REPORT...82
MULTI-YEAR REVIEW...83
NOTICE OF AGM...84

Connecting devices

HMS products make it possible for industrial devices to communicate. Millions of robots, engines, generators and other business-critical equipment current rely on HMS technology for industrial communication.

FINANCIAL DATA IN SUMMARY (SEK M)	2015	2014
Net sales	702	589
Growth in net sales, %	19	18
Operating profit	102	98
Operating margin, %	14	17
Profit for the period	60	63
Order intake	682	611
Earnings per share, SEK	5.33	5.59
Cash flow from operating activities	90	93
Average number of employees	362	352

OPERATING PROFIT AND MARGIN

SALES GROWTH AND NUMBER OF DESIGN WINS
Sales
Number of new design wins

In total, we received 195 new design wins during the year, bringing the total number of active design wins to 1,381, which is a 12 percent increase compared to the prior year.

ALLOCATION
HMS EMPLOYEES / COUNTRY
22% 78%

PERCENTAGE WOMEN / MEN
AT FOREFRONT OF TECHNOLOGY
At HMS, innovation is in our blood and we're constantly launching new products and solutions.

around the world

THE WORLD IS BECOMING MORE CONNECTED

Trends like The Internet of Things and Industrie 4.0 are creating a need for more machines to become connected. And that's been the core of HMS's business concept for decades, with our motto of Connecting Devices™.

ESTABLISHED MARKET LEADER

HMS is already a trusted communications partner for the world's major industrial companies and many of them have adopted HMS products as their standard. It provides us with a stable financial position and many opportunities for the future.

WORLDWIDE PRESENCE

NETSITERS
A cloud-based solution that enables online remote monitoring and remote control of industrial equipment.

ESTABLISHED SALES CHANNELS IN MORE THAN 50 COUNTRIES

PRODUCT SALES / REGION

EMEA, 60%
North and South America, 22%
Asia, 18%

NEW STARS UNDER DEVELOPMENT

Significant market potential in the growing segments of Industrial Internet of Things, Remote Management and Safety.

WE SOLVE COMMUNICATIONS PROBLEMS ON THE FACTORY FLOOR

HMS enables millions of devices to communicate on factory floors worldwide. Our products ensure that industrial applications, like drives, robots, generators, sensors etc. can communicate with controlling networks and monitoring systems. HMS products are turnkey solutions, with reliable hardware and software, which make them easy to install, configure and maintain.

HMS NETWORKS ANNUAL REPORT 2015

Key figures • HMS in brief • CEO's comments

CEO'S COMMENTS

Continued expansion and profitable growth

2015 was another record year for HMS in terms of sales, profitability and several other key figures. A combination of strong market position, loyal customers and innovative products provides the foundation for continued growth. In 2015, we also benefited from a weak SEK and ended the year with a 19 percent growth in sales compared to the year prior.

In addition, we hired 17 new employees, primarily in sales and product development. At year-end we had 388 employees in 10 countries. Subsequent to our company acquisition of eWON early in February 2016, we are now around 450 employees in 11 countries.

> Important trends, such as Industrial Internet of Things (IIoT) and Industrie 4.0, are based on products becoming increasingly intelligent and exchanging information with their environment. This will open up many new opportunities for HMS since it is highly consistent with our core expertise of Connecting Devices.

Products + Service = Solution

During the year, we continued our intense product development efforts related to our three brands, Anybus, IXXAT and Netbiter and we anticipate more good opportunities for further expansion based on both existing and new products.

We also started up Technical Services, where we offer supplementary services associated with our products. At present, services represent a small portion of our sales and we regard this move as a step towards being able to offer a combination of products and services so that we can provide our customers with a complete solution for industrial communication.

Growing customer base

All three of our product areas, Anybus, IXXAT and Netbiter demonstrated healthy growth during the year. There was also continued growth in the number of new design wins in 2015 (see page 16 for an explanation of this term). In total, we received 195 new design wins during the year, bringing the total number of active design wins to a record level of 1,381, representing a 12 percent increase compared to the prior year. Of these, 1,023 are in production and 358 are expected to

HMS NETWORKS ANNUAL REPORT 2015

CONTENTS | SEARCH

Key figures • HMS in brief • CEO's comments

CEO'S COMMENTS

enter production during the next few years. The steady flow of new customers confirms that we have an attractive product offering and a successful sales organization.

Integration

IXXAT Automation GmbH, acquired in 2013, has been recast such that it is now the brand IXXAT, sold by HMS international sales channels. It also became the legal entity HMS Technology Center Ravensburg GmbH, which is now one of our two development centers. During the year, we developed several new IXXAT products, which are partly based on Anybus technology. It's an example of good synergy that accelerates our product development efforts.

In 2015, integration of wireless gateways, acquired from u-blox AG in the fall of 2013, was completed. During the fall trade shows, we demonstrated our new, innovative Anybus Wireless Bolt, an entirely new concept for wireless data access in industrial environments, which was a result of the integration.

Quality and production

Efforts to improve efficiency and quality continue. That is reflected in our stable gross margin for the year and more excellent results from our quality measurements. As in prior years, we had a low level of returns, just 154 ppm (0.0154 percent) for the year, which is world-class!

Expanding the offering

Early in February 2016, HMS signed an agreement to acquire the Belgian company, eWON SA. Currently, eWON is a market leader in remote monitoring and remote control. It will make an excellent contribution to HMS's position in this area. The company has 58 employees and sales of around SEK 140 million, with an operating margin in excess of 20 percent.

The products currently manufactured and marketed by eWON are a great fit with our current solution for remote monitoring. Together, these products will comprise a competitive offer where we are building a strong position as the leading supplier of solutions for remote control and

remote monitoring of industrial applications. It is particularly pleasing that both of the entrepreneurs behind eWON have decided to stay at HMS and have thereby also become major shareholders of the company.

Exciting future for HMS

Advancements in technology are progressing rapidly. In the area of industrial data communication and automation, there are some important trends, such as Industrial Internet of Things (IIoT) and Industrie 4.0. Both are based on products becoming increasingly intelligent and exchanging information with their environment. We expect this to open up many new opportunities for HMS over the coming years since this is highly consistent with our core expertise of Connecting Devices.

We will continue developing our technology and expertise to solidify our position as the leading player in our market segment going forward. New, innovative products and services are emerging from our internal HMS Labs initiative and we believe that industrial communication

Early in February 2016, HMS acquired the Belgian company, eWON SA. From left: Pierre Crokaert, Staffan Dahlström and Serge Bassem.

will continue to be an exciting area of the future.

To conclude, I and the company's senior executives would like to thank all of our employees, customers, partners, suppliers and shareholders for a successful year at HMS. We look forward with confidence to a stimulating future and a continued journey of growth together.

Staffan Dahlström
President and CEO

Significant events 2015. 27 February: AAEON Europe and HMS Networks AB (publ) announce strategic collaboration in Europe. 27 April: HMS and Xilinx Inc. start collaborations to develop next generation solutions for industrial network technology. 28 April: Charlotte Brogren takes over the position of Chairman of the Board for HMS after Urban Jansson. 25 May: HMS obtains an EUR 1.4 million order pertaining to Ethernet POWERLINK technology for electrical drives. 1 November: New sales office is opened in Basel, Switzerland. 3 November: Rockwell Automation Inc. chooses Netbiter for online monitoring of frequency converters. 16 November: HMS Industrial Networks presents new solutions for Industrial Internet of Things at SPS/IPCI Drives in Nuremberg.

HMS NETWORKS ANNUAL REPORT 2015

INTRO

MARKET

PRODUCTS

OUR BUSINESS

THE SHARE

CORPORATE GOVERNANCE

GLOSSARY

FINANCIAL

CONTENTS

Trends give a boost • Connecting Devices – more relevant than ever

DRIVING FORCES IN THE MARKET

Trends give a boost

The mega trend, Industrial Internet of Things (IIoT), has to do with industrial products, machines and systems becoming more connected. The driving force is industry's need for high flexibility, efficiency and productivity. Data is collected from the connected industrial equipment and made available in IT systems, where it can be analyzed and presented. Operators and decision-makers are thus provided with immediate insight about their industrial processes, making it possible to ensure that their factory systems are functioning, properly adapted and using resources optimally. IIoT also makes it possible for subcontractors to monitor delivered products so that they can anticipate maintenance needs during the product life cycle and thereby increase their service level.

HMIS NETWORKS ANNUAL REPORT 2015

Trends give a boost • Connecting Devices – more relevant than ever

DRIVING FORCES IN THE MARKET

DRIVING FORCE

INCREASED CONNECTIVITY

INCREASED GLOBALIZATION

HIGHER DEMANDS ON ENVIRONMENTAL ADAPTATION

IMPORTANCE

This trend of connectivity is causing a technology shift in industry. Industrie 4.0, is an example of a German IIoT initiative where communications and IT systems automate production and create connected, intelligent factories. Characteristics of such factories are high flexibility, efficiency and productivity resulting from their ability to adapt and use resources optimally. For the market players, this opens up two main business opportunities, i.e. offering solutions for new installations along with ones that integrate old and new equipment.

More and more equipment is becoming connected in networks and new IT technology is making inroads in industry. Information channels via Ethernet, wireless communication, cloud-based data solutions and safety solutions are just some examples of the new technology that is emerging. IIoT is generating new benefits, which is giving operators and decision-makers immediate access to information from their industrial processes, where both old and new equipment can communicate and interact. That kind of insight makes process and resource optimization possible.

Some of the factors driving increased globalization are: rapid advancements in technology, spreading industrialization, international growth opportunities for companies, economic and trade cooperation, as well as global forums for sustainable development. IIoT lies at the heart of globalization, making borderless, yet safe, communication and information transfer possible for smart, integrated industrial solutions. Access to data from industrial processes is possible no matter where you are and this facilitates global business and industry that is both sustainable and resource efficient.

The industry has a very important role to play and it must make a major effort on environmental initiatives to ensure sustainable global development. By installing reliable, smart and safe products that are connected to industrial communication and information systems, entirely new opportunities arise for optimal use of energy and equipment in industrial systems, without sacrificing production capacity or efficiency.

HMS APPROACH

HMS has expertise in both traditional industrial communication (fieldbusses or industrial Ethernet) and new IT technology (e.g. IT standards for communication, wireless communication and cloud-based data management systems), which means that the company is able to offer intelligent communications solutions that integrate old with new. This makes it possible for customers to reuse well-functioning and existing systems in industry and combine them with modern equipment. In this way, IIoT creates new user areas and business opportunities around HMS products and through that, the company can offer new types of services in the emerging IIoT market.

HMS is a business that is in sync with IIoT – where the aim is to connect industrial products to networks. HMS is steadily increasing its offering in the IIoT area, where the point of departure is the company's core expertise in industrial communication. Anybus .NET- and SG- (Smart Grid) gateways are two innovative IIoT products that HMS recently launched and is now able to offer the existing customer base in industry, thereby creating new business. HMS also invests in wireless communication, Anybus Wireless Bridge™/Bolt™, and in the cloud service, Netbiter Argos where data from industrial processes is made available.

HMS is currently a global player, with a distinct global presence, which gives the company a sharp competitive edge. Approximately 90 percent of HMS's sales are from exports, which means that the company is firmly established on the international scene, and thus prepared for additional growth. HMS has 10 offices covering all primary markets where it has locally adapted sales, marketing and technical services. These offices, along with the company's steadily growing distribution network, are what make up an international organization that is well equipped for future success.

HMS contributes to sustainable development by developing and manufacturing products that make energy conservation and resource-efficient production possible for its users, with the lowest possible environmental impact during the product's useful life. Intelligent communication systems from HMS help lower the energy consumption of industrial equipment like motor drives, pumps and fan systems. HMS also has a program in place for minimizing the company's environmental impact along with environmental and quality requirements for suppliers aimed at improving the sustainability of the goods and services that HMS purchases.

HMS NETWORKS ANNUAL REPORT 2015

Trends give a boost • Connecting Devices – more relevant than ever

THE MARKET – HMS

Connecting Devices™ – more relevant than ever

HMS's core competence in industrial communications and network protocols has established the company as a world-leading supplier of communications solutions for factory automation in particular. The need for communication is spreading to other markets, such as building and process automation, power and energy and the transport and infrastructure segments. The IIoT trend, where all industrial equipment is connected, is helping fuel this. This opens up new market opportunities for HMS, which already has a foothold via the new, targeted solutions it offers.

In terms of IIoT, HMS plays an important role because of our core expertise in industrial communication, which is summed up in the company's motto: Connecting Devices™. A shift in technology is occurring worldwide in industry and the demand for sustainable, intelligent industrial solutions is growing. These are reliable, safe and robust communications solutions, typically involving wireless technology. It all gives rise to new opportunities and application areas for HMS technology and products, helping the company to make headway and further solidify its market position. HMS's competitive edge in industrial communication provides an excellent foundation for creating new, innovative products and services for the emerging, global IIoT market.

Comprehensive supplier to industry

Step-by-step, HMS has established itself as a comprehensive supplier of products and services for industrial communication. HMS has refined its offering such that it now includes innovative solutions that are relevant and sought after by all types of industrial players. Manufacturers of automation products, machine suppliers, system integrators and end users all regard HMS as a key supplier who ensures that their equipment can communicate and

HMS NETWORKS ANNUAL REPORT 2015

CONTENTS | SEARCH

Trends give a boost • Connecting Devices – more relevant than ever

THE MARKET – HMS

be integrated with other equipment in industrial systems in the international market. This applies not only to factory automation, but also the process, energy, construction and transport sectors.

Focused offering

HMS started out with a more narrow scope, i.e. as a manufacturer of automation products with a range of pocket-sized communication cards. But now its scope is much wider and the company offers a number of well-established and growing product lines. They are designed and packaged for different parts of the industrial value chain, which has steadily expanded HMS's market presence. This has been key to the company's growth process, establishing HMS as a market leader, offering manufacturers of automation products its Anybus Embedded portfolio – the world's most used software solution for integrating support for industrial communication. In 2015, HMS launched several new solutions targeting additional customer applications, with the aim of capturing new market share. Anybus Gateways are also used by manufacturers to connect with networks, typically as a means of quick time-to-market, during the process of integrating Anybus Embedded into their automation products.

The main offering to machine suppliers is IXXAT products like Econ 100, INpact, CAN@net and USB to CAN to create control, communications and infrastructure solutions for machines. But Netbiter Remote Management is also frequently used for remote monitoring and Anybus Gateways for interconnecting various types of networks.

System integrators are offered a comprehensive toolbox in the form of Anybus Gateways, which is HMS's market-leading product line for system integration. No other supplier has the same capacity as HMS when it comes to interconnecting all kinds of older industrial networks with new ones, even with wireless connections.

With HMS products, end-users benefit from stable, reliable communication, typically without even having any direct contact with HMS, since HMS's strategy has thus far involved collaboration with subcontractors to industry, i.e. system integrators.

Strong position in a clear trend

The Anybus, IXXAT and Netbiter product brands are well-known in the market, each one with a unique purpose. But what they all have in common is industrial communication. Please read more about our innovative products and their markets on pages 10-17.

Companies like Hilscher, Prosoft, Moxa and Molex are competitors to HMS in various sub-sectors, but none of them can match HMS overall. The product range for all of HMS's brands comprise a total offering for industrial communication that is attractive to a growing number of industrial markets. This has to do with the fact that the HMS offering is both expanding and being refined, along with the growing importance of industrial communication throughout industry. HMS already feels the impact of the transformative IIoT trend, where industrial products, machines and systems are becoming more connected in order to facilitate communication and information transfer within industry. New, smart solutions are creating entirely new worlds, where suppliers are able to monitor their delivered products so that they can anticipate maintenance needs and where end-users can analyze critical data from industrial processes to ensure that their systems function and are used optimally.

Connecting both new and old

In industry, modern equipment must frequently be integrated with an installed base of well-functioning equipment that communicates using older technology. Thanks to HMS's vast experience in fieldbus technology, industrial Ethernet and wireless networks, it is able to offer solutions to manufacturers of products and machines who want to integrate the latest technology. System integrators also rely on HMS solutions when tasked by end customers to connect existing, older equipment on the factory floor with new equipment.

Connecting Devices™ – a contemporary slogan

The IIoT trend is a perfect fit with the longstanding motto of HMS, i.e. Connecting Device and in 2015, progress was made in this new market situation, with the preview of solutions for information flow between industrial networks and IT systems in factories and Smart Grid systems (SG). The launch of the gateway variants Anybus .NET to PROFIBUS/PROFINET and Anybus SG-gateway, combined with prior solutions that support OPC UA communication in accordance with specifications that have been created within the scope of Industrie 4.0 clearly indicate HMS's market direction, which is further strengthened by the company's position and importance as a supplier of communications solutions.

WHAT CUSTOMERS SAY

> When I got back to the office, I realized that I had shut off the school's warm water supply. But, since we had Netbiter installed, I could just turn it on again right from the office, with a simple click of the mouse.
>
> Mark Jenkins, CEO, Global Electrical Solutions

At EF Language Centre in Oxford, the system integrator, Global Electrical Solutions (GES) Ltd. installed a system for monitoring water, lighting and other installations. With Netbiter, it is possible to see current temperatures, levels and consumption via a website. You can also turn on lights and open windows remotely. It's a typical example of what's possible with Internet of Things.

HOW IT WORKS: A Netbiter gateway is connected to a Rockwell PLC that controls the various systems in the building. The Netbiter unit sends data to the cloud-based Netbiter Argos service, where GES and the property owner can see current values and remotely control various processes at the building.

HMS NETWORKS ANNUAL REPORT 2015

INTRO

MARKET

PRODUCTS

OUR BUSINESS

THE SHARE

CORPORATE GOVERNANCE

GLOSSARY

FINANCIAL

CONTENTS

Anybus Embedded
•
Anybus Gateways
•
Netbiter
•
IXXAT

INNOVATIVE PRODUCTS -

Anybus

Anybus Embedded enables communication

Growing market for industrial network interface cards

The market for industrial network interface cards, which is the specific sub-market for the Anybus Embedded product line, is estimated to be worth approximately SEK 10 billion. Manufacturers of industrial automation equipment who make their own network cards represent the largest portion of the market, worth approximately SEK 7.5 billion. Other external suppliers, like HMS, share the remaining portion, valued at approximately SEK 2.5 billion. This market is expected to continue growing by around 10 percent per year during the next few years. Major markets include Germany, Japan and USA, along with emerging growth markets like China, India and Brazil.

HMS has a leading position in the market for external suppliers, with market share of nearly 20 percent. At the same time, there is considerable potential within the portion of the market where manufacturers of industrial automation equipment design their own solutions.

Demand for flexible communication solutions

The share of automated machines and production processes is increasing for all types of manufacture.

MARKET DISTRIBUTION

Own manufacturing, industrial automation equipment, 80% in HMS, 4%
Other external suppliers, 16%

ing. With increased automation, the demand for communication solutions from manufacturers of industrial equipment increases. Communication travels over different industrial networks. Manufacturers who want to serve the global market must be able to offer their customers products that can connect to the majority of these networks in a flexible and efficient way. HMS offers communications solutions to a large target group via Anybus Embedded, which can be used by all types of automation products to connect to the desired industrial network.

Value to customers improves competitiveness

HMS has customers all over the world who are gaining competitive advantages in a number of ways by using Anybus Embedded. Studies show that it is possible to cut development costs by up to 70 percent. With Anybus, manufacturers can offer their customers a completely flexible product that can easily be configured, adapted and changed according to the circumstances.

Competition and potential

HMS has special status worldwide among independent companies focusing on communications solutions in the Embedded market. Looking at the

total market for network interface cards, HMS's largest competitors are manufacturers of automation equipment who make their own embedded network interface cards. Currently, this type of in-house development and manufacturing represents most of the total global volume of embedded network cards. HMS feels that there is considerable potential in convincing more companies, which currently develop their own communication solutions, to instead purchase them from HMS. As a specialist in industrial communication, HMS can offer the best and most future-proof solutions so that customers can focus on their own core technology instead.

Connectable turnkey solutions

Anybus network interface cards are primarily sold as standard solutions with complete system functionality for industrial networks. The products provide immediate connection to all leading field-busses and industrial Ethernet systems. The products are certified for the various network standards and they fulfill CE, UL and RoHS standards.

Expansion of Anybus CompactCom

Already in 2013, HMS launched its new embedded offering, the Anybus CompactCom 40 series. It offers CompactCom in three formats – Chip,

Brick and Module, all of which have improved functionality, performance and real-time properties throughout the new 40 series. In 2015, HMS also launched Anybus IP, through which the company delivers software for integration in other suppliers' chips. Anybus CompactCom currently supports all leading industrial Ethernet networks and fieldbus technologies.

A safe solution

The demand for communication solutions that meet the requirements for personal safety is increasing in industry. With HMS safety solutions, like IXXAT Safe T100 or dedicated safety software that connects to Anybus CompactCom, customers are provided with a safe solution for transferring safety-critical information over the network. With this concept, HMS can offer customers safety solutions for their automation products without large-scale, expensive development efforts.

Anybus Embedded • Anybus Gateways • Netbiter • IXXAT

INNOVATIVE PRODUCTS – Anybus

WHAT CUSTOMERS SAY

> “We can focus on making first-class safety interlocks and use HMS products for communication with industrial networks.
>
> Rob Johnson, Senior Electronics Engineer, Fortress Interlocks

UK-based Fortress Interlocks manufactures safety interlocks that are used to safeguard operators from injury and protect plants from damage. For example, they can shut down a machine when a door is opened, or a button is pushed.

Fortress Interlocks was interested in connecting their product, amGardpro, to the network, PROFINET, using PROFIsafe. But they realized that coming up with a solution for that would be a time-consuming and complicated process. With Anybus CompactCom and IXXAT SafeT100, they quickly had a solution in place. It is now used in several safety systems.

HMS NETWORKS ANNUAL REPORT 2015 9

INTRO MARKET PRODUCTS OUR BUSINESS THE SHARE CORPORATE GOVERNANCE GLOSSARY FINANCIAL CONTENTS SEARCH

Anybus Embedded
•
Anybus Gateways
•
Netbiter
•
IXXAT

INNOVATIVE PRODUCTS - Anybus

Anybus Gateways – market-leader for interconnecting networks

Growing market for gateways

The use of industrial networks continues to increase in industry and this increases the need to interconnect various types of networks via gateways. The market for gateways is estimated to be worth slightly more than SEK 3 billion, with an annual growth rate of around 10 percent. HMS has a distinct profile and market position via its well-know product program that, above all, is focused on factory automation, which is the same arena where Anybus Embedded is used.

Old meets new

In industry, modern equipment must frequently be integrated with an installed base of well-functioning equipment that communicates using older technology. That's what automation projects tend to focus on. While the newer automation products typically communicate over industrial Ethernet, the older equipment in the installed base usually communicates over a fieldbus or serial communication. In such a situation, it is possible to use a gateway, with two separate network interfaces, as an effective problem-solver.

Anybus network technology provides wide market coverage

HMS's leading position in gateways has to do with the very essence of the Anybus technology, namely HMS's unique expertise on the roughly 20 industrial networks that are most used worldwide. Working from the basic idea, to merge two different Anybus network interfaces into pre-packaged gateways, HMS has created a very wide product

range – now more than 300 products – that make it possible to connect virtually any industrial network in existence. Because of this, Anybus Gateways are demanded and used by automation engineers throughout the world, primarily for factory automation purposes, but also in related areas, like building automation.

Because of the wide network coverage, HMS has a distinct position in the market for gateways and the company's perception is that none of its competitors currently has a product offering that is as wide as HMS's. Competitors are primarily focusing on connections between a handful of industrial networks, typically in local or regional markets.

Focus on the needs of system integrators

Just like machine builders and end customers, system integrators require turnkey solutions that they can quickly and easily configure in order to connect networks and products, and also ensure a quick, safe transfer of data. Anybus Gateways meet

these needs and they only require simple configuration at installation, which means that time-consuming programming by the user isn't necessary. Anybus Gateways have also been tested and verified by leading manufacturers of network systems, such as Siemens, Rockwell Automation, Schneider Electric, Mitsubishi, ABB, Omron, Hitachi, Beckhoff, Phoenix Contact, Bosch Rexroth and others. It's yet another reason why HMS is perceived as a reliable and trustworthy supplier by customers.

Three different gateways: Anybus Communicator, X-gateway and Wireless Bridge

With Anybus Communicator, all types of automation products with either a serial interface or a CAN interface can connect to a fieldbus or industrial Ethernet.

Anybus X-gateway establishes communication between two industrial networks. In the true Anybus spirit, around twenty networks are covered and the product range supports more than 200 network combinations.

Anybus Wireless Bridge enables wireless communication between machines and networks on the factory floor.

New products for the future

A new product line, EtherNet/IP Linking Devices, is under development and a major marketing campaign was launched at Chicago's Automation Fair in November 2015. These products will be released during the first half of 2016 and they have been designed for Rockwell Automation customers and suppliers in need of cost-efficient,

simple solutions for connecting their automation devices with Rockwell control systems.

During 2015, there was a great deal of focus on Industrial Internet of Things and Industrie 4.0, aimed at launching products in 2016 that help connect factory equipment with the Internet.

In 2016, Anybus Wireless Bolt will also be launched, which is an example of yet another HMS investment in gateways for wireless communication. A wireless interface is created when this product is installed in an electrical cabinet or machine, enabling connection of smart phones or tablets, or communication with a cloud solution.

Anybus SG-gateways will be launched to help solve Smart Grid communication challenges. They can be used for remote control and remote monitoring of equipment in grids and for communication between industrial networks and smart grids.

MARKUS BLADH AND NIKLAS SELANDER
Product Managers, Gateways

HMS NETWORKS ANNUAL REPORT 2015

INNOVATIVE PRODUCTS – Anybus®

WHAT CUSTOMERS SAY

> DeviceNet is the standard we use in most of our robot cells and for conversion to other networks, we simply install X-gateways from HMS, rather than trying to solve that ourselves.
>
> Anders Mandorsson, Project Manager & Design, SVIA

SVIA manufactures robot cells for picking items on conveyors using a unique, optical system. They use Anybus X-gateways to connect their robot cells to many other networks, thus enabling them to export their products to any market they choose.

HMS NETWORKS ANNUAL REPORT 2015 11

INTRO

MARKET

PRODUCTS

OUR BUSINESS

THE SHARE

CORPORATE GOVERNANCE

GLOSSARY

FINANCIAL

CONTENTS

Anybus Embedded • Anybus Gateways • Netbiter • IXXAT

INNOVATIVE PRODUCTS - netbiter

Netbiter – turnkey solution for remote management

Rapidly growing market

The market for remote control and monitoring of industrial machines and systems is still young, fragmented and difficult to assess, but several driving forces indicate that it is growing at a rapid pace. We've noticed a clear trend with leading automation companies, where IoT solutions and the services that IoT enables, are an important component of prioritized strategies for future growth.

Rapid changes in technology and higher demands on both functionality and reliability in critical systems are quickly increasing the number of application areas. HMS is striving to make the turnkey solution Netbiter known throughout industry. At the same time, sales and marketing efforts for remote monitoring are focused on a number of vertical segments where there is particularly high potential, such as emergency power systems, building and factory automation and infrastructure systems.

Critical information is made available

The need for cost control, reliability and time savings is giving rise to new technical solutions. Remote monitoring cuts out the need for unnecessary site inspections. A solution for remote monitoring and control provides the system owner with new, valuable information for streamlining operations and increasing the useful life of the investment. The requirements on reliability are increasing for mission-critical systems, which is driving the demand for intelligent control and monitoring systems.

New technology opens up new application areas

The Internet and expansion of mobile networks, has opened up new opportunities for remote monitoring and control of geographically dispersed equipment. The need for intelligent, remotely-controlled control and monitoring systems exists in many areas, such as traffic and transport systems, telecommunications base stations and emergency power systems in data centers, hospitals and banks. The energy sector is another growth area due to progressively more production of electricity using renewable energy sources like wind and water, as well as new advanced systems for energy distribution and management. These are examples of some of the potential growth areas for Netbiter Remote Management.

Large customer base

By integrating Netbiter, manufacturers of industrial products and machines can gain a competitive advantage by preparing their products for remote monitoring in the systems where they will later become integrated. Machine builders require Remote Access for their industrial devices in order to run updates and standard service on the machines and systems used in factory automation, for example. System integrators often encounter situations where the end customer requires remote monitoring solutions for their specific industry. Consequently, there is business potential at all stages of the value chain.

Fragmented competition

A number of suppliers offer subsystems and products in the category of remote management. However, HMS has assessed that no competitor is able to offer a turnkey solution that is as cost-effective, quick and simple as Netbiter. Most of the other systems being sold today are customized solutions that have been designed for specific needs. Within the Remote Access application area, there are a few dominant players in the market, but HMS has identified opportunities for success by offering a solution that is safe and easy to use.

Simple, complete solution

Netbiter provides its users with a turnkey solution for collecting, storing, managing and graphically visualizing data, which helps improve operational reliability, while saving both time and costs. The solution consists of specially adapted gateways, Netbiter EasyConnect, which, on the one hand connects to the device you want to monitor and on the other hand, enables remote contact with the device via Internet or the mobile network.

The facility is automatically connected to Netbiter Argos data center, which collects, processes and visualizes data from all monitored parameters. The operator receives real-time information, along with trend analyses and automatically generated reports through the user-friendly and easy-to-grasp web interface in Netbiter Argos. As soon as any part of the industrial process strays beyond the pre-defined thresholds established by the user, Netbiter sends an alarm via email or SMS.

Remote Access also enables the user to create a remote connection directly to control systems and control equipment for remote programming or diagnostics.

Savings and higher reliability

Netbiter Remote Management generates significant savings for system owners. Site visits can be better planned and reduced, leading to significant environmental benefits via less travel and energy-

HMS NETWORKS ANNUAL REPORT 2015

INTRO

MARKET

PRODUCTS

OUR BUSINESS

THE SHARE

CORPORATE GOVERNANCE

GLOSSARY

FINANCIAL

CONTENTS

Anybus Embedded • Anybus Gateways • Netbiter • IXXAT

INNOVATIVE PRODUCTS – netbiter®

efficient monitoring processes. At the same time, reliability and thus availability improves in these installations that are often critical to businesses and society. It's the result of reliable monitoring and control of critical parameters, 24/7, which increases the investment's lifespan and lowers the total costs of ownership.

Back to the future

The Netbiter solution was originally designed as a generic solution for remote monitoring with application areas throughout industry. However, based on customer inquiries from various vertical markets, the solution has been trimmed to support the requirements within specific areas, such as emergency power and telecommunications base stations, regarding both the technology and the packaged solution.

With the launch of Remote Access, HMS now also reaches customers in its traditional domestic market of factory automation. HMS's goal is to be able to capture market share relatively quickly due to its existing market and customer knowledge, which it has acquired over the course of many years of selling Anybus products to this market.

WHAT CUSTOMERS SAY

> “The Netbiter solution paid for itself as soon as the customer called in needing assistance.
> Andy Leck, Electrical Design Engineer, C-Tech Innovation

C-Tech Innovation in Capenhurst, just south of Liverpool manufactures electrochemical equipment used in industries such as food, chemical processing, power, heating and advanced materials production.

The customers are typically large, multinational companies and research centers throughout the world. The products are very advanced and they are frequently delivered to R&D departments and universities, which are demanding customers who often need to adapt and optimize the products subsequent to installation.

C-Tech Innovation uses Netbiter for remote reprogramming of its solutions, making long, international travel unnecessary.

HMS NETWORKS ANNUAL REPORT 2015

INTRO MARKET PRODUCTS OUR BUSINESS THE SHARE CORPORATE GOVERNANCE GLOSSARY FINANCIAL CONTENTS SEARCH

Anybus Embedded
•
Anybus Gateways
•
Netbiter
•
IXXAT

INNOVATIVE PRODUCTS - IXXAT

IXXAT – communication solutions for machines

Many markets – one mega trend, the Industrial Internet of Things

Communications technology is a key issue for all automation machinery. Controller Area Network (CAN) and Industrial Ethernet (e.g. EtherCAT) are typical examples of the communications technology used in machines and they are central to IXXAT's offering for machine communication.

Industrial Internet of Things is all about getting connected. Higher efficiency, flexibility and quality are all possible when machines on the factory floor are able to connect to IT systems. IXXAT's offering for machine communication plays an important role in facilitating this.

Market position

The main customers are machine builders and large-scale equipment manufacturers and developers. This includes packaging machinery, wind turbines, X-ray systems and agricultural equipment.

Our products also connect computers to the communications network inside machines, thus enabling control and data access via HMIs (Human Machine Interfaces) and maintenance tools. IXXAT infrastructure products make it possible to optimize communication inside machines, resulting in higher flexibility, performance and availability.

IXXAT is a leading brand in the CAN area and we have many specific OEM products that solve specific customer needs. This, along with our expertise in Ethernet-based technology, puts HMS in a unique position for becoming a market-leading IIoT solutions provider.

IXXAT safety solutions – Expertise and products for a growing market

Safety mechanisms are used to prevent personal injury, environmental damage and minimize downtime. With modern communications technology, it is possible to transfer safety-critical data via a single network. This increases both flexibility and efficiency. Because safety requirements can often be quite stringent, there is a high demand for safety-related equipment, particularly among machine builders. Implementing safety functions requires extensive experience and knowledge about development and international standards like IEC61508, which can take considerable time to acquire.

IXXAT safety solutions provide simpler, more efficient implementation. IXXAT Safe T100 is a turnkey product for machine safety. It can cut around two years from a customer's development efforts, compared to in-house development. HMS also offers consulting services that help OEM customers meet their specific needs.

IXXAT Automotive – Solutions for an interesting market

Gateways are used to connect different networks inside a vehicle and for data exchange between a vehicle and various test systems. For example, signal simulation is used to test vehicle components and simulate various parts of the vehicle during the test. IXXAT technology is used to connect the vehicle to the testing system. Visualization on a computer, tablet or phone is also possible using the latest Internet technology.

The strength of the IXXAT offering for the vehicle industry is based on close cooperation with customers. For years, BMW and IXXAT have been collaborating on the development of IXXAT vehicle solutions. Most test systems at BMW factories rely on IXXAT products. ZF and Bosch, both key suppliers to car manufacturers, base their offering on solutions from HMS.

HMS NETWORKS ANNUAL REPORT 2015

Anybus Embedded • Anybus Gateways • Netbiter • IXXAT

INNOVATIVE PRODUCTS – IXXAT

HMS NETWORKS ANNUAL REPORT 2015 15

INTRO
MARKET
PRODUCTS
OUR BUSINESS
THE SHARE
CORPORATE GOVERNANCE
GLOSSARY
FINANCIAL
CONTENTS
SEARCH

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

BUSINESS MODELS AND THE VALUE WE CREATE

A value-creating business model

HMS has designed its business models to fit each market and product line. For the Embedded market, most business is via framework agreements (i.e. design wins). The sales cycle is relatively long and the design phase occurs in close cooperation with the customer. After that, there is steady revenue over a long period of time. For other products, the business model is more traditional, with a short business cycle and manufacturing based on customer orders.

Vision

In a world where all devices are intelligent and networked, HMS is the leader in making industrial devices and systems communicate – for a more productive and sustainable world.

Mission

We drive innovation in collaboration with partners and customers creating leading technologies, products and solutions bringing value to real-world challenges.

Business model

Example, Anybus Embedded

EVALUATION PHASE

The customer buys a test series of Anybus and evaluates HMS as a supplier. The time required before a decision is made is typically 2-12 months.

DESIGN PHASE

The customer then adapts the product design to Anybus, which is a process that typically takes 6-18 months, depending on the launch plan.

HMS's mission

HMS's mission is based on the vision that all automation equipment should be possible to coordinate in intelligent networks. The mission is to provide industry with technology for intelligent communication, between various automation devices and networks, between several networks or between remote installations and operating centers.

Design-wins for Anybus Embedded and IXXAT

For Anybus Embedded and certain IXXAT products, the business model is based on framework agreements, which are referred to as design wins. A design-win typically involves a collaboration in excess of ten years, with a manufacturer of automation equipment. For this business model, there is a relatively long development period followed by steady long-term revenue, provided that the customer's product is successful in the market. In most cases, standard products are offered that are quick and easy to integrate. They are also suitable for many applications. For certain larger customers, fully customized hardware and software solutions are offered that meet specific requirements. This sometimes also involves issuing a manufacturing license so that the customer is able to manufacture the network interface card unassisted.

For Device Level, it's primarily direct sales to OEM customers from HMS's own sales engineers.

Direct and partner sales for Anybus Gateways and IXXAT

Anybus Gateways and most of the IXXAT products are sold as independent products that are manufactured according to customer order. They are sold via a network of approximately 300 independent distributors in approximately 50 countries, either directly to the end user or to system integrators, installers or machine builders who integrate networks and build communication solutions for industry.

REVENUE DISTRIBUTION

■ Direct sales, 87%
■ Sales through distributors, 13%

EVALUATION PHASE

The customer buys a test series of Anybus and evaluates HMS as a supplier. The time required before a decision is made is typically 2-12 months.

DESIGN PHASE

The customer then adapts the product design to Anybus, which is a process that typically takes 6-18 months, depending on the launch plan.

PRODUCTION YEARS 2-3

The product becomes increasingly established and for most cases, it reaches the entire market within about 3 years.

PRODUCTION YEARS 4-7

The customer's sales keep pace with the market for industrial automation.

PRODUCTION YEARS 8-10

Sales start to diminish and the customer initiates the launch of a new product generation

PRODUCTION YEARS 11 AND LATER

After-market phase with sales of spare parts and replacement cards.

50 percent of the potential

100 percent of the potential

The business model for integrated Anybus and IXXAT products. The customer decides to use HMS products (referred to by HMS as a design win), thereafter placing orders as they develop their products.

HMS NETWORKS ANNUAL REPORT 2015

CONTENTS | SEARCH

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

BUSINESS MODELS AND THE VALUE WE CREATE

Remote Management – products and service subscriptions

Netbiter Remote Management is sold as a gateway along with a subscription to the Netbiter Argos web service, used by the customer to access its equipment online. Netbiter Argos offers this as a free-of-charge standard solution, as well as a more advanced service with increased functionality via a paid subscription.

How we create value

We create sustainable growth, profitability and thereby value for our stakeholders. We do this by focusing on development and by thoroughly understanding and responding to new needs and requirements.

Customers

Manufacturers of automation equipment don't need to worry about adapting their products to the multitude of communications standards when they use HMS Anybus and IXXAT solutions. HMS takes care of the communication needs, so that customers can focus on their core operations.

For geographically dispersed installations, Netbiter Remote Management offers a web-based solution for remote monitoring and control, which provides significant cost-savings for service and maintenance, while increasing the reliability and useful life of the equipment. Please read more about our innovative products on pages 8-15.

HMS's products make industrial processes more flexible and energy efficient, while solving concrete communication problems on the factory floor. We help our customers achieve their sustainability targets through our development of energy-efficient products with a long lifespan that do not contain any materials or components that are harmful to the environment.

Shareholders

HMS's overall goal is to create higher value for its shareholders over the long term. For HMS shareholders, value is created via a rising share price and dividends.

HMS strives to provide a long-term stable and growing dividend to its shareholders. HMS has an explicit dividend policy of up to 50 percent of the profit. Please read more about the share's performance and dividends on pages 30-31.

Employees

The Group relies on motivated, skilled employees who are innovative and make a contribution to the company's success. Employee commitment and performance is critical to HMS's success in implementing its strategies, reaching its targets and continuing to grow. HMS managers are expected to energize, encourage and create the conditions whereby everyone can realize their full potential. HMS creates value for its employees by offering exciting technological developments in a modern, dynamic and growing organization that has a wide network of international contacts and excellent career opportunities. The company culture is modern and open, where shared values, learning and own responsibility are prioritized. HMS employees have many opportunities for shaping their work situation and developing their skills and role in the company. Please read more about our working method and employees on pages 24-25.

HMS products are sold via direct sales and through its distributors in more than 50 countries.

Society

As an employer, HMS contributes to the local economy in several regions. Besides income tax, HMS also pays property taxes, VAT, payroll taxes, pension taxes, customs and energy taxes.

HMS strives to strengthen its relationship with the community where it operates through a strong commitment and long tradition of cooperation with universities and schools in the area.

Sustainability efforts at HMS are comprised of careful evaluation of development and manufacturing processes, materials selection and supplier quality.

We also have products that support lower energy consumption by turning off machines when they are not in use. Read more about HMS's sustainability efforts on pages 26-29.

HMS NETWORKS ANNUAL REPORT 2015 17

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

STRATEGIES AND TARGETS

HMS’s strategies for profitable growth

The world is becoming more connected, which provides HMS with excellent opportunities for future growth. Stable, established products, primarily within the Anybus and IXXAT brands provide HMS with a steady flow of revenue, which makes it possible to develop and test new innovations for IIoT.

HMS NETWORKS ANNUAL REPORT 2015

STRATEGIES AND TARGETS

Profitable growth in strategic product areas

Using the company's technology and strong market position, HMS strives to expand into related industrial areas and move further along the value chain, primarily via gateways and remote management.

HMS strives primarily for organic growth by strengthening its position and developing its range of products and services. Selective acquisitions may also be made if they are a valuable addition to HMS's technology or product portfolio, thus strengthening the company's offering to the market.

Focused and sustainable product development

HMS provides products under its three brands: Anybus, IXXAT and Netbiter. The product portfolio for each area will also continue to be further developed and expanded, keeping pace with customer needs and technological developments in order to strengthen HMS's position as a leading supplier of proven, complete solutions for intelligent industrial communication.

HMS products and solutions are developed based on the latest technology and expertise in industrial network communications, wireless communication and remote management. The cornerstone of all development work is to create significant value using leading technology in order to meet market needs, while maintaining the focus on quality and environmental aspects. Please read more about our innovative products on pages 8-15.

Global player with a local presence

Local presence is a key component of HMS's success. HMS has own sales and marketing offices in strategically important key markets (Central Europe, North America, Japan, Nordic region, Great Britain, Italy, China and India) and a well-established network of independent distributors in approximately 50 countries. It means that the company can have quick, efficient sales and proactively offer its Technical Services in the local language, which is an important prerequisite for continued global expansion.

Technical Services helps customers quickly select the right immediate and future solutions, which speeds up the time until placement of their first order. It also helps solidify the market's perception of HMS as a reliable supplier that is prepared to assist its customers with all their needs.

A sustainable value chain

HMS provides high-quality turnkey solutions that are easy to install and use. This has been achieved via full control over the entire chain of value-adding operations, i.e. from product development, components supply, manufacturing and distribution, to training and after-sales service. HMS uses its business management system (BMS) to ensure quality and continually improve its operations.

Manufacturing occurs both in-house and in close cooperation with selected subcontractors in Europe and China. The production of prototypes, small series, certain customized products, quality control and final assembly are performed at HMS's own facilities in Halmstad, in close proximity to the development department. The company, and its strategically important subcontractors have been certified according to the ISO 9001 quality management standard for quite some time. The point of departure for HMS's sustainability strategy is the company's vision and core values. These core values, together with respect for customers, employees, shareholders and environmental/societal conscientiousness provide the foundation for how HMS operates. The company's responsibility for sustainable development originates in its product offering, where HMS contributes to sustainable development by developing and manufacturing products that enable significant energy savings for its users, with minimal environmental impact over the product's lifespan.

SUSTAINABLE VALUE CHAIN, PPM

FINANCIAL TARGETS

Average long-term annual growth of 20 percent.

Operating margin of over 20 percent.

OPERATIONAL TARGETS

At least 85 percent of deliveries must be on time.

Product returns must be less than 200 ppm (parts per million).

HMS NETWORKS ANNUAL REPORT 2015 19

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

THE MARKET– HMS SALES REGIONS

Established sales channels in more than 50 countries

With offices in 10 countries and distributors in more than 50 countries, HMS is established in all major industrial markets. HMS products are used worldwide, but are primarily found in countries where a lot of manufacturing is done.

HMS NETWORKS ANNUAL REPORT 2015

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

THE MARKET– HMS SALES REGIONS

DRIVING FORCES FOR GROWTH IN INDUSTRIAL AUTOMATION BY GEOGRAPHIC REGION

NORTH AND SOUTH AMERICA
A definite but slow recovery for HMS based on an increasing need for productivity as market conditions improve.

EUROPE
Established manufacturing countries like Germany require increased flexibility at production sites.

MIDDLE EAST AND AFRICA
Investments in alternative industries to diversify income sources together with investments in infrastructure create the right conditions for HMS to sell remote management solutions.

ASIA
Considerable needs exist for automation-related equipment in the areas of energy, working environment and infrastructure.

HMS PRODUCT SALES BY REGION 2015

■ EMEA, 60%
■ North and South America, 22%
■ Asia, 18%

CENTRAL EUROPE

The Central European Sales and Marketing Organization (CESMO) is based in Karlsruhe, Germany. It is responsible for sales, services and marketing in Germany, Austria, Switzerland and France. CESMO has 38 employees who work in close cooperation with HMS Technology Center in Ravensburg. They make up a strong alliance for positioning HMS as a leading supplier of communications technology associated with Industrial Internet of Things and Industrie 4.0.

In 2015, a new sales office was opened in Basel, Switzerland. Together with the offices in Karlsruhe and Mulhouse, we are equipped to serve all of our approximately 2,000 customers. Representing more than 35 percent of the Group's income, CESMO is the largest sales area in the HMS Group.

Germany continues to be the most important market, with its prominent automation industry. With an organic growth rate of almost 20 percent, we keep capturing market share and we have qualified distributors and system partners that supplement our direct sales. Since the third quarter of 2015, many of our products have also been available via Conrad, Europe's leading catalogue distributor, with its comprehensive online shop and logistics services.

HMS NETWORKS ANNUAL REPORT 2015 21

INTRO

MARKET

PRODUCTS

OUR BUSINESS

THE SHARE

CORPORATE GOVERNANCE

GLOSSARY

FINANCIAL

CONTENTS

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

THE MARKET- HMS SALES REGIONS

NORTH AMERICA

The North American Sales & Marketing Organization (NASMO) has its head office in downtown Chicago, along with a Solution Center in Bedford, New Hampshire. NASMO is responsible for sales, marketing, technical support, customer service and customized solutions for customers in North, Central and South America (excluding Brazil). NASMO serves OEM customers via direct sales or via system integrators and machine builders. It also serves end-users through a wide network of distributors.

During the year, there was weak demand due to a lower level of investments in US industry, particularly in areas associated with the oil and gas industry.

Nevertheless, HMS products for wireless communication and remote management were more successful in 2015 than ever before.

One significant event in 2015 was the launch of EtherNet/IP Linking Devices that have been specially designed for Rockwell Automation's automation systems. Another was Rockwell's decision to use Netbiter as its standard solution for online monitoring of variable frequency drives. With Netbiter, Rockwell can also offer its customers service and maintenance agreements via remote management. The Industrial Internet of Things provides major opportunities for HMS in North America, since the leading IT and cloud service companies are based in USA.

JAPAN AND KOREA

HMS Japan, located just outside Tokyo in Shin-Yokohama works with sales, marketing and technical support in Japan and Korea. The industrial market in Japan is growing, which is something HMS benefits from. Many major Japanese companies are expanding their operations both at home, throughout Asia and in USA.

HMS has a thriving business with manufacturers of robots, valves and drives, which in turn provide equipment to automotive, mobile phone and semiconductor factories. Many potential business opportunities exist for Anybus CompactCom 40 series and IXXAT safety solutions, since

our customers require higher performance and more functions that put high demands on network communication.

HMS is able to offer local technical support for our Japanese customers, which is a significant advantage over many of our competitors.

CC-Link IE Field is becoming the dominant network in the East Asian market and HMS is one of the few suppliers of communications solutions for this network. There is also great interest in Japan for our future IIoT solutions.

HMS NETWORKS ANNUAL REPORT 2015

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

THE MARKET– HMS SALES REGIONS

INTERNATIONAL SALES

HMS Channel Sales

HMS Channel Sales is based in Sweden and it covers the geographic areas where HMS does not have its own sales offices. In these markets, our Channel Managers work with distributors and selected partners to offer HMS products in the local market. Sales of our IXXAT products were particularly pleasing, far exceeding expectations by increasing more than 82 percent.

HMS China

HMS operations in China, based in Beijing, involve sales, marketing and technical support for customers and distributors in China and Taiwan.

In 2015, our sales in China reached new record levels, with a 40 percent rate of growth. We maintained our project-based activities for Anybus Gateways, while growing the business for Anybus Embedded and IXXAT. HMS China has built up a strong team over the last few years and it is now possible for us to efficiently offer products and services to our Chinese customers.

HMS India

HMS operations in India, with offices in Pune, involve sales, marketing and technical support for customers and distributors in India.

2015 was an intensive year for HMS India, with growth in sales of 74 percent compared to the year before. We're starting to see the results of our efforts in recent years to establish HMS as a leading, reliable partner in the Indian market. More and more interactions with customers are transitioning from discussions to actual projects.

HMS Italy

HMS operations in Italy are run from our offices near Milan. Work is with direct customers and longstanding collaboration with distributors. Developments were favorable in the Italian market, where HMS had growth in sales of 25 percent compared to 2014. Many of our customers are active in the successful machine manufacturing industry of northern Italy, which is once again reporting high exports and where there is renewed faith in the future.

HMS Nordic

The Nordic sales organization is based in Halmstad, Sweden, but also has employees located in Västerås and Malmö.

2015 was a great year for sales in the Nordic region, with 40 percent growth compared to the year before. Growth is fueled by three factors: a strong economy in Sweden and Denmark, more HMS employees in the sales team and success with the IXXAT brand that exceeded expectations, not least owing to synergies with the other HMS brands.

HMS UK + EIRE

HMS operations in Great Britain, based in Coventry, involve sales, marketing and technical support for customers and distributors in the UK and Ireland. For HMS UK + ERIE, 2015 was weak, which was partly due to an unexpectedly weak industrial climate, and partly to delays in projects associated with Netbiter.

HMS NETWORKS ANNUAL REPORT 2015 23

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

EMPLOYEES

Many professional roles create dynamics

HMS is a growth and knowledge company with own operations at every stage – from research and development, to purchasing, production, sales, marketing and customer support. This creates good dynamics with many professional roles interacting in a learning organization. In order to achieve shared goals and growth, without sacrificing quality, you need a strong company culture and shared values, which in turn makes it possible to have short decision paths and employees that can take their own initiative.

Clear, shared values

HMS is a young, international, entrepreneurial company where there is high growth, exciting technological development and proximity to customers. This makes having shared values even more important, because it ensures that decisions and working methods are aligned with our long-term strategy. It also serves as our guiding star when performing daily tasks and interacting with customers, suppliers, colleagues and other stakeholders.

HMS has formulated these shared values as five core values – HMS High Five. They are basically self-explanatory: We will always prioritize our commitment to customers. We will grow and be innovative. We pursue our work with a long-term perspective. We believe in building relationships and being efficient.

Few decision levels and a dynamic work environment

HMS has a flat organization, with widespread delegation of responsibilities, few decision-making levels and quick decision paths. Employees at HMS are used to taking own responsibility, tackling new challenges and acquiring new skills.

This results in a dynamic work environment, where there are many opportunities for shaping

HMS NETWORKS ANNUAL REPORT 2015

CONTENTS | SEARCH

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

EMPLOYEES

> Fenjoy working with a variety of countries and cultures. It is especially exciting to work in Japan and Germany, where expectations on engineers are quite high.
> Björn Otterdahl, Project Manager

and developing one's own professional career. It also creates a strong drive and commitment to continually improve, which is a critical success factor for a growth company that provides high value-added.

The right recruitment leads to growth and quality

HMS's growth strategy depends on it having employees with the right expertise. The task of recruiting development engineers is challenging for HMS and many other companies. HMS actively strives to profile the company in the labor market,

with a special focus on technicians and engineers. For example, HMS participates in job fairs at universities and colleges, offers students opportunities for doing their thesis projects at HMS and promotes the company through various types of social media. This year, we added 17 (25) new employees, of which 5 (7) in Sweden and 12 (18) in other countries.

Feedback brings improvements

Employee surveys are regularly conducted. Status checks are carried out four times per year and a more comprehensive survey is conducted every other year. The aim is to follow up on, and measure, how employees feel about the company's values, work environment, climate for cooperation and leadership, as well as gathering their thoughts on the company both at the departmental level and as a whole.

The surveys provide valuable insight and ideas on how HMS can become even better as an organization and employer. The latest survey revealed that, among others, a pleasant work environment and cooperation with colleagues are highly valued.

Work and career

HMS has a young work force and it is a learning organization, which applies to our daily operations

as well as our external and in-house training initiatives.

A large portion of development work is carried out jointly with customers, typically in an international network that provides new perspectives and personalized skill development.

At the company, there is a special foreign exchange program that provides engineers from the development department with the opportunity of working in one of the company's other offices around the world.

All new positions are filled in a transparent recruitment process and applications from within the company are encouraged. New employees participate in individually structured introduction programs and in addition to that, all new

> For me, it's important that I'm able to make a contribution and feel that my efforts really make a difference.
> Cynthia Svensson, Accounting and Finance

Sabina Lindén, HR Manager

employees worldwide are invited to a week-long introduction at the head office in Halmstad, where they get an overview of the HMS Group and the company's values.

Health and lifestyle

To promote good health and lifestyle, regular health checkups are offered, an ergonomic overview of workplaces and many types of subsidized fitness activities. Group activities for fun and fitness are arranged on a regular basis. During 2015, sick leave was 2.65 (2.84) % and employee turnover for the Group was 4.8 (6.5) %, while in Sweden it was 3,0 (5.5) %.

HMS NETWORKS ANNUAL REPORT 2015

Business models • HMS strategies for profitable growth • Established sales channels in more than 50 countries • Many professional roles create dynamics • More focus on our sustainability

OUR SUSTAINABILITY EFFORTS

More focus on sustainability

HMS is a global company with operations in many countries. We base our operations on five core values – High Five. These core values, together with respect for our customers, employees, shareholders and environmental/societal conscientiousness provide the foundation for how HMS operates. In 2015, HMS updated its vision and adopted as an overall company target that it would design and implement a sustainability program in 2016.

Our vision for sustainability efforts

HMS's vision is for all industrial units and systems to be able to communicate in order to raise productivity and make our world more sustainable. This is also the concept behind our strategy of creating value and sustainable growth for our stakeholders.

Sustainability targets

The goal for 2016 is to design and implement a sustainability program, while also increasing transparency.

This will, among others, result in a report on the company's sustainability efforts in 2016.

Sustainability for us

Sustainable development has three components – environmental, financial and societal – all of which are interdependent. For HMS, this requires:

Environmental sustainability

Delivering reliable, smart products that enable various machines to connect to industrial networks and systems.
Working proactively with environmental issues via an action plan that lowers our environmental impact.
Having relevant environmental and quality requirements for our suppliers to improve the sustainability of the goods and services we purchase from them.

HMS NETWORKS ANNUAL REPORT 2015

Economic sustainability

Having a sound, successful business with solid finances and a long-term perspective.
Running the business in an ethical manner and opposing all forms of corruption.
Investing in technological development and initiatives.

Social sustainability

Encouraging learning and innovation, along with striving to attract and retain the best talent in the market.
Making a contribution, as a company, to progress in the communities where we operate.
Investing in youth by helping to spark their interest in technology and offering apprenticeship opportunities to students.

Compliance with laws and codes

HMS is conscientious of its social responsibility as a company in the global market. At all of our companies worldwide, we are obligated to comply with regulations on ethics, the environment, human rights and health & safety. We believe in responsible societal and ethical behavior.

Our employees are introduced to the HMS Code of Conduct during recruitment. The Code is a compilation of external and internal regulations that guide employees in their everyday pursuits. It provides guidance on how HMS employees are expected to act in a way that is ethical and in sync with the company's values. In 2016, all employees will be given a refresher course in the Code and routines will be updated so that all employees must regularly certify that they understand and comply with these rules.

Human rights

HMS respects human rights in all areas under our control. This means that HMS does not accept child labor, does not tolerate direct or indirect discrimination, supports and respects the protection of internationally recognized rights, does not use any form of forced labor and recognizes the rights of trade unions to collective bargaining.

Business ethics

HMS runs its operations professionally, honestly and ethically. For us, this means the following:
- Our employees must not put themselves in situations where their personal and / or financial interests may conflict with the interests of the company.
- HMS is not tied to any political parties. Neither does the company provide financial support to any political parties, nor does it make any political donations.
- No employee may, directly or indirectly, demand or accept, offer or give any kind of bribe or any other unlawful or unethical benefit to employees, other representatives or any third party. HMS does not accept any improper gifts or payments that are offered to our employees because doing so could affect business decisions.
- Applicable law against corruption must be followed at all times. HMS respects fair competition. We comply with legislation that protects and promotes competition.

Working conditions and employee rights

Ensuring that the company has a good, safe work environment is an important strategical issue for HMS. Our goal is to create a physically, mentally and socially sound/stimulating workplace for all employees, where the risk of occupational injuries and work-related ill health is minimized. All employees must be treated equally, regardless of gender, ethnicity, religion and age.

Supplier assessment

In order to establish the credibility of the company's sustainability efforts, it is vital that we take responsibility for the indirect impact of the goods and services purchased by HMS.

Our efforts to follow up in our supplier chain on requirements pertaining to human rights, labor rights and the environment are in their infancy. During the year, we also issued new purchasing terms for our suppliers, clarifying the requirements we have on suppliers and stating specific sustainability requirements, such as requirements that they have ISO 14001 environmental management and SA8000 social accountability certification.

In 2016, we will start issuing our own assessment of our most important suppliers in order to cover the areas of human rights, labor rights, the environment and business ethics.

HMS address the issue of conflict minerals, including compliance with the US Dodd-Frank Act and the rule of disclosure adopted by the US Securities and Exchange (SEC), by cooperating actively with suppliers on this issue and reporting the results in a report published on our home page.

Environment

HMS minimizes its use of hazardous substances and encourages recycling by complying with RoHS and REACH environmental legislation. In 2015, efforts also got underway to ensure compliance with the WEEE Directive. Compliance with the WEEE Directive involves responsibility for collecting and taking care of our electronic waste in an environmentally correct way and collecting such waste in special containers, clearly labeled with the symbol of a crossed-out waste bin.

Sustainable products

HMS contributes to sustainable development by developing and manufacturing products that enable significant energy savings for its users, with minimal environmental impact over the product's lifespan. The Eco Strategy Wheel is HMS's model for considering the environmental aspects associ

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OUR SUSTAINABILITY EFFORTS

ated with developing, manufacturing, shipping and using HMS products. In other words, it considers the entire product life cycle.

Focus on energy efficiency

HMS strives to develop products and solutions that contribute to efficient energy consumption and resource-efficient production. By using automated processes and intelligent industrial communication, it is possible to achieve more efficient energy consumption for industrial equipment, such as motor drives, pumps and fan systems.

HMS products for remote control, remote monitoring and its cloud solutions may be used in efforts to address global challenges having to do with sustainable development. Intelligent remote control of equipment results in energy savings, due to more efficient operations and fewer necessary site visits for the purpose of inspection and control. This is how HMS's products lead to higher energy efficiency and thus lower environmental impact.

Product development and environmental aspects

During the product development process, HMS considers many environmental aspects. HMS uses energy efficient technology and low-energy components in its products. NP30 and NP40, which are HMS microprocessors, have been designed using modern silicon geometry. This makes the components more powerful, as well as more energy-efficient.

Products are designed so that they are easy to repair and upgrade on site. This helps achieve a maximum useful life, while avoiding unnecessary transportation. They are also designed and packaged to be as compact as possible to save on packaging material and reduce the transport volume.

Packaging is designed to have the lowest possible environmental impact in terms of the materials used and to enable reuse and recycling.

Fitness activities and exercise are a prioritized area at HMS. The annual step-counting competitions get everyone at the company involved and there are many subsidized fitness activities available to employees.

Controlled material selection

There are routines and work methods in place for selecting the right materials during the design phase. HMS complies with the EU Directive on electronic products, RoHS, when it develops and manufactures its products. This means that no hazardous substances are used, such as lead or flame retardants. HMS also complies with the EU Directive REACH, for restricted use of chemicals.

Green automation

HMS offers products with PROFIenergy, which is an open, standardized solution for energy control and an example of green automation. This makes it possible to significantly reduce the energy consumption of machines and processes by turning them off when they are in standby mode. It also offers factories a standardized way of shutting down equipment during short or long production breaks rather than keeping them in standby mode, which consumes electricity.

Manufacturing – control and routines

It is also important to consider a number of important environmental aspects during manufacturing. Through careful control of production processes, it is possible to achieve efficient manufacturing with minimal use of materials, waste and energy consumption. The manufacturing process is designed to minimize each of the following: emissions, the use of chemicals and human exposure to chemicals.

HMS CODE OF CONDUCT

Our Code of Conduct has to do with safe working conditions, environmental responsibility, ethical interaction with customers and suppliers, and engaging in positive interaction with the community where we conduct operations. All employees must regularly undergo training on our Code.

Safe and efficient use of resources

Work environment

For HMS, it is important to have employees with long-term good health, who both want to, and are able to remain working with the company for a long time. We engage in systematic, work environment efforts aimed at promoting employee health and well-being. This is carried out primarily via our

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OUR SUSTAINABILITY EFFORTS

HMS SPONSORSHIP ÅRETS TEKNIKER 2015

HMS is one of the sponsors of Årets tekniker, an award which recognizes technology's importance to society, lifestyle and entrepreneurship. The 2015 winner of Årets tekniker was Petra Wadström, CEO and founder of Solvatten AB Through her company, Petra Wadström has helped people obtain access to something most of us take for granted – clean water. The company uses solar energy to provide users with warm, clean water, without the use of any chemicals that are hazardous to health or the environment. The product makes a valuable contribution to society and the environment at an international level and it is an excellent example of Swedish innovation.

local safety committees, in which local managers and safety representatives participate.

Responsibility for the work environment has been delegated in a clear way. To clarify work environment responsibilities for individuals in various leading roles at HMS, there is a document summarizing the various types of responsibilities for senior executives, department heads and team managers. It serves as a supplement to the job descriptions for these three roles.

Fitness activities and health checkups are offered as a benefit to all employees so that everyone can enjoy good health. We also participate in many types of external fitness activities.

During the year, HMS improved its routines for chemicals and it has set up a chemical advisory committee at Swedish manufacturing facilities. Next year, we will conduct an in-depth audit of our chemical use and make the risk assessments of the chemicals we use in our processes more transparent and accessible.

Use of resources

HMS uses 100 percent renewable/green electricity at its facilities. We minimize our energy use by having lighting, computer screens and printers that automatically turn off when not in use. When purchasing devices run on electricity, we choose models with the lowest power consumption.

In 2016, we will document our carbon emissions so that we have a good foundation for decisions on energy-efficiency measures where minimal carbon emissions is the overriding goal. We have well-established routines for waste management and recycling.

Minimal travel

HMS has a local presence in our largest markets and when possible, it uses video and phone conferencing instead of business travel in order to help make society more green.

The core of our social commitment

We are proactive in our efforts to spread knowledge. HMS is one of the largest private employers in Halmstad and has a strong commitment and long tradition of cooperation with universities and schools in the area. We do that by participating in research projects on innovation and by offering students apprenticeship opportunities, thesis projects and other forms of collaboration with the company. HMS also regularly invites students and the public to tour its facilities. During the year, we held 12 tours for the public and 15 for students, including a visit from 30 engineering students from Shanghai Dianji University.

We promote learning in the workplace so that we can ensure that we have relevant expertise for the future. In 2015, we offered 5 individuals trainee positions at the company. In addition, 3 university students completed their thesis work at HMS.

We also offered a trainee position via Korta vagen. It is an initiative of the Swedish Public Employment Service to help foreign academics establish themselves professionally as soon as possible after their arrival in Sweden.

In cooperation with Halmstad University, HMS awards scholarships to the year's best thesis projects. The scholarships are awarded at the UTEXPO event at Halmstad University to exceptional students studying computer engineering, electrical engineering and electronics.

HMS is one of the sponsors of Årets tekniker, an award which recognizes technology's importance to society, lifestyle and entrepreneurship. The award helps us promote engineering as a career choice, along with sparking interest in technology. The award is presented each year to an engineer who has made a difference.

In cooperation with HMS (a main sponsor), Halmstad University has set up a state-of-the-art EMC testing center in Halmstad. It enables HMS to conduct EMC testing nearby, as the center is just a few minutes away by car from the head office. The testing center was inaugurated last fall by Helene Hellmark Knutsson, Sweden's Minister for Higher Education and Research

CUSTOMER CASE, SOLAR ENERGY

> “With Netbiter, we can connect with everything and retrieve reports and statistics online.”
> Hassan Shamma, Operations Manager Enerwhere

In places that get a lot of sun, like the Middle East, Africa and Latin America, solar energy is currently the most effective energy source.

New, innovative solar energy solutions have surpassed fossil fuels in terms of both energy and costs. In these regions, electricity generated from solar energy is 20-30 percent cheaper than electricity from diesel generators. Enerwhere is a Dubai-based solar company that offers innovative solar-diesel hybrid production system.

The solar energy system is used as much as possible during daylight hours, with diesel generators kicking in when needed. This results in a very reliable, cost-efficient electricity supply.

By monitoring its facilities with Netbiter, Enerwhere is able to get maximum use of the cheaper, solar energy and also keep its service visits to a minimum.

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The HMS share

SHARE INFO

The HMS share

The HMS share has been listed on the NASDAQ OMX Nordic Mid Cap list, in the Information Technology sector, since 19 October 2007. The share's ISIN code is SE0002136242. Shares are traded under the HMS ticker. A trading lot is 1 share.

HMS share performance 2015-01-01 through 2016-02-29

Yield of HMS share 2011-01-01 through 2015-12-31

Number of shares and share capital

At year-end, HMS had a total of 11,322,400 shares. Share capital amounts to SEK 1,132,240. All shares have the same voting rights.

Price trend

In 2015 HMS's share price rose by 64 percent to SEK 245.00 (149.00). OMX Technology (the sector that HMS belongs to) fell during the same period of time by 5 percent. The highest price paid during the year for HMS shares was SEK 264.00 and the lowest price paid was SEK 141.25. At year-end 2015, HMS's market capitalization was SEK 2,774 (1,687) million.

Trading volume

A total of 1,129,080 shares were traded during the year, valued at SEK 230 million, which corresponds to an annual turnover rate of 10 percent. On average, 4,516 (3,153) shares valued at SEK 919 (456) thousand were traded each trading day.

Dividend policy

HMS's policy is to pay annual dividends of approximately 50 percent of the net profit for the year. Dividends are adjusted based on, for example, the Group's earnings, financial position and future growth opportunities. For 2016, the Board proposes dividends of SEK 2.50 (2.50), which corresponds to around 47 percent of net profit for the year. During the last five years, average dividends have been around 45 percent. HMS shares had an average yield of 1.88 percent per year over the last five years.

Warrants and options

All HMS employees were invited to participate in an incentive program, which will involve saving in HMS shares during 2016.

Shareholders and shareholder structure

As of 31 December 2015, HMS Networks AB (publ) had 2,678 (2,425) shareholders. The 10 largest shareholders represented 79.0 (79.5) percent of the voting rights and capital.

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The HMS share

SHARE INFO

Share capital trend

Year	Transactions	Change in no. of shares	Total no. of shares	Change in share capital (SEK)	Total share capital (SEK)
2004	Company formation	100,000	100,000	100,000	100,000
2004	New share issue	900,000	1,000,000	900,000	1,000,000
2005	New share issue	22,100	1,022,100	22,100	1,022,100
2006	New share issue	1,900	1,024,000	1,900	1,024,000
2007	Warrants	33,165	1,057,165	33,165	1,057,165
2007	Split 10:1	9,514,485	10,571,650	0	1,057,165
2009	Warrants	581,250	11,152,900	58,125	1,115,290
2012	Warrants	169,500	11,322,400	16,950	1,132,240

Ownership stakes as of 31 December 2015

Holding	No. of shareholders	%
1–500	2,202	82.2
501–1 000	221	8.3
1 001–5000	189	7.1
5 001–10 000	24	0.9
10 001–15 000	5	0.2
15 001–20 000	6	0.2
20 001–	31	1.2
Total	2,678	100.0

Key figures*

	2015	2014	2013	2012	2011	2010
Share price (final day of trading)	245.0	149.0	136.5	112.3	94.8	108.0
Volume-weighted average share price	203.5	144.6	112.8	102.7	99.8	87.2
Average sales per day (SEK m)	0.9	0.5	1.2	0.5	0.7	1.1
Average number of shares traded per day	4,516	3,153	10,416	4,754	7,204	12,059
No. of shares **	11,322	11,322	11,322	11,254	11,169	11,158
Earnings per share **	5.33	5.59	5.54	4.64	4.83	5.40
Market cap, SEK m	2,774	1,687	1,546	1,271	1,057	1,205
Enterprise value, EV (Market cap.+ net debt), SEK m	2,951	1,915	1,789	1,240	1,056	1,189
P/E	46.0	26.7	24.6	24.2	19.6	20.0
Net debt/EBITDA	1.3	1.8	2.3	N/A	N/A	N/A
EV/EBITDA	21.8	15.2	17.1	16.6	12.8	12.8
EV/Net sales	4.2	3.2	3.6	3.2	2.8	3.5

HMS's shares became listed in 2007
** As of 2014, the number of shares is calculated as the total number of outstanding shares. In the past, the number of shares was calculated as the total number of diluted shares.

OWNERSHIP STRUCTURE AS OF 31 DECEMBER 2015

Swedish institutional owners, 57%
Swedish individuals, 30%
Swedish pension funds, 7%
Foreign institutional owners, 4%
Swedish legal entities, 2%

Ownership structure as of 31 December 2015

	No. of shares	Share of votes and equity, %
Investment AB Latour	3,027,322	26.7
Staffan Dahlström	1,617,073	14.3
Swedbank Robur fonder	1,089,194	9.6
Lannebo fonder	1,066,418	9.4
SEB Fonder	902,706	8.0
AP4	493,054	4.4
Handelsbanken Fonder	228,964	2.0
AMF	231,414	2.0
HMS Management *	151,234	1.3
Deka Bank	141,700	1.3
State Street Bank	140,000	1.2
Nordea småbolagsfond	138,954	1.2
DNB Norden Micro Cap	123,029	1.1
Eklund & Peterson AB	118,672	1.0
Avanza Pension	114,144	1.0
Other	1,738,522	15.5
Total	11,322,400	100.0

HMS Group management and Board

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Chairman's comments • Corporate governance report • The Board's report on internal controls • Board of Directors • Group management

CORPORATE GOVERNANCE

Chairman's comments

2015 was the sixth year in a row that HMS reported double-digit growth and high earnings.

At the 2015 AGM, I proudly took over from Urban Jansson as Chairman of the Board for HMS. During Urban's eight years serving as Chairman, HMS has become a globally successful company. I and the rest of the Board will of course strive to continue in the same spirit, with a focus on profitable growth.

HMS is a unique, technology-based growth company that creates jobs in Sweden and the rest of the world, supplying solutions that improve productivity for customers worldwide. The company is also in a unique position for delivering smart solutions in what is now called the fourth Industrial Revolution.

To ensure future growth, HMS invests approximately 18 percent of its sales in product development and it focuses on new technology platforms in order to increase its competitiveness and lay the foundation for long-term growth.

We have a clear strategy and consciously strive to achieve our goals of long-term profitable growth by taking advantage of new business opportunities and doing our homework when it comes to technology, products and quality, in particular. The proof is not only in the figures, but also in the growing number of customers and their loyalty.

We are on the right track. Rapid technological and IT developments are quickly reaching many new areas of industry and society, which has a positive impact on the demand for HMS's products.

This is evident from the ever-increasing interest in the company's technology, particularly concerning new development areas like Industrial Internet of Things (IIoT) and Industrie 4.0.

For a growth company in a rapidly growing sector, the Board of Directors plays an important role. This requires that we support management by listening and coaching on strategic issues, along with ensuring that policies are correctly formulated and risks properly monitored.

The work performed by the Board basically follows a fixed annual cycle, with scheduled meetings and an allocation of tasks and responsibilities in accordance with the company's rules of procedure. Already at the first Board meeting held in conjunction with the AGM, we set the structure for the upcoming Board year.

The members of the Board complement each other well. Several of them hold top management positions and they understand and have insight into the challenges faced by the HMS management team. Others are able to contribute valuable input about such areas as the stock market, company acquisitions, technology development and marketing based on their own experience in top managerial positions. The entire management team takes part in discussions about strategic issues and this mix results in exciting and valuable debates.

Each year, the work done by the Board is evaluated by having every member of the Board answer a number of questions, which I, as Chairmen, then compile and discuss with the entire Board. The results of these evaluations, which are also made available to the nomination committee, help ensure that the work done by the Board is efficient and they provide us with valuable feedback on whether the composition and competence of the Board is adequate. The summary for the year once again showed that the Board has performed its tasks well.

Besides the work done by the audit and remuneration committees, the development committee also made important contributions. It is responsible for monitoring important issues concerning product development, technology development and ensuring the HMS has the right expertise.

Going forward, the Board's challenges are to support and debate with the management team on issues within a number of strategically important focus areas. We need to ensure that HMS can maintain a competitive edge over the long term in a changing and growing market by keeping the right focus on product development, market expansion, customer needs and the skills of our employees. In other words, adapting HMS to the future.

Charlotte Brogren

Chairman of the Board

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CORPORATE GOVERNANCE

Corporate governance report

HMS's Board and management team work to ensure that the company lives up to the requirements that NASDAQ OMX, shareholders and other stakeholders have on the company. The Board also monitors all issues having to do with the recommendations and requirements from the company's stakeholders. HMS complies with the directives in the Swedish Code of Corporate Governance. Corporate governance at HMS is primarily exercised at the Annual General Meeting and through the work done by the Board. In a broader perspective, corporate governance also applies to management, its duties and the Group's control and reporting functions.

Structure for corporate governance

HMS's shareholders are ultimately responsible for making decisions on corporate governance. The Annual General Meeting elects the Board of Directors, the Chairman of the Board and the auditors. It also decides how the nomination committee will be elected. The Board is responsible to the shareholders for the organization of the Group and the administration of the Group's affairs. The auditors report their findings at the Annual General Meeting.

Shareholders and AGM

The shareholders exercise their right to decide on the company's affairs at the Annual General Meeting, which is the company's highest decision-making body. The Annual General Meeting (AGM) decides, among other things, on the adoption of the financial statements, balance sheets, appropriation of profits, discharge of responsibility for the Board, election of Board members and auditors and remuneration to the Chairman of the Board, other Board members and auditors. The meeting also decides on guidelines for remuneration to the management team.

In addition, the AGM decides on any changes to the company's Articles of Association, new share issues and the introduction of any share-based incentive programs. The Articles of Association is the fundamental governing document for the company. It stipulates the type of operations, the size of share capital, shareholders' right to attend the AGM and the agenda of the AGM.

Any shareholder who wishes to have a particular item dealt with at the AGM must submit a written request to the Board well in advance so that the item can be included in the notice of the AGM. Information on the deadline for submitting such requests to the Board is available on the company's website. Information relevant to the AGM and the minutes from the AGM are available on the company's website: www.hms.se.

The AGM must be held within six months following the end of the financial year. All shareholders registered in the shareholders' register on the record day (five calendar days before the day of the AGM) and who have applied, have the right to attend. Each share entitles the shareholder to one vote. Notice of the AGM must be issued no earlier than six weeks and no later than four weeks in advance by advertising in Dagens Industri and the Swedish Gazette.

Annual General Meeting 2015

The AGM was held on 28 April 2015 at the company's office in Halmstad. Present at the meeting were shareholders representing approximately 66 (76) percent of the number of shares and votes. Those in attendance at the AGM were Chairman of the Board Urban Jansson and the following Board members: Henrik Johansson, Ray Mauritsson, Charlotte Brogren, Kerstin Lindell and Karl Thedén. Also at the meeting were Jan Svensson, Chairman of the nomination committee and Fredrik Göransson from the firm of auditors. Shareholders at the AGM decided:

to issue dividends of SEK 2.50 per share, totaling SEK 28,306,000 (28,306,000).
that the Board shall consist of six members, without any deputies.
to newly elect Charlotte Brogren as Chairman of the Board. Urban Jansson declined reelection.
to reelect Ray Mauritsson, Henrik Johansson, Kerstin Lindell and Karl Thedén.
to newly elect Fredrik Hansson as a member of the Board.
that remuneration to the Board would be SEK 1,275,000 for the next term, of which SEK 400,000 to the Chairman of the Board and SEK 175,000 to each of the other Board members
the election of Öhrlings PricewaterhouseCoopers AB (PwC) as auditor, with Fredrik Göransson, Certified Public Accountant, in charge.
on principles for appointing the nomination committee

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CORPORATE GOVERNANCE

on guidelines for remuneration and other remuneration for the CEO and other senior executives.
on the authority of the Board to issue new shares.
to acquire shares in HMS Networks AB as part of its established incentive program.
to have an incentive program open to all permanent employees of the Group.

Nomination committee

The AGM decides on how the nomination committee is appointed. It is the duty of the nomination committee to, prior to the next AGM, prepare and submit proposals for a Chairman of the Board and other Board members, as well as proposing remuneration to the Chairman and other Board members. The nomination committee is also responsible for evaluating the work done by the Board of Directors based on the report it receives from the Chairman. The nomination committee also proposes the election of auditors and their remuneration.

At the 2015 AGM, there was a decision on the principles for establishing a nomination committee at HMS Networks AB. In accordance with the nomination committee's proposal, the shareholders at the AGM decided that the nomination committee would consist of the Chairman of Board, along with representatives from the largest shareholders (as of 31 August) up until the next AGM is held or, when necessary, until such time as a new nomination committee has been appointed.

Staffan Dahlström's knowledge and experience, in this context, is considered to be so important to the nomination committee's work and continuity of the top management of the company, that it justifies having him represented on the committee.

The nomination committee appoints one of its members as chairman (however, neither the Chairman of the Board nor any other member of the Board of Directors may be elected as chairman of the nomination committee). Should any of the three largest shareholders decline their right to appoint a representative, the right is transferred to the shareholder with the next largest shareholding on the specific date. If a member leaves the nomination committee in advance then, if appropriate, a replacement will be appointed by the same shareholder that appointed the one departing, or if this shareholder no longer ranks among the three largest shareholders, by the shareholder who in terms of shareholding is next in line.

The composition of the nominations committee will be published on the company's website no later than six months before the next AGM. The nomination committee strives to achieve gender balance on the Board of Directors. The Board of

NOMINATION COMMITTEE FOR 2016 AGM

Name/representing	Year to Date: 2016-12-31
Jan Svensson, Investment AB Latour	27%
Staffan Dahlström, own holdings	14%
Evert Carlsson, Swedbank Robur Fonder	10%
Charlotte Brogren, Chairman of the Board	0%

Directors currently has 33 (33) percent women serving on it.

External auditors

Auditors are appointed by the AGM. The auditors are accountable to the shareholders at the AGM and they must provide an auditor's report on the financial statements and the administration by the Board of Directors. The auditors report verbally and in writing on an ongoing basis to the audit committee about how the audit has been carried out and give their views on the level of order and control in the company. Auditors also report in person at least once per year to the entire Board about their audit and state their views about internal controls.

At the 2015 AGM, shareholders elected Ohrlings PricewaterhouseCoopers AB (PwC) as the audit firm, with Certified Public Accountant, Fredrik Göransson as the auditor in charge until the date of the next AGM. In addition to the audit, PwC also provides advice concerning financial reporting and tax. This advice is not considered to be biased.

In 2015 total remuneration paid to HMS's auditors amounted to SEK 1,862 (1,423) thousand. Further information regarding auditors' remuneration is available in Note 7.

AUDITOR

Fredrik Göransson
Certified Public Accountant
Auditor for HMS Networks since 2014.
Education: M.Sc. in Business and Economics, Certified Public Accountant since 2003.
Assignment: Also the auditor in charge of, for example, Bulten AB (publ) and VBG Group AB (publ). Born: 1973

Board of Directors

The Board is responsible for how the company is organized and for administration of the company's affairs on behalf of the owners. The Board assesses the company's financial situation on an ongoing basis and makes sure that it is organized such that there are adequate controls on its bookkeeping, fund management and other financial matters. The Board sets policies and instructions for how this is to be achieved. It also adopts rules of procedure for the Board and instructions for the CEO. These central governance documents specify how responsibilities and authority are allocated between the Board and its committees, as well as between the Chairman of the Board and the CEO. The Board appoints the CEO. The Chairman is responsible for evaluating the work of the Board and providing the nomination committee with the results of that evaluation.

Basis for Board work

The fundamental issues concerning the division of responsibility between the Board, Board committees, Chairman and CEO are expressed in the Board's rules of procedure and instructions for the CEO. The rules of procedure regulate such things as how often the Board convenes and the items that it should address at Board meetings. The rules of procedure also explain the allocation of responsibility between the Board, its Chairman and the CEO.

The Board is responsible for adopting strategies, business plans, budgets, quarterly reports, financial statements and the annual report. The Board is also responsible for appointing and dismissing the CEO and decisions involving significant changes to the HMS organization and

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operations. The rules of procedure state the thresholds that apply when the Board must decide on investments, company mergers and acquisitions, loans, etc.

Evaluation of the work done by the Board occurs continually, in part on its overall efforts and in part on the contribution made by each individual member. The purpose is to ensure that the HMS Board of Directors has the right structure in terms of its expertise and dedication. Each year, the work done by the Board is evaluated by having every member of the Board answer a number of questions, which the Chairman then compiles and presents to the Board. This evaluation, which is distributed to, among others, the nomination committee, is important for ensuring that work done by the Board is efficient.

Board structure

The Board consists of six members. The Board members have extensive professional experience and are, or have at some time, been CEOs and/or senior executives in large companies and many are also Board members in other large companies. Some of the company's Board members have served on the Board for quite some time and they are well acquainted with the company's operations.

The Swedish Code of Corporate Governance stipulates that the majority of elected Board members must be independent in relation to the company and Group management. Furthermore, at least two of the independent members must also be independent in relation to the shareholders that control ten percent or more of the shares or voting rights in the company. The nominations committee has, during a joint assessment of each member's

Board work follows a structure that includes certain standing items. It is depicted below:

relationship to the company, Group management and major shareholders, found that all of the members are independent in relation to the company and its management. All members are assessed as being independent in relation to the company's major shareholders. The unique expertise of each individual Board member and the resulting competence of the entire Board is presented on page 40.

The total amount of fees paid to the Board in 2015 was SEK1,275 (1,050) thousand. For a more detailed description of Board members' attendance at meetings, please see Note 26.

Chairman of the Board

The Board's rules of procedure stipulate that the Chairman must ensure that the Board's work is run effectively and that the Board meets its obligations. This includes organizing and leading the Board's efforts and creating the best possible conditions for meeting its responsibilities. It is also the duty of the Chairman to ensure that Board members regularly update and hone their know-how about the company and that new members receive the requisite introduction and training. Furthermore, the Chairman must meet with the CEO to

provide advice and discuss important issues. The Chairman must also evaluate the CEO's work and report these findings to the Board. In addition, it is the Chairman's duty to ensure that the work of the Board is evaluated annually and that a report on this evaluation is provided to the nomination committee.

At the AGM on 28 April 2015 Charlotte Brogren was newly elected as Chairman of the Board. The Chairman of the Board is not involved in the operational management of the company.

Work of the Board in 2015

Since the AGM of 28 April 2015 the Board has held 13 minuted meetings up to the adoption of this annual report. Both the CEO and CFO of HMS Networks AB participate in Board meetings, with the CEO serving as rapporteur and the CFO serving as secretary. At each of its meetings, the Board has dealt with the mandatory standing items, as stipulated in the Board's rules of procedure. This includes discussion of the company's business situation, budgets, quarterly reports and annual financial statements. The work of the Board otherwise focused on the further development of previously established market and acquisition strategies. Besides its scheduled meetings, the Board's work consists of regular follow-up on financial matters, strategic product development, providing recommendations on remuneration levels, dealing with company acquisition issues and matters having to do with accounting and auditing.

Remuneration committee

The Board appoints some of its members to serve on the remuneration committee, which is responsible for regularly reviewing the employment terms of senior executives by making comparisons with persons holding similar positions in other companies. The Board decides on the principles for remuneration to senior executives and the CEO.

The remuneration committee consists of the Chairman of the Board (Charlotte Brogren) and one other appointed Board members (Ray Maurittson). Ray Maurittson was elected as Chairman of the remuneration committee. Attendance was 100 percent at all of the meetings.

Audit committee

The Board nominates an audit committee, which monitors the financial reporting by examining all critical audit issues and other conditions that

HMS NETWORKS ANNUAL REPORT 2015

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REMUNERATION TO GROUP MANAGEMENT 2015, SEK T

	Basic salary*	Variable remuneration	Pension costs	Total 2015
CEO	2,088	790	638	3,516
Group management, other (7)	8,521	1,532	2,317	12,370
Total	10,609	2,322	2,955	15,886

*Including other remuneration.

might affect the content and quality of the financial statements. The committee also monitors the effectiveness of the company's and Group's internal controls, risk management systems and the external auditors' impartiality and independence. The audit committee evaluates the audit work and assists the nomination committee in the selection of auditor. The committee also makes decisions regarding all purchases of consulting services (not related to the audit) from the company's auditor.

The audit committee consists of two Board members (Kerstin Lindell and Fredrik Hansson) that have been appointed by the Board. Kerstin Lindell was elected as Chairman of the audit committee. Attendance was 100 percent at all of the meetings.

The committee has regular contact with external auditors, who report to the committee concerning important details that arose during the statutory audit, specifically concerning possible inconsistencies in the internal controls over the financial reporting.

Development committee

The Board appoints some of its members to serve on the development committee. This committee is meant to serve as a sounding board for the HMS management team on issues having to do with research and development, specific projects and the company's portfolio of development projects,

the organizational structure of the R&D department and how it is managed, as well as the training and development of employees. Furthermore, the committee should serve as a resource when it comes to preparing and obtaining support for R&D initiatives that require a decision by the Board due to the strategic importance, investment decisions or collaboration with others. The committee should ensure that the HMS Board stays up to date on R&D issues relevant to the company and its future.

The development committee consists of three Board members (Charlotte Brogren, Henrik Johansson and Karl Thedén) that have been appointed by the Board. Henrik Johansson was elected as Chairman of the development committee. Attendance was 100 percent at all of the meetings.

CEO and Group management

The CEO is responsible for developing the company's business, as well as leading and coordinating daily operations in accordance with the instructions and directions adopted by the Board. This means, among other things, responsibility for the financial reporting, compiling the supporting information for decisions and ensuring that obligations, contracts and other legal documents do not contravene Swedish or international laws and regulations. The CEO must also ensure compliance with the company's goals, policies and strategic plans and that they are updated whenever necessary. The CEO appoints the other members of the Group management team.

Furthermore, the CEO is responsible for providing the Board with required information and supporting documentation for decisions. Such information must be sent to each Board member at least seven days prior to scheduled Board meetings, where the CEO serves as rapporteur. The CEO keeps the Board and its Chairman continually updated about the company's and Group's financial position and growth.

Group management is headed by the CEO and it also consists of the following seven members: Chief Financial Officer, Chief Operating Officer, HR Manager, Marketing Director, General Manager NASMO, General Manager CESMO and General Manager for IXXAT. For additional information about the Group management team, please see page 41.

The Group management team has overall responsibility for ensuring that the activities of the Group are in accordance with the strategy and long-term objectives stipulated by the Board. The Group management team meets approximately eight times per year. These meetings deal with strategic issues that concern the entire Group. The meetings are led by the CEO, who makes decisions after consulting with the other members of the Group management team.

In 2015, the total remuneration (including pension provisions) to the CEO amounted to SEK 3,516 (2,473) thousand. For more information about remuneration to the CEO and Group management team, see Note 26.

HMS NETWORKS ANNUAL REPORT 2015

The Board's report on internal controls

HMS's work with internal controls has been designed to ensure that the company's financial reporting¹ is correct and reliable and that its financial statements have been prepared in accordance with applicable laws and regulations, accounting standards and other requirements for listed companies. The work with internal controls provides value by clarifying roles and responsibilities, improving the efficiency of processes, increasing risk awareness and improving the reliability and quality of financial reporting and follow up.

Description

At HMS, the internal controls over financial reporting are an integral part of corporate governance. They consist of processes and methods for protecting the Group's assets and ensuring the accuracy of its financial reporting. The purpose of such internal controls is to protect the owners' investment in the company. To organize and further improve this work, HMS uses the COSO framework, which provides structure when evaluating and monitoring the internal controls over financial reporting.

Control environment

The foundation for internal controls consists of the overall control environment that has been established by the Board and management team. This is built on an organization with clear decision-making paths where authority and responsibility are defined with clear instructions. It is also built on a corporate culture with common values and individual awareness of each person's role in maintaining good internal control.

The Group strives to ensure that the entire organization lives by these values. There is much emphasis on making sure that these core values

guide all behavior, both internally and externally. HMS has established a Code of Conduct. It explains the desired behavior in different situations.

The Board has overall responsibility for the internal controls concerning financial reporting. The Board has established written rules of procedure that clarify the Board's responsibilities and how work should be allocated within the committees. The Board has also appointed an audit committee, which is primarily responsible for ensuring the reliability of financial reporting and adequacy of internal controls. It also interacts with the company's auditors for that same purpose. Furthermore, the Board has drawn up instructions pertaining to financial reporting for both the CEO and the Board of HMS. Responsibility for maintaining an effective control environment and the ongoing work concerning internal controls is delegated to the CEO who in turn delegates function-specific responsibility to managers at different levels throughout the Group.

The purpose of HMS's internal control efforts is to ensure that the Group achieves its goals for financial reporting. A minimum requirement is for the control activities to address the key identified risks within the Group.

Responsibility and authority are defined in the instructions for the right to sign on behalf of the company, manuals, policies and routines. Examples include HMS's manual for accounting and reporting, the finance and credit policy, information policy, IT security policy and HR policies. These guidelines, together with laws and other external regulations, are the components of the control environment. Every employee must follow these guidelines.

During 2015, in accordance with established guidelines, HMS continued its review of the existing internal controls so that the Board has adequate supporting documentation for establishing the appropriate level of stringency. The result of this effort will be an evaluation and verification of

the governing documents and guidelines that form the basis of corporate governance.

Risk assessment

Risk assessment stems from the Group's financial targets. The overall financial risks are liquidity risk, currency risk, interest rate risk and customer credit risk. These are primarily dealt with via the accounting and finance functions, in accordance with the Group's financial policy. For more detailed information, please see Note 3. Through quantitative and qualitative risk analyses based on the Group's balance sheet and income statement, HMS identifies the key risks that could pose a threat to the company achieving its business objectives and financial targets. Risk assessment involves identifying the risks that could arise if the fundamental requirements on financial reporting (completeness, accuracy, valuation and presentation) by the Group are not fulfilled.

OVERALL CONTROL ENVIRONMENT
Decision paths • Responsibilities/Authority • Values • Individuals/Organization

1) Financial reporting relates to quarterly reports, financial reports, annual reports and internal reporting.

HMS NETWORKS ANNUAL REPORT 2015 37

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The focus is on risks in the financial reporting related to significant income statement and balance sheet items, which, on the whole, are more dependent on an underlying complex process or where the effect of errors could be very large, since the transaction amounts are significant. These investigations result in specific measures such as improved control routines for further safeguarding correct financial reporting.

Control activities

Control activities mitigate the identified risks and ensure that financial reporting is both correct and reliable and that processes are efficient. The control activities include both the overall and specific controls and they aim to prevent, discover and correct inaccuracies and deviation.

The central finance and accounting department is responsible for the consolidated financial statements, as well as the financial and administrative control systems. The department's responsibilities also include ensuring that relevant instructions for the financial reporting are made known and available to the employees concerned.

The accounting and control functions regularly perform reconciliations and checks of reported amounts, along with analyses of the income statements and balance sheets. The control function performs control activities at all levels of the company. The function analyzes and follows up on any budget deviations, makes forecasts, monitors significant fluctuations over defined periods and reports findings to the rest of the company, thus minimizing the risk of errors in the financial reporting.

The financial managers of the subsidiaries are responsible for ensuring that the control activities for the financial reporting of their respective units are adequate, which means that they have been designed to prevent, discover and correct errors and deviations, and that they comply with internal guidelines and instructions.

A high degree of IT security is required for good internal control in financial reporting. Rules and guidelines are therefore in place to ensure accessibility, accuracy, confidentiality and traceability of the information in the ERP. Access to the various components of the ERP is limited, based on the employee's authorization level, responsibilities and position. Furthermore, segregation of duties helps prevent both intentional and unintentional entries.

As part of the effort to ensure the quality of the financial statements, the Board has set up an audit committee consisting of two Board members, appointed by the Board. The committee deals with, for example, critical auditing issues and monitors the effectiveness of internal controls and risk management concerning the financial reporting.

Information and communication

Information and communication about risks, controls and control results throughout the HMS group help ensure that the right business decisions are made. The Group strives to make certain that the information and communication routes for the internal controls pertaining to financial reporting work as intended and are known throughout the Group.

The guidelines for financial reporting are communicated to all employees concerned within the Group via policies, manuals and work instructions. The information includes methods, instructions and practical checklists, descriptions of roles and responsibilities and a comprehensive schedule. The HMS Group's published financial statements for external reporting purposes are derived from all of its legal entities and they are prepared in accordance with standardized reporting routines.

The HMS Group's accounting policies and any changes that are made to them are always communicated by direct mail to all employees concerned within the organization. Furthermore, each month, all subsidiaries prepare a monthly report, which contains information about its financial status and performance.

To ensure that information reported externally is correct and complete, the Board has established an information policy. It specifies which items must be communicated, who is responsible for communicating the information, and how this should be done. There are also instructions for how financial information should be communicated between managers and other employees. There must also be adequate information security routines to ensure correct dissemination of information.

HMS's information routines and systems aim at providing the market with relevant, reliable, correct and current information about the Group's development and financial position. HMS's information policy meets the requirements that have been established for listed companies.

Financial information is regularly published in the form of:

Quarterly and year-end reports, which are published as press releases.
Annual Report.
Press releases about important news and events that could have a significant impact on the share price.
Presentations and teleconferences for financial analysts, investors and the media on the same day as the financial statements and quarterly reports are published and in conjunction with the publication of other important information.

HMS NETWORKS ANNUAL REPORT 2015

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CORPORATE GOVERNANCE

Meetings with financial analysts and investors
All reports, presentations and press releases are published simultaneously on the Group's website at: http://investors.hms.se.

Follow up

Follow up and tests of controls are regularly performed to ensure that all risks have been taken into account and dealt with satisfactorily. Follow up includes both formal and informal routines used by managers, process owners and controllers. They include such things as comparing results to budgets and plans, analyses and key figures.

If controls fail, actions are taken to address the problem and correct whatever weaknesses were identified.

The Board studies and approves all of the Group's quarterly reports, year-end reports and annual reports prior to publication. The Board also receives monthly financial reports concerning the Group's position and earnings trend and the Group's financial situation is discussed at each Board meeting. The finance department and management team carry out detailed monthly analyses of financial reports.

Making forecasts is another important component of Group-wide internal control. Sales forecasts are at the product level, made by managers within the sales organization. Sales forecasts are consolidated and validated in connection with compiling the forecasts for the entire business. Comprehensive forecasts are compiled once per year. In addition to the comprehensive forecasts, a budget is also drawn up, which is presented to the Board for its approval in the fourth quarter. Besides the forecasts and budgets, Group management also works with overall strategic plans.

The audit committee follows up the financial reports and receives information from the company's auditor about their findings and recommendations. Checks on how well internal control activities are working are regularly performed at various levels within the Group and the audit committee also reports back to the Board. In view of the scope of the business and the existing control activities, the Board has decided that there is no need to introduce a special internal audit function.

For the same reason, the Board decided that the Audit Committee would consist of two Board members. This is a deviation from the Code, which stipulates that there should be three members.

The Board is of the opinion that the company complies with the Swedish Code of Corporate Governance, except for the following:

Internal audit.
Number of members on audit committee.
Composition of members on nomination committee.

The reason for these deviations is explained in this corporate governance report.

Halmstad 21 March 2016

Charlotte Brogren Fredrik Hansson

Henrik Johansson Kerstin Lindell

Ray Mauritsson Karl Thedén

Auditor's statement on the corporate governance report

To the Annual General Meeting of HMS Networks AB (publ) CIN: 556661-8954

The Board of Directors is responsible for the 2015 Corporate Governance Report on pages 33-39 and for ensuring that it has been prepared in accordance with the Annual Accounts Act.

We have read the Corporate Governance Report and based on that reading and our knowledge of company and Group, we feel we have an adequate foundation for our opinion. This means that our statutory review of the Corporate Governance Report has a different focus and significantly smaller scope than the focus and scope required for performing an audit in accordance with International Standards on Auditing and generally accepted auditing practices in Sweden.

We believe that the Corporate Governance Report has been prepared correctly, and that its statutory information is consistent with the Annual Report and consolidated accounts.

Halmstad 22 March 2016

Öhrlings PricewaterhouseCoopers AB

Fredrik Göransson

Certified Public Accountant

HMS NETWORKS ANNUAL REPORT 2015 39

Board of Directors

Name	Charlotte Brogren	Fredrik Hansson	Henrik Johansson	Kerstin Lindell	Ray Maurisson	Karl Thedéen
Part of the Board	Chairman of the Board	Board member	Board member	Board member	Board member	Board member
Current employment	General Director of Vinnova and Chairman of the Board of Industrifonden.	Operates in his own company.	CEO of Arctos Equity Partner.	CEO of Bona AB.	CEO of Axis AB (publ).	CEO of Transmode AB (publ).
Education	PhD in Chemical Engineering from Lund University.	Bachelor of Science, Economics and Finance from UNA (University of North Alabama).	Master of Science in Industrial Economics from Chalmers University of Technology.	Master of Science in Chemical Engineering and Tech. Fil.lic. in Polymer chemistry from Lund Institute of Technology and a Master of Business Administration from Lund University.	Master of Science in Technical Physics and Executive MBA from Lund University.	Master of Science in Systems Engineering at the Royal Institute of Technology in Stockholm.
Year elected	2010	2015	2009	2014	2007	2014
Born in	1963	1971	1966	1967	1962	1963
Resident of	Täby	Lyckeby	Sävedalen	Limhamn	Limhamn	Spånga
Other assignments	Chairman of the Board of Q-Free AS and Board member of Gunnebo AB.	Board member of Roxtec AB, Nord Lock AB, Cate AB, Hedson AB and Wapro AB.	Chairman of the Board of Rapid Images AB and Board member of Tele-Radio International Holding AB.	Board member of Peab AB, Exel Composites Plc and Vice Chairman of the South Sweden Chamber of Commerce.	No	Board member of Kabona AB and Eidgware AB.
Dependent	Independent from the company and its main owners.	Independent from the company and its main owners.	Independent from the company and its main owners.	Independent from the company and its main owners.	Independent from the company and its main owners.	Independent from the company and its main owners.
Previous experience	Development Manager for ABB Robotics and executive positions within ABB's research organization.	CEO at Roxtec Group AB	Senior positions in Investment AB Labour, Brady Corporation and Tradex Converting with extensive experience in international expansion activities.	Research and Development Manager at Akzo Nobel.	Senior positions in tac (now Scneider Electrics) from 1987 to 1995. Division Manager and other senior positions in Axis Communications from 1995 to 2003.	Board member of Ericsson Network Technologies AB from 2004 to 2007 and Vice President of the Wineline Product Area, Ericsson AB from 2004 to 2006.
Shareholding (alone and with related party)	1,000	600	6,400	0	5,000	700
Audit committee		X		X (chairman)
Remuneration committee	X				X (chairman)
Development committee	X		X (chairman)			X
Presence of Board meetings	100%	100%	100%	100%	92%	85%
Compensation in 2015*	400,000 SEK	175,000 SEK	175,000 SEK	175,000 SEK	175,000 SEK	175,000 SEK

*Perfains to the period between AGM 2015 and AGM 2016.

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CORPORATE GOVERNANCE

Group management

Name	Staffan Dahlström	Anders Hansson	Gunnar Högberg	Kevin Knake	Sabina Lindén	Jörgen Palmhager	Christian Schlegel	Michael Volz
Current employment	Chief Executive Officer	Marketing Director	Chief Financial Officer	General Manager, NASMO	Human Resources Manager	Chief Operating Officer and Chief Technology Officer	General Manager Technology Center Ravensburg	General Manager CESMO
Education	Degree in Computer Systems Engineering from Halmstad University and an Executive MBA from Lund School of Economics and Management.	Master's Degree in Industrial Management and Economics from Halmstad University.	M.Sc. in Business and Economics from Uppsala University.	Bachelor's degree in Industrial Engineering and Computer Science from Central Michigan University.	Bachelor's degree in vocational sociology from the University of Gothenburg.	B.Sc. in Computer Systems Engineering from Halmstad University.	Bachelor's degree in mechanical engineering from Ravensburg-Weingarten University of Applied Sciences, Germany.	Bachelor's degree in communications from the University of Dieburg, Germany.
Born in	1967	1968	1956	1961	1979	1968	1965	1957
Nationality	Sweden	Sweden	Sweden	USA	Sweden	Sweden	Germany	Germany
Other assignments	No	No	Board member of På i Stockholm AB and member of Meritmind AB's advisory committee	Chairman of ODVA Roundtable of EtherNet/IP Implementers	No	No	No	No
Previous experience	Sales and Marketing Manager at HMS.	Global Key Account Manager, Sales and Marketing Director of France, Benelux, Spain and Portugal and Product Manager at HMS.	Auditor at Ernst & Young, Controlling Manager at Althin Medical AB, COO at Kipling AB and COO at Roxtec AB.	Engineering Manager at Rockwell Automation, Micro Processor Systems Inc. and Pyramid Solutions Inc.		Developer at Haldex. Developer, project manager and development manager at HMS.	Development Manager at IXXAT Automation GmbH.	Team leader at Bosch, CEO at PROFIBUS in Germany and founder of Vcom GmbH.
Shareholding (alone and with related party)	1,618,581	7,613	46,706	6,557	7,097	59,750	3,970	7,163
Employed since	1989	2000	2006	2003	2006	1992	1991	2000
In current position since	2009	2010	2006	2009	2007	2007	1998	2000

HMS NETWORKS ANNUAL REPORT 2015

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Glossary
\cdot
Financial definitions

GLOSSARY

Glossary

ARM – a family of 32-bit processor kernels with RISC architecture, developed by ARM Ltd. ARM is the most widely used RISC based architecture for high performance solutions and low energy consumption.

CBM – Chip Brick Module, the formats in which HMS's new embedded concept is offered.

Design win – a framework agreement with an OEM company. It enables a company to use Anybus in its products as long as the products are manufactured.

Discrete manufacturing – involves manufacturing volumes consisting of discrete units of a product, which are manufactured according to a description and component's list, such as computers, cars and toasters. This type of manufacturing is usually in batches and the final product can typically be disassembled into its original components.

EMS (Electronic Manufacturing Services) – EMS is a contract manufacturer of electronics. Their end customers are typically OEMs (Original Equipment Manufacturers).

ESD protection – Protection against electrostatic discharge.

FPGA – Field Programmable Gate Array, programmable semiconductor devices that are based around a matrix of configurable logic blocks. The FPGA circuit's logic function can be adapted to different functional requirements, which makes possible flexible solutions with high, optimal performance.

Gateway – a connecting point between different networks where some form of data conversion takes place. It is actually a collection of hardware and software, such as routers that convert data between networks, or between networks and equipment with different standards.

IoT (Internet of Things) – IoT typically pertains to ordinary physical devices that connect to the Internet. Such devices make "things", i.e. information available to IT systems so that the information can be managed and analyzed.

IIoT (Industrial Internet of Things) pertains to industrial devices and machines that can exchange information with manufacturing systems, control systems and operators.

NP40 – HMS's network processor technology that is foundation for its new embedded concept.

Network – a general term for a system with interconnected computers that can be designed in various ways. In an industrial network, such as a manufacturing facility, machines and equipment are connected and controlled by programmable logic controllers (PLCs), which enable the devices to interact with one another.

Network protocol – a collection of rules or a standard, for how two or more computer programs communicate and exchange information with each other. Examples of communication protocols are HTTP (transfer of websites between computers over the internet), TCP/IP (for basic internet communication) and SMTP (transfer of emails).

High real time demands – involves knowing exactly when data arrives. There are high real time performance demands when the data is extremely time-critical and millisecond precision is required. Email has comparatively low real time demands, since not even second precision is required.

OEM – Original Equipment Manufacturer is a company that manufactures and sells products under its own brand, even though their products can contain products and components from other companies.

PFOS – EU Directive 2006/122/EG restricts the use of perfluorooctane sulfonates and substances that can be broken down into PFOS in chemical products and goods.

PLC – Programmable Logic Controller. Programmable control system that controls all or parts of an automation system or equipment in discreet manufacturing.

Port – a computer interface to which a device can be connected. Personal computers (PCs) have different types of ports. Internally there are many ports to which hard drives, monitor cards and other devices can be connected. Externally there are ports for connecting modems, printers, mouse and other external devices.

PPM – Product returns.

Process manufacturing – a branch of manufacturing that is associated with formulas and manufacturing recipes, such as quantities of liquid, gas or powder. Once an output is produced by this process, it cannot be distilled back to its basic components.

Reach – EU framework legislation (2006/1907/EG) the registration, evaluation, authorization and restriction of chemicals. This legislation came into force on 18 December 2006.

RISC – Reduced Instruction Set Computing, a processor architecture that requires fewer logic levels and thus achieves higher clock speeds while consuming less silicon. It provides high performance and high cost effectiveness.

RoHS – EU Directive (2002/95/EG) on the restriction of the use of certain hazardous substances in electrical or electronic equipment. The Directive has been in force since 1 July 2006. The banned substances are mercury, lead, cadmium, hexavalent chromium, poly-brominated biphenyls (PBB) and polybrominated diphenyl ethers (PBDE). The government authority in charge of enforcing this in Sweden is the Swedish Chemicals Agency.

RTA – Real Time Accelerator. HMS's unique IP that makes it possible for HMS network interface cards to be used in the most demanding real-time applications.

Serial port – a physical interface through which information is transferred serially as in or out data (one bit at a time). It is often used for communication with terminals and modems. A single PC typically has 2-4 serial ports. Serial ports have a maximum data transfer capacity of 115.2 kbit/s and are therefore increasingly being replaced by USBs that support data transmission at 12 Mbit/s (version 1.0) and 480 Mbit/s (version 2.0).

WEEE – EU Directive (2002/96/EG) on waste that is comprised of, or contains, electrical or electronic equipment. The Directive has been in force since 27 January 2003. The government authority in charge of enforcing this in Sweden is the Swedish Environmental Protection Agency.

VPN – virtual private network is a technology used for creating strong connections, or tunnels, between two points in a computer network.

HMS NETWORKS ANNUAL REPORT 2015

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Glossary • Financial definitions

FINANCIAL DEFINITIONS

Financial definitions

No. of outstanding shares

The number of registered shares, less repurchased shares that are held as treasury shares.

Return on shareholders' equity

Share of the profit after tax attributable to the parent company's shareholders in relation to average equity.

Return on capital employed

Share of the profit after financial income in relation to the average capital employed.

Return on total capital

Share of the profit after financial expenses attributable to the parent company's shareholders in relation to the average total capital.

EBIT

Operating income according to income statement excluding items affecting comparability.

EBITA

Operating profit (loss) excluding amortization of intangible assets and items affecting comparability.

EBITDA

Operating profit (loss) excluding depreciation of PPE, amortization of intangible assets and items affecting comparability.

Equity per share

Equity attributable to the Parent Company's shareholders divided by the number of outstanding shares at the end of the period.

Financial assets

Long-term and short-term financial receivables plus cash and cash equivalents.

Net debt

Long-term and current financial liabilities less financial assets.

Net debt/equity ratio

Net debt divided by equity.

P/E ratio

Market price in relation to earnings per share.

Earnings per share

Share of the profit after tax attributable to the parent company's shareholders in relation to the average number of outstanding shares.

Earnings per share after dilution

Share of the profit after tax attributable to the parent company's shareholders in relation to the average number of outstanding shares plus an adjustment for the average number of shares that are added when converting the outstanding number of convertibles and options.

Working capital

Current assets less cash and cash equivalents and current liabilities.

Operating margin

Operating profit (loss) in relation to net sales.

Equity/assets ratio

Shareholders' equity in relation to total assets.

Capital employed

Total assets less non-interest-bearing current liabilities, provisions, and total deferred tax liabilities.

HMS NETWORKS ANNUAL REPORT 2015 43

Directors' report • Financial statements • Notes • React affirmation • Audit report • Multi-year review • Contents

FINANCIAL REPORTS

HMS NETWORKS ANNUAL REPORT 2015

DIRECTORS' REPORT

DIRECTORS' REPORT...46-50
Significant events...46
Sustainability efforts...47
Risks and uncertainty factors...48
Employees...49
Future outlook...50

THE GROUP...51-54
Consolidated income statement...51
Consolidated statement of comprehensive income...51
Consolidated balance sheet...52
Consolidated cash flow statement...53
Consolidated statement of changes in equity...54

PARENT COMPANY...55-57
Parent company's income statement...55
Parent company's balance sheet...56
Parent company's cash flow statement...57
Parent company's statement of changes in equity...57

NOTES...58-80
Note 1 General information...58
Note 2 Accounting policies...58
Note 3 Financial risk management...65
Note 4 Important estimates and assessments for accounting purposes...67
Note 5 Segment information...68
Note 6 Categorization by type of cost...68
Note 7 Remuneration to auditors...68
Note 8 Remuneration to employees...69
Note 9 Income tax...70
Note 10 Exchange rate differences – net...70

Note 11 Earnings per share...70
Note 12 Dividend per share...70
Note 13 Intangible assets...71
Note 14 Property, plant and equipment...72
Note 15 Derivatives...73
Note 16 Accounts receivable and other receivables...73
Note 17 Inventories...74
Note 18 Cash and cash equivalents...74
Note 19 Share capital and other contributed capital...74
Note 20 Provisions...74
Note 21 Borrowings...74
Note 22 Deferred tax...75
Note 23 Pension obligations...76
Note 24 Pledged assets and contingent liabilities...76
Note 25 Finance leases...76
Note 26 Remuneration to the Board and senior executives, etc...76
Note 27 Participations in subsidiaries...78
Note 28 Other interest income and similar profit or loss items...78
Note 29 Other interest expenses and similar profit or loss items...78
Note 30 Prepaid expenses and accrued income...78
Note 31 Accrued expenses and deferred income...78
Note 32 Related parties...79
Note 33 Business combinations...79
Note 34 Financial assets and financial liabilities...80
Note 35 Subsequent events...80

BOARD AFFIRMATION...81
AUDIT REPORT...82

HMS NETWORKS ANNUAL REPORT 2015 45

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Directors' report
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Financial statements
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Notes
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Board affirmation
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Audit report
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Multi-year review
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Contents

DIRECTORS' REPORT

Directors' report

Operations

HMS is the leading independent supplier of products for industrial communication. The products make it possible for many types of machines to connect to industrial networks and systems. Millions of robots, engines, generators and other business-critical equipment current rely on HMS technology for industrial communication.

Product development and some manufacturing takes place at the company's head office in Halmstad, Sweden, as well as in Ravensburg, Germany. Sales offices exist in Japan, China, Germany, USA, Italy, France, India, Great Britain and Denmark. The company also has distributors in more than 50 countries. HMS has more than 370 employees and manufactures network and gateways for connecting different networks under the Anybus brand and IXXAT, along with products for remote monitoring/controlling under the Netbiter brand. HMS is listed on the NASDAQ-OMX Nordic Exchange in the Mid Cap, Information Technology category.

Seasonality

HMS does not have any significant seasonal variations in its operations, except for higher costs in the fourth quarter, primarily associated with the number of large marketing events that occur in that period.

Significant events

HMS ended the year with growth at 19 (18) percent and annual sales at a new record level, SEK 702 (589) million. In 2015, HMS benefited from a weak SEK. But even in local currencies, the company reported double-digit growth. Order intake for the year was SEK 682 (611) million, which corresponds to a 12 (18) percent growth rate.

The company has continued with a lower level of capitalization for its development costs, which has a negative impact on earnings. Geographically, Germany, the Nordic region and Japan reported stable growth for the year, while the US market remained relatively weak.

All three of our product areas, Anybus, IXXAT and Netbiter demonstrated healthy growth. There was also a significant increase in the number of new design wins for 2015. In total, we received 195 new design wins during the year, bringing the total number of active design wins to 1,381, which is a 12 percent increase compared to the prior year. Of these design wins, 1,023 are in production and 358 are expected to enter production during the next few years.

Efforts to launch products in accordance with HMS's new strategy for Industrial Internet of Things (IIoT) got underway in 2015, resulting in new products designed for efficient data collection and transfer for IIoT applications. These efforts also meant that we invested more in sales, marketing and development during the year.

Early in February 2016, HMS signed an agreement to acquire the Belgian company, eWON SA. eWON is a market leader in remote monitoring and remote control. It will make an excellent contribution to HMS's position in this area. The company has 58 employees and sales of around SEK 140 million, with an historic operating margin in excess of 20 percent.

The products manufactured and marketed by eWON are a great fit with our current solution for remote monitoring. Together, these products will comprise a competitive offering where we are building a strong position as the leading supplier of solutions for remote control and remote monitoring of industrial applications.

On 28 April 2015, HMS held its AGM. All of the proposals by the Board and nomination committee were adopted by the AGM.

Charlotte Brogren was elected as Chairman of the Board. Ray Maurittsson, Henrik Johansson, Kerstin Lindell and Karl Thedén were reelected as Board members. Fredrik Hansson was newly elected as a Board member.

At the first Board meeting following election, Staffan Dahlström was appointed President and CEO of HMS Networks AB.

Significant events in brief:

HMS Netbiter EC 300 series obtained certification for the Schneider Electric Colaborative Automation Partner Program
AAEON, the industrial PC manufacturer, selected IXXAT INpact Real-Time Ethernet PC-Interface for a strategic collaboration
IXXAT Safety obtained certification from the German certification body, TÜV
HMS started collaborating with Xilinx to develop solutions for industrial network technology
HMS obtained an SEK 14 million order pertaining to Ethernet POWERLINK technology for electrical drives.
Subsequent to the end of the period, HMS acquired the Belgian company, eWON SA.

HMS Group's revenue distribution by market in 2015

Summary of results

	2015	2014
Net sales, SEK m	701.7	589.2
Operating profit before depreciation/amortization (EBITDA), SEK m	135.5	126.0
Operating margin before depreciation/amortization (EBITDA), %	19.3	21.4
Operating profit after depreciation/amortization (EBIT), SEK m	101.6	97.6
Operating margin after depreciation/amortization (EBIT), %	14.5	16.6
Profit after financial items, SEK m	87.6	85.8
Profit for the year, SEK m	60.2	63.1
Earnings per share, SEK	5.33	5.59

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Net sales

The Group's net sales increased by 19 percent and amounted to SEK 701.7 (589.2) million. Exchange rate fluctuations positively affected net sales during the year by SEK 51.4 million, compared to last year. Invoiced sales by region were as follows: EMEA 60 (64) percent, North and South America 22 (20) percent and Asia 18 (16) percent. The Group's largest markets are Germany, USA and Japan.

Profit (loss)

Operating profit before depreciation/amortization (EBITDA) was SEK 135.5 (126.0) million, which corresponds to an operating margin before depreciation/amortization of 19.3 (21.4) percent. Operating profit after depreciation/amortization (EBIT) was SEK 101.6 (97.6) million, which corresponds to an operating margin after depreciation/amortization of 14.5 (16.6) percent. Net financial income/expense amounted to SEK -14.0 (-11.8) million and profit after financial items amounted to SEK 87.6 (85.8) million. Tax expense was SEK -27.4 (-22.7) million and profit after tax amounted to SEK 60.2 (63.1) million.

Investments

Investments in items of property plant and equipment during the year amounted to SEK 5.0 (6.0) million and investments in intangible assets amounted to SEK 20.4 (31.8) million. Investments in intangible assets primarily consist of the development of technology platforms. With the recent completion of several new basic technologies, a comparatively lower share of the Group's development costs were capitalized during the year. Amortization of capitalized development costs was SEK 17.6 (13.1) million and impairment losses were SEK 0 (2.0) million.

Financial position

As of 31 December 2015, the Group had cash and cash equivalents of 19.5 (17.6) million, excluding unutilized credit of SEK 30.0 (30.0) million. The Group's net debt amounted to SEK 177.4 (227.8) million. The net debt to equity ratio was 0.4 (0.5) times and the equity to assets ratio was 54.9 (50.8)%.

The Group's loan amortization is approximately SEK 37 million per year. SEK 37 (37) million was amortized in 2015. In the second quarter, dividends of SEK 2.50 (2.25) per share were paid, which totaled SEK 28 million.

Cash flow from operating activities amounted to SEK 90.0 (93.3) million. After net investments of SEK -25.4 (-38.0) million and new borrowings, amortization and dividends paid, totaling SEK -62.9 (-54.8) million, the cash flow for the year amounted to SEK 1.7 (0.5) million.

Group structure

HMS Networks AB (publ), CIN 556661-8954, is the Parent Company of the wholly-owned subsidiary, HMS Industrial Networks AB. HMS Industrial Networks AB is in turn the Parent Company of HMS Industrial Networks Inc, HMS Industrial Networks GmbH, HMS Industrial Networks K.K., HMS Technology Center Ravensburg GmbH, HMS Industrial Networks S.r.l., HMS Industrial Networks India Private Limited, HMS Industrial Networks Ltd, HMS Industrial Networks ApS, Intellicom Innovation AB (dormant) and HMS Electronics AB (dormant). HMS Technology Center Ravensburg GmbH is a development center for the HMS Group, while the other subsidiaries are responsible for sales, marketing and support in their respective geographic markets.

Foreign branch offices

The Group has a branch office in Beijing that is responsible for sales, marketing and technical support in the Chinese market.

Sustainability efforts

Sustainable development has three components – environmental, financial and societal – all of which are interdependent.

Environmental sustainability:

Delivering reliable, smart products that enable various machines to connect to industrial networks and systems.
Working proactively with environmental issues via an action plan that lowers our environmental impact.
Having relevant environmental and quality requirements for our suppliers to improve the sustainability of the goods and services we purchase from them.

Economic sustainability

Having a sound, successful business with solid finances and a long-term perspective.
Running the business in an ethical manner and opposing all forms of corruption.
Investing in technological development and initiatives.

Social sustainability

Encouraging learning and innovation, along with striving to attract and retain the best talent in the market.
Making a contribution, as a company, to progress in the communities where we operate.
Investing in youth by helping to spark their interest in technology and offering apprenticeship opportunities to students.

Compliance with laws and codes

Human rights

HMS respects human rights in all areas under the company's control.

Business ethics

HMS runs its operations professionally, honestly and ethically.

Working conditions and employee rights

Ensuring that the company has a good, safe work environment is an important strategical issue for HMS.

Supplier assessment

In order to establish the credibility of the company's sustainability efforts, it is vital that we take responsibility for the indirect impact of the goods and services that we purchase.

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Environment

Sustainable products

HMS' contributes to sustainable development by developing and manufacturing products that enable significant energy savings for its users, with minimal environmental impact over the product's lifespan. The Eco Strategy Wheel is HMS's model for considering the environmental aspects associated with developing, manufacturing, shipping and using HMS products. In other words, it considers the entire product life cycle.

Focus on energy efficiency

HMS strives to develop products and solutions that contribute to efficient energy consumption and resource-efficient production.

Product development and environmental aspects

In product development efforts, HMS considers a variety of environmental aspects, such as using energy-efficient technology and low-energy components in its products.

Controlled material selection

There are routines and work methods in place for selecting the right materials during the design phase.

Green automation

HMS offers products with PROFIenergy, which is an open, standardized solution for energy control and an example of green automation.

Manufacturing – control and routines

It is also important to consider a number of important environmental aspects during manufacturing. For example, by carefully controlling production processes, it is possible to achieve efficient manufacturing with minimal use of materials, waste and energy consumption.

Safe and efficient use of resources

HMS engages in systematic, work environment efforts aimed at promoting employee health and well-being.

Use of resources

HMS uses 100 percent renewable/green electricity at its facilities.

Minimal travel

HMS has a local presence in its largest markets.

Sustainability targets

The goal for 2016 is to design and implement a sustainability program, while also increasing transparency. This will, among others, result in a report on the company's sustainability efforts in 2016.

Research and development

The Group expensed SEK 103.1 (85.1) million for research and development during the year. In addition, SEK 20.0 (27.5) million in development costs was capitalized. Total research and development expenses make up 18 (19) percent of sales. The Group's policy is to only capitalize major projects for developing its own integrated circuits and new platforms for products intended for use in embedded systems. Development of additional products or applications based on these are not capitalized. Customer-specific projects are capitalized when it has been determined as likely that the development costs will be covered by future volume commitments.

Personnel

At year-end the Group had 388 (371) employees.

Principles for remuneration to senior executives

At the first Board meeting of 2015, a remuneration committee was appointed by the Board. The following principles, which were proposed to the company's remuneration committee, will be brought forth for approval at the 2016 AGM. Remuneration to the CEO and other members of the HMS Group management team consists of basic salary, short-term and long-term incentive schemes and pension. Other benefits and remuneration are awarded on the same terms that apply to other employees.

The aim of the HMS remuneration policy for Group management is to offer remuneration that promotes the retention and recruitment of qualified expertise to HMS Networks AB. Basic salary is established on the basis that it, in combination with both short and long-term incentives, will be competitive. The absolute level depends on the position in question and individual performance. Remuneration to the CEO is established by the Board based on the proposal from the remuneration committee. Remuneration to other senior executives is decided by the CEO after approval by the remuneration committee.

Short-term incentive schemes to the CEO and senior executives are based on the financial targets for the Group. Incentive schemes must be primarily based on growth and profitability. In addition to that, other personal goals may be established. For the CEO and other senior executives, the highest possible annual amount is 50 percent of basic salary in 2015.

The retirement age for the CEO is 65 years. The pension premium must equal 35% of the fixed monthly salary. For other senior executives, the ITP agreement is applied with a retirement age of 65.

In the case of notice of termination, the mutual period of notice for the CEO is six months. In the case of notice of termination of the CEO from the company's side, a severance payment is made corresponding to 12 month's salary. Other earnings are not deducted from the severance pay. In the case of notice of termination from the CEO's side, no severance payment is made. The mutual notice of termination period between the company and other senior executives is six months.

For information on the composition of the remuneration committee, see pages 35.

Risks and uncertainty factors

Market-related risks

The company is exposed to market-related risks that are beyond the company's control. These risks are mainly connected with the business climate, competitive situation, world market demand and access to resources that are important for the Group's business.

Business cycle

The company's products are primarily used in industry. Industry is affected by the general economic situation and investment levels, which in turn can be affected by a number of factors beyond the company's control, such as interest rates, currency exchange rates, inflation, deflation, political uncertainty, taxes, stock market trends, unemployment and other factors that impact the economic outlook. These factors can impact the Group's profit and overall financial situation.

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Competitors

The market for HMS's products is competitive. HMS competes in local markets where there are a number of competitors and it is possible for new entrants to become established. HMS's strategy is to improve the Group's already strong market position and thereby prepare it for possibly tougher competition in the future. A change in the competitive situation affects both sales volumes and gross profit margins. HMS must be able to successfully compete because a failure to do so could affect the Group's profit and overall financial position.

Operational risks

The company is exposed to operational risks in its business. These risks are associated with the company's strategy, activities and its relations with the world at large.

Suppliers

HMS is dependent on well-functioning cooperation with suppliers. HMS is also dependent on its component suppliers, but other suppliers are important as well. If cooperation with these suppliers should deteriorate or be terminated, the Group would be forced to replace them with new suppliers, alternative components or it might possibly even need to redesign its products. This could have a negative effect on the Group's earnings and financial position.

Customers

The Group's sales are to professional firms. It is of the utmost importance for HMS to be able to offer attractive and competitive products in order to maintain its market position. It is therefore essential that HMS is able to develop and market new products that are both accepted by the market and fulfill customer requirements. HMS must also have the capacity for improving its existing products. If major changes should occur in the purchasing patterns of the Group's largest customers, this would affect the company's profitability. However, because HMS has such a large number of customers, its dependence on any individual customer is limited. Nevertheless, if the Group were to encounter difficulty in maintaining its relations with one or more customers, this could negatively affect the company's business, earnings and financial position.

Employees

The Group's future growth is partly dependent on retaining key employees. There are no guarantees that HMS can succeed in retaining such individuals. The loss of one or more key employees could have a negative impact on the business. Thus far, HMS has not had difficulty recruiting qualified employees. However, the Group cannot guarantee that it will be able to recruit equally skilled individuals in the future. Going forward, if HMS is less successful in recruiting and retaining highly qualified managers and other skilled employees, it could find it difficult to maintain and further develop the business.

Acquisitions

In the future, HMS could acquire, divest or discontinue certain operations and/or companies. All such transactions are associated with uncertainties and risks. A thorough valuation is carried out prior to a transaction in order to reduce risks and avoid inaccurate price setting for acquisitions. However, that is not always sufficient to ensure success or minimize the associated risks.

Risk related to new products

If HMS is unsuccessful in introducing new, innovative products or in keeping up with technological developments, there could be a negative impact on the business and revenues. HMS is convinced that much of its success stems from the Group's ability to introduce new, innovative products and further develop its existing products on a continual basis. There could be a negative impact on the Group's revenues and market shares if its competitors are more successful in introducing new or improved products or services that customers find attractive. If HMS doesn't succeed in keeping up with product development and technological developments, or fails to meet customers requirements, it could have an impact on the Group's earnings and financial position.

Product safety

When manufacturing and selling industrial products, there is an associated risk of warranty claims and product liability. Therefore, HMS typically designs its products according to detailed technical specifications in order to meet the requirements of industry. Even though the company tests its products thoroughly to ensure that they meet the relevant specifications, the activities in this area could nevertheless be associated with an increased risk of warranty claims and product liability. When HMS carries out detailed studies on product safety, it relies on both internal and external analyses to ensure that its products correspond to the agreed product specifications. Even though the Group considers that these measures are sufficient in each individual case, it cannot guarantee that warranty claims or product liability suits will not occur, despite its efforts to prevent this from happening.

The purchasing and ordering of components from subcontractors also carries a risk that issues in the supplied components are only discovered at a later stage of production or after the product has been sold. In these types of situations, it can be difficult to pinpoint where the problem occurred and obtaining compensation for lost revenue and the costs associated with warranty claims and product liability suits from the supplier who was responsible for the problem can also be difficult.

Even though HMS considers that it has adequate insurance protection for product liability, it still cannot guarantee that the insured amount will be sufficient to cover claims that could be brought forth against the Group in the future. Product liability or warranty claims can result in significant costs of litigation and damages. Claims successfully made on HMS that exceed the Group's insurance cover, or claims that entail considerable negative publicity, could significantly impact the Group's earnings and financial position.

Legal risks

Legislation and regulation

HMS and its markets are, to a certain extent, affected by legislation and other directives that regulate the business. Changes in legislation, or political decisions, can thus negatively affect HMS's ability to run or develop its business.

Intellectual property rights

HMS's intellectual property rights are essential to its business. HMS has registered patents and brands in a number of countries. HMS has strived to protect its brand by registering it in each country where it currently has operations, or expects to soon become established.

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HMS has also sought patent protection where the company considers it to be commercially justified. Nevertheless, there is no guarantee that these measures are, or will be, sufficient to protect the company's intellectual property rights. HMS cannot prevent its competitors from using the HMS brand and logotype to market their own products in a way that infringes or in any other way poses a threat to the company's intellectual property rights. If the intellectual property rights cannot be protected, regardless of the reason, the Group's business could be affected in a negative way.

Disputes

The company is not currently involved in any disputes. However, although no potential future disputes have been identified, the Group could nevertheless still become involved in disputes that could have a negative impact on its earnings and financial position.

Financial risks

The Group's international operations entail a number of financial risks, which are dealt with in accordance with policies that have been established by the Board. The overall objective is for the Group to be able to provide financing to its companies and manage its financial risks so that there is minimal effect on the Group's earnings. The Group is mainly exposed to liquidity, currency, interest rate and credit risks. For further information, see Note 3.

Currency exposure

Assets and liabilities in foreign currencies are revalued at each closing. Hedging contracts are also revalued at each balance sheet date and there is also an effect when they are settled. The revaluation of balance sheet items associated with operations and the result from settlement of any hedging contracts are reported in either Other operating income or Other operating expenses. Any value change pertaining to hedging of net investments is reported in other comprehensive income. Changes in the value of other balance sheet items in foreign currency, such as cash and cash equivalents, are reported in net financial items. Operating income and expenses are also affected by changes in exchange rates. These changes have a direct impact on income and expense items.

The currency composition of operating income is approximately 60 percent in EUR, 25 percent in USD, 7 percent in JPY and 8 percent in SEK and other currencies. The currency composition of cost of goods sold is 73 percent in EUR, 22 percent in USD, 4 percent in SEK and 1 percent in JPY. The currency composition of operating expenses is 38 percent in EUR, 11 percent in USD, 4 percent in JPY and 47 percent in SEK and other currencies.

The Group's policy is to minimize currency exposure by entering into forward exchange agreements.

Future outlook

The Group's long-term growth is supported by a continued inflow of design-wins, a wider product offering, particularly for the Gateway products and Remote Management, further enhanced by the product offering from eWON, supplementary technology platforms from IXXAT and improved customer focus with expansion of HMS's sales channels, in accordance with the established strategy.

The global economic situation is assessed as uneven with a careful, positive undertone. Its effects on the market for HMS's product offering and the currency impact is difficult to assess, but HMS's long-term goals remain unchanged: long-term growth averaging 20 percent per year and an operating margin that exceeds 20 percent.

HMS share

HMS Networks AB (publ) is listed on the NASDAQ OMX Nordic Mid Cap list, in the Information Technology sector. On average, 4,516 (3,153) shares were traded each day. The shares' volume-weighted average price in 2015 was SEK 203.5 (144.6). The total number of shares at the end of the period were 11,322,400, of which 31,000 are held in treasury. All shares have the same voting rights.

PARENT COMPANY

Information about the business

The parent company's activities focus on Group-wide administration and financing. Apart from the CEO, the Parent Company has no employees.

Proposed distribution of profit in the Parent Company

The following profits are at the disposal of the AGM:

Summary of results
Profit brought forward and other non-restricted reserves	69,670,683
Profit (loss) for the year	194,337
Total non-restricted equity	69,865,020

The Board of Directors and CEO propose:

Distributing dividends to shareholders of SEK 2.50 per share	29,184,293
Carried forward	40,680,727
	69,865,020

It is the Board's opinion that the proposed dividend would not inhibit the company, or any other company belonging to Group, from meeting its obligations over the short or long term, nor would it prevent the Group from being able to make necessary investments. The proposed dividend is thus justifiable, having considered what is stated in Chapter 17, Paragraph 3, Sections 2-3 of the Swedish Companies Act (prudence rule).

HMS NETWORKS ANNUAL REPORT 2015

Consolidated income statement

SEK t	Note	2015	2014
Net sales	5	701,676	589,212
Cost of goods and services sold		-271,918	-222,366
GROSS PROFIT		429,757	366,846
Selling expenses		-164,932	-138,766
Administrative expenses		-61,354	-53,750
Research and development expenses		-103,116	-85,052
Other operating income	10	1,230	8,303
OPERATING PROFIT	6, 7, 8, 26	101,584	97,582
Financial income	10, 28	2	37
Financial expenses	10, 29	-14,025	-11,809
Total income from financial investments		-14,023	-11,772
PROFIT BEFORE TAX		87,561	85,811
Income tax	9	-27,356	-22,713
PROFIT FOR THE YEAR		60,205	63,098
Earnings per share, SEK	11	5.33	5.59
Total number of outstanding shares, in thousands		11,291	11,291
Dividends per share, SEK	12	2.50	2.25

Consolidated statement of comprehensive income

SEK t	Note	2015	2014
Profit (loss) for the year		60,205	63,098
Other comprehensive income:
Items that could be reclassified to the income statement
Cash flow hedges		1,787	-2,720
Hedging of net investments		11,565	-13,029
Exchange differences on translation of foreign operations		-11,244	18,395
Income tax attributable to the items above	22	-2,937	3,465
Other comprehensive income for the year, after tax		-830	6,111
Total comprehensive income for the year		59,376	69,209

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FINANCIAL STATEMENTS

Consolidated balance sheet

SEK t	Note	2015-12-31	2014-12-31
ASSETS
Non-current assets
Intangible assets	13
Patents		0	237
Capitalized development work		111,143	108,374
Goodwill		394,167	400,752
Customers and technology platforms		53,993	64,408
Brands		80,699	84,060
Total intangible assets		640,002	657,830
Property, plant and equipment	14, 25
Plant and machinery		7,764	9,938
Equipment, installations and facilities		7,536	8,582
Total property, plant and equipment		15,300	18,520
Financial assets
Deferred tax asset	22	3,239	1,328
Other long-term receivables		1,723	1,498
Total financial assets		4,962	2,826
Total non-current assets		660,264	679,176
Current assets
Inventories	17	55,810	53,953
Accounts receivable - trade	34	81,973	69,494
Current tax assets		198	0
Other receivables	34	7,234	7,459
Prepaid expenses and accrued income	16, 30	5,881	4,630
Cash and cash equivalents	34	19,503	17,629
Total current assets		170,599	153,165
TOTAL ASSETS		830,863	832,341
SEK t	Note	2015-12-31	2014-12-31
---	---	---	---
EQUITY AND LIABILITIES
Equity
Share capital	19	1,132	1,132
Other contributed capital	19	125,641	125,641
Reserves		8,926	9,755
Retained earnings		319,783	286,070
Total equity		455,482	422,599
Non-current liabilities
Borrowings	34	158,142	204,891
Deferred income tax liabilities	22	72,242	65,115
Total non-current liabilities		230,384	270,006
Current liabilities
Borrowings	34	38,759	40,497
Accounts payable - trade	34	44,704	40,695
Current tax liability		7,760	7,802
Derivative instruments	34	473	2,260
Other liabilities	34	10,712	12,641
Accrued expenses and deferred income	31	40,177	33,475
Other provisions	20	2,412	2,366
Total current liabilities		144,997	139,736
TOTAL EQUITY AND LIABILITIES		830,863	832,341

HMS NETWORKS ANNUAL REPORT 2015

Consolidated cash flow statement

SEK t	Note	2015	2014
Cash flow from operating activities
Operating profit		101,584	97,582
Adjustment for items not included in cash flow:
Depreciation		33,170	27,998
Impairment of intangible assets		202	2,011
Disposals of PPE		202	0
Incentive program	8	1,737	1,238
Exchange rate differences		-14,026	-4,502
Interest paid		-4,936	-5,851
Income tax paid		-21,125	-19,034
Cash flow from operating activities before changes in operating capital		96,808	99,442
Change in working capital
Change in inventories		-2,353	-17,140
Change in accounts receivables - trade		-12,100	-13,370
Change in other current receivables		-1,091	839
Change in accounts payable - trade		4,087	12,186
Change in other current liabilities		4,661	11,298
Cash flow from operating activities		90,012	93,255
SEK t	Note	2015	2014
---	---	---	---
Investing activities
Investments in PPE	14	-5,042	-6,037
Investments in intangible assets	13	-20,404	-31,773
Change in non-current financial assets		-160	0
Change in current financial investments		208	-172
Cash flow from investing activities		-25,398	-37,982
Financing activities
Borrowings		0	7,375
Repayment of loans		-34,643	-36,778
Dividends paid to the parent company's shareholders	12	-28,229	-25,405
Cash flow from financing activities		-62,872	-54,808
CHANGE IN CASH AND CASH EQUIVALENTS		1,742	465
Cash and cash equivalents at beginning of year	18	17,629	15,818
Exchange rate differences in cash and cash equivalents		-208	172
Translation differences		340	1,174
Cash and cash equivalents at year-end	18	19,503	17,629

HMS NETWORKS ANNUAL REPORT 2015 53

Consolidated statement of changes in equity

SEK t	Note	Share capital	Other contributed capital	Reserves	Retained earnings	Total equity
Opening balance on 1 January 2014 as per adopted balance sheet		1,132	125,641	3,644	247,139	377,557
Comprehensive income
Profit (loss) for the year					63,098	63,098
Other comprehensive income:
Cash flow hedges	15			-2,720		-2,720
Hedging of net investments	15			-13,029		-13,029
Exchange rate differences				18,395		18,395
Income tax attributable to components in other comprehensive income	22			3,465		3,465
Total comprehensive income		0	0	6,111	63,098	69,209
Transactions with shareholders in their capacity as owners:
Costs for share-related remuneration					1,238	1,238
Dividend (SEK 2.25 per share)	12				-25,405	-25,405
Total transactions with shareholders, reported directly to equity		0	0	0	-24,167	-24,167
Closing balance on 31 December 2014		1,132	125,641	9,755	286,070	422,599
SEK t	Note	Share capital	Other contributed capital	Reserves	Retained earnings	Total equity
---	---	---	---	---	---	---
Opening balance on 1 January 2015 as per adopted balance sheet		1,132	125,641	9,755	286,070	422,599
Comprehensive income
Profit (loss) for the year					60,205	60,205
Other comprehensive income:
Cash flow hedges	15			1,787		1,787
Hedging of net investments	15			11,565		11,565
Exchange rate differences				-11,244		-11,244
Income tax attributable to components in other comprehensive income	22			-2,937		-2,937
Total comprehensive income		0	0	-829	60,205	59,376
Transactions with shareholders in their capacity as owners:
Costs for share-related remuneration					1,737	1,737
Dividend (SEK 2.50 per share)	12				-28,229	-28,229
Total transactions with shareholders, reported directly to equity		0	0	0	-26,492	-26,492
Closing balance on 31 December 2015		1,132	125,641	8,926	319,783	455,482

HMS NETWORKS ANNUAL REPORT 2015

Parent company's income statement

SEK I	Note	2015	2014
Net sales	5	11,933	8,835
GROSS PROFIT		11,933	8,835
Administrative expenses	7, 8, 26	-11,606	-8,834
OPERATING PROFIT		327	1
Profit from financial investments
Interest expenses and similar items	29	0	-1
Total income from financial investments		0	-1
PROFIT AFTER FINANCIAL ITEMS		327	0
Appropriations		8	0
Tax on profit for the year		-141	-48
PROFIT FOR THE YEAR		194	-48

HMS NETWORKS ANNUAL REPORT 2015 55

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FINANCIAL STATEMENTS

Parent company's balance sheet

SEK t	Note	2015-12-31	2014-12-31
ASSETS
Non-current assets
Financial assets
Participations in Group companies	27	244,039	244,039
Total financial assets		244,039	244,039
Total non-current assets		244,039	244,039
Current assets
Current receivables
Tax receivables		0	101
Other receivables		4	21
Prepaid expenses and accrued income	30	596	332
Total current receivables		600	454
Cash and bank balances		276	192
Total current assets		876	646
TOTAL ASSETS		244,915	244,685
SEK t	Note	2015-12-31	2014-12-31
---	---	---	---
EQUITY AND LIABILITIES
Equity
Restricted equity
Share capital	19	1,132	1,132
Statutory reserve		19,446	19,446
Total restricted equity		20,578	20,578
Non-restricted equity
Retained earnings		51,073	79,350
Share premium reserve		18,598	18,598
Profit (loss) for the year		194	-48
Total non-restricted equity		69,865	97,899
Total equity		90,443	118,477
Untaxed reserves		0	8
Current liabilities
Accounts payable - trade		667	427
Liabilities to Group companies		149,890	122,888
Income tax liabilities		30	0
Other liabilities		1,068	561
Accrued expenses and deferred income	31	2,817	2,323
Total current liabilities		154,472	126,200
TOTAL EQUITY AND LIABILITIES		244,915	244,685
PLEDGED ASSETS	24	244,039	244,039
CONTINGENT LIABILITIES	24	226,630	271,665

HMS NETWORKS ANNUAL REPORT 2015

Parent company's cash flow statement

SEK t	Note	2015	2014
Operating activities
Operating profit		327	1
Interest paid	29	0	-1
Income tax paid		-10	-141
Cash flow from operating activities before changes in working capital		317	-141
Change in working capital
Change in other current receivables		-247	-114
Change in accounts payable - trade		240	-108
Change in other current liabilities		28,002	25,153
Cash flow from operating activities		28,313	24,789
Financing activities
Dividend paid		-28,229	-25,405
Cash flow from financing activities		-28,229	-25,406
CHANGE IN CASH AND CASH EQUIVALENTS		84	-617
Cash and cash equivalents at beginning of year		192	808
Cash and cash equivalents at year-end		276	192

Parent company's statement of changes in equity

SEK t	Note	Restricted equity		Non-restricted equity			Total
		Share capital	Statutory reserve	Retained earnings	Share premium reserve	Profit (loss) for the year
Opening balance on 1 January 2014		1,132	19,446	54,740	18,598	50,016	143,931
Transfer of profit (loss) from 2013				50,016		-50,016	0
Dividend (SEK 2.25 per share)	12			-25,405			-25,405
Profit (loss) for the year						-48	-48
Closing balance on 31 December 2014		1,132	19,446	79,350	18,598	-48	118,477
SEK t	Note	Restricted equity		Non-restricted equity			Total
---	---	---	---	---	---	---	---
		Share capital	Statutory reserve	Retained earnings	Share premium reserve	Profit (loss) for the year
Opening balance on 1 January 2015		1,132	19,446	79,350	18,598	-48	118,477
Transfer of profit (loss) from 2014				-48		48	0
Dividend (SEK 2.50 per share)	12			-28,229			-28,229
Profit (loss) for the year						194	194
Closing balance on 31 December 2015		1,132	19,446	51,073	18,598	194	90,443

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NOTES

Notes

All amounts in SEK thousands unless otherwise stated

NOTE 1 General information

The HMS Group is one of the world's leading suppliers of communication technology for industrial automation. The Group develops and manufactures flexible, innovative and reliable solutions to connect industrial products to networks and gateways, thus enabling interconnection between various networks under the Anybus and IXXAT brands, as well as products for remote monitoring under the Netbiter brand. Nearly all development and most of the manufacturing takes place at the company's head office in Halmstad, Sweden and in Ravensburg, Germany. Sales are conducted from the head office in Sweden and from the sales offices in Japan, China, Germany, USA, Italy, France, India, Great Britain and Denmark.

The parent company, HMS Networks AB (publ), is a listed Swedish limited liability company based in Halmstad, Sweden. The head office address is Stationsgatan 37, Halmstad, Sweden. The company is listed on the NASDAQ-OMX Nordic Exchange in the Mid Cap, Information Technology category.

This annual report and consolidated financial statements were approved for publication by the Board of Directors on 21 March 2016.

NOTE 2 Accounting policies

The most important accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis for preparation of financial statements

The consolidated financial statements of the HMS Group have been prepared in accordance with the Swedish Annual Accounts Act and RFR 1 Additional Accounting Regulations for Groups and the International Financial Reporting Standards (IFRS) and interpretations issued by the IFRS Interpretations Committee (IFRS IC) that have been adopted by the EU.

The annual report has been prepared in accordance with the cost method, with the exception of certain financial assets measured at fair value in other comprehensive income.

The parent company's financial statements have been prepared in accordance with the Annual Accounts Act and RFR 2 Accounting for Legal Entities. In cases where the parent company has applied different accounting policies than the Group, this is specifically stated in the respective sections below.

Preparing financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires the management team to make certain judgments in the process of applying the accounting policies. Note disclosures are provided for areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, which is explained in Note 4.

2.1.1 Changes in accounting policies and disclosures

a) New and amended standards adopted by the Group

During the financial year, the Group did not apply any new or revised standard that has a significant impact on the Group's financial statements.

b) New standards, amendments and interpretations of existing standards that have not yet come into force and have not been early adopted by the Group

At the time when the consolidated financial statements for 31 December 2015 were prepared, several standards and interpretations applicable to the Group had been published, but had not yet come into force. None of these are expected to have a significant impact on the consolidated financial statements with the exception of the ones stated below:

Standard	Materiality requirements	Impact	Valid as of
IFRS 9 Financial instruments	IFRS 9 deals with the classification, measurement and recognition of financial assets and liabilities and introduces new rules for hedge accounting. The complete version of IFRS 9 was issued in July 2014. It replaces the parts of IAS 39 that deal with the classification and measurement of financial instruments and introduces a new impairment model.	The new hedge accounting rules in IFRS 9 are more compatible with the company's risk management in practice. In general, it will become easier to apply hedge accounting because the standard introduces a more principles-based approach to hedge accounting. The new standard also introduces increased disclosure requirements and changes in presentation. The Group has not yet evaluated how the Group's hedge accounting will be affected by the new rules.	1 January 2018 According to the transition rules in the full version of IFRS 9, early adoption in stages was allowed for financial years beginning before February 1, 2015. After that date, the rules must be applied in their entirety. Expected to be applied by the Group as of 1 January 2018.
IFRS 15 Revenue from Contracts with Customers	IFRS 15 is the new standard for revenue recognition. IFRS 15 replaces IAS 18 Revenue and IAS 11 Construction Contracts. IFRS 15 is based on the principle that revenue is recognized when the customer obtains control of the goods sold or services rendered - a principle which replaces the previous principle that revenue is recognized when the risks and benefits have been transferred to the buyer. A company may choose between the fully retrospective approach or prospective application with additional disclosures.	Management is currently evaluating the effect of the new standard. At present, the Group is not able to assess the impact of the new rules on the financial statements. The Group will carry out a detailed evaluation over the coming year.	1 January 2018 Expected to be applied by the Group as of 1 January 2018.
IFRS 16 Leases	IFRS 16 Leases was published in January 2016 and it replaces the prior IAS 17 Leases and the related interpretations IFRIC 4, SIC-15 and SIC-27. Reporting by the lessor will essentially remain unchanged, while reporting by the lessee will change. There will no longer be a difference between operating and finance leases. All leases will instead be recognized in the balance sheet, except for short-term agreements and agreements for insignificant amounts. Reporting is based on the view that the lessee is entitled to use the asset for a specific period of time, while also being obligated to pay for that right.	Management is currently evaluating the effect of the new standard. At present, the Group is not able to assess the impact of the new rules on the financial statements. The Group will carry out a detailed evaluation over the coming year.	1 January 2019 or later. Early adoption is allowed.

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NOTES

None of the other IFRS or IFRIC interpretations that have still not come into force are expected to have a significant impact on the Group.

2.2 Consolidated financial statements

a) Subsidiaries

Subsidiaries are all companies that are controlled by the Group. The Group has a controlling interest in a company when it is exposed to, or entitled to, a variable return from its holding in the company and it is able to affect the return via its control over the company. Subsidiaries are fully consolidated as of the date when the Group obtains a controlling influence. They are no longer consolidated as of the date when the Group no longer has a controlling influence.

The acquisition method is used for reporting the Group's business combinations (see Note 2.8).

Intra-Group transactions, balance sheet items and unrealized gains and losses on transactions between Group companies are eliminated. Intra-Group losses could indicate a necessity of recognizing impairment losses in the consolidated financial statements. The accounting policies of subsidiaries have been adjusted, where necessary, to ensure consistency with the policies applied by the Group.

Non-controlling interest in subsidiaries' profit or loss and equity are presented separately in the consolidated income statement, statement of comprehensive income, statement of changes in equity and the balance sheet.

b) Divestment of a subsidiary

When the Group no longer has a controlling interest, each remaining holding is measured at fair value as of the point in time when the loss of control occurred. The change in carrying amount is reported in the income statement. Fair value is used as the first reported value and provides the basis for future reporting of the remaining holding as an associated company, joint venture or financial asset. All amounts concerning the divested unit that were previously reported in other comprehensive income are reported as if the Group had directly divested the attributable assets or liabilities. This could mean that amounts previously recognized in other comprehensive income are reclassified and recognized in profit or loss instead.

2.3 Reporting of segments

Segment disclosures must be presented from the management's perspective, i.e. in the same way that they are presented for internal reporting purposes. The point of departure for identifying reportable segments is the internal reporting used by the highest-ranking executive decision-maker. Management has analyzed the internal reporting and concluded that the Group's highest-ranking executive decision-maker, the Group management team, regularly analyses the sales reports, quality reports, consolidated income statement and cash flow statement. This reporting is based on the fact that the common technology platform, development process, manufacturing process, market strategy and sales resources do not motivate further segmentation of the business. Therefore, there is no follow-up on the profit of any particular segment of the business.

2.4 Translation of foreign currency

a) Functional currency and reporting currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (i.e. the functional currency). The consolidated financial statements are presented in Swedish kronor (SEK), which is the Parent Company's functional currency and the Group's reporting currency.

b) Transactions and balance sheet items

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the transaction dates or the date when items were remeasured. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of closing day rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. However, this does not apply to transactions that fulfill the requirements for hedge accounting of cash flows or net investments. Such gains or losses are recognized in other comprehensive income. Foreign exchange gains and losses attributable to loans and cash equivalents are reported in the income statement as financial revenue or financial expenses. Exchange profits and losses attributable to the purchasing of raw materials and products are reported in the

income statement as cost of goods sold. Other foreign exchange gains and losses are reported in the income statement as 'Other operating income' and 'Other operating expenses' respectively.

c) Group companies

The profit or loss and financial position of all Group entities (none of which has the functional currency of a hyperinflationary economy) that have a different functional currency than their reporting currency, are translated into the Group's reporting currency as follows:

a) assets and liabilities in each of the balance sheets are translated at the closing rate of exchange;
b) income and expenses in each of the income statements are translated at the average rate of exchange, and
c) all resulting exchange differences are recognized in other comprehensive income.

In the consolidated financial statements, exchange rate differences attributable to the translation of a net investment in a foreign operation, together with exchange rate differences attributable to loans or other financial instruments designated as hedges of such investments are recognized in other comprehensive income. Accumulated gains and losses in equity are recognized in profit or loss when foreign operations are sold, either entirely or in part.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

2.5 Revenue recognition

Revenue is recognized at the fair value of the consideration received or to be received for goods and services sold as part of the Group's operating activities. Revenue is recognized after deductions for VAT, returns, rebates and discounts and after the elimination of intra-Group sales.

The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the company and when specific criteria have been met for each of the Group's activities as described below. The Group bases its estimates on historical outcomes, the type of customer, the type

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CONT. NOTE 2 Accounting policies

of transaction and the particular circumstances of each case.

The Group manufactures and sells products to connect industrial equipment to networks and gateways to enable the interconnection of different networks, as well as products for remote monitoring.

Revenue is recognized upon delivery of the products to the customer, in accordance with the sales conditions, at the point at which the material risks and benefits are transferred to the buyer.

The Group also sells development services associated with industrial network technology. These services are invoiced based on time and material or as fixed price contracts. Revenue from time and material contracts is recognized at the contractual rates as labor hours are provided and direct expenses are incurred.

For services provided as part of a fixed price contract, revenue is recognized on the balance sheet date in accordance with the percentage of completion method. Percentage of completion is determined by comparing the services already rendered to the total amount of services to be performed.

Estimates are revised if any circumstances arise that could alter the original estimate of revenue, expenses or the percentage of completion. These reassessments could result in an increase or decrease to the estimated revenue or costs and the effect is on revenue during the period when management became aware of such circumstances.

Interest income is recognized using the effective interest method. When the value of a receivable becomes impaired, the carrying amount is lowered to the recoverable amount, which is equal to the estimated future cash flows discounted at the original effective interest rate for the instrument. The discounting effect then continues to be dissolved as interest income. Interest income on impaired loan receivables is recognized using the original effective interest rate.

2.6 Current and deferred income tax

Tax expense for the period includes current tax on the period's taxable profit using current tax rates. The current tax expense is adjusted by changes in deferred tax assets and tax liabilities attributable to temporary differences and unutilized loss carry-forwards.

Current tax expense is calculated using the tax regulations that have been decided or announced at year-end in the countries where the

parent company and its subsidiaries have operations and generate taxable income.

Deferred tax is reported in the consolidated financial statements on all differences arising between the tax base and the carrying amounts of assets and liabilities (temporary differences). However, a deferred tax liability is not reported if it arises in conjunction with the initial recognition of goodwill. Furthermore, deferred tax is not recognized if it arises from a transaction associated with the initial recognition of an asset or liability that is not a business combination and which, at the time of the transaction, has no effect on either reported profit or taxable profit.

Deferred income tax is calculated using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realized or deferred tax liability is settled.

Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred taxes attributable to temporary differences associated with holdings in subsidiaries and associated companies, are recognized only to the extent that the parent can control the reversal of the temporary differences and it is probable that such a reversal will not occur in the foreseeable future.

Deferred tax assets and deferred tax liabilities are offset only if the entity has the legal right to offset current tax assets and tax liabilities and when the deferred tax assets and tax liabilities are related to taxes levied by the same taxing authority and pertaining to either the same entity or different entities that intend to realize the asset and settle the liability at the same time via net payments.

Current and deferred tax is recognized in the income statement, except when the tax relates to items reported in other comprehensive income or directly in equity. In such cases the tax is also recognized in other comprehensive income and equity respectively.

2.7 Leasing

Leasing of items of property, plant and equipment in which the Group, as lessee, essentially holds the financial risks and rewards associated with ownership, are classified as finance leases (Note 25). At the start of the leasing period, a finance lease is recognized

in the balance sheet at the lower of the leased item's fair value and present value of the minimum lease payments. Corresponding payment obligations, after deductions for financial expenses, are included in the balance sheet items 'Long-term borrowings' and 'Short-term borrowings'. Each lease payment is allocated between interest and amortization of the liability. Interest is recognized in the income statement over the leasing period so that the amount of the expense in each reporting period corresponds to a constant periodic rate of interest on the remaining balance of the liability. If there is no reasonable certainty that the lessee will obtain ownership at the end of the lease – items of property, plant and equipment, held under a finance lease, are then depreciated over the shorter of the lease term or the life of the asset.

Leases in which a significant portion of the risks and rewards associated with ownership are retained by the lessor are classified as operating leases (Note 25). Payments made during the leasing period are expensed in the income statement linearly over the leasing period.

Note 2.8 Business combinations

The acquisition method is used for reporting the Group's business combinations, regardless of whether the acquisition consists of equity interests or other assets. Consideration for the acquisition of a subsidiary consists of the fair value of

transferred assets
liabilities that the Group incurs to former owners
shares issued by the Group
assets or liabilities resulting from an agreement on contingent consideration
previously held equity interest in the acquired company

Identifiable acquired assets, assumed liabilities and assumed contingent liabilities in a business combination are (with few exceptions) initially measured at fair value on the acquisition date. For each acquisition, i.e. business combination, the Group determines whether the non-controlling interest in the acquired company should be reported at fair value or at the holding's proportionate share of the carrying amount of the acquired company's identifiable net assets.

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The costs associated with acquisition are expensed as incurred. Goodwill is the amount for which

transferred consideration,
any non-controlling interest in the acquired company, and
the fair value at the time of acquisition on the prior equity interests in the acquired company (if the business combination is done in stages)

exceeds the fair value of the identifiable acquired net assets. If the amount is lower than the fair value of the acquired net assets, e.g. acquisition at a low price, the difference is reported directly to profit or loss.

In cases where all or part of the consideration is deferred, the future payments are discounted to present value at the acquisition date. The discount rate used is the company's marginal interest rate, which is the interest rate that the company would have paid for financing via loans during the corresponding period and corresponding terms.

Conditional consideration is classified either as equity or as a financial liability. Amounts classified as financial liabilities are revalued each period at fair value. Any gains or losses resulting from such revaluation are recognized in profit or loss.

If a business combination is carried out in several steps, the prior equity interests in the acquired company are revalued to its fair value at the time of the acquisition. Any gains or losses resulting from such revaluation are recognized in profit or loss.

2.9 Impairment of non-financial assets

Goodwill and intangible assets with an indefinite useful life, or intangible assets that are not ready for use, are not amortized. Instead, they are tested annually, or whenever there is an indication of loss in value, for impairment. Assets subject to amortization are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the asset's fair value less selling expenses or its value-in-use, whichever is higher.

For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash

flows (cash-generating units). For assets (other than goodwill) where an impairment loss was previously recognized, a test is done at each closing to determine whether the loss can be reversed.

Capitalized development work is tested annually for impairment before it is ready to be put into use.

2.10 Cash and cash equivalents

Cash and cash equivalents are reported in both the balance sheet and cash flow statement. They include cash in hand, deposits held in bank accounts and other current investments. Other current investments are classified as cash and cash equivalents when they have maturities of three months or less, can be easily converted to cash at a known amount and are subject to an insignificant risk of changes in value.

Utilized bank overdraft facilities are recognized as borrowings in current liabilities.

2.11 Accounts receivables – trade

Accounts receivable are amounts to be paid by customers for goods or services provided by the company as part of its operating activities. If payment is expected within one year or less (or during the normal business cycle, if it is longer than one year), they are classified as current assets. If not, they are reported as non-current assets.

Accounts receivable are initially measured at fair value and subsequently measured at amortized cost using the effective interest method, less any provision for impairment. A provision for impairment of accounts receivable is set up when there is objective evidence that the Group will not be able to collect all amounts that have fallen due according to the original terms that applied.

2.12 Inventories

Inventories are recognized at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) principle. Raw materials are measured at cost. Finished goods are measured at standard cost. The cost of finished goods and work-in-progress consists of raw materials/components, direct labor, and other direct and indirect directly attributable manufacturing costs (based on normal manufacturing capacity). Borrowing costs are not included. The net realizable value is the estimated selling price in the ordinary course of

business, less applicable variable selling expenses. Inter-company profit from sales between Group companies is eliminated.

2.13 Financial instruments

2.13.1 Classification

The Group classifies its financial assets as follows: financial assets measured at fair value through profit or loss, loan receivables, accounts receivable and derivatives used as a hedge.

The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

a) Financial assets valued at fair value through profit or loss

Financial assets valued at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if it was acquired primarily for the purpose of selling it in the short-term. Derivatives are classified as held for trading if they have not been identified as hedging instruments. Assets in this category are classified as current assets if they are expected to be settled within 12 months. Otherwise, they are classified as non-current assets.

b) Loan receivables and accounts receivable

Accounts receivable and cash are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, with the exception of items that mature more than 12 months after the balance sheet date. These are classified as non-current assets. Loan receivables and accounts receivable consist of 'Accounts receivable and other receivables' and 'Cash and cash equivalents' in the balance sheet (Note 2.10 and 2.11).

c) Derivatives and hedging

Derivatives are recognized in the balance sheet on the contract date. They are measured at fair value both initially and upon subsequent revaluation at the end of each reporting period.

When determining the fair value of a hedging instrument, the quoted rate of the currency on the closing date is used. At each balance sheet date, the Group assesses whether there is objective evidence of impairment of a financial asset or a group of financial

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assets. If there is objective evidence of impairment, the asset is written down to its fair value.

The method for recognizing the gain or loss arising from revaluation depends on whether the derivative has been identified as a hedging instrument. If so, consideration is also given to the item that is being hedged. The Group identifies certain derivatives as either:

hedge of fair value, for a recognized asset or liability or a binding obligation (fair value hedge),
hedge of a risk linked to cash flows of a recognized asset or liability or a highly likely forecast transaction (cash flow hedge), or
hedge of a net investment in a foreign operation (hedge of net investment).

When the transaction is entered into, the relationship between the hedging instrument and the hedged item is documented, as well as the Group's objectives for risk management and its risk management strategy for the hedge. The Group also documents its assessment, both at the start of the hedging period and on an ongoing basis, of how the derivative instruments used in the hedging transaction have been, and will continue to be, effective in terms of counterbalancing changes in fair value or cash flows attributable to the hedged items.

Information about the fair value of various derivative financial instruments used for hedging is provided in Note 15. All derivative instruments are classified as either current assets or current liabilities.

Cash flow hedging

The Group utilizes derivatives to cover the risks associated with exchange rate fluctuations on future commercial cash flows (both external and internal) in a foreign currency. The holdings of derivative financial instruments consist of currency forwards.

Hedges are designed with the expectation that they will be effective. The effective part of changes in fair value of a hedging instrument that has been identified as a cash flow hedge and which meets the conditions for hedge reporting, is reported in other comprehensive income, and the accumulated amount is reported directly in equity. The gain or loss attributable to any ineffective part is reported immediately in profit or loss as part of other revenue or other expenses.

The accumulated amount reported in equity is reclassified to profit or loss in the periods when the hedged item impact profit or loss (e.g. when the forecast sale that has been hedged occurs).

Accumulated gains or losses in equity will be retained in equity when the hedging instrument expires, is sold, or when the hedge no longer meets the hedge accounting criteria. These gains and losses are taken to profit or loss when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the accumulated gains or losses that have been retained in equity must be immediately reported in the income statement as part of operating profit or loss.

Hedging of net investments

Hedging of net investments in foreign operations are reported in the same way as cash flow hedges.

The portion of the gain or loss on a hedging instrument that is assessed as an effective hedge is recognized in other comprehensive income and the accumulated amount is recognized in equity. The gain or loss attributable to the ineffective part is recognized immediately in profit or loss as part of other revenue or other expenses.

Accumulated gains and losses in equity are reclassified to profit or loss when foreign operations are sold, either entirely or in part.

2.13.2 Reporting and valuation

Purchases and sales of financial assets are recognized on the trade date, which is the date on which the Group commits to purchase or sell the asset. Financial instruments, except for financial assets reported at fair value via the income statement, are initially recognized at fair value plus transaction costs. Financial assets carried at fair value via the income statement are initially recognized at fair value, and associated transaction costs are reported in the income statement.

Financial assets are removed from the balance sheet when the rights to receive cash flows from the instruments have expired or have been transferred and the Group has substantially transferred all risks and rewards of ownership. Financial assets that can be sold and financial assets valued at fair value via the income statement are reported at fair value after the acquisition date. Loan receivables

and accounts receivable are measured at amortized cost using the effective interest method.

Gains or losses arising from changes in the fair value of any assets in the category 'financial assets at fair value through profit or loss' are reported in the income statement as 'Other operating income' or 'Other operating expenses' in the same period that the gain or loss arises.

2.13.3 Offsetting financial instruments

Financial assets and liabilities are offset and reported at a net sum in the balance sheet, only when there is a legally enforceable right to offset the amounts and an intention either to settle on a net basis, or to realize the asset and settle the liability simultaneously. The legal right may not be dependent on future events and must be legally binding on the company and the counterparty both in the normal course of business and in the event of default, insolvency or bankruptcy.

2.14 Property, plant and equipment

Property, plant and equipment are reported at cost less accumulated depreciation. Cost includes expenditure that is directly attributable to the acquisition of the asset.

Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. The carrying amount of a replaced part is derecognized. All other repairs and maintenance are expensed in the same period that they incurred.

Depreciation is based on original cost and the estimated useful life of the asset as follows:

Plant and equipment 3–7 years

Equipment, installations and facilities 3–7 years

The residual value and useful life of assets are tested at the end of every reporting period and adjusted if necessary. In cases where the carrying amount exceeds the estimated recoverable amount, the asset is immediately written down to its recoverable amount.

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Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and they are reported under 'Other operating income' or 'Other operating expenses'.

2.15 Intangible assets

a) Goodwill

Goodwill is calculated in accordance with the principles explained in Note 2.8. Goodwill that arises from a business combination is included in intangible assets. Goodwill is not amortized. Instead, goodwill is tested for impairment on an annual basis, or more often if events or changed conditions indicate possible impairment. Goodwill is recognized at cost less accumulated impairment losses. Upon sale of a unit, the carrying amount of goodwill is included in the gain/loss that arises.

When testing for impairment, goodwill that has been acquired in conjunction with a business combination is allocated to the cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the acquisition. Each unit, or group of units, to which goodwill has been allocated represent the lowest level within the entity at which the goodwill is monitored for internal management purposes.

Impairment losses are immediately expensed and they are never reversed.

b) Brands

Brands have been acquired via business combination and they are measured at fair value on the acquisition date. Brands with an indefinite useful life are tested each year for impairment.

c) Customers and technology platforms

Customers and technology platforms have been acquired via business combination and they are measured at fair value on the acquisition date. Customers and technology platforms have a definite useful life and are measured at cost less accumulated amortization and impairment losses.

Amortization is on a straight-line basis to allocate the cost over the estimated useful life of 10 years.

d) Capitalized development work

HMS's technology is based on internally developed solutions for connecting industrial equipment to networks, as well as gateways for the interconnection of different networks. The technology used in HMS's products is based on the patented Anybus technology. IXXAT products are built on complete system solutions, as well as hardware and software solutions in the areas of embedded subsystems.

Expenditures that are directly attributable to development and testing of identifiable and unique integrated circuits, strategic IP blocks, new product line platforms and expenditure up until the first protocol version for a specific network in a product line and that are controlled by the Group are recognized as intangible assets if the following criteria are fulfilled:

it is technically possible to complete the above development project so that the development results can be used,
the company's intention is to complete the development project and to either use it or sell it,
it is likely that the development results can be used or sold,
it can be shown how the development results generate probable future economic benefits,
there is access to adequate technical, financial and other resources to complete development and to either use or sell the development results, and
the expenditure attributable to the project during its development can be estimated in a reliable way.

Customer-specific projects are capitalized when it has been determined as likely that the development costs will be covered by future volume commitments. Costs include the employee costs for internal work with development, external expenses and a reasonable share of the indirect costs.

Intangible assets resulting from development work are reported at cost. In cases where the carrying amount exceeds the estimated recoverable amount, the asset is immediately written down to its recoverable amount.

The development of new product platforms is capitalized during the development phase. Maintenance of software and expansions of existing products and product lines are treated as adjustments of the core product and are not capitalized. Projects in the development phase are not capitalized.

Development costs that were previously expensed are not capitalized as assets in later periods.

Advances attributable to external development are reported as intangible assets provided that the company has control over the asset.

Amortization is calculated on the original cost and is based on the assessed useful life of the asset as follows:

Capitalized development work 5-7 years

2.16 Accounts payable and other liabilities

Accounts payables are obligations to pay for goods or services acquired by suppliers as part of operating activities. The amounts are not hedged and are typically paid within 30 days.

Accounts payables and other liabilities are classified as current liabilities if they fall due for payment within 1 year or sooner (or over a normal business cycle if this is longer). Otherwise, they are reported as non-current liabilities.

The liabilities are initially measured at fair value and subsequently measured at amortized cost using the effective interest method.

2.17 Borrowing and borrowing costs

Borrowing is initially reported at fair value net after transaction costs. Afterwards, borrowing costs are reported at amortized cost and any difference between received amount (net after transaction costs) and the repayment amount is reported in profit or loss allocated over the loan period, applying the effective interest method.

Borrowing is removed from the balance sheet when the obligations have been settled, canceled or otherwise terminated. The difference between the carrying amount of a financial liability (or part of financial liability) that has been extinguished or transferred to another party and the consideration paid, including transferred assets which are not cash or liabilities assumed, is recognized in profit or loss.

Utilized bank overdraft facilities are reported as borrowings under current liabilities in the balance sheet.

The company does not have any major development projects that would necessitate capitalization of borrowing costs. All borrowings costs are thus expensed as incurred.

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CONT. NOTE 2 Accounting policies

2.18 Provisions

Provisions for legal claims, guarantees and restoration measures are recognized when the Group has a legal or informal obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. No provision is made for future operating losses.

Where there are a number of similar obligations, an assessment is made of the likelihood that an outflow of resources will be required to settle the obligations. That assessment covers the entire group of similar obligations. A provision is made for the entire group of similar obligations even if the likelihood of an outflow of resources to settle a particular item in that group is low.

The returns and warranty provision is based on a routine developed specifically for the company.

2.19 Remuneration to employees

Liabilities for wages and salaries, including non-monetary benefits and paid absence, that are expected to be settled within 12 months after the fiscal year end, are recognized as current liabilities at the undiscounted amount expected to be paid when the liabilities are settled. The expense is recognized at the rate that employees render services.

Liabilities for long-term paid absence are not expected to be regulated in full within 12 months after the end of the reporting period in which the employees perform the services that are eligible for compensation. These are reported as non-current liabilities.

a) Pension commitments

Group companies have different plans for post-employment benefits, defined benefit and defined contribution pensions. A defined contribution plan is a pension plan under which the Group pays fixed contributions to a separate legal entity. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.

The pension obligations for salaried employees in Sweden are secured through insurance with Alecta, which is a defined benefit plan covering a number of employers. For the 2015 financial year, the company has not had access to sufficient information to enable it to report this plan as a defined benefit plan. The pension commitments are thus reported as a defined contribution plan.

For defined contribution plans, the Group pays contributions to privately administered pension insurance plans on a contractual basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they fall due for payment.

b) Share-based remuneration

The Group's incentive program aims to facilitate recruitment and stimulate long-term commitment from employees regarding the Group's profit and business development.

During 2015, all permanent employees of the HMS Group were offered the opportunity to participate in an incentive program, where payment is made in shares and where the Group receives services from employees as consideration for the Group's own equity instruments.

Fair value for the services that entitle employees to allotment of shares are expensed in the income statement as personnel costs, with the corresponding posting to equity under retained earnings in the balance sheet. The total amount to be expensed is based on the fair value of the allocated shares, which is established on the date they are allocated. Non-market vesting conditions are included in assumptions about the number of shares expected to vest. The total expense is recognized over the vesting period, which is the period during which all the specified vesting conditions are to be fulfilled.

At the end of each reporting period, the Group revises its estimates of the number of shares expected to vest based on the non-market vesting conditions. Any deviation from the original assessments that are discovered during the reassessment, are recognized in the income statement with a corresponding adjustment to equity.

Social security contributions that arise from the allocation of shares are regarded as an integral part of the allocation and the cost is treated as a cash-settled share-based compensation, which means that social security contributions are calculated based on the fair value of the shares at each reporting date.

2.20 Share capital

Ordinary shares are classified as equity.

Transaction costs directly attributable to a new issue of shares or options are recognized, net after tax, in equity as a deduction from the emission proceeds.

When any of the Group companies purchase Parent Company shares (repurchase of own shares), the consideration that was paid, including any directly attributable transaction costs (net after tax), reduces equity until its shares are canceled or sold. If these ordinary shares are later sold, the received amount (net after any directly attributable transaction costs and tax effects) is reported in equity.

2.21 Provisions

Other provisions reported in equity are comprised of hedging and translation reserves. The hedging reserve is comprised of unrealized gains and losses on futures and hedging of net investments, which are recognized in profit or loss in the periods that the hedged transactions impact profit or loss. The translation reserve is comprised of exchange differences arising when the income statements and balance sheets of all the Group companies are translated to the Group's reporting currency.

2.22 Dividends

Dividends are recognized as revenue when the right to receive payment is established. This applies even if the dividends are paid out of profits arising before the date of acquisition. As a consequence, however, the investment many need to be tested for impairment.

2.22 Cash flow statement

The consolidated cash flow statement has been prepared in accordance with the indirect method. The year's change in the cash balance is apportioned between operating, investing and financing activities. The starting point for the indirect method is operating profit adjusted for items that did not involve actual cash receipts or payments.

Cash and cash equivalents include cash/bank balances and short-term financial investments with maturities of less than three months. All items within cash and cash equivalents can be converted into cash at relatively short notice.

HMS NETWORKS ANNUAL REPORT 2015

NOTES

NOTE 3 Financial risk management

3.1 Financial risk factors

The Group's business activities are associated with a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and financing/liquidity risk. The Group's overall risk management policy focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group's financial results.

Risk management is carried out by a central finance department according to policies approved by the Board of Directors. The head of the Group's financial function identifies, evaluates and hedges financial risks in close cooperation with the Group's operating units. The Board of Directors has provided written policies for overall risk management and for specific areas such as currency risk, interest rate risk, credit risk, use of derivatives and non-derivative financial instruments and investment of excess liquidity.

The Group uses derivatives to hedge some of its risk exposure.

a) Derivative instruments

The Group has financial derivatives in the form of currency futures that hedge purchases and sales in foreign currency. Derivatives are used only for commercial hedging purposes and not as speculative investments.

Information about the fair value of various derivative instruments used for hedging is provided in Note 15.

b) Currency risk

The Group operates internationally and is exposed to currency risks arising from currency exposure to, primarily, the USD, EUR and JPY. The Group's currency risks comprise the transaction risk from future commercial transactions in foreign currencies, as well as the translation risk of recognized assets and liabilities and net investments in foreign subsidiaries.

Transaction risk is minimized by hedging anticipated net cash flows in foreign currencies over the next twelve months. The Group's risk management policy states that 60 percent of the exposure should be hedged for the next three months and 10 to 40 percent of

Risk	Exposure arises from	Measurement	Management
Market risk – currency risk	Future business transactions.
Recognized financial assets and financial liabilities that are not expressed in SEK.	Cash flow forecasts
Sensitivity analysis	Currency futures
Market risk – interest rate risk	Long-term borrowings with variable interest rate	Sensitivity analysis	Interest rate derivatives
Credit risk	Cash and cash equivalents, accounts receivable and derivative instruments	Aging analysis
Credit rating	Credit limits
Liquidity risk	Borrowings and other liabilities	Rolling cash flow forecasts	Access to committed credit facilities and credit

the anticipated exposure should be hedged for the three to nine months thereafter.

Translation risk arises because the Group's equity amount is affected by currency rate fluctuations on its investments in subsidiaries, as well as loans in foreign currency. The Group is primarily exposed to currency fluctuations in EUR/SEK. If the SEK had weakened/strengthened by 10 percent against the EUR with all other variables held constant, the Group's equity as of 31 December 2015 would have been SEK 3.5 million higher/lower. If the SEK had weakened/strengthened by 10 percent against all other currencies the Group's equity as of 31 December 2015 would have been SEK 4.2 million higher/lower.

Currency exposure that has arisen from the net assets obtained during 2013 from the acquired business (IXXAT), is primarily dealt with by borrowing in the currency concerned.

If the SEK had weakened/strengthened by 5 percent against the EUR with all other variables held constant, the operating profit/loss as of 31 December 2015 would have been SEK 4.8 (5.2) million higher/lower, mainly as a result of purchases and sales in foreign currency, and from the gains/losses that would arise upon translation of accounts receivable and financial assets measured at fair value through profit or loss.

If the SEK had weakened/strengthened by 5 percent against the USD with all other variables held constant, the operating profit/loss as of 31 December 2015 would have been SEK 3.9 (3.6) million higher/lower, mainly as a result of purchases and sales in foreign currency, and from the gains/losses that would arise upon translation

of accounts receivable and financial assets measured at fair value through profit or loss.

If the SEK had weakened/strengthened by 5 percent against the JPY with all other variables held constant, the operating profit/loss as of 31 December 2015 would have been SEK 1.8 (1.5) million higher/lower, mainly as a result of purchases and sales in foreign currency, and from the gains/losses that would arise upon translation of accounts receivable and financial assets measured at fair value through profit or loss.

c) Interest rate risk

The Group's primary interest rate risk arises from long-term borrowings with floating rates, which expose the Group to interest rate risk on the cash flow. The Group's financial policy states that interest expenses should be as low as possible. In order to minimize the Group's interest expenses, interest rate derivatives may be utilized. For 2015, it was assessed that the use of interest rate derivatives would not decrease the Group's interest expenses.

If interest rates on borrowings in EUR as of 31 December 2015 were 1 percent higher/lower with all other variables constant then the profit before tax for the financial year would have been SEK 2.2 (2.5) higher/lower.

If the SEK had weakened/strengthened by 5 percent against the EUR with all other variables held constant, profit before tax for the financial year would have been SEK 0.2 (0.3) million higher/lower due to increased/decreased interest expenses.

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CONT. NOTE 3 Financial risk management

d) Credit risk

Credit risk arises from holdings in cash and cash equivalents, derivative instruments and deposits with banks and credit institutions and other credit exposures, including outstanding receivables.

Credit risk is dealt with at the Group level, except for credit risk associated with overdue accounts receivable. Each Group company is responsible for monitoring and analyzing credit risk for each customer before offering the standard terms for payment and delivery. There are clear guidelines in the Group's credit policy for when to grant credit to customers and when security is required. The Group management team has concluded that there is no significant credit risk associated with any particular customer, counterparty or geographical region.

e) Financing and liquidity risk

Financing risk is the risk that maturing loans cannot be refinanced without difficulty or added expense and that this situation would make it difficult for the Group to fulfill its payment obligations. Liquidity risk is the risk of difficulties in fulfilling obligations that are associated with financial liabilities. See Note 21 for an analysis of the Group's borrowings, classified according to the time remaining until maturity as of the closing date.

Cash flow forecasts are drawn up by the Group's operating companies and aggregated by Group finance. The Group carefully monitors rolling forecasts of its liquidity reserve (which consists of unused lines of credit and cash equivalents) to ensure that the Group has sufficient cash to meet the needs of its operating activities. At the same time, the Group must maintain a sufficient margin in its granted unused credit so that it does not breach any of its credit limits or loan terms. This is done centrally for all of the Group's operational units in accordance with the practices and limits established for the company. Liquidity management also involves calculating the expected cash flows in major currencies and determining the amount of various liquid assets thus required, monitoring solvency in relation to internal and external supervisory requirements and drawing up plans for debt financing.

Financing risk arises when, at a given point in time, it becomes difficult obtaining financing. To minimize the costs of the Group's borrowings and financing, the finance function must provide credit facilities that adequately meet the Group's need for working capital credit. HMS's goal is to always have access to approximately 10 percent of sales in cash, excess liquidity and unutilized credit facilities, which at year-end corresponded to approximately 7 (8) percent.

According to the Group's financial policy, excess liquidity may be invested in interest-bearing securities with a maximum maturity of one year and an average maturity of six months. Counterparty risk is managed through regulations in the financial policy regarding the long-term rating of issuers. The policy states that investments may be made in Swedish corporate bonds with a Standard & Poor's rating of at least BBB+, Swedish commercial papers with a rating of at least K1, Swedish mortgage institutions and the Swedish State. All borrowing is done in consultation with the parent company's finance function.

The table below (maturity analysis) analyzes the Group's non-derivative financial liabilities and net-settled derivatives that are financial liabilities, grouped according to the time remaining as of the balance sheet date until the contractual maturity date. The amounts reported in the maturity analysis are the contractual, undiscounted cash flows.

3.2 Managing capital risks

The Group's objective with regard to capital structure

is to safeguard the Group's ability to continue operations, so that it can continue to generate returns for shareholders and benefits for other stakeholders.
It also strives to maintain an optimal capital structure in order to keep the cost of capital down.

To maintain or adjust the capital structure, the Group can change the dividend paid to shareholders, repay capital to shareholders, issue new shares or sell assets to reduce debt.

The Group evaluates its capital structure by calculating and monitoring the net debt/equity ratio. This key figure is calculated as net liabilities divided by total equity. The net debt is calculated as the total borrowings (including short-term borrowings and long-term borrowings in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as equity in the consolidated balance sheet plus net debt.

Maturity analysis

As of 31 December 2015	Less than 3 months	Between 3 months and 1 year	Between 1 and 2 years	Between 2 and 5 years	More than 5 years
Finance leases	-135	-406	-451	-541
Derivative instruments	-236	-237
Bank loans	-10,046	-29,813	-39,143	-113,265	-9,222
Accounts payable - trade	-44,704
As of 31 December 2014	Less than 3 months	Between 3 months and 1 year	Between 1 and 2 years	Between 2 and 5 years	More than 5 years
Finance leases	-189	-568	-541	-992
Derivative instruments	-1,209	-1,051
Bank loans	-10,698	-31,739	-41,656	-120,429	-48,240
Accounts payable - trade	-40,695

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The net debt/equity ratios on 31 December 2015 and 31 December 2014 were as follows:

	2015	2014
Total borrowings (Note 21)	196,901	245,388
Less cash and cash equivalents (Note 18)	- 19,503	- 17,629
Net debt	177,398	227,759
Total equity	455,482	422,599
Total capital	632,880	650,358
Net debt/equity ratio	39 %	54 %

3.3 Calculation of fair value

The following table shows the financial instruments measured at fair value, based on how the classification in the fair value hierarchy was made. The various levels are defined as follows:

The quoted prices (not adjusted) on active markets for identical assets or liabilities (Level 1)
Other observable data for the asset or liability than the quoted prices included in Level 1, either directly (i.e. as a price quotation) or indirectly (i.e. derived from price quotations) (Level 2)
Data for assets or liabilities not based on observable market data (i.e. non-observable data) (Level 3)

The following table shows the Group's assets and liabilities valued at a fair value as of 31 December 2015:

	Level 1	Level 2	Level 3	Total
Total assets	0	0	0	0
Liabilities
Derivative instruments used for hedging		-473		-473
Total liabilities	0	-473	0	-473

The following table shows the Group's assets and liabilities valued at a fair value as of 31 December 2014:

	Level 1	Level 2	Level 3	Total
Total assets	0	0	0	0
Liabilities
Derivative instruments used for hedging		-2,260		-2,260
Total liabilities	0	-2,260	0	-2,260

The fair value of derivative instruments is determined using market prices for the currency on the closing date.

NOTE 4 Important estimates and assessments for accounting purposes

The Group makes estimates and assumptions about the future. The estimates for accounting purposes that result from these, by definition, will rarely equate to the actual result. The management team also makes certain judgments in the process of applying the accounting policies.

Estimates and assessments are evaluated continuously and they are based on past experience and other factors, including expectations of future events considered reasonable under the prevailing conditions.

The estimates and assumptions that involve a considerable risk of needing to make significant adjustments to the carrying amounts of assets and liabilities during the next financial year are shown below.

a) Test of impairment for goodwill

Each year, in accordance with the accounting policies described in Note 2.9, the Group tests goodwill for impairment. The recoverable amount for the Group's cash-generating units is established by calculating the value-in-use. Various estimates must be made in order to make these calculations (Note 13). Reported goodwill amounted to SEK 394.2 (400.8) million.

The sensitivity analysis shows that an increased return requirement after tax, of 9 percentage points (i.e. a return on capital employed of 20 percent) does not imply that impairment exists.

b) Revenue recognition

The Group uses successive revenue recognition when reporting fixed-price agreements for sales of development services. Successive revenue recognition means that the Group must assess services already performed by the closing date as a proportion of the total services to be performed.

c) Capitalized development costs

The company capitalizes costs associated with the development of identifiable and unique integrated circuits when the criteria described in Section 2.15 d have been fulfilled and when the costs are expected to be covered and exceeded by future volume commitments from customers. Four times per year, the Group determines whether its products, for which a carrying amount has been recognized, are in the process of being sold, or are expected to be sold. The Group records impairment loss on products for which the future revenue is expected to be less than the carrying amount. In 2015, impairment testing resulted in a write-down of SEK 0 (2,011) thousand.

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NOTE 5 Segment information

The HMS Group sells products primarily in seven countries, as shown in the following table. These countries are not considered to be geographic segments. For information about the Group's segments, see Note 2.3. Categorization is based on the country that a product or service is delivered to.

The acquisition of IXXAT did not impact the Group's segmentation.

| Net sales
by country | The Group | | Parent company | |
| --- | --- | --- | --- | --- |
| | 2015 | 2014 | 2015 | 2014 |
| Germany | 199,260 | 176,505 | | |
| USA | 135,502 | 103,899 | | |
| Japan | 68,472 | 51,773 | | |
| Sweden | 56,591 | 40,852 | 11,933 | 8,835 |
| China | 33,452 | 25,360 | | |
| France | 30,827 | 28,112 | | |
| Finland | 28,009 | 33,089 | | |
| Other countries | 149,563 | 129,623 | | |
| | 701,676 | 589,212 | 11,933 | 8,835 |

The carrying amounts of assets and investments in Sweden represents 58 (56) percent of the Group's total assets and in Germany, the corresponding figure is 38 (41) percent. The carrying amounts of fixed assets in Sweden represents 55 (53) percent of the Group's total fixed assets and in Germany, the corresponding figure is 44 (46) percent.

Revenue of approximately SEK 21,744 (27,391) thousand is derived from a single external customer. This revenue is attributable to USA (last year, to a customer in Finland).

NOTE 6 Categorization by type of cost

	2015	2014
Cost of purchasing and handling materials	197,478	161,557
Costs for remuneration to employees (Note 8)	279,317	246,761
Depreciation, amortization and impairment (Note 13, 14)	34,088	30,384
Marketing costs	14,033	10,872
Freight costs	4,561	4,384
Other external costs	92,247	73,449
Capitalized development costs	-20,404	-27,473
Total costs of goods sold, selling, administration and R&D	601,320	499,934

NOTE 7 Remuneration to auditors

| Remuneration
to auditors | The Group | | Parent company | |
| --- | --- | --- | --- | --- |
| | 2015 | 2014 | 2015 | 2014 |
| PWC | | | | |
| Audit assignment* | 1,038 | 1,000 | 720 | 690 |
| Tax advice | 824 | 422 | | 189 |
| Other services | | | | |
| Total | 1,862 | 1,423 | 720 | 879 |

The audit assignment is the fee for conducting the statutory audit, i.e. work necessary for providing an audit report, and any audit advice provided in connection with the audit engagement.

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NOTES

NOTE 8 Remuneration to employees

	The Group		Parent company
	2015	2014	2015	2014
Salaries and other remuneration	209,539	184,347	4,642	3,031
Social security contributions	55,812	49,981	1,410	1,111
Pension costs	13,966	12,433	638	492
Total	279,317	246,761	6,691	4,634

Salaries in the parent company pertain to the CEO and Board of Directors.

Salaries, other remuneration and social security expenses	2015		2014
	Salaries and other remuneration	Social expenses (of which pension expenses)	Salaries and other remuneration	Social expenses (of which pension expenses)
Board members and CEO	9,271	2,771 (1,021)	7,207	2,251 (853)
Senior executives	4,931	3,953 (1,934)	4,389	2,935 (1,252)
Other employees	195,336	63,054 (11,011)	172,752	57,228 (10,328)
The Group, total	209,539	69,778 (13,966)	184,347	62,414 (12,433)
Average no. of employees	2015		2014
---	---	---	---	---
	Average no. of employees	Of which men	Average no. of employees	Of which men
Sweden	186	139	190	142
Germany	112	96	104	84
USA	24	16	23	15
France	2	2	2	2
Italy	5	5	5	4
Japan	12	9	10	7
China	9	8	8	7
Great Britain	5	4	4	3
Denmark	2	1	2	1
India	4	5	4	4
The Group, total	359	285	352	269
Gender distribution of the Group (incl. subsidiaries) for Board members and other senior executives	2015		2014
---	---	---	---	---
	Number on closing date	Of which men	Number on closing date	Of which men
Board members	6	4	6	4
CEO and other senior executives	8	7	8	7
The Group, total	14	11	14	11

Share-based remuneration

To promote long-term ownership commitment among employees, it is the Board's intention to, each year, evaluate the need for and, when necessary, present a proposal for, a share incentive plan to the AGM. At the AGMs in 2012, 2013, 2014 and 2015 it was decided to introduce an incentive program that would be open to all permanent employees of the HMS Group. As of 31 December 2015, HMS thus had four share incentive plans.

In brief, each share-related incentive program works as follows: employees who choose to participate in the program, must make an initial investment HMS Networks shares during the investment period (1 January – 31 December of year 1). Then, during spring of year 5, they are allocated additional shares in HMS Networks, free-of-charge, for each invested share. This is done partly in the form of matching shares and partly in the form of performance shares. Employees who participate in the program must set aside at least 1 percent of their annual gross salary and at most 3 percent, except for a few key employees, who may set aside up to 6 percent of their gross salary for the purchase of shares during the investment period. In order for the participants to be eligible to receive matching shares, they must be an employee of the Group during all of the qualification period (the period from the end of the investment period through 31 December of year 4) and the HMS shares they invest in during the investment period must be held for the entire qualification period.

Additionally, in order to be eligible to receive performance shares, HMS Networks AB (publ) must achieve certain financial goals pertaining to earning per share during the qualification period. If the requirement on savings is fulfilled, a matching share is allocated for each share that is held. If both the savings and performance requirements are met, a matching share and a performance share are allocated for each share that is held.

In order to ensure delivery of shares in accordance with the incentive program, the AGM decided to acquire own shares for all programs.

Program 1

In accordance with a decision at the 2012 AGM, all permanent employees of the HMS Group were invited to participate in a share incentive plan in 2013. 60 percent chose to participate. The number of shares acquired as part of the plan was 24,939. In conjunction with

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CONT. NOTE 8 Remuneration to employees

this, the company acquired 31,000 own shares in 2013 in order to fulfill obligations pertaining to future matching and performance shares.

Program 2

In accordance with a decision at the 2013 AGM, all permanent employees of the HMS Group were invited to participate in a share incentive plan in 2014. 51 percent chose to participate. The number of shares acquired as part of the plan was 20,049.

Program 3

In accordance with a decision at the 2014 AGM, all permanent employees of the HMS Group were invited to participate in a share incentive plan in 2015. 47 percent chose to participate. The number of shares acquired as part of the plan was 12,761.

Program 4

In accordance with a decision at the 2015 AGM, all permanent employees of the HMS Group were invited to participate in a share incentive plan. The registration period for participation was the month of December 2015 and approximately 54 percent chose to participate. With this incentive program, savings in HMS shares will be implemented during 2016.

The fair value of the services rendered is based on the share price for the matching shares and performance shares that are expected to be allocated. The share price is established on the date when the shares are allocated. The Group's costs for the share-related incentive program are reported in accordance with IFRS 2 Share-based payment (see also the description under accounting policies). In 2015, the Group's total employee benefit expenses for the share-based incentive program amounted to SEK 3,278 (1,790) thousand, of which SEK 1,737 (1,238) thousand was reported under equity and SEK 1,541 (552) thousand was reported as a provision for future social security expenses.

NOTE 9 Income tax

	2015	2014
Current tax	23,398	21,692
Deferred tax (Note 22)	3,958	1,021
Tax	27,356	22,713

The following shows how income tax on the Group's profit before tax differs from the theoretical amounts that would have arisen if the weighted average tax rate had been applied to the profit of consolidated companies:

	2015	2014
Profit before tax	87,561	85,811
Tax at the Swedish tax rate (22%)	19,263	18,878
Tax effect for items that are non-deductible/non-taxable	2,514	407
Difference in foreign tax rates	2,358	3,102
Adjustment pertaining to prior years	2,282	326
Previously recognized loss carry-for-wards in subsidiaries that were not utilized	938	0
Tax expense	27,356	22,713
Weighted average tax rate	31.2%	26.5%

Tax attributable to components of other comprehensive income amount to, for cash flow hedges SEK 393 (598) thousand (revenue) and for hedging of net investments to SEK 2,544 (2,866) thousand (revenue).

NOTE 10 Exchange rate differences – net

	2015	2014
Other operating income	1,230	8,303
Net financial items	-9,289	-6,050
	-8,059	2,253

NOTE 11 Earnings per share

Earnings per share is calculated by dividing the amount of profit reported in the income statement that is attributable to the parent company's shareholders by the weighted average number of outstanding ordinary shares during the period.

	2015	2014
Profit attributable to parent company shareholders	60,205	63,098
Weighted average number of outstanding ordinary shares (000s)	11,291	11,291
Earnings per share (SEK per share)*	5.33	5.59

*Applies to both basic and diluted.

NOTE 12 Dividend per share

The dividend paid in 2015 and 2014 was SEK 28,229 (25,405) thousand and dividends per share were SEK 2.50 (2.25) per share.

At the AGM on 28 April 2016 a proposal will be made to distribute SEK 29,184 thousand as dividends for the 2015 financial year, which corresponds to SEK 2.50 per share. The proposed dividend has not been reported as a liability in these financial statements.

HMS NETWORKS ANNUAL REPORT 2015

NOTES

NOTE 13 Intangible assets

	Patents	Capitalized development work	Goodwill	Customers, technology platforms	Brands	Total
As of 1 January 2014
Cost	448	139,838	385,290	68,002	76,167	669,744
Accumulated amortization
Impairment losses/ exchange rate effects	-171	-43,776	5,555	-3,937	2,835	-39,493
Carrying amount	277	96,062	390,844	64,064	79,001	630,249
Financial year 2014
Opening carrying amount	277	96,062	390,844	64,064	79,001	630,249
Purchases		27,473		4,300		31,773
Exchange rate differences			9,908	3,773	5,058	18,740
Impairment		-2,011				-2,011
Depreciation	-41	-13,150		-7,730		-20,920
Closing carrying amount	237	108,374	400,752	64,408	84,060	657,830
As of 31 December 2014
Cost	448	167,311	385,289	72,302	76,167	701,516
Accumulated amortization
Impairment losses/ exchange rate effects	-211	-58,937	15,463	-7,894	7,893	-43,686
Carrying amount	237	108,374	400,752	64,408	84,060	657,830
Financial year 2015
Opening carrying amount	237	108,374	400,752	64,408	84,060	657,830
Purchases		20,404				20,404
Exchange rate differences			-6,585	-2,251	-3,361	-12,198
Impairment	-237					-237
Depreciation		-17,635		-8,163		-25,798
Closing carrying amount	0	111,143	394,167	53,993	80,699	640,002
As of 31 December 2015
Cost	0	187,715	385,289	72,302	76,167	721,472
Accumulated amortization
and impairment/ rate effects	0	-76,572	8,878	-18,308	4,532	-81,470
Carrying amount	0	111,143	394,167	53,993	80,699	640,002

In the income statement, amortization and impairment losses of SEK 25,833 (20,920) thousand is included in cost of goods sold, SEK 0 (2,011) thousand in R&D costs and SEK 0 (0) in selling costs.

Through the acquisition of HMS Networks AB in 2004, the Group acquired expertise that has provided synergy effects in the form of management and financing opportunities. This has resulted in enhanced growth prospects, which is reflected in goodwill for an amount of SEK 236,071 thousand.

In 2013, the German company, IXXAT (HMS Technology Center Ravensburg GmbH) was acquired, which resulted in consolidated goodwill in the form of customers, technology platforms and brands. The new business also brought synergies to the Group in the form of complementary technology and a broader market, with a goodwill value of SEK 149,219 thousand.

Capitalized development costs and brands are tested for impairment each year. In 2015, impairment testing resulted in a write-down of SEK 0 (2,011) thousand.

Test of impairment for goodwill

The Group's goodwill has been evaluated in accordance with IAS 36. The recoverable amount for the cash generating unit has been based on its value-in-use. This has included estimates for growth, profit margin, tied-up capital, investment requirement and risk premium. The principles behind these assumptions were unchanged compared with the previous year.

Financial forecasts are based on the company's budget for the coming year and its five-year financial plan. The company's market assessment for each period is also considered. Estimates of future cash flows are based on the existing structure of the assets. Acquisitions are not included.

The company's assumptions about future growth are based on prior experience, external sources of information and its long-term business plan. For this assumption, expected market growth and price development were also considered.

Assumptions about future margins are in line with the company's financial plan and historic performance.

Investments during the period are based on the company's internal investment plan and are expected to equal the replacement need.

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NOTES

CONT. NOTE 13 Intangible assets

These estimates form the basis for calculating value-in-use and the cash flow forecast for a period covering the fixed budget and the company's five-year financial plan. Cash flow has then been extrapolated based on an assumption of 2.0 (2.0) annual growth, which is lower than the actual annual rate of growth. The long-term working capital requirement (excluding cash and cash equivalents) is estimated at 8 (8) percent of the company's net sales. The return requirement, WACC, before tax was set at 12.8 (10.6) percent.

The calculated recoverable amount exceeds the carrying amount with a good margin. The management team has concluded that no reasonably significant adjustments are required to the assumptions that were made when testing for impairment of its cash generating units such that the recoverable amount would fall below the carrying amount.

NOTE 14 Property, plant and equipment

	Machinery and equipment	Equipment, installations and facilities	Total
As of 1 January 2014
Cost	27,214	32,815	60,029
Accumulated depreciation	-18,292	-21,558	-39,850
Carrying amount	8,922	11,257	20,179
Financial year 2014
Opening carrying amount	8,922	11,257	20,179
Exchange rate differences		-244	-244
Purchases	4,147	1,890	6,037
Depreciation	-3,132	-4,320	-7,453
Closing carrying amount	9,938	8,582	18,520
As of 31 December 2014
Cost	31,361	34,704	66,065
Accumulated depreciation, exchange rate effects	-21,423	-26,122	-47,546
Carrying amount	9,938	8,582	18,520
Financial year 2015
Opening carrying amount	9,938	8,582	18,520
Exchange rate differences		-7	-7
Purchases	1,742	3,300	5,042
Sales and disposals		-202	-202
Depreciation	-3,916	-4,137	-8,053
Closing carrying amount	7,764	7,536	15,300
As of 31 December 2015
Cost	33,103	35,897	70,898
Accumulated depreciation	-25,340	-28,361	-55,599
Carrying amount	7,764	7,536	15,300

Depreciation costs of SEK 3,610 (3,415) are included in cost of goods sold, SEK 1,481 (1,346) thousand in selling costs, SEK 1,481 (1,346) thousand in administration costs and SEK 1,481 (1,346) thousand in R&D costs.

Included in the item, Plant and machinery is leased items that the Group has under financing leases for the following amounts (see Note 25 for more information):

HMS NETWORKS ANNUAL REPORT 2015

NOTES

CONT. NOTE 14 Property, plant and equipment

Assets held under a finance lease	2015	2014
Cost - capitalized finance leases	2,164	3,362
Accumulated depreciation	-631	-1,071
Carrying amount	1,533	2,290

NOTE 15 Derivatives

	2015	2014
Currency futures-cash flow hedges	473	2,260
Total	473	2,260

Derivatives held for trading are classified as either current assets or current liabilities. All of the fair value of a derivative instrument that constitutes a hedge instrument is classified as a non-current asset or non-current liability if the hedged item's remaining term is longer than 12 months, and as a current asset or current liability if the hedged item's remaining term is less than 12 months. During the period, the Group did not have any derivatives for trading.

Information about the Group's accounting policies and cash flow hedges is provided in Note 2.13.

(a) Currency futures

The nominal amount of outstanding currency futures as of 31 December 2015 was SEK 36,984 (62,698) thousand.

The hedged (and highly probable forecast) transactions in foreign currency are expected to occur at varying times over the next 12 months. Gains and losses on currency futures as of 31 December 2015, which is reported as equity, is reported in the income statement as operating profit for the periods when the hedged transaction affects earnings.

In 2015, realized currency futures had a negative impact on operating profit equal to SEK 5,684 (785) thousand.

(b) Hedging of net investments in foreign operations

The Group's borrowings in EUR amounting to SEK 191,835 (237,888) thousand are identified as a hedging of net investments pertaining to the acquisition of IXXAT. The Group's assessment is that the fair value corresponds to the carrying amount as of 31 December 2015. The exchange gain on translation of the borrowings into SEK amounts to SEK 11,565 (loss of 13,029) thousand for the reporting period and it has been recognized in other comprehensive income.

NOTE 16 Accounts receivable and other receivables

	2015	2014
Accounts receivable - trade	83,246	69,853
Provision for doubtful debts	-1,273	-359
Accounts receivable – net	81,973	69,494
The fair value of accounts receivables and other receivables is as follows:	2015	2014
Accounts receivable - trade	81,973	69,494
Other receivables	7,234	7,459
Prepaid expenses and accrued income, see Note 30	5,881	4,630
	95,088	81,583

As of 31 December 2015 the Group reported a loss concerning the reversal and impairment of accounts receivable amounting to SEK 1,019 (474) thousand. As of 31 December 2015, the provision for doubtful debts amounted to SEK 1,273 (359) thousand. The Group lacks a system for reporting external credit ratings but historically, it has had very low credit losses.

An age analysis is presented in the table below.

	2015	2014
1-15 days	8,237	10,252
15 days to 3 months	10,570	3,629
3 to 6 months	669	498
More than 6 months	921	307
	20,397	14,686

As of 31 December 2015, the Group reported accounts receivable for which there was a write-down requirement of SEK 921 (307) thousand.

As of 31 December 2015, the provision for doubtful debts amounted to SEK 1,273 (359) thousand. The assessment is that a portion of the receivables is expected to be paid.

An age analysis is presented in the table below.

	2015	2014
Less than 3 months
3 to 6 months
more than 6 months	921	307
	921	307

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CONT. NOTE 16 Accounts receivable and other receivables

Provisions for each reversal of the reserves for doubtful debts are included under Selling expenses in the income statement. Amounts reported in the provision are typically written off when the Group no longer expects to receive any additional payments.

Other categories of accounts receivable and other receivables do not include assets for which there is a write-down requirement.

Carrying amounts (by currency) for the Group's accounts receivable are as follows:

	2015	2014
EUR	44,305	36,289
USD	22,641	22,879
JPY	7,050	4,523
SEK	5,647	4,578
CNY	2,061	0
GBP	1,242	1,338
DKK	292	239
INR	7	7
Total	83,246	69,853

NOTE 17 Inventories

The Group	2015	2014
Raw materials and consumables	21,352	32,675
Work-in-progress	2,546	2,731
Finished goods	31,912	18,547
	55,810	53,953

Costs for impairment of inventories (obsolescence) that affected the profit of the year are included in the item cost of goods sold for SEK 120 (1,650) thousand. The Group does not have sufficient financial information to calculate the proportion of material in cost of goods sold.

NOTE 18 Cash and cash equivalents

Included in cash equivalents in the balance sheet and the cash flow statement are:

The Group	2015	2014
Cash and bank balances	19,503	17,629
	19,503	17,629

NOTE 19 Share capital and other contributed capital

	Number of shares (SEKs)	Share capital (SEK £)	Other contributed capital (SEK £)	Total (SEK £)
As of 1 January 2014	11,322	1,132	125,641	126,773
As of 31 December 2014	11,322	1,132	125,641	126,773
As of 31 December 2015	11,322	1,132	125,641	126,773

The total number of shares is 11,322,400 (11,322,400) with a quotient value of SEK 0.1 (0.1) per share. During 2013, the company repurchased 31,000 own shares on NASDAQ OMX Stockholm. The total amount paid for the shares was SEK 3,895 thousand. The shares are held as treasury shares.

NOTE 20 Provisions

	2015	2014
Provision for returned goods	2,412	2,366
Total	2,412	2,366

NOTE 21 Borrowings

The Group	2015	2014
Non-current
Bank loans	157,150	203,358
Liabilities pertaining to finance leases (Note 25)	992	1,533
	158,142	204,891
Current
Bank loans	38,218	39,740
Liabilities pertaining to finance leases (Note 25)	541	757
	38,759	40,497
Total borrowings	196,901	245,388

The Group's exposure related to borrowing at the end of the reporting period:

The Group	2015	2014
3 months or less	9,690	10,124
Between 3 months and 1 year	29,069	30,373
Between 1 and 2 years	38,668	40,822
Between 2 and 5 years	110,339	116,492
More than 5 years	9,135	47,578
	196,901	245,388

The bank loan matures in 2021. Interest on the bank loan is variable, tied to EURIBOR. The average interest rate for 2015 was 1.93 (2.14) percent. Shares in subsidiaries was provided as collateral for the bank loan (Note 27).

Loan terms for the bank loan are based on the development of net debt and EBITDA.

HMS NETWORKS ANNUAL REPORT 2015

NOTES

NOTE 22 Deferred tax

Deferred tax assets	Tax deficit	Other	Total
As of 1 January 2014	724	0	724
Exchange rate differences	145	355	500
Recognized in profit or loss		104	104
As of 31 December 2014	869	459	1,328
Exchange rate differences	69	21	90
Reclassification from deferred tax liabilities		775	775
Recognized in profit or loss	-938	1,983	1,045
As of 31 December 2015	0	3,238	3,239
Deferred tax liabilities	Tax allocation reserves	Intangible assets and PPE	Currency hedging
---	---	---	---
As of 1 January 2014	20,214	46,875	-1,946
Recognized in profit or loss	352	1,386
Recognized in other comprehensive income			-3,465
Exchange rate differences		2,537
As of 31 December 2014	20,567	50,797	-5,411
Recognized in profit or loss	-1,916	6,846
Recognized in other comprehensive income			2,937
Reclassification to deferred tax assets
Exchange rate differences		-1,670
As of 31 December 2015	18,651	55,973	-2,474

The deferred tax asset from 2014 of SEK 869 thousand, which was reversed during the year, pertained to loss carry-forwards for the subsidiary in USA. Other deferred tax assets are attributable to temporary tax differences in subsidiaries.

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NOTES

NOTE 23 Pension obligations

Pension benefits

For salaried employees in Sweden, the ITP 2 plan's defined benefit pension obligations for retirement pension and family pension have been secured through insurance with Alecta covering several employers. For some of the company's first employees, retirement pension obligations have been secured via insurance with Skandia. For a few people in the Group, fee-based solutions are in place. For the 2015 financial year, the company did not have access to information in order to report its proportionate share of the ITP plan's obligations, plan assets and costs, which meant that it was not possible to report this as a defined benefit plan. Pension plan ITP 2, which is secured through insurance with Alecta, is therefore reported as a defined contribution plan.

The premium for the defined benefit retirement and family pension is individually calculated. It is based on such things as salary, previously earned pension and expected remaining period of service. The year's fees for pension insurance with Alecta amounted to SEK 6,362 (5,972) thousand. The year's fees for pension insurance with Skandia amounted to SEK 3,470 (2,595) thousand. Expected fees for the next reporting period for ITP 2 insurance with Alecta are SEK 6,680 thousand. The Group accounts for an insignificant portion of the plan.

The collective consolidation level is comprised of the market value of Alecta's assets as a percentage of the pension obligations calculated in accordance with Alecta's actuarial methods and assumptions, which are not in accordance with IAS 19. The collective consolidation level should typically be allowed to fluctuate between 125 and 155 percent. If Alecta's collective consolidation level falls below 125 percent or exceeds 155 percent, measures must be taken to bring the consolidation level back to the normal interval. If the consolidation level is low, one measure might be to raise the set price for new subscription or expand existing benefits. If the consolidation level is high, one measure might be to introduce premium reductions. At year-end 2015, Alecta's surplus at the collective consolidation level was 148 (143) percent.

For the foreign units, the pension obligations are classified as defined contribution plans and the amount reported in the income statement is SEK 4,437 (3,540) thousand.

NOTE 24 Pledged assets and contingent liabilities

| The Group
Pledged assets | 2015 | 2014 |
| --- | --- | --- |
| Shares in subsidiaries | 459,188 | 452,266 |
| Contingent liabilities | | |
| Contingent liabilities | none | none |
| Parent company
Pledged assets | 2015 | 2014 |
| --- | --- | --- |
| Shares in subsidiaries | 244,039 | 244,039 |
| Contingent liabilities | | |
| Surety for subsidiaries | 226,630 | 271,665 |

NOTE 25 Finance leases

The Group's property, plant and equipment includes leased items that are held in accordance with financial lease agreements.

Plant and machinery

	2015	2014
Cost – capitalized finance leases	13,501	13,501
Accumulated depreciation	-11,968	-11,211
Carrying amount	1,533	2,290

The present value of future payment obligations related to financial lease agreements is reported as a liability to credit institutions as follows:

	2015	2014
Within 1 year	541	757
Between 1 and 5 years	992	1,533
More than 5 years
Total future leasing payments	1,533	2,290

Operating leases

The Group leases a number of office, production and warehouse facilities. It also leases a variety of office machines. The leasing period typically varies between 3 and 5 years and most lease agreements can be extended at the end of the leasing period for a fee that corresponds to a market-based fee.

	2015	2014
Total minimum leasing fees for the financial year	20,867	15,718
Total minimum leasing fees	20,867	15,718

Future contractual leasing payments

	2015	2014
Within 1 year	25,379	19,440
Between 1 and 5 years	104,078	79,724
Total future leasing payments	129,457	99,164

NOTE 26 Remuneration to the Board of Directors and senior executives, etc

Remuneration to the Board and senior executives

Remuneration to the Chairman and Board members is in accordance with the AGM decision. There is no separate remuneration for committee work. Board fees do not pertain to employee representatives.

Remuneration to the CEO and other senior executives at HMS Industrial Networks AB (the operating company) is comprised of basic salary, variable remuneration, other benefits and pension. Other senior executives are the seven members of the Group management team that also includes the CEO.

The distribution between basic salary and variable remuneration shall be proportionate to the executive's responsibilities and authority. For the CEO and other senior executives, variable remuneration may not exceed 50 percent of basic salary. Variable remuneration is based on performance in relation to targets. Pension benefits and other benefits for the CEO and other senior executives are a part of the total remuneration package.

Variable remuneration for the financial year consists of expensed bonus, which is paid out in the coming year. For details of how the bonus is calculated, see below.

At the HMS AGM on 28 April 2015 Charlotte Brogren was elected as Chairman of the Board. The following individuals were also

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NOTES

relected at the AGM to serve on the Board of Directors: Ray Mauritsson, Henrik Johansson, Kerstin Lindell and Karl Thedén. Urban Jansson resigned from the Board of Directors, and Fredrik Hansson was newly elected to serve on the Board of Directors.

Since the AGM of 28 April 2015 the Board has held 13 minuted meetings up to the adoption of this annual report.

Variable remuneration

Variable remuneration for the CEO and other senior executives is based primarily on growth along with profitability goals set by the Board. In addition to that, other personal goals may be established.

For 2015 variable remuneration for the CEO corresponds to 40 (34) of basic salary and for other senior executives, to 18 (19) percent. Variable remuneration may not exceed 50 (50) percent of basic salary.

Defined benefit/Defined contribution pension plans

The Group has both defined benefit and defined contribution pension plans. See section 2.19 and Note 23. Pension costs are costs that affect profit (loss) for the year.

Remuneration and other benefits 2015	Basic salary*/ Board fees	Variable remuneration	Pension expenses	Total 2015	Board attendance
Chairman of the Board, Charlotte Brogren	400			400	100%
Board member, Ray Mauritsson	175			175	92%
Board member, Henrik Johansson	175			175	100%
Board member, Fredrik Hansson	175			175	100%
Board member Karl Thedén	175			175	85%
Board member Kerstin Lindell	175			175	100%
Total, Board	1,275	0	0	1,275
CEO Staffan Dahlström	2,088	790	638	3,516
Other senior executives (7)	8,521	1,532	1,532	12,370
Total	11,884	2,322	2,322	17,161
Remuneration and other benefits 2014	Basic salary*/ Board fees	Variable remuneration	Pension expenses	Total 2014	Board attendance
---	---	---	---	---	---
Chairman of the Board, Urban Jansson	300			300	100%
Board member, Ray Mauritsson	150			150	90%
Board member, Henrik Johansson	150			150	100%
Board member, Charlotte Brogren	150			150	100%
Board member Karl Thedén	150			150	100%
Board member Kerstin Lindell	150			150	100%
Total, Board	1,050	0	0	1,050
CEO Staffan Dahlström	1,513	468	492	2,473
Other senior executives (7)	7,152	1,413	1,613	10,178
Total	9,714	1,881	2,105	13,701

Pensions

The retirement age for the CEO is 65 years.

For other senior executive, the retirement age is 65 years.

Severance pay

The notification period for termination of employment of the CEO is 6 months for both sides. If the company initiates dismissal, severance pay amounting to 12 months' salary in addition to regulatory salary will be paid. In the case of notice of termination from the CEO's side, no severance payment is made.

The notification period for termination of employment of the other senior executives is 6 months for both sides.

Decisions on remuneration

During the year, the remuneration committee submitted a proposal to the Board on principles for remuneration to senior executives. The proposal specifies proportions between fixed and variable remuneration and the size of possible salary increases. Furthermore, the remuneration committee has proposed criteria for assessing the outcome of variable remuneration, allocation and size in the form of financial instruments, etc., as well as pension conditions and severance pay. The committee also assessed the feasibility of giving remuneration to other Board members who provide consulting services to the Group.

The Board discussed the remuneration committee's proposal and reached a decision based on the recommendations. Remuneration to the CEO for the 2015 financial year was decided by the Board based on the recommendations of the remuneration committee. Remuneration for other senior executives was decided by the CEO after consultation with the remuneration committee.

The remuneration committee consists of the Chairman of the Board and one Board member, who is appointed by the Board.

*Including other remuneration.

HMS NETWORKS ANNUAL REPORT 2015

NOTE 27 Participations in subsidiaries

Shares owned by parent company	Registered office	CIN	Share	No. of shares	With quotient value	151231	141231
HMS Industrial Networks AB	Halmstad, Sweden	556529-9251	100%	6,540	100	244,039	244,039
Shares owned by subsidiary	Registered office	CIN,	Share	Equity	Profit (loss)
HMS Electronics AB	Halmstad, Sweden	556463-9374	100%	247	0
Intellicom Innovation AB	Halmstad, Sweden	556537-7826	100%	8,360	-10
HMS Industrial Networks Inc	Chicago, USA	5983-659-5	100%	3,468	383
HMS Industrial Networks GmbH	Karlsruhe, Germany	35006/39876	100%	13,046	4,044
HMS Industrial Networks K.K.	Tokyo, Japan	0200-01-060118	100%	2,251	417
HMS Industrial Networks S.r.l.	Milano, Italy	5260930960	100%	438	81
HMS Industrial Networks ApS	Copenhagen, Denmark	33363842	100%	390	60
HMS Industrial Networks India Pvt. Ltd.	Pune, India	138298	100%	351	86
HMS Industrial Networks Ltd.	Coventry, Great Britain	7521411	100%	597	152
HMS Technology Center Ravensburg GmbH	Ravensburg, Germany	29724241	100%	21,617	17,514

This year, HMS Technology Center Ravensburg GmbH changed its name (prior name was IXXAT Automation GmbH) and moved its operations to Ravensburg, Germany. During the year, IXXAT Sarl was merged with HMS Industrial Networks GmbH.

NOTE 28 Other interest income and similar items

	The Group		Parent company
	2015	2014	2015	2014
Interest income	2	37
Total	2	37	0	0

NOTE 29 Other interest expenses and similar items

	The Group		Parent company
	2015	2014	2015	2014
Interest expenses	-4,736	-5,758		-1
Exchange rate differences	-9,289	-6,050
Total	-14,025	-11,809	0	-1

NOTE 30 Prepaid expenses and accrued income

	The Group		Parent company
	2015	2014	2015	2014
Rents	2,507	222
Accrued income	241	1,197
Other items	3,133	3,211	596	332
Total	5,881	4,630	596	332

NOTE 31 Accrued expenses and deferred income

	The Group		Parent company
	2015	2014	2015	2014
Accrued salaries	11,586	9,604	790	467
Vacation pay	8,308	7,381	418	246
Social security contributions	10,246	8,672	976	610
Other items	10,037	7,817	633	1,000
Total	40,177	33,475	2,817	2,323

HMS NETWORKS ANNUAL REPORT 2015

NOTE 32 Related parties

There have not been any related party transactions except for the ones specified in Note 26 Remuneration to the Board and senior executives.

NOTE 33 Business combinations

On 5 February 2016, the Group acquired 100 percent of the share capital in the Belgian company, eWON SA for EUR 29 million.

eWON was founded in 2001 and its head office is in Nivelles, Belgium. Along with the subsidiaries in USA and Japan, eWon offers communications products and services for remote access of industrial applications and controllers (PLC), data collection applications and cloud-based software. The products currently manufactured and marketed by eWON are a great fit with HMS's current solution for remote monitoring. Together, these products will comprise a competitive offer where HMS is building a strong position as a leading supplier of solutions for remote control and remote monitoring of industrial applications.

According to the preliminary acquisition analysis, the consideration, acquired net assets and goodwill amount to:

Consideration:
Cash and cash equivalents	178,981
Issued shares	93,285
Total consideration	272,266

The fair value of the 382,317 shares that were issued as part of the consideration for eWON (SEK 93,285 thousand) is based on the listed share price as of 5 February 2016 of SEK 244 per share.

The assets and liabilities that were recognized as a result of the acquisition are:	Fair value
Cash and cash equivalents	26,783
Accounts receivable and other receivables	32,455
Inventories	19,253
Property, plant and equipment	21,551
Intangible assets
- Customers	15,045
- Brands	81,675
- Deferred tax liabilities	-30,950
Accounts payable and other liabilities	-30,228
Borrowings	-28,971
Deferred tax liabilities	-329
Total identifiable net assets	106,283
Goodwill	165,982
Acquired net assets	272,266

Goodwill is attributable to the employees and the high profitability of the acquired business. No portion of recognized goodwill is expected to be deductible for tax purposes.

HMS NETWORKS ANNUAL REPORT 2015 79

Directors report • Financial statements • Notes • Board affirmation • Audit report • Multi-year review • Contents

NOTES

NOTE 34 Financial assets and financial liabilities

Financial assets	Financial assets measured at amortized cost	Total
2015
Accounts receivable and other receivables *	85,609	85,609
Cash and cash equivalents	19,503	19,503
Total	105,112	105,112
2014
Accounts receivable and other receivables *	73,719	73,719
Cash and cash equivalents	17,629	17,629
Total	91,348	91,348

Not including prepayments

Financial liabilities	Derivative instruments used for hedging	Liabilities measured at amortized cost	Total
2015
Borrowings		196,901	196,901
Derivative instruments	473		473
Accounts payable and other liabilities *		46,083	46,083
Total	473	242,984	243,457
2014
Borrowings		245,388	245,388
Derivative instruments	2,260		2,260
Accounts payable and other liabilities *		43,754	43,754
Total	2,260	289,142	291,402

Excluding non-financial liabilities

Note 35 Subsequent events

At the beginning of 2016, HMS acquired 100 percent of the shares in the Belgian company, eWON. The acquisition price amounted to EUR 29 million on a debt free basis, of which approximately EUR 10 million was paid by issuing 382,317 shares in the company and the remainder in cash. The acquisition was financed via a bank loan for EUR 19 million. The acquisition generated consolidated goodwill of approximately SEK 232 million. The new issue of shares, which was in accordance with the authority of the Board to issue new shares granted by the 2015 AGM, had a dilutive effect of 3.27 percent. The acquired company is included in the consolidated income statement and balance sheet for HMS as of 1 February 2016.

HMS NETWORKS ANNUAL REPORT 2015

BOARD AFFIRMATION

The Board of Directors and CEO affirm that the consolidated accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and that they provide a true and fair view of the Group's financial position and results. The Annual Report has been prepared in accordance with generally accepted accounting principles, provides a true and fair view of the and Parent Company's financial position and results.

The Board of Directors' report for the Group and parent company provides a true and fair overview of the Group's and parent company's operations, financial position and results and also describes material risks and uncertainties faced by the parent company and the companies that comprise the Group.

The income statement and balance sheets will be brought forth at the Annual General Meeting on 28 April 2016 for adoption.

Halmstad, 21 March 2016

Charlotte Brogren
Chairman

Staffan Dahlström
CEO

Kerstin Lindell
Board member

Ray Mauritsson
Board member

Fredrik Hansson
Board member

Karl Thedéen
Board member

Henrik Johansson
Board member

Our audit report was submitted on 22 March 2016
Öhrlings PricewaterhouseCoopers AB

Fredrik Göransson
Certified Public Accountant

HMS NETWORKS ANNUAL REPORT 2015 81

INTRO MARKET PRODUCTS OUR BUSINESS THE SHARE CORPORATE GOVERNANCE GLOSSARY FINANCIAL CONTENTS SEARCH

Directors' report • Financial statements • Notes • Board affirmation • Audit report • Multi-year review • Contents

AUDIT REPORT

Audit report

To the Annual General Meeting of HMS Networks AB (publ) CIN: 556661-8954

Report on the Annual Report and Consolidated Financial Statements

We have conducted an audit of the annual report and consolidated financial statements of HMS Networks AB (publ) for the year 2015. The company's annual report and consolidated financial statements are included in the printed version of this document on pages 46-81.

The Board of Directors and CEO are responsible for the annual report and consolidated financial statements.

The Board of Directors and the CEO are responsible for preparing an annual report which give a true and fair view in accordance with the Annual Accounts Act and for preparing consolidated financial statements which give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and the Annual Accounts Act, and for providing the level of internal control that the Board and the CEO deem necessary to prepare an annual report and consolidated financial statements that are free of material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on the annual report and consolidated financial statements based on our audit. We conducted the audit in accordance with International Standards on Auditing and generally accepted auditing practices in Sweden. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance that the annual report and consolidated financial statements are free of material misstatement.

An audit includes various measures to obtain audit evidence about the amounts and disclosures in the annual report and consolidated financial statements. The auditor selects the action to be performed, including assessing the risks of material misstatements in the annual report and consolidated financial statements, whether due to fraud or error. When performing this risk assessment, the auditor takes into account the components of the internal controls that are relevant to how the company prepares its annual report and consolidated financial statements in order to provide a true and fair view. The aim is to design audit procedures that are appropriate in

the circumstances, but not for the purpose of expressing an opinion on the effectiveness the company's internal controls. An audit also includes evaluating the appropriateness of the accounting policies applied and the reasonableness of estimates used by the Board of Directors and CEO when preparing the financial statements, as well as an evaluation of the overall presentation of the annual report and consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate as a basis for our opinion.

Opinion

In our opinion, the financial statements have been prepared in accordance with the Annual Accounts Act and in all material respects, they give a true and fair view of the parent company's financial position as at 31 December 2015 and of its financial performance and cash flows for the year in accordance with the Annual Accounts Act. The consolidated financial statements have been prepared in accordance with the Annual Accounts Act and in all material respects, they give a true and fair view of the Group's financial position as at 31 December 2015 and of its financial performance and cash flows for the year in accordance with the International Financial Reporting Standards (IFRS) that have been adopted by the EU. The Board of Directors' report is consistent with the other parts of the annual report and the consolidated financial statements.

We therefore recommend that the AGM should adopt the income statements and balance sheets for the parent company and the Group.

Report on other requirements in accordance with legislation and other regulations

In addition to our audit of the annual report and consolidated financial statements, we have also audited the proposed appropriation of the profit or loss and the administration of Board of Directors and CEO of HMS Networks AB (publ) for the year 2015.

The Board of Directors' and CEO's responsibilities

The Board of Directors is responsible for the proposed appropriation of the profit or loss, and the Board of Directors and the CEO are

responsible for administering the company in accordance with the Swedish Companies Act.

Auditor's responsibility

Our responsibility is to, with reasonable assurance, express an opinion on the proposal for appropriation of the profit or loss and the administration of the company, based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden.

As a basis for our opinion on the Board's proposed appropriation of the profit or loss, we examined whether the proposal complies with the Annual Accounts Act.

As a basis for our opinion concerning discharge from liability, we also, in addition to our audit of the annual report and consolidated financial statements, 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 CEO. We also examined whether any Board member or the President has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association.

We believe that the audit evidence we have obtained is sufficient and appropriate as a basis for our opinion.

Opinion

We recommend to the AGM that the appropriation of profit should be in accordance with the proposal in the Board of Directors' report and that the members of the Board of Directors and the CEO should be discharged from liability for the fiscal year.

Halmstad, 22 March 2016

Öhrlings PricewaterhouseCoopers AB

Fredrik Göransson

Certified Public Accountant

HMS NETWORKS ANNUAL REPORT 2015

MULTI-YEAR REVIEW

Financial data in summary (SEK m)	2015	2014	2013	2012	2011	2010
Net sales	702	589	501	382	384	345
Growth in net sales, %	19	18	31	-0.5	11	41
Gross profit	430	367	314	229	232	208
Gross margin, %	61	62	63	60	61	60
Operating profit before depreciation/amortization (EBITDA)	136	126	105	75	82	93
Operating margin before depreciation/amortization (EBITDA), %	19	21	21	20	22	27
Operating profit after depreciation/amortization (EBIT)	102	98	87	64	72	84
Operating margin after depreciation/amortization (EBIT), %	14	17	17	17	19	24
Profit for the period	60	63	63	52	54	62
Order intake	682	611	516	424	388	342
Earnings per share, SEK	5.33	5.59	5.54	4.64	4.84	5.41
Dividend per share, SEK	2.50*	2.50	2.25	2.25	2.25	2.00
Total assets	830	832	771	418	391	392
Equity	455	423	378	342	299	286
Equity per share, SEK	39	35	32	30	27	25
Equity/assets ratio, %	55	51	49	82	76	72
Net debt/equity ratio %	39	54	65	-9	0	-5
Return on shareholders' equity, %	14	16	17	16	19	23
Return on capital employed, %	15	15	18	20	23	28
Investments in non-current assets	25	38	57	42	20	15
Cash flow from operating activities	90	93	89	83	46	75
Cash flow from operating activities per share, SEK	7.97	8.36	7.92	7.27	3.96	6.71
Average number of employees	362	352	338	241	213	164
Revenue per employee	1.9	1.7	1.5	1.6	1.8	2.1

Board's proposal

HMS NETWORKS ANNUAL REPORT 2015 83

NOTICE of AGM + Shareholder information

CONTENTS | SEARCH

Welcome to the Annual General Meeting

The shareholders of HMS Networks AB (publ) are hereby invited to the Annual General Meeting, which will be held on Thursday 10.30 p.m. on 28 April 2016 at the HMS offices, Stationsgatan 37, Halmstad. Registration for the Annual General Meeting will begin at 9.30 p.m.

Right of participation in the Annual General Meeting

Shareholders who wish to participate in the Annual General Meeting must be registered in the share register kept by Euroclear Sweden on April 22 2016 and give notice of their intention to participate at the Meeting to the Company no later than April 22 2016.

Registration must be communicated in one of the following ways: by phone: +46 (0)35-17 29 00, in writing: HMS Networks AB c/o Computershare AB, Box 610, 18 216 Danderyd, or via the website: www.hms.se/investors. The registration must include the following information: name, personal ID number/ CIN, shareholding, address, daytime telephone number and, when applicable, information on assistants or deputies who will be attending. The notification must include, where applicable, complete authorization documents such as registration certificate, power of attorney, or equivalent.

Proxies

If a shareholder is represented by a proxy, the proxy must be issued with a power of attorney dated for this day. If the power of attorney is issued by a legal entity, a certified copy of the registration certificate, or other document demonstrating the signatory's authority to sign for the legal entity, must be included. The power of attorney and any registration certificate may not be more than one year old. The power of attorney (original), and registration certificate should be sent to HMS Industrial Network AB, c/o Computershare AB, Box 610, 182 16 Danderyd, well in advance of the AGM. The power of attorney form is available on the Company's website: www.hms.se/investors and at the Company's head office.

Nominee registered shares

Shareholders whose shares are registered in the name of a nominee through a bank or Securities Register Centre must temporarily re-register the shares in their own name to be able to participate at the Meeting. Such registration must be recorded with Euroclear Sweden no later than April 22 2016, which means that shareholders must notify their intentions on this matter to the nominee well in advance of the stated date.

Halmstad, March 2016

HMS Networks AB (publ)

The Board of Directors

HMS ACT SERIES BRISTOL REPORT 2016

Shareholder information

Future reports

Q1 interim report, 26 April
Q2 interim report, 19 July
Q3 interim report, 26 October
Year-end report, February 2017

All interim reports, annual reports and certain presentations are available on the HMS website: www.hms.se/investors. A printed version of the annual reported is only distributed to shareholders and investors who have requested one. The annual report can be ordered by mailing a complete address to [email protected].

Follow HMS – www.hms-networks.com

https://www.facebook.com/HMSIndustrialNetworks/

https://twitter.com/hmsnetworks

https://www.linkedin.com/company/hms-industrial-networks

YouTube

https://www.youtube.com/user/HMSIndustrialNetwork

The world's no.1 choice for industrial communication

We provide reliable solutions to connect devices such as robots, control systems, motors and sensors to any industrial network.

Our products and know-how enable customers to broaden their market and implement devices regardless of network environment. This makes our technology a must-have for any system integrator or manufacturer of industrial equipment wishing to operate globally.

Our long expertise, large installed base, and wide market coverage, make us the undisputed market leader of our field.

Get connected!

Box 4126, SE-300 04 Halmstad
Phone: +46 35 17 29 00
[email protected], www.hms.se

AI assistant

HMS Networks — Annual Report 2015

2921_10-k_2020-07-15_e9531984-0bb9-4249-8ae8-821f40a0008a.pdf

Inms networks

CONTENTS

Connecting devices

around the world

THE WORLD IS BECOMING MORE CONNECTED

ESTABLISHED MARKET LEADER

ESTABLISHED SALES CHANNELS IN MORE THAN 50 COUNTRIES

NEW STARS UNDER DEVELOPMENT

WE SOLVE COMMUNICATIONS PROBLEMS ON THE FACTORY FLOOR

Continued expansion and profitable growth

Products + Service = Solution

Growing customer base

Integration

Quality and production

Expanding the offering

Exciting future for HMS

Trends give a boost

IMPORTANCE

HMS APPROACH

Connecting Devices™ – more relevant than ever

Comprehensive supplier to industry

Focused offering

Strong position in a clear trend

Connecting both new and old

Connecting Devices™ – a contemporary slogan

WHAT CUSTOMERS SAY

Anybus Embedded enables communication

Growing market for industrial network interface cards

Demand for flexible communication solutions

MARKET DISTRIBUTION

Value to customers improves competitiveness

Competition and potential

Connectable turnkey solutions

Expansion of Anybus CompactCom

A safe solution

WHAT CUSTOMERS SAY

Anybus Gateways – market-leader for interconnecting networks

Growing market for gateways

Old meets new

Anybus network technology provides wide market coverage

Focus on the needs of system integrators

Three different gateways: Anybus Communicator, X-gateway and Wireless Bridge

New products for the future

WHAT CUSTOMERS SAY

Netbiter – turnkey solution for remote management

Rapidly growing market

Critical information is made available

New technology opens up new application areas

Large customer base

Fragmented competition

Simple, complete solution

Savings and higher reliability

Back to the future

WHAT CUSTOMERS SAY

IXXAT – communication solutions for machines

Many markets – one mega trend, the Industrial Internet of Things

Market position

IXXAT safety solutions – Expertise and products for a growing market

IXXAT Automotive – Solutions for an interesting market

A value-creating business model

Vision

Mission

Business model

EVALUATION PHASE

DESIGN PHASE

HMS's mission

Design-wins for Anybus Embedded and IXXAT

Direct and partner sales for Anybus Gateways and IXXAT

EVALUATION PHASE

DESIGN PHASE

PRODUCTION YEARS 2-3

PRODUCTION YEARS 4-7

PRODUCTION YEARS 8-10

PRODUCTION YEARS 11 AND LATER

50 percent of the potential

100 percent of the potential

Remote Management – products and service subscriptions

HMS Networks Annual Report 2015