HMS Networks — Annual Report 2016

Jul 15, 2020

ANNUAL REPORT 2016

CONNECTED

CONNECTED

CONNECTED

CONNECTED

CONNECTED

CONNECTED

HMS products make it possible for industrial devices to communicate. Millions of robots, packaging machines, generators, conveyors and other business-critical equipment around the world rely on HMS technology for industrial communication.

THE CONNECTED MACHINE – HOW HMS MAKES THE INDUSTRIAL INTERNET OF THINGS POSSIBLE

HMS products enable industrial machines to connect to different types of networks and control systems. We manufacture hardware and software that can be used for:

NETWORK CONNECTION: Anybus products connect machines to any type of industrial network. They exist as stand-alone gateways or solutions that can be integrated into a machine.

WIRELESS COMMUNICATION: HMS offers new solutions for accessing a machine via Bluetooth or WiFi.

Communication between machines and different types of safety systems.

REMOTE SOLUTIONS:

Remote monitoring and control via Internet using eWON solutions. Makes it possible for technicians to service the machine without being on site. • At fore front of technology. SAFETY SOLUTIONS:

INSIDE MACHINES: Communication solutions between components and systems inside a machine. Usually based on the CAN communication protocol. MACHINES:

WHY INVEST IN HMS

• Internet of Things increases the need for communication solutions.
• Established leader.
• Worldwide presence.
• New stars under development.

WORLDWIDE PRESENCE

AT THE FOREFRONT OF TECHNOLOGY

At HMS, innovation is in our blood and we are constantly launching new products and solutions in the market.

THE WORLD IS BECOMING INCREASINGLY CONNECTED

With trends like The Internet of Things and Industrie 4.0, more machines will need to be connected. And that is what lies at the core of the HMS mission – for decades, our motto has been Connecting Devices™.

ESTABLISHED SALES CHANNELS IN MORE THAN 50 COUNTRIES

2016 in brief

HMS in brief • Key figures • CEO's comments

In 2016, sales increased to SEK 952 (702) million and profit was SEK 149 (102) million. The number of employees increased to 500 (388).

• February: HMS acquires Belgian eWON SA A leading IIoT company that delivers products for remote access of industrial equipment.
• March: HMS receives Ruban d'Honneur at the 2016 European Business Awards in Milan. The award designates HMS as one of the 10 most successful companies in Europe, with annual sales in the range of EUR 26-150 million. In total, more than 32,000 companies competed in European Business Awards in 11 categories.
• May: One of the leading US manufacturers of emergency power generators decides to use Netbiter as its hardware platform for remote monitoring and control. Estimated volume of USD 1.5 million.
• June: US machine builders name HMS as the best choice for network connection and remote control, based on voting in the journal, Control Design.
• June: HMS acquires the Spanish company, Intesis Software, SLU. – a leading manufacturer of communications solutions for building automation.
• September: HMS launches Anybus Wireless Bolt, an entirely unique product for connecting industrial machines to wireless networks.
• October: HMS offers the Netbiter Remote Management under its newly acquired brand, eWON.
• December: New organization launched, with division into four Market Units (Americas, Continental Europe, Asia and North) along with three Business Units (Anybus, IXXAT and eWON).

FINANCIAL INFORMATION IN BRIEF, SEKm	2016	change %	2015
Net sales	952	+36%	702
Growth in net sales, %	36	-	19
Operating profit	149	+46%	102
Operating margin, %	16	-	14
Profit for the year	100	+67%	60
Order intake	966	+42%	682
Earnings per share, basic, SEK	8.63	+62%	5.33
Earnings per share, diluted, SEK	8.59	+62%	5.31
Cash flow from operating activities	155	+72%	90
Average number of employees	467	+30%	359

OPERATING PROFIT

OPERATING MARGIN

EMPLOYEES / COUNTRY

SWEDEN, 41%	SPAIN, 7%
CENTRAL EUROPE	USA, 6%
GERMANY, FRANCE,	JAPAN, 3%
ITALY,	CHINA, 2%
SWITZERLAND), 26%	INDIA, 1%
BELGIUM, 12%	UK, 1%
	DENMARK, <1%

SALES GROWTH AND NUMBER OF DESIGN WINS

NUMBER OF NEW DESIGN-WINS

In total, we received 195 new design wins during the year for our products, which brings the total number of active design wins to 1,381, which is an increase of 12 percent compared to last year.

CONTENTS

CEO'S COMMENTS 2
HMS STOCK 4-5
MARKET TRENDS 6-7
BUSINESS MODEL 8-9
HMS mission 8
Business model 8
Value creation for our target groups 9
STRATEGIES AND GOALS 10
THE MARKET – SALES REGIONS 12
PRODUCT OFFERING 14
Anybus® 16
IXXAT® 18
eWON® 20
Intesis 22
SUSTAINABILITY 24
Focus areas 24
Employees 26
Environmental impact 28
Sustainable business 30
Social commitments 31
CORPORATE GOVERNANCE 32-41
Chairman's comments 32
Corporate governance report 33
Board's internal control report 37
Board of Directors 40
Group management 41
GLOSSARY 42
FINANCIAL DEFINITIONS 43
DIRECTORS' REPORT 46-50
FINANCIAL STATEMENTS 51-57
NOTES 58-81
BOARD'S AFFIRMATION 82
AUDIT REPORT 83
MULTI-YEAR OVERVIEW 86
NOTICE OF AGM 87

HMS in brief • Key figures • CEO's comments

CEO'S COMMENTS

CEO'S COMMENTS

Organic growth, successful acquisitions and more focus on sustainability

I look back on 2016 with a sense of satisfaction and pride. We've had a high level of activity in all areas of operation and we made great strides in growing the company.

During the year, HMS has grown organically, which along with two acquisitions, generated a growth rate of 36 percent. Over the last four years, HMS has thus achieved annual growth of 21 percent per year, which exceeds our primary goal of a 20 percent annual growth rate.

HMS in brief • Key figures • CEO's comments

In 2016, we also reached new record levels for our operating profit, which was SEK 149 million for the year. Higher volumes, stable gross margins and cost control have enabled us to achieve an operating margin of 16 percent, which is just below our secondary goal of 20 percent.

At year-end, we had 500 (388) employees in 12 (10) countries. By the end of the year, we had also launched our new global organization, comprised of four market units (Americas, Continental Europe, Asia and North), all of which handle sales, marketing and technical support for each of our three brands, Anybus, IXXAT and eWON.

NEW PRODUCTS

In 2016, we continued investing in innovation and product development, with the launch of many new exciting products in our traditional markets, along with new Industrial IoT applications. One example is our innovative Anybus Wireless Bolt, which combines industrial communication technology with wireless communication for new and exciting application areas. This product has attracted much attention and it was also chosen as Best Network Technology by Automation Inside.

SUPPLEMENTARY ACQUISITIONS

The acquisition of the Belgian eWON SA was an important strategic step that now allows us to offer

"

a complete portfolio in the growing field of remote control and remote monitoring. We call it Remote Solutions. eWON's products are a great supplement to our existing Netbiter offering

and during the year, we integrated Netbiter into the eWON brand.

Acquisition of the small, but quickly growing Spanish company, Intesis Software SLU, provides us with new opportunities in the interesting area of communications for intelligent buildings. Both of these companies are strategic supplements for the HMS growth agenda in our market areas for industrial communication.

SUSTAINABILITY

Over the last four years, HMS has achieved annual growth of 21 percent per year, which exceeds our primary goal of a 20 percent annual

growth rate.

During the year, we solidified and intensified our sustainability efforts. We also began reporting in accordance with the UN Global Reporting Initiative, which is a natural progression of the efforts we have expended over many years to be a good employer, take responsibility for the environment

and help our customers use technology to save energy and increase productivity. Please see pages 24-31 for more information about our work in the area of sustainability.

LOOKING TO THE FUTURE

Our aim is to be a global growth company on the cutting edge regarding both customer focus and technology. The challenge in 2017 will be implementing the strategic initiatives adopted in 2016. We will, given the investments and innovation achieved in 2016, continue to deliver profitable growth in the year ahead.

The transition to a digital society continues and there are powerful trends, like Industrial Internet of Things (IIoT) and Industrie 4.0, occurring in our markets. Both are based on products becoming increasingly intelligent and exchanging information with their environment. This is what fuels the use of industrial communication technology and continues creating excellent growth opportunities for us in the area of our core expertise and motto, Connecting Devices.

In conclusion, I would like to heartily thank our management team and all of our employees, customers, partners, suppliers and shareholders for their contribution to a successful year for HMS. We look forward with confidence to a stimulating future and a continued journey of growth together.

Staffan Dahlström President and CEO

HMS stock

HMS STOCK

HMS stock

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

HMS STOCK PERFORMANCE 2016-01-01 THROUGH 2017-02-29

HMS STOCK YIELD 2011-01-01 THROUGH 2016-12-31

Number NUMBER OF SHARES AND SHARE CAPITAL

HMS has a total of 11,704,717 shares. Share capital amounts to SEK 1,170,472 All shares have the same voting rights.

PRICE TREND

In 2016 HMS's share price rose by 24 percent to SEK 304.00 (245.00). OMX Technology fell by 20 percent during the same period. The highest price paid during the year for HMS shares was SEK 310.00 and the lowest price paid was SEK 200.00. At year-end 2016, HMS's market capitalization was SEK 3,558 (2,774) million.

TRADING VOLUME

A total of 940,822 shares were traded during the year, valued at SEK 225 million, which corresponds to an annual turnover rate of 8 percent. On average, 3,719 (4,516) shares valued at SEK 889 (919) 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. The dividend amount is adapted to the company's earnings level, financial position and future growth opportunities. For 2017, the Board and propose dividends of SEK 4.00 (2.50), which corresponds to approximately 47 percent of net profit for the year. Over the last five years, average dividends have been approximately 46 percent. HMS stock has had an average yield of 1.76 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 2017.

SHAREHOLDERS AND SHAREHOLDER STRUCTURE

As of 31 December 2016, HMS Networks AB (publ) had approximately 2,818 (2,678) shareholders. The ten largest shareholders represented 78.5 (79.0) percent of the voting rights and capital.

THE FOLLOWING ANALYSTS MONITOR HMS ON AN ONGOING BASIS:

Johanna Ahlqvist, and Victor Höglund SEB Enskilda Equity Research.

SHAREHOLDERS, BASED ON HOLDINGS AS OF 31 DECEMBER 2016

Shareholding	Number shareholders	%
1– 500	2,345	83.2%
501– 1,000	213	7.6%
1,001– 5,000	188	6.7%
5 001– 10,000	22	0.8%
10,001– 15,000	7	0.2%
15,001– 20,000	8	0.3%
20,001–	35	1.2%
Total	2,818	100.0%

HMS STOCK

SHARE CAPITAL TREND

Year	Transactions	Change in no. of shares	Total no. of shares	Change in share capital (SEK)	Totalt share capital (SEK)
2004	Company formed	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
2016	Non-cash issue	382,317	11,704,717	38,232	1,170,472

KEY FIGURES*
	2016	2015	2014	2013	2012	2011
Share price (fi nal day of trading)	304.0	245,0	149.0	136.5	112.3	94.8
Volume-weighted average share price	239.0	203.5	144.6	112.8	102.7	99.8
Average sales per day, SEK m	0.9	0.9	0.5	1.2	0.5	0.7
Average number of shares traded per day	3,719	4,516	3,153	10,416	4,754	7,204
Number of shares	11,704	11,322	11,322	11,322	11,254	11,169
Earnings per share	8.59	5.33	5.59	5.54	4.64	4.83
Market capitalization, SEK m	3,558	2,774	1,687	1,546	1,271	1, 057
Enterprise value,
EV (Market cap. + net debt), SEK m	3,979	2,951	1,915	1,789	1,240	1,056
P/E	35.4	46.0	26.7	24.6	24.2	19.6
Net debt /EBITDA	2.2	1.3	1.8	2.3	N/A	N/A
EV/EBITDA	21.1	21.8	15.2	17.1	16.6	12.8
EV/Net sales	4.2	4.2	3.2	3.6	3.2	2.8

HMS'S LARGEST SHAREHOLDERS ON 31 DECEMBER 2016

	No. of shares	Share of votes and equity, %
Investment AB Latour	3 027,322	25.9%
Staffan Dahlström	1,617,073	13.8%
Lannebo fonder	1,104,349	9.4%
Swedbank Robur fonder	1,089,194	9.3%
SEB Fonder	902,706	7.7%
Fjärde AP-Fonden	493,054	4.2%
Serge Bassem, Pierre Crokaert	382,317	3.3%
AMF	231,414	2.0%
Eklund & Peterson AB	184,522	1.6%
HMS Management *	151,234	1.3%
Deka Bank	141,700	1.2%
State Street Bank	140,000	1.2%
Nordea småbolagsfond	138,954	1.2%
DNB Norden Micro Cap	124,124	1.1%
Avanza Pension	117,748	1.0%
Greenspecialisten AB	105,303	0.9%
Other	1,753,703	15.0%
Total	11,704,717	100.0%

* HMS Group management team and Board of Directors excluding Staffan Dahlström and Serge Bassem

MY PERSPECTIVE – WHY INVEST IN HMS:

HMS has a strong financial position and a sustained trend of continuous growth, at around 20 percent per year. We intend to keep it up, too. Above all, we have a very stable income model that is based on our embedded products that customers will rely on for years to come. Trends like the Internet of Things put wind in our sails." Gunnar Högberg, CFO

Everything is getting connected • Global mega trends driving HMS

MARKET TRENDS – DRIVING FORCE

Everything is getting connected!

With the Industrial Internet of Things (IIoT), industrial products, machines and systems are becoming increasingly connected. The driving force is to increase flexibility, efficiency and productivity, which has always permeated industrial automation. However, IIoT is also a strong trend in building automation, power generation, medical systems and more. IIoT makes it possible to gather data from the connected, industrial devices and feed it into IT systems, where it can be analyzed and presented. It provides operators and decision-makers with immediate insight into the industrial processes,

enabling them to ensure that factory systems are functioning as intended, are correctly adapted, and that there is optimal use of resources. Furthermore, with IIoT, subcontractors are able to monitor delivered products and provide maintenance during the product life cycle, thereby offering a higher level of service to industry.

MARKET TRENDS – DRIVING FORCE MARKET TRENDS – DRIVING FORCE

GLOBAL MEGA TRENDS DRIVING HMS

ciency and productivity. However, they often also rely on older system that they want to keep using, and which are still in good working order. It means that there is a need for solutions that integrate the old equipment with the new. HMS products are very good at connecting old systems with new ones. In this way, IIoT creates new application areas and business opportunities for HMS products and services.

from industrial processes. It is insight that enables optimal performance of processes and use of resources. HMS's business is highly aligned with IIoT – connecting industrial products to networks. HMS is gradually expanding its IIoT offering, based on its core expertise in industrial communication.

new opportunities arise for achieving optimal use of energy and equipment in the industrial systems. HMS's main contribution to sustainable development is developing and manufacturing products that make energy conservation and energy efficient production possible for its users, with the lowest possible environmental impact during the product's useful life.

HMS NETWORKS ANNUAL REPORT 2016 7

tions. Security is important to our customers, which is why they prioritize working with reliable, knowledgeable communications partners when implementing IIoT solutions.

A value-creating business model

HMS has designed its business models to fit each market and product line. Design Wins, i.e. framework agreements in direct contact with customers, are fundamental to the Anybus embedded products. Long-term revenue is secured following a relatively long sales cycle and design phase, which occurs in close collaboration with customers. For other products, the business model is more traditional, with a short sales cycle and sales typically occuring through distribution.

DESIGN WINS SYSTEM INTEGRATION (HMS PRODUCTS ARE PURCHASED FOR THE PURPOSE OF SOLVING A COMMUNICATIONS PROBLEM) SERVICES AND SUBSCRIPTIONS

REVENUE DISTRIBUTION, 2016

DIRECT SALES, 70% SALES VIA DISTRIBUTORS, 30%

HMS'S MISSION

HMS's mission is based on the vision that all industrial devices and machines will communicate in intelligent networks. The mission is to provide industry with solutions for intelligent communication, between automation devices and networks, between various types of networks or between remote installations and operating centers. Although the concept Industrial Internet of Things may be new to many, it has been a reality to HMS for many years. The company's business activities are focused on precisely this – connecting global industry as conveyed in the HMS motto – Connecting DevicesTM.

DEVELOPMENT OF SEVERAL BUSINESS MODELS OVER TIME

In prior years, HMS's activities and business model were one dimensional, with the company focused on delivering communication solutions to manufacturers of automation products, in direct contact with the customer. Since then, HMS has evolved into a company that offers products and services to customers in many parts of the industrial value chain. In developing the offering, supplementary business models have been created for each market and product line.

Design-Wins still the foundation

For Anybus Embedded and certain IXXAT products, the business is built upon framework agreements, or so-called Design Wins. A design-win typically involves a long-term collaboration with a manufacturer of automation equipment. It means that customers integrate HMS hardware and software into their product designs.

Direct contact with customers is important, which is why HMS's own sales and application engineers ensure that there is excellent collaboration both technically and commercially. And, although the sales cycle is relatively long, the upside is a steady stream of income over a long period of time, provided that the customer's automation product gains market acceptance.

For some major customers, customized hardware and software solutions are offered that meet specific specifications.

Major product offering for system integration.

Anybus Gateways and most of the eWON and IXXAT products are offered via HMS's network of qualified distributors. The business model is based on a network of around 300 independent, technically competent distributors in around 50 countries, who ensure that HMS products are used in local projects. The target groups are primarily

system integrators, installers and machine builders who are working to integrate networks, and design communications solutions, for various applications and end users in industry.

In this segment, HMS focuses on offering a wide variety of standard products, which are ready for easy configuration and installation – without wasting costly engineering resources on this task. In the same segment, HMS also offers certain programmable gateways that are suitable for more complex applications. With the sale of these products, local solution partners, or HMS's own application engineers provide much-appreciated value-added by offering programming services.

Remote solutions – products and service subscriptions

eWON Remote Solutions are based on a different model. First, HMS offers an eWON product that enables remote connection to industrial apparatus. Afterwards, the customer subscribes to a webbased eWON service through which both the customer and its approved users gain access to their equipment, online. With a range of free basic services, along with more advanced paid services, customers are able to choose a custom solution for each remote monitoring application.

A value-creating business model • HMS strategies for profitable growth • Established sales channels in more than 50 countries

BUSINESS MODEL AND THE VALUE WE CREATE BUSINESS MODEL AND THE VALUE WE CREATE

HMS products make it possible for machines to communicate. Customers purchase them in order to connect with industrial networks or Internet. They are sold via direct sales as well as via distributors in more than 50 countries.

VALUE CREATION – FOR OUR TARGET GROUPS

Customers

Manufacturers of automation equipment don't need to worry about adapting their products to the multitude of communications standards when they use HMS solutions. HMS products flexibly solve communication problems so that customers can focus on their core products and business.

System integrators worldwide can rely on the fact that there is an HMS product designed to solve every type of network integration problem, with delivery of it from a local supplier, quickly and efficiently.

For geographically dispersed installations, eWON Remote Solutions offer the potential of major savings in maintenance costs. Other benefits are higher reliability and service life for the equipment.

Besides solving concrete communication problems on the factory floor, HMS products make industrial processes more flexible and energy-efficient. HMS products are designed for energy efficiency during operations and over a long lifespan. Furthermore, none of the materials or components in the design are hazardous to the environment and HMS strives to help its customers achieve their sustainability goals.

Shareholders

HMS's goal is to create long-term value added for its shareholders. It is created via both share performance and dividends. HMS strives to achieve a long-term, increasing dividend for its shareholders. It also has an explicit dividend policy to distribute up to 50 percent of the profit.

Employees

The Group depends on motivated and competent employees who think innovatively and contribute to the company's success. Employee commitment and performance is critical for HMS to succeed with its strategy, achieve its goals and continue growing.

HMS offers its employees exciting personal and professional development 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.

Society

As employer, HMS provides benefits to the local economy in many regions worldwide. Besides the taxes and fees that it pays in each market, HMS actively strives to, in a variety of ways, strengthen its bond with society via, for example, strong commitment and long-term, goal-oriented cooperation with universities and schools in the area.

STRATEGIES AND GOALS

HMS's strategies for profitable growth

The industrial world is becoming increasingly connected. As such, it provides HMS with excellent opportunities for continued growth into the future. The well-established brands, Anybus, eWON and IXXAT, address various aspects of industrial communication in different markets. Our wide market coverage makes it possible for HMS to develop new solutions for industrial IIoT in close collaboration with customers.

LONG-TERM GROWTH IN STRATEGIC MARKETS

HMS has steadily expanded, on the foundation of its technology and strong market position in the area of embedded network solutions for the manufacturing industry. Via a combination of new technologies, innovative products and market initiatives, HMS has diversified into related industrial areas such as remote monitoring of industrial equipment, functional safety and communication for building automation and smart grids. HMS aims to, primarily, expand via 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. The acquisition of eWON and Intesis are just two examples of the latter scenario.

FOCUSED, SUSTAINABLE PRODUCT DEVELOPMENT

Going forward, the product portfolio for HMS's three brands, Anybus, eWON and IXXAT will continue being developed in line with new customer requirements and technological developments. Besides the pure sales goals, the aim is to strengthen HMS's market position as a leading supplier of user-friendly, safe solutions for industrial communication. The importance of solutions for information security in industry increases in conjunction with the growing need for new, innovative communication solutions. This is also an

STRATEGIES AND GOALS

area where HMS is well-positioned, not least considering its ongoing collaboration with leading industrial companies that have high demands.

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. HMS products and solutions are based on the latest, proven, sustainable technology for industrial networks, wireless communication and remote monitoring.

GLOBAL PLAYER WITH LOCAL PRESENCE

Local presence is one of the key factors for HMS as a global company. HMS's strategy is to maintain own sales and marketing offices in its most important strategic key markets (currently North America, Central Europe, Germany, France, Switzerland, Nordic, Great Britain, Italy, Japan, China and India), while supplementing it all with a well-established network of selected distributors in over 50 countries. Thanks to this organization, HMS is able to ensure quick, efficient sales of, for example,Technical Services that are offered in the local language. HMS assists customers with finding the right solution for the intended purpose, which reduces the amount of time that expires between customer inquiry and placement of the first customer order with HMS. At the same time, it solidifies the market's impression of HMS as a reliable supplier who is prepared to meet all of its customers needs.

SUSTAINABLE VALUE CHAIN

Industry requires high quality products that are easy to install and use. Another basic requirement is the ability to use industrial products for a long period of time, over the entire product life cycle, which is standard for industrial systems. HMS is able to meet all of these requirements because it has full control over the entire value chain, from product development, component supply, manufacturing, distribution, sales, training and aftersales service. The Business Management System (BMS) is used to specify and monitor all of the processes in order to ensure quality and continuous improvement in the value chain.

Manufacturing occurs at our own facilities and in close cooperation with exclusive distributors in Europe and Asia. HMS's own production facilities are located right next to the development department in Halmstad. This is where production occurs for prototypes, small series and certain customized products, along with final assembly and quality control. Because we have our own manufacturing we are able to maintain technical expertise in all areas of production, which means that HMS can continue placing high demands on its subcontractors.

For many years, HMS has been certified according to the ISO 9001 quality management standard, just like all strategically important subcontractors. The sustainability strategy is based on HMS's vision and core values, along with the respect that the company desires to show towards all of its stakeholders (customers, employees, shareholders and suppliers), plus an awareness of society and the environment. A critical component of sustainable development of society has to do with the value of the product offering and HMS contributes by developing and manufacturing products that make significant energy savings and efficiency improvements possible for users, with minimal environmental impact during the product lifespan.

The goal for returned defective products from the field was not achieved 2016. 285 PPM (Parts Per Million) is, however, still very low (0.0285 percent error rate). With such a low PPM, a very small number of defective products can have a large impact on the error rate. HMS continues its careful monitoring of the PPM rate, in accordance with existing quality routines, to ensure that failure to meet the target does not become a trend.

Operating margin >20%

* after depreciation/amortization (EBIT) 10 20 30 2012 2013 % 2014 2015 2016 Goal 20% OPERATING MARGIN*, %

RETURNED DEFECTIVE PRODUCTS, OPERATIONAL PPM (PARTS PER MILLION). OBJECTIVES

At least 95 percent of deliveries must be delivered on time.

4

Return of products must be less than 200 ppm (parts per million).

A value-creating business model • HMS strategies for profitable growth • Established sales channels in more than 50 countries

THE MARKET – HMS SALES REGIONS

Established sales channels in more than 50 countries

THE MARKET – HMS SALES REGIONS

HALMSTAD, SWEDEN

The HMS Head Office. Development of Anybus products (and some eWON development), along with global functions like IT, accounting/ finance, HR, marketing, etc.

GOTHENBURG, SVERIGE

Development offices for parts of Anybus.

KARLSRUHE, GERMANY

Center for HMS in Central Europe. Manages local sales, support and marketing and some customer-related development.

RAVENSBURG, GERMANY Development office for IXXAT products.

NIVELLES, BELGIUM Development office for eWON products.

CHICAGO, USA Center for HMS in North and South America. Manages local sales, support and marketing.

BEDFORD, USA Development office for customized solutions.

PITTSBURGH, USA Local office for sales and support of eWON products.

SHIN-YOKOHAMA, JAPAN

A value-creating business model • HMS strategies for profitable growth • Established sales channels in more than 50 countries

Manages local sales (Japan and Korea), support and marketing.

MULHOUSE, FRANCE Manages local sales, support and marketing.

MILAN, ITALY

Manages local sales, support and marketing.

COVENTRY, UK

Manages local sales, support and marketing.

BEIJING, CHINA

Manages local sales, support and marketing.

PUNE, INDIA Manages local sales, support and marketing.

BASEL, SWITZERLAND Manages local sales.

IGUALADA, SPAIN Development and sales of HMS Intesis products.

VANTAA, FINLAND During 2017 HMS established an office in Vantaa, Finland.

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, are in need of more flexibility at production facilities.

MIDDLE EAST AND AFRICA Investments in alternative industries to diversify revenue sources along with investments in infrastructure improve the conditions for HMS being able to sell remote solutions.

ASIA

Considerable needs exist for automation-related equipment in the areas of energy, working environment and infrastructure. HMS products – a critical component of Industrial Internet of Things • Anybus • IXXAT • eWON • Intesis

HMS PRODUCT OFFERING HMS PRODUCT OFFERING

HMS products – a critical component of Industrial Internet of Things

Industrial Internet of Things is all about getting industrial machines connected with networks and control systems. HMS products, solutions and expertise makes it possible for machines to communicate. Accordingly, they are critical to organizations wanting to be a part of the IIoT evolution.

HMS PRODUCT OFFERING

In modern factories, there are smart solutions that offer entirely new possibilities. For example, suppliers are able to monitor their delivered products so that they can anticipate maintenance needs, while factory owners are able to analyze critical data from industrial processes to ensure that the systems function and are used optimally. These types of smart solutions rely on communication between industrial devices and IT systems. HMS products make it all possible.

MORE COMMUNICATION NEEDED

HMS products for industrial communication are already used by millions of people around the world and even more will need to get connected in the future. The need for communication is not only apparent in HMS's traditional market of factory automation, but also in building and process automation, the power and energy market and the transport and infrastructure segments. This opens up new market doors for HMS.

We have noticed a growing demand for sustainable, intelligent industrial solutions, which are reliable, safe and robust, typically also relying on wireless technology. HMS's strong position in industrial communication provides an excellent foundation for creating new, innovative products and services for the emerging IIoT global market.

CONNECTING BOTH NEW AND OLD

It's not just the new equipment that needs to be connected with the latest technology in industry. Equally important is the ability to connect existing industrial equipment based on older technologies. HMS has extensive expertise in fieldbus technology, Industrial Ethernet and wireless networking. As such, we are able to offer solutions for manufacturers of devices and machines who want to integrate the latest technology. Another typical inquiry comes from system integrators tasked with helping end customers connect existing, older equipment on the factory floor with new equipment.

WHO ARE HMS'S CUSTOMERS?

HMS products are used by many different types of players in industry. Manufacturers of automation products, machine builders, system integrators and end users all regard HMS as a key supplier who helps ensure that their equipment is able to communicate and be integrated with other equipment in industrial systems on the international market. It involves not only factory automation, but also process energy, buildings, life sciences, and transportation.

MY PERSPECTIVE – WHY INVEST IN HMS:

Although the concept Industrial Internet of Things may be new to many, it has been a reality to HMS for many years. The company's business activities are focused on precisely this – connecting global industry as conveyed in the HMS motto – Connecting Devices™. "

Anders Hansson, Marketing Director.

THREE STRONG PRODUCT BRANDS FOR CONNECTING DEVICES

HMS started out focusing on manufacturers of automation products with our range of communication cards. Our current offering, however, consists of three well-established and growing product lines: Anybus, IXXAT and eWON. They are packaged and designed for specific segments of the industrial value chain, which has gradually broadened HMS's market presence. This development has been key to HMS's growth process and it has established the company as a leading player in the market.

The product brands, Anybus, IXXAT and eWON are well-known in the market and they have distinct, individual identities, yet with the same common denominator: Connecting Devices.

INNOVATIVE PRODUCTS –

Anybus connects industrial devices to all types of networks

HMS products – a critical component of Industrial Internet of Things • Anybus • IXXAT • eWON • Intesis

In the industrial world, there are many types of networks, depending on the geographic market and industry. They can be compared to the various languages used in different parts of the world. Anybus products are used to connect industrial devices to these various networks. The products are grouped in integrated network cards (Anybus Embedded) that are designed into a customer's product and standalone units (Anybus Gateways) that function as the "translator" between machines and networks. As of 2016, HMS wireless products are also offered in their own sub-category: Anybus Wireless.

HMS products for embedded network cards remain the foundation of our business. Embedded products are primarily marketed under the name, Anybus CompactCom. When a customer decides to use CompactCom (a Design Win), it initiates an integration process of approximately 7-10 months, during which CompactCom is integrated into the design of the customer's product. Once the customer's product is complete, all that's needed is to plug in the selected CompactCom for the network desired by the customer. This makes it possible for customers to sell their products in markets that use different networks. Anybus CompactCom currently supports all leading Ethernet networks and fieldbus technologies.

MY PERSPECTIVE – WHY INVEST IN HMS:

For Anybus, we see a considerable demand, all over the world, for industrial communication solutions. For many years, HMS has maintained a leading position in the area of industrial communication, and the need for smart solutions is constantly increasing in conjunction with the need to connect devices on the factory floor with the rest of the company's operations. The Anybus offering is extremely well-positioned to meet the market's growing communication needs." Christian Bergdahl, Product Marketing Manager, Anybus "

DID YOU KNOW THAT: Industrial networks are often called buses or fieldbuses. It's how the name Anybus came about.

total sales.

DID YOU KNOW THAT: Anybus products account for just over 55 percent of HMS's

ANYBUS EMBEDDED 25% ANYBUS GATEWAYS/WIRELESS 15% CUSTOMER-SPECIFIC PRODUCTS BASED ON ANYBUS TECHNOLOGY 15%

INNOVATIVE PRODUCTS – INNOVATIVE PRODUCTS –

Globally, HMS has a special status among independent companies that focus on communication solutions. The competition is typically comprised of automation equipment manufacturers who design their own embedded network 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.

ANYBUS GATEWAYS

A gateway is an independent "translator" that enables automation devices and systems to communicate with industrial networks. Gateways consist of one or more Anybus embedded cards and they typically function as problem-solvers on factory floors all over the world. They are pre-packaged solutions that can immediately be used to connect machines and networks. Gateways are typically used to connect older automation equipment with newer systems.

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 at all. Because of this, Gateways are in demand and used by automation engineers around the world, particularly for factory automation, but also in related areas such as building automation.

HMS markets gateways under the name, Anybus X-gateways (communication between two networks) and Anybus Communicator (communication between an automation device and a network).

ANYBUS WIRELESS

HMS products – a critical component of Industrial Internet of Things • Anybus • IXXAT • eWON • Intesis

Having acquired technology for wireless communication in 2014, HMS was able to, in 2016, launch its first proprietary solutions for wireless communications. Anybus Wireless Bolt and Wireless Bridge are used to give machines on the factory floor a solid wireless connection via Bluetooth or WLAN.

Wireless technology has existed for quite some time in the realm of consumer technology. In industry, however, with requirements on signal quality and security, the technology is relatively new. HMS has noticed that there is considerable interest in solutions like Anybus Wireless Bolt, which can be mounted on a machine to provide wireless access. It provides users with access to a machine from distances of up to several hundred meters, without any costly cables. They can also use cell phones or tablets to control the machine (rather than an expensive HMI screen).

DID YOU KNOW THAT: More than 70 engineers work with research and development of Anybus products in Halmstad and Gothenburg.

MARKET

Factory automation remains the most important market for Anybus. Since communication is becoming increasingly important in other areas, like buildings, vehicles, process plants and infrastructure, it means that new applications and markets are continually opening up for Anybus.

BUSINESS MODEL

Anybus embedded is sold through direct sales to manufacturers of automation products. A Design Win means that the customer has decided to use Anybus, after which, an Anybus module is mounted to each new product that is manufactured. Anybus gateways and wireless are sold via direct sales as well as distributors.

COMPETITION

For embedded, the competitor is often also the actual customer, who could decide to develop network solutions in-house. Companies like Hilscher, Prosoft, Moxa and Molex compete with HMS in various gateway sub-segements. However, on the whole, nobody can match what HMS has to offer.

HMS products – a critical component of Industrial Internet of Things • Anybus • IXXAT • eWON • Intesis

INNOVATIVE PRODUCTS –

IXXAT products enable Machine Automation

IXXAT is a renowned brand for its solid solutions within CAN, safety and automotive. The IXXAT offering comprises many standard products which solve common communication issues in automated machinery. HMS's IXXAT team also focuses on customized solutions for companies requiring tailor-made embedded communication solutions.

EXPERTS IN CAN AND REAL-TIME ETHERNET SYSTEMS

CAN is a standard for communication widely used within cars, medical automation, machines, marine vessels, and much more. HMS's IXXAT team has extensive experience in CAN-based communication and are in fact pioneers for CAN in industrial applications. Although CAN is mature and proven, it is being used in many new installations as CAN and CAN-based protocols like CANopen or SAE J1939 bring benefits such as low costs, flexibility, reliability and power efficiency. IXXAT products are also used to meet the strong demand for connecting CAN-based machinery to the Internet of Things.

In addition to classic CAN, a range of new IXXAT products enable customers to master current and future machine-communication challenges involving the next-generation standard CAN FD as well as industrial Ethernet systems such as EtherCAT and PROFINET.

The main customers are OEM machine builders (OEM = Original Equipment Manufacturers) and large-scale equipment manufacturers and developers. Typical applications include machine control, Human Machine Interfaces (HMIs), data-concentration, network extension and improving network robustness.

IXXAT AUTOMOTIVE – ENABLING NEXT GENERATION VEHICLES

HMS's core strength is the continuous transfer of our know-how in communication and embedded systems into products that enable our customers to realize their solutions. Evidence is the strong demand from new and long-term customers on products and consultancy."

MY PERSPECTIVE – WHY INVEST IN HMS:

"

Thomas Waggershauser, Product Marketing Director, IXXAT

As cars are turning into computers on wheels, the testing efforts for car manufacturers and their suppliers are immense. IXXAT Automotive solutions combine elaborate test-functions in a small device combined with software for configuration and visualization. Applications include connection of vehicle components to test systems and simulating other vehicle parts.

The strength of the IXXAT Automotive offer-

DID YOU KNOW THAT: Each year,

about 1 billion CAN nodes (a connection point for a machine) are sold

INNOVATIVE PRODUCTS –

ing comes from close cooperation with customers –including key players like BMW: Most test systems at BMW factories rely on IXXAT products.

IXXAT SAFETY – EXPERTISE AND PRODUCTS FOR A GROWING MARKET

Safety mechanisms in machines and factories are used to prevent injury, environmental damage and minimize downtime. With modern communications technology, process-control data and safety-critical data can share a single network. However, implementing safety functions requires extensive experience and knowledge about development and complex international standards like IEC61508.

IXXAT safety products offer safe and non-safe data communication fully integrated into a single solution: IXXAT Safe T100 in combination with the Anybus CompactCom is the turnkey product for machine safety, cutting about two years of customer's efforts.

DID YOU KNOW THAT: IXXAT Automation GmbH was acquired by HMS in 2013 and is now an integral part of the HMS offering and knowledge base. Since July 2015 IXXAT is operating as HMS Technology Center Ravensburg GmbH.

MARKET

Industrial automation and the automotive industry are important markets for IXXAT products. IXXAT solutions are also gaining traction in many other markets such as medical applications, power generation, heavy-duty vehicles, infrastructure etc.

BUSINESS MODEL

IXXAT products are sold both directly and through distributors. IXXAT products have a similar design-win-based business model as Anybus Embedded. A core element of the IXXAT brand are services and turn-key customized products.

COMPETITION

CAN is a mature technology and other companies offer similar products. However, none has such a complete product portfolio and few have the technical competence and local services as HMS. IXXAT Automotive Solutions, IXXAT Safety and the IXXAT INpact boards are unrivalled by the unique combination of communication hardware and software.

HMS NETWORKS ANNUAL REPORT 2016 19

INNOVATIVE PRODUCTS –

eWON Remote Solutions allow users to access, monitor and control industrial equipment from anywhere

eWON Remote Solutions are Internet of Things in its purest form. By connecting an eWON product to an industrial machine, the machine gets connected to the Internet giving users access to it anytime, anywhere. The eWON Remote Solutions became a part of HMS's offering after the acquisition of the Belgian company eWON S.A. in February 2016. The offering now also includes the Netbiter remote management solution which was developed by HMS in Halmstad.

DID YOU KNOW THAT: Approximately 30 engineers work with research and development of eWON products in Nivelles and Halmstad.

INNOVATIVE PRODUCTS – INNOVATIVE PRODUCTS –

We see a growing market for remote solutions. In today's business, it is often the operational costs that put a burden on profitability and if you can invest in new tools and technologies to make your business sharper and more efficient, you will get a quick return-on-investment and you will still be building your business. Not only does eWON remote solutions reduce operational cost, we also add value by gathering and displaying KPIs and key parameters from machines which improves service and performance. "

HMS products – a critical component of Industrial Internet of Things • Anybus • IXXAT • eWON • Intesis

eWON has always been bringing new innovations to the market and has on many occasions been the trendsetter, picking the right technology at an early phase. At HMS, we will be able to keep eWON as the market-leading brand for remote solutions.

Jon Jacobsen, Marketing Manager, eWON

DID YOU KNOW THAT: Calculated Annual Growth for the remote Machine-to-Machine (M2M) market is 11.57 percent reaching \$35.16 billion by 2020 (Markets and Markets).

RAPIDLY GROWING MARKET

The market for remote access, 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 that they see IIoT solutions as an important component for future growth.

FOUR REMOTE SOLUTIONS

Today, every machine builder recognizes the need to remotely access machines and equipment in the field in order to reduce maintenance costs and optimize uptime. Under the eWON brand, HMS offers four different ways to remotely access and monitor industrial equipment.

Remote Access with eWON Cosy

With an eWON Cosy connected to a machine, it is possible to create a secure tunnel to the machine and do programming and troubleshoot machines remotely without going on site, drastically reducing support costs.

Remote Data with eWON Flexy

The eWON Flexy product is, just like Cosy, mainly used for remote access, but it also provides advanced data services such as data collection from remote sites and alarm management. This solution makes performance monitoring and proactive maintenance possible. eWON Flexy comes with all major protocols embedded (including legacy) for data acquisition.

DID YOU KNOW THAT: The name eWON originally comes from "Eyes Watching Over the Net."

Remote Management with Netbiter

Netbiter is an out-of-the-box solution allowing users to easily set up web-based dashboards and get alarms when something happens to their equipment. It is often used to monitor field equipment such as backup power generators, weight scales or pumps.

Remote Networks with eFive

eFive is a remote solution for permanent VPN connections. This solution allows system integrators to establish secure industrial networks linking multiple remote sites to a SCADA in a central control room.

MARKET

Any remote equipment can be reached and monitored with eWON solutions. PLCs are the most common thing to control but applications also include backup power generators, UPSs, wind turbines, solar panels, telecom base stations, tanks, water basins etc.

BUSINESS MODEL

eWON products are sold mainly on a one-by-one basis through a network of distributors.

COMPETITION

There are many providers of remote monitoring solutions but most of them specialize in a particular industry or market segment. Under the new eWON umbrella, HMS is undisputedly one of the leading companies within remote access and management of industrial equipment.

HMS NETWORKS ANNUAL REPORT 2016 21

HMS products – a critical component of Industrial Internet of Things • Anybus • IXXAT • eWON • Intesis

INNOVATIVE PRODUCTS –

Intesis – Connecting devices within building automation

In June 2016, HMS acquired the Spanish company Intesis Software SLU. Just like HMS, Intesis offers communication solutions which connect devices, but for the building automation industry. Building automation is a rapidly growing market valued at approximately 50 billion USD with an annual growth rate of 10.65 percent (MarketsandMarkets). HMS already has customers using Anybus, IXXAT and eWON products to connect building infrastructure such as air conditioning, temperature sensors or water pumps. With the acquisition of Intesis, HMS can now offer an even wider range of connectivity solutions.

ABOUT INTESIS

Intesis Software SLU is based in Igualada outside Barcelona, employs 35 people, and offers solutions for both system integrators and home owners. Intesis' main market is Europe, but the products are used in more than 100 different countries worldwide. Just like HMS, Intesis has a solid track record of innovation and bringing new ideas and technology to the market. Intesis was founded in 2000 and has been growing the last years above 20 percent p.a.

THE OFFERING

IntesisBox: A range of communication gateways for building automation. These gateways are very similar to Anybus gateways but designed to connect heating, ventilation, air conditioning and other building-specific devices.

IntesisHome: A complete IoT solution to connect air conditioners to the Internet enabling remote control and management through a smartphone, tablet or PC to reduce energy consumption and increase comfort.

HouseinHand: An app for iOS or Android where users can control their entire smart home with their smartphone. Via the WiFi in the building, the HouseinHand app can connect to the building automation network KNX giving users access to lights, blinds, climate, TV, audio, doors, cameras and more.

INTEGRATION WITH HMS AND FUTURE PLANS

Since Intesis works within building automation while HMS's traditional business is within industrial automation, there will be no merging of sales and marketing forces in the immediate future. However, there are several gateway combinations that can be used in both market segments so here, HMS sees obvious synergy effects to use the HMS and Intesis market channels to merge and distribute each others' solutions.

MY PERSPECTIVE – WHY INVEST IN HMS:

Buildings are the biggest energy consumers today, and we see many opportunities to increase both energy efficiency and user comfort while reducing costs with our communication and networking technology." Josep Cerón, General Manager of Intesis SLU. "

HMS products – a critical component of Industrial Internet of Things • Anybus • IXXAT • eWON • Intesis

Sustainability • UN Sustainable development goals • A world-class workplace • HMS products lower environmental impact • Sustainable business • Realizing social commitments

SUSTAINABILITY

What sustainability means to us

HMS's vision is to enable industrial devices and systems to communicate so that the world becomes more productive and sustainable. It is a vision that also underlies our strategy of creating long-term value and sustainable development for us and our stakeholders. We combine growth and profitability with environmental and social responsibility, which means that we can help create a better world for future generations.

For us, sustainable growth has three interdependent components: economic, environmental and social sustainability. We believe that sustainable growth is about taking responsibility for customers, the environment and the people around us, in all areas of our operations. We do this by maximizing value when we create profitable growth, minimize our footprint and realize our social responsibility. We call it our "Three Zings".

ENVIRONMENT MINIMIZING FOOTPRINT

SOCIAL REALIZING SOCIAL COMMITMENTS

FOCUS AREAS

The HMS management team has established four particularly important focus areas of sustainable enterprising that provide the foundation for how HMS is able to contribute to a sustainable develop ment of society.

• Innovative products and attractive solutions
• Energy efficiency
• Attractive employer
• Responsible business dealings

During the year, HMS engaged with stakeholders

to find out which sustainability issues are most important to our customers, employees, investors and owners. The sustainability aspects deemed most important are: the environmental impact from products and services, energy, emissions, electronic waste, anti-corruption, customer privacy, indirect economic impact, skill development and supplier human rights assessment.

There is ongoing dialog on what is important in order to obtain valuable feedback on how to carry out effective sustainability efforts. Read more about our materiality assessment and how HMS works with stakeholder engagement in our GRI supplement.

We achieved our sustainability goals for 2016, which were to, in a systematic and comparable way, demonstrate our company's contribution to sustainable development. We do this by presenting our sustainability performance in accordance with the Global Reporting Initiative (GRI). We will keep working with our prioritized issues, building on what was achieved in 2016.

MY PERSPECTIVE – WHY INVEST IN HMS:

Our customers demand smart, sustainable products and services that help them address their economic and climaterelated challenges. HMS engages in long-term sustainability efforts aimed at not only meeting our customers' requirements, but also promoting and making progress on sustainability issues in our niche." Katarina Lekander, Quality Manager "

ECONOMY MAXIMIZING VALUE

Sustainability • UN Sustainable development goals • A world-class workplace • HMS products lower environmental impact • Sustainable business • Realizing social commitments

SUSTAINABILITY SUSTAINABILITY

HMS NETWORKS ANNUAL REPORT 2016 25

UN Sustainable Development Goals

The United Nations has specified 17 global goals that leaders around the world have pledged to achieve by 2030. HMS takes responsibility and actively strives to help achieve these goals within the areas relevant to our operations. HMS has decided to focus on the 7 areas that are most relevant and where we can make the most impact.

GOAL 3

GOOD HEALTH AND WELL-BEING Investing in our employees' health and well-being Read more on page 26.

GOAL 4

QUALITY EDUCATION Prioritizing skill development and supporting training initiatives Read more on pages 27 and 31.

GOAL 5

GENDER EQUALITY Ensuring equal rights, opportunities and conditions Read more on pages 26-27.

GOAL 8

DECENT WORK AND ECONOMIC GROWTH Promoting a long-term safe and secure working environment. Read more on page 30.

GOAL 9 PROMOTING INNOVATION Investing in research and development Read more on pages

14-23, 28-29. GOAL 10

DIVERSITY Efforts to increase diversity. Read more on page 26.

GOAL 12

SUSTAINABLE CONSUMPTION AND PRODUCTION Developing and manufacturing products that enable significant energy savings for our customers. Read more on pages 28-29.

SUSTAINABILITY

A world-class workplace

HMS is a global company with operations in many countries. In order to achieve common 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.

HMS HIGH FIVE

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 longterm 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 principles – 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 we are efficient.

ATTRACTIVE EMPLOYER

At HMS, it is important that we have a good mix of people with different backgrounds and that we offer an equitable work environment to all employees. We do not allow any form of discrimination and emphasize that everyone should have the same opportunities. We know that this can boost efficiency, creativity and quality of operations.

In our employee survey, areas dealing with gender and equality received very high ratings. We conduct employee surveys on a regular basis. The latest survey revealed that, among others, a pleasant work environment, gender and equality issues, as well as cooperation with colleagues are highly valued. This year, however, we introduced a new type of survey, which is carried out three times per year, where we "take the pulse" of the organization and thereby can get quicker feedback. It offers managers a way of obtaining quick feedback from employees via a portal that shows the departments results.

Our employee surveys provide us with important feedback on how we can continue improving. The response rate was over 80 percent and we are of the impression that our employees truly provide us with honest feedback. The majority of our employees feel that HMS is a world-class workplace!

HEALTH AND LIFESTYLE

We believe that a good work environment is a prerequisite for being able to perform one's job. We have modern, functional offices at all of our workplaces around the world. In order to promote good health and lifestyle, we offer regular health checkups, ergonomic review of workplaces and many different kinds of subsidized exercise options. Social and fitness activities are arranged on a regular basis. During 2016, sick leave was 2.98 (2.65) percent and employee turnover for the Group was 3.36 (4.8) percent, while in Sweden it was 3.27 (3.0) percent.

We have well-implemented procedures for risk assessment and we continually evaluate our work environment. Complaints may be submitted directly to a manager or the HR department. Anonymous complaints are also possible via Sustainability • UN Sustainable development goals • A world-class workplace • HMS products lower environmental impact • Sustainable business • Realizing social commitments

SUSTAINABILITY SUSTAINABILITY

Daniel Rosén, Electrical engineer "Through the HMS exchange program, I was able to work for six months at our office in Chicago. I am a project manager at our development department, so I took a couple of the projects with me and was able to obtain valuable input from my American colleagues. With some American customers, I was also able to start up some projects, which I later took with me back home to Halmstad. As a developer, the opportunity to work at one of our market companies, in close collaboration with customers, was incredibly valuable.

employee surveys, by placing them in actual mailboxes or via our whistleblower function.

THE RIGHT RECRUITMENT LEADS TO GROWTH AND QUALITY

HMS's growth strategy depends on it having employees with the right expertise. We actively strive to profile HMS 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 to the Group, of which 5 (7) in Sweden and 12 (18) in other countries.

EMPLOYEE DEVELOPMENT

HMS is a learning organization, which applies to our daily operations as well as our external and in-house training initiatives. Employees at HMS are used to taking own responsibility, tackling new challenges and learning new skills.

A large portion of development work is carried out jointly with customers, typically in an international network that provides new perspectives and which results in personalized skill development. New employees participate in individually tailored

MY PERSPECTIVE – WHY INVEST IN HMS:

During our nearly 30 years in the market, we have acquired unique expertise. We have a very healthy team spirit and our employees are motivated by working as a team to create value for customers." Sabina Lindén, Human Resources Manager "

introduction programs. In addition, all new HMS employees throughout the world are invited to attend an introduction week in Halmstad. At HMS, there are many opportunities for shaping and developing one's own professional career. Career development discussions between an employee and his or her manager also take place each year. It creates a strong drive and commitment to continually improve, which is a critical success factor for long-term success. 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.

DID YOU KNOW THAT: This year, HMS was named the most bicycle-friendly workplace in Halmstad.We provide both bicycles and helmets that employees may borrow, which makes it easier for them to run errands during the workday, or bike to a meeting.

Sustainability • UN Sustainable development goals • A world-class workplace • HMS products lower environmental impact • Sustainable business • Realizing social commitments

HMS products lower environmental impact

HMS's main contribution to sustainable development is developing and manufacturing products that make energy conservation possible for its users. Environmental aspects are considered when developing, manufacturing, shipping and using HMS products. In other words, it considers the entire product life cycle.

HMS products can help to significantly reduce travel. By being able to monitor and control industrial equipment via the Internet, you can cut down on the number of expensive and environmentally detrimental service calls.

SUSTAINABLE PRODUCTS

As regards sustainable products, HMS actively works with the following areas:

• Products that are considered to be fundamental components in sustainable industrial systems
• Sustainable product development
• Sustainable manufacturing and logistics

SUSTAINABLE SOLUTIONS

HMS products make it possible to create sustainable industrial solutions, with a focus on such things as energy and resource efficiency, lower emissions, less pollution, higher quality and less waste. Another important aspect is being able to offer effective and flexible industrial solutions to reduce overproduction. The goal is to be able to manufacture a small number of devices just as efficiently as with mass production.

HIGHER EFFICIENCY WITH DIGITIZATION

In industry, we are in the midst of a communication and data revolution, which is being fueled by initiatives and trends like Industrie 4.0, Industrial Internet of Things (IIoT) and The Connected Enterprise. There is a global impetus behind these trends, based on the desire to reclaim manufacturing from low-cost countries, increase competitiveness and future-proof the country's exports of machinery and systems. Another powerful driving force is sustainability. The goals here include improved working environment and ergonomics,

TOTAL ENERGY CONSUMPTION		Greenhouse gas emissions, tons CO2e	2016
	kWh per skeppad enhet	Scope 1, direct greenhouse gas emissions	251
	5	Scope 2, indirect greenhouse gas emissions from energy consumption	66
	4	Scope 3, other indirect greenhouse gas emissions	148
	3	Total greenhouse gas emissions	465
	2	Greenhouse gas emissions for each unit (kg CO2e)	0.65

The table shows greenhouse gas emissions from HMS's three largest business areas. Scope 1 is from company cars, Scope 2 is electricity, heating and cooling and Scope 3 is transports.

SUSTAINABILITY

energy and resource optimization, flexible mass production, reduced environmental impact and a clearer understanding of own impact.

The basis for creating the smart industrial systems of the future is the information and data obtained from industrial systems. HMS products provide that by offering intelligent control functions, along with capturing and presenting data to the main analysis and decision systems. As a result of the growing amount of data collection and remotely connected systems, new services and companies are arising, both centrally and regionally.

PRODUCT DEVELOPMENT

HMS's goal is to continually develop the capacity of products and solutions, in a way that is compatible with our sustainability goals, so that they can easily be integrated into industrial systems and provide valuable functionality and information. With this is mind, HMS participates in various technical network organizations, thereby ensuring that the company's products and solutions remain on the cutting edge as regards such functions as energy management.

In the area of industrial communication solutions, technology is developing at a rapid pace, which puts high demands on the ability to offer more powerful, efficient products, without compromising on the environmental aspects. Since time to market is important, methods and platforms also play a critical role because the quicker new solutions start getting used, the more there is to win, from a sustainability perspective. HMS puts a great deal of emphasis on energy-efficient technologies and solutions. Powerful, energy-efficient solutions, are created using processors and memories with contemporary silicon geometries. Products are designed to be used over a long period of time, in demanding environments. And, to achieve maximum lifespan, it must be possible to make repairs and perform upgrades in the field. Low weight, small size and efficient packaging are also considered in the design, in order to conserve material resources and have a lower environmental impact in the logistics chain. Of course, only materials and manufacturing processes that meet the latest international legal requirements are used. To the greatest extent possible, hazardous substances and chemicals are avoided.

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 and remote monitoring, along with its cloud solutions, can be utilized to address global challenges in sustainable development. Intelligent remote control of equipment also 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.

RECYCLING AND E-WASTE

Through careful control of production processes, it is possible to achieve efficient manufacturing with minimal use of materials, waste and energy consumption.

HMS minimizes the use of hazardous substances and facilitates recycling by complying with environmental laws like RoHS, REACH and WEEE. There are routines and work methods in place for selecting the right materials during the design phase.

In 2016, a collection system was set up so that products from the field can be scrapped in an environmentally correct way that is in compliance with the WEEE Directive. All end products that fall within the scope of the WEEE Directive, like Anybus Gateways and eWON remote monitoring products, display the symbol of a crossed-out wheeled bin.

2016
2,006,124,400
255,981

HMS products lower the amount of travel by our customers. Travel savings for Talk2M are estimated at 2,006,124,400 km per year.

"With remote maintenance, we cut out more than 100,000 kilometers of travel per year"

Frank Weiß, CEO, Autech Tesla

HMS's eWON Remote Solutions lower the amount of service travel for our customers and thereby their carbon dioxide emissions. One example is the German water treatment specialist, Autech Tesla GmbH. They install water treatment systems for, among others, pools and water parks across Europe, thereby enabling them to radically reduce travel by being able to manage their systems remotely.

SUSTAINABILITY

Sustainable business

Responsible business dealings and profitability go hand in hand. By combining good business ethics and innovation, we strengthen our competitiveness and contribute solutions for meeting challenges in society.

receive any complaints during the year having to do with customer privacy, nor were any leaks of customer data identified.

HUMAN RIGHTS

HMS supports and respects human rights. Our Code of Conduct covers respect for human rights in the areas that are within our control. We have also integrated human rights monitoring and approval processes of suppliers. We do not accept child labor and the minimum age for employment in the Group's operations is 15 years. All employees are guaranteed the right to organize and bargain collectively. They also have the right to a safe, healthy workplace.

During the year, we initiated human rights assessments for new suppliers. These efforts will continue and in 2017, we will strive to raise awareness of human rights in the supply chain.

SUSTAINABLE DELIVERY CHAIN

We expect our suppliers to respect human rights and employee working conditions. They must also take responsibility for their environmental impact. As a prerequisite for doing business, we require our business-critical suppliers to have management systems in place for the environment and work environment. HMS is required to comply with certain laws and regulations, like the RoHS Directive and REACH Regulation. We therefore require our suppliers to follow the latest guidelines on materials and provide declarations of compliance with rules for materials and products delivered to HMS.

BUSINESS ETHICS AND ANTI-CORRUPTION

The HMS Code of Conduct is a set of external and internal regulations that guide employees in everyday life. Compliance with the Code of Conduct ensures that we run our business in a professional, honest and ethical manner. The Code provides guidance on how HMS employees should behave in a way that is ethical and in line with the company's values. It is also used when monitoring suppliers. The Code of Conduct is available externally on the company's website and has been approved by the group management team and the Board. The Code is available to all employees via the company intranet and it is covered during the introduction of new employees.

HMS operations involve the processing of customer data generated in our systems when customers use our cloud services. We are committed to respecting and protecting the privacy of our customers. During the year, we developed our routines for storing data and we implemented technical solutions aimed at protecting business-related data and confidentiality. We did not Sustainability • UN Sustainable development goals • A world-class workplace • HMS products lower environmental impact • Sustainable business • Realizing social commitments

SUSTAINABILITY SUSTAINABILITY

Conflict minerals and compliance with Dodd-Frank Act

HMS addresses the issue of conflict minerals, including compliance with the US Dodd-Frank Act (the SEC) by cooperating actively with our direct suppliers, and reporting the results in a report that is published on our website. To be successful in our efforts, suppliers are expected to comply with the HMS conflict minerals policy, which includes, for example, providing information on the source and origin of potential conflict minerals in deliveries to HMS.

Supplier audits

During the year, HMS implemented routines for evaluating materials suppliers. This is done via self-audits. The topics covered are risk management, labor law, health and safety, environment and business ethics. The results showed that a large portion of our suppliers have inadequate procedures for being able to communicate to us how they work with sustainability issues. 32 percent of the material suppliers were deemed as having adequate processes for communicating sustainability. 3 percent were rejected because of poor communication. They are being monitored and must implement corrective measures in order to be allowed to keep doing business with us.

During the year, site visits were made to all of our Chinese suppliers of printed circuit boards and materials to products. The purpose was to check compliance with requirements and also ensure that our products are being manufactured under fair conditions. This has involved inspection of work environment conditions and a review of documentation. No risks were identified in the areas of safety or work environment.

Realizing social commitments

HMS maintains close dialog and long-term collaboration with universities and schools. We do this through research in innovation and through our core business activities, where we offer students training in the form of job training, project work and holiday work at the company. In 2016, we offered such training to 22 individuals. HMS also arranges study visits at our offices in Halmstad. During the year, we held 16 study visits that were open to students and the public.

Each year, in collaboration with Halmstad University, HMS grants scholarships to the best thesis projects. The scholarships are awarded to outstanding students in computer science, electrical engineering and mechatronics. HMS is one of the sponsors of Årets Tekniker, an award that recognizes the importance of technology to society, quality of life and entrepreneurship. The award helps us promote engineering as a career choice and create interest in technology.

HMS has various sponsorship programs aimed at both helping the needy and reducing inequalities. The programs also provide opportunities and encourage local initiatives in the Group. HMS sponsors SWE – Society of Women Engineers and participates in WoW, a meeting place for women from different cultures, which aims to create a better integration of immigrant women in society.

Every quarter, a successful customer case is

selected and the HMS salesperson who was involved is awarded funds that he or she then donates to the charity of their choice. Examples of organizations receiving such funds during the year were Engineers Without Borders, Alzheimer's Association, St. Jude Children's Research Hospital, UNHCR and SWE.

During the year, HMS supported the US organization, SWE – Society of Women Engineers.

CORPORATE GOVERNANCE

Chairman's comments

HMS is extremely well positioned and prepared to deliver future solutions in an increasingly connected world. HMS products contribute in various ways to a higher level of competitiveness and resource efficiency and thereby a sustainable society. The interest in, and demand for, HMS products is increasing, and the company's performance in 2016 demonstrates just how sound and progressive HMS's business is.

To ensure future growth, HMS invests approximately one-third 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. During the year, HMS also increased its global presence and breadth of the product portfolio through its acquisitions of eWON SA and Intesis Software SLU.

For a growth company in a rapidly growing sector, the Board of Directors plays an important role. It must actively support management by listening and coaching on strategic issues, ensuring that strategies are correctly formulated and monitored. It must also keep track of the risks. The work performed by the Board 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 some questions, which I 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 that 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, over the long term, remains competitive in a changing and growing market by keeping the right focus on product development, market expansion, customer needs and the skills of our employees.

Charlotte Brogren Chairman of the Board

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, share holders 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 AGM elects the Board of Directors, the Chairman of the Board and the auditors. It also decides how the nomination committee with 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 general meeting of shareholders, which is the company's highest decision-making body. The Annual General Meeting (AGM) decides, among other things, on the adoption of the income statements and balance sheets, appropriation of profits, discharge of responsibility for the Board, election of Board members and auditors, as well as remuneration to the Chairman of the Board, other Board members and auditors. The AGM 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 sharebased incentive schemes. 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 2016

The AGM was held on 28 April 2016 at the company's office in Halmstad. Present at the meeting were shareholders representing approximately 59 (66) percent of the number of shares and votes. The following were present at the AGM: Chairman Charlotte Brogren and Board members Henrik Johansson, Ray Mauritsson, Fredrik Hansson, Kerstin Lindell and Anders Mörck. 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 29,261,793 (28,306,000).

• that the Board of Directors shall consist of six Board Members without Deputies.

• to re-elect Charlotte Brogren as Chairman of the Board.

• to re-elect Ray Mauritsson, Henrik Johansson, Kerstin Lindell and Fredrik Hansson.
• to elect Anders Mörck as Board member.
• 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.

CORPORATE GOVERNANCE

• the election of Öhrlings PricewaterhouseCoopers AB (PwC) as auditor, with Fredrik Göransson, Authorized Public Accountant, in charge.
• on principles for appointing the nomination committee.
• on guidelines for salary and other remuneration for the CEO and other senior executives.
• on the authority of the Board to issue new shares.
• acquisition of shares in HMS Networks AB in connection with the established Share Savings Plan.
• to set up share savings plan 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 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 2016 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 the Board, along with representatives from the four 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

NOMINATION COMMITTEE FOR THE AGM 2017

Name/representing	Share of votes 2016-08-31
Jan Svensson, Investment AB Latour	26%
Staffan Dahlström, own holdings	14%
Göran Espelund, Lannebo Fonder	9%
Evert Carlsson, Swedbank Robur Fonder	9%
Charlotte Brogren, Chairman of the Board	0%

MEN, 71%

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 nomination 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 Directors currently has 29 (33) percent women serving on it.

EXTERNAL AUDITORS

Auditors are elected 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 2016 AGM, shareholders elected Öhrlings PricewaterhouseCoopers AB (PwC) as the audit firm, with Authorized Public Accountant Fredrik Göransson as the auditor in charge until

AUDITOR

Fredrik Göransson Authorized Public Accountant Senior Auditor for HMS Networks AB since 2014. Education: M.Sc. in Business and Economics, Authorized Public Accountant since 2003. Assignment: Also serves as Senior Auditor for Bulten AB (publ), BUFAB AB (publ) and VBG Group AB (publ). Born: 1973

the date of the next AGM. In addition to the audit, PwC also provides advisory services relating to financial reporting and taxes. This advice is not considered to be biased.

In 2016 total remuneration paid to HMS's auditors amounted to SEK 2,999 (1,862) thousand. Further information regarding auditors' remuneration is available in Note 7.

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 of Directors, 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

CORPORATE GOVERNANCE

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 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 also distributed to the nomination committee, is important for ensuring that the work done by the Board is effective.

BOARD STRUCTURE

The Board consists of six members elected by the AGM and one employee representative. 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 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.

Board work follows a structure that includes certain standing items, mainly in accordance with the following plan

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 nomination committee has, during a joint assessment of each member's relationship to the company, Group management and major shareholders, found that all members are independent in relation to the company and its management. Except for Anders Mörck, all the members have been assessed as being independent in relation to 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 2016 was SEK 1,275 (1,275) 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. He 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 2016 Charlotte Brogren was elected as Chairman of the Board. The Chairman of the Board in not involved in the operational management of the company.

WORK OF THE BOARD IN 2016

Since the AGM of 28 April 2016 the Board has held ten 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

CORPORATE GOVERNANCE

REMUNERATION TO GROUP MANAGEMENT 2016, SEKm

		Variable remu
	Basic salary*	neration	Pension costs	Total 2016
CEO	2,467	574	692	3,733
Group management, other (8
individuals)	10,900	1,937	2,939	15,777
Total	13,367	2,511	3,631	19,510

*Including other remuneration

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 individuals 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 Board member (Fredrik Hansson) who was appointed by the Board. Fredrik Hansson was elected as Chairman of the remuneration committee. Attendance was 100 percent at all 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 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 appointed by the Board (Kerstin Lindell and Anders Mörck). Kerstin Lindell was elected as Chairman of the audit committee. Attendance was 100 percent at all 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 for 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 appointed Board members (Charlotte Brogren, Henrik Johansson and Ray Mauritsson). Henrik Johansson was elected as Chairman of the development committee. Attendance was 100 percent at all 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 that the company's goals, policies and strategic plans are being followed 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 constantly updated about the company's and Group's financial position and growth.

Group management is headed by the CEO along with the following eight members: Chief Financial Officer, Chief Technical Officer, HR Manager, Marketing Director, General Manager Americas, General Manager Central Europe, General Manager eWON 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 ten 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 2016, the total remuneration (including pension provisions) to the CEO amounted to SEK 3,733 (3,516) thousand. For more information about remuneration to the CEO and Group management team, see Note 26.

CORPORATE GOVERNANCE

Board's internal control report

HMS's work with internal controls has been designed to ensure that the company's financial reporting is correct and reliable1) 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 it 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 2016, 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.

The focus is on risks in the financial reporting

¹⁾ Financial reporting consists of the interim reports, year-end report, annual report and internal reporting.

CORPORATE GOVERNANCE

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 such things as 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 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.

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 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.

Forecasts are another important component of Group-wide internal control. Sales are forecast at the product level by managers from the sales organization. Sales forecasts are consolidated and validated in connection with compiling the forecasts for the entire business. The comprehensive forecast is compiled once per year. In addition to the comprehensive forecast, a budget is also drawn up, which is presented to the Board for its approval in Q4. Besides the forecast and budget, 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 reported back to the Group by the audit committee. 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 in the audit committee.
• Composition of members in the nomination committee.

The reasons for these deviations are explained in this corporate governance report.

Halmstad, 21 March 2017

Ray Mauritsson	Anders Mörck
Henrik Johansson	Kerstin Lindell
Charlotte Brogren	Fredrik Hansson

Auditor's statement on the corporate governance report

To the Annual General Meeting of HMS Networks AB, CIN: 556661-8954

DUTIES AND RESPONSIBILITIES

The Board of Directors is responsible for the 2016 Corporate Governance Report on pages 33-39 and for ensuring that it has been prepared in accordance with the Annual Accounts Act.

FOCUS AND SCOPE OF THE REVIEW

Out review has been conducted in accordance with RevU 16, Auditor's Review of the Corporate Governance Report. This means that our review of the Corporate Governance Report has a different focus and significantly smaller scope that 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 this review provides a reasonable basis for our opinion set out below.

OPINION

A corporate governance report has been prepared. Disclosures in accordance with Chapter 6, Section 6, second paragraph, items 2-6 of the Swedish Companies Act, along with Chapter 7, Section 31, second paragraph of the Swedish Companies Act are consistent with the financial statements and consolidated financial statements and they are in accordance with the Annual Accounts Act.

Halmstad, 24 March 2017 Öhrlings PricewaterhouseCoopers AB

Fredrik Göransson Authorized Public Accountant

CORPORATE GOVERNANCE

Board of Directors

Name	Charlotte Brogren	Fredrik Hansson	Henrik Johansson	Kerstin Lindell	Ray Mauritsson	Anders Mörck	Tobias Persson
Board position	Chairman of the Board	Board member	Board member	Board member	Board member	Board member	Board member (employee representative)
Current employment	General Director of Vinnova and Chairman of the Board of Industrifonden.	Active in own company.	CEO of Arctos Equity Partner. CEO of Bona AB.		CEO of Axis AB (publ).	CFO at Investment AB Latour. (publ.).	Development Engineer at HMS
Education	PhD in Chemical Engineering from Lund University	Bachelor of Science, Econom ics and Finance from UNA (University of North Alabama).	Master of Science in Industrial Economics from Chalmers University	Master of Science in Chemical Engineering and Tech. Fil.lic. in Polymer chem istry from Lund Institute of Technology.	M.Sc.in Technical Physics and Executive MBA from Lund University.	M.Sc. in Business and Economics, Växjö University 1987.	M. Sc. Tech. in Computer Technology.B. Sc. Tech. in Information and Communications Technology. B. Sc. Tech. in Electrical Engineering.
Year elected	2010	2015	2009	2014	2007	2016	2016
Born	1963	1971	1966	1967	1962	1963	1978
Resident of	Stockholm	Karlskrona	Gothenburg	Malmö	Malmö	Gothenburg	Halmstad
Other assignments	Chairman of the Board of Q-Free AS and Board member of Gunnebo AB.	Board member of Roxtec AB, Nord Lock AB, Cale AB, Hedson AB and Wapro AB.	Chairman of the Board of Rapid Images AB and PDS Vision Group AB and Board member of Tele-Radio Interna tional Holding AB and Elektron Music Machines MAV AB.	Board member of Peab AB, Hexpol AB and Vice Chairman of the South Sweden Cham ber of Commerce.	None	Board member of Diamorph AB, Swegon AB, Hultafors Group AB, Latour Industries AB and Nord-Lock AB.	Chairman of the Board at MedicWave AB (publ.) Partner of Lypson Intelligenta System HB.
Dependence	Independent from the com pany and its main owners.	Independent from the com pany and its main owners.	Independent from the com pany and its main owners.	Independent from the com pany and its main owners.	Independent from the com pany and its main owners.	Independent from the com pany. Not independent of the major shareholders.	Employee of HMS
Previous experience	Development Manager for ABB Robotics and executive positions within ABB's research organization.	CEO at Roxtec Group AB.	Senior positions in Invest ment AB Latour, Brady Corporation and Tradex Converting with extensive experience in international expansion activities.	Research and Development Manager at Akzo Nobel.	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.	CFO at Bure Equity AB, Nilörngruppen AB and Previously Authorized Public Accountant at Ernst & Young.
Shareholding (own and related party)	1,000	600	6,400	0	5,000	1,000	Via Share Savings Plan for employees: 280
Audit committee				X (Chair)		X
Remuneration committee	X	X (Chair)
Development committee	X		X (Chair)		X
Attendance at Board meetings	100%	100%	100%	100%	92%	100%	100%
Remuneration 2016*	400,000	175,000	175,000	175,000	175,000	175,000	0

*Pertains to the period between AGM 2016 and AGM 2017

CORPORATE GOVERNANCE

Group management

Name	Staffan Dahlström	Anders Hansson	Gunnar Högberg	Kevin Knake	Sabina Lindén	Jörgen Palmhager	Christian Schlegel	Michael Volz	Serge Bassem
Current position	Chief Executive Officer	Marketing Director	Chief Financial Officer	General Manager Market Unit Americas	Human Resources Manager	Chief Operating Officer and Chief Technology Officer	General Manager IXXAT Business Unit	General Manager Market Unit Continental Europe	General Manager, eWON Business Unit
Education	Degree in Computer Systems Engineering from Halmstad University and an Executive MBA from Lund School of Economics and Management.	Master's Degree in In dustrial 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 voca tional sociology from the University of Gothenburg.	B.Sc. in Computer Sys tems 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	Master's degree in Electrical and Mechanical Engineering from Brussels University, Belgium.
Born	1967	1968	1956	1961	1979	1968	1965	1957	1965
Nationality	Sweden	Sweden	Sweden	USA	Sweden	Sweden	Germany	Germany	Belgium
Other assignments None		None	Board member of På i Stockholm AB. Member of Meritmind AB's advisory committee.	Chairman of ODVA Roundtable of EtherNet/IP Implementors	None	None	None	None	Board member of Modbus user organization.
Previous experience	Sales and Marketing Manager at HMS.	Previous positions at HMS: Global Key Account Manager, Sales and Marketing Manager for France, Benelux, Spain and Portugal, and Product Manager.	Auditor at Ernst & Young. Controlling Manager at Althin Medical AB. COO at Kipling AB COO at Roxtec AB.	Engineering Manager at Rockwell Automation, Micro Processor Systems Inc. and Pyramid Solutions Inc.		Developer, Project Man ager and Chief Operating Offi cer at HMS.	Development Manager	Team Leader at Bosch. CEO at PROFIBUS in Germany. Founder of Vcom GmbH	VD HMS Industrial Networks SA
Shareholding (own and related party)	1,618,581	7,613	46,775	6,557	7,097	59,750	3,970	7,260	191,158
Employed since	1989	2000	2006	2003	2006	1992	1991	2000	2016
Member of Group management team since:	2009	2010	2006	2009	2007	2007	1998	2000	2016

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 address and 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 – is a general term for a system with interconnected computers that can be constructed in different 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 – Return of products

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, in 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.

GLOSSARY 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 the 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

Average 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.

Average number of outstanding shares

The average number of registered shares during the year, less repurchased shares that are held as treasury shares.

Cash flow from operating activities per share, SEK

Cash flow from operating activities in relation to the average number of outstanding shares.

Net debt

Long-term and current interest-bearing 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, diluted

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.

FINANCIAL STATEMENTS FINANCIAL STATEMENTS

44 HMS NETWORKS ANNUAL REPORT 2015

CONTENTS

DIRECTORS' REPORT	46-50
Significant events 46
Sustainability 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 sheet52
Consolidated cash flow statement	53
Consolidated statement of change in equity54
PARENT COMPANY55-57
Parent company's income statement55
Parent company's balance sheet56
Parent company's cash flow statement57
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 management65
Note 4 Important estimates and assessments
for accounting purposes 67
Note 5 Segment information	68
Note 6 Categorization by type of cost68
Note 7 Remuneration to auditors	68
Note 8 Remuneration to employees68
Note 9 Income tax	70
Note 10 Exchange rate differences – net	70
Note 11 Earnings per share70 Note 12 Dividend per share70

Note 13 Intangible assets71
Note 14 Property, plant and equipment 72
Note 15 Derivatives 73
Note 16 Accounts receivable and other receivables73
Note 17 Inventories74
Note 18 Cash and cash equivalents 74
Note 19 Share capital and other contributed capital74
Note 20 Provisions74
Note 21 Interest-bearing liabilities75
Note 22 Deferred tax75
Note 23 Pension obligations76
Note 24 Pledged assets and contingent liabilities	76
Note 25 Finance leases 76
Note 26 Remuneration to the Board
and senior executives, etc. 77
Note 27 Shares in subsidiaries78
Note 28 Earnings from participations
in Group companies 79
Note 29 Financial income79
Note 30 Financial expenses79
Note 31 Prepaid expenses and accrued income79
Note 32 Accrued expenses and deferred income	79
Note 33 Related parties79
Note 34 Business combinations	79
Note 35 Financial assets and financial liabilities	81
Note 36 Subsequent events	81
Note 37 Proposed distribution of profit in the Parent Company	81
BOARD'S AFFIRMATION	82
AUDIT REPORT	83
Multi-year overview	86

DIRECTORS' REPORT

Directors' report

Operations

HMS is the leading independent supplier of products for industrial communication. The products enable various types of machines to connect to industrial networks and systems. Millions of robots, motors, generators and other business-critical equipment around the world 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), Igualada (Spain) and Nivelles (Belgium). Sales offices are located in Japan, China, Germany, USA, Italy, France, Belgium, India, England, Spain and Denmark. There are also distributors in more than 50 countries. HMS has approximately 500 employees and it produces network interface cards and gateways for linking different networks under the Anybus and IXXAT brands, along with products for remote monitoring/controlling under the eWON 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 36 (19)% and annual sales at a new record level, SEK 952 (702) million. Order intake for the year was SEK 966 (682) million, which corresponds to a growth rate of 42 (12)%.

Geographically, Germany and the US showed solid growth during the year, while the Japanese market's growth rate weakened somewhat during the latter part of the year.

All three product areas, Anybus, IXXAT and eWON demonstrated strong growth. The upward trend in the number of new design wins also continued in 2016. In total, there were 203 (195) new design wins during the year for products, which brings the total number of active design wins to 1,508 (1,381), which is an increase of 9% compared to last year. Of these design wins, 1,137 (1,023) are in production and 371 (358) are expected to enter production in the coming years.

Efforts to launch products in accordance with the HMS's new strategy for Industrial Internet of Things (IIoT) continued in 2016, resulting in new products focused on efficient data collection and data transfer for IIOT applications. The focus on IIOT has, during the year, involved a higher level of investment in sales, marketing and development.

Early in February 2016, HMS entered into an agreement to acquire the Belgian company eWON SA. eWON is currently market leader in the field of remote monitoring and remote control, and it will significantly strengthen HMS's position in this area. The company has approximately 58 employees and sales were around SEK 165 million in 2016 with an historically high operating margin over 20%.

The products that eWON currently markets are an excellent addition to HMS's existing solution for remote monitoring. Together, these products comprise a competitive offering, giving the company a strong position as the leading provider of solutions for remote control and remote monitoring for industrial applications.

On 28 April 2016, HMS held its AGM. All the proposals by the Board and nomination committee were adopted by the AGM. Charlotte Brogren was elected as Chairman of the Board. Ray Mauritsson, Henrik Johansson, Kerstin Lindell and Fredrik Hansson were re-elected as Board members. Anders Mörck was elected as new Board member.

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

At the end of June 2016, the Group acquired 100% of the share capital in Spanish company, Intesis Software SLU. The company offers advanced gateway solutions and products for communication in the building automation segment. The majority of sales are derived from the company's industrial building automation solution, Intesis-Box. Intesis closely collaborates globally with many leading manufacturers of air conditioning and building automation systems. The company currently has 33 employees. Sales for 2016 were approximately SEK 57 million and it has had annual growth of over 20% over the last few years.

Significant events in brief:

• HMS receives a USD 1.5 million order for delivery of remote monitoring of backup power generators.
• HMS Anybus Wireless Bolt, a product group in the IIoT segment was launched during the third quarter of 2016 and it received the 2016 Automation Inside Reader´s Choice Award for Best Network Technology

HMS Group's revenue distribution by market in 2016

Summary of performance

	2016	2015
Net sales, SEK m	952.3	701.7
Operating income before depreciation (EBITDA), SEK m	188.5	135.5
Operating margin before depreciation (EBITDA), %	19.8	19.3
Operating income after depreciation (EBIT), SEK m	149.3	101.6
Operating margin after depreciation (EBIT), %	15.7	14.5
Profit after financial items, SEK m	139.7	87.6
Profit for the year, SEK m	100.5	60.2
Earnings per share, basic, SEK	8.63	5.33
Earnings per share, diluted, SEK	8.59	5.31

DIRECTORS' REPORT

Net sales

The Group's net sales increased by 36% and amounted to SEK 952 (702) million. Exchange rate fluctuations positively affected net sales during the year by SEK 17 million, compared to last year. Invoiced sales by region were as follows: EMEA 62 (60)%, North and South America 22 (22)% and Asia 16 (18)%. The Group's largest markets are Germany, USA and Japan.

Profit (loss)

Operating profit before depreciation and amortization (EBITDA) amounted to SEK 188.5 (136) million, which corresponds to an operating margin before depreciation and amortization of 20 (19)%. Operating profit after depreciation and amortization (EBIT) amounted to SEK 149 (102) million, which corresponds to an operating margin after depreciation and amortization of 16 (15)%. Net financial income/expense amounted to SEK -10 (-14) million and profit after financial items amounted to SEK 140 (88) million. Tax expense was SEK -39 (-27) million and profit after tax amounted to SEK 100 (60) million.

Investments

Investments in items of property plant and equipment during the year amounted to SEK 11 (5) million and investments in intangible assets amounted to SEK 24 (20) million. Investments in intangible assets primarily consist of development of technology platforms. Amortization of capitalized development costs amounted to SEK 18 (18) million and impairment losses were SEK 3 (0) million.

Financial position

As of 31 December 2016, the Group had cash and cash equivalents of 99 (20) million, excluding unutilized credit of SEK 30.0 (30.0) million. The Group's net debt amounted to SEK 421 (177) million. The net debt to equity ratio was 0.7 (0.4) times and the equity to assets ratio was 45 (55)%.

The Group's loan amortization is approximately SEK 62 million per year. In total, SEK 61 (37) million was amortized in 2016. During the second quarter, dividends of SEK 2.50 (2.50) were paid, totaling SEK 29 million.

Cash flow from operating activities amounted to SEK 155 (90) million. After net investments of SEK -308 (-25) million and new borrowings, amortization and dividends paid, totaling SEK 231 (-63) million, the cash flow for the year amounted to SEK 78 (2) 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 SA, Intesis Software SLU, 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, HMS Industrial Networks SA and Intesis Sofware SLU comprise the 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, which is responsible for sales, marketing and support to the Chinese market.

Sustainability

HMS's vision is to enable industrial devices and systems to communicate so that the world becomes more productive and sustainable. It is a vision that also underlies the strategy of creating value and sustainable development stakeholders.

For us, sustainability has 3 components; maximizing value, minimizing carbon footprint and realizing social commitments

• We deliver sustainable growth and smart products that provide value to customers, partners and employees
• We work with action plans for environmental issues to reduce our environmental impact
• We respect human rights, employee working conditions and actively participate in the communities where we operate.

Compliance with laws and codes HMS is aware of its social responsibility as a company in the global market. The Company undertakes to comply with the rules on ethics, the environment, human rights and health and safety at our companies worldwide.

Human rights HMS respects human rights in all areas under its control.

Business ethics

HMS runs its business in a professional, honest and ethical manner.

Working conditions and rights of workers

Providing a good, safe work environment is an important strategic issue for HMS.

Qualification of suppliers

In order to create confidence in HMS's own sustainability efforts, it is necessary to also take responsibility for the indirect impact from the company's purchasing of goods and services.

Environment

HMS products can help to significantly reduce travel. By being able to monitor and control industrial equipment via the Internet, customers are able to cut down on the number of expensive and environmentally detrimental service calls.

HMS minimizes the use of hazardous substances and facilitates recycling by complying with the EU environmental directives RoHS, REACH and WEEE.

Sustainable products

HMS's main contribution to sustainable development is developing and manufacturing products that enable significant energy savings for its users, with the lowest possible environmental impact during the product's useful life. 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.

DIRECTORS' REPORT

Sustainability in product development

HMS's goal is to continually develop the capacity of products and solutions so that they can easily be integrated into industrial systems and provide valuable functionality and information.

Controlled material selection

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

Manufacturing – control and routines

As regards manufacturing, there are additional important environmental aspects that must be considered. For example, higher efficiency can be achieved by controlling manufacturing processes, resulting in less waste and lower energy consumption.

Safe and efficient use of resources

HMS conducts systematic work to promote employee health and well-being.

Use of resources

HMS has the goal of using 100% renewable/green electricity in its three main business areas.

Less travel

HMS has local presence in the major markets.

Sustainability goals and principles

In 2016, HMS worked with its goal to, in a systematic and comparable way, be able to demonstrate the company's contribution to sustainable development. This is now done by reporting sustainability performance in accordance with the Global Reporting Initiative (GRI). The company has a good foundation for future growth and in 2017, it will keep working with prioritized issues, building on what was achieved in 2016.

Research and development

The Group expensed SEK 119 (103) million for research and development during the year. In addition, capitalized development costs were SEK 24 (20) million. Total costs for research and development expenses make up 15 (18)% 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.

Employees

At year-end, the number of employees for the Group was 506 (388).

Principles for remuneration to senior executives

At the first Board meeting of 2016, a remuneration committee was appointed by the Board. In 2016, the following principles were applied, which were proposed to the company's remuneration committee to be brought forth for approval at the 2017 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 longterm 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 amount is 50% of basic salary in 2016.

The retirement age for the CEO is 65 years. The pension premium must amount to 35% of fixed monthly salary up to 28.5 times the price base amount. For salary above that level, the pension premium is 25%. For other senior executives, the retirement age is 65-66 years.

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 page 36.

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.

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

DIRECTORS' REPORT

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. 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

DIRECTORS' REPORT

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% in EUR, 24% in USD, 7% in JPY and 9% in SEK and other currencies. The currency composition of cost of goods sold is: 63% in EUR, 21% in USD, 1% in JPY and 15% in other currencies. The currency composition of operating expenses is: 46% in EUR, 15% in USD, 4% in JPY and 36% 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 strengthened by product offerings from eWON and Intesis, 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 asses, but HMS's long-term goals remain unchanged: Long-term growth averaging 20% per year and an operating margin that exceeds 20%.

HMS stock

HMS Networks AB (publ) is listed on the NASDAQ OMX Stockholm Mid Cap list, in the Information Technology sector. On average, 3,719 (4,516) shares were traded each day. The shares' volume-weighted average price in 2016 was SEK 239.0 (203.5). The total number of shares at the end of the period were 11,704,717, 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:

SEK	183,289,558
Profit (loss) for the year	49,931,489
Profit brought forward and other non-restricted reserves	133,358,069

The Board of Directors and CEO propose the following appropriation of profits:

Distributing dividends to shareholders of SEK 4.00/share*	46,694,868
Carried forward	136,594,690
SEK	183,289,558

* The dividend is calculated on the total number of outstanding shares as of 2016-12-31

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, Chapter 3, sections 2-3 of the Swedish Companies Act (prudence rule).

FINANCIAL STATEMENTS

Consolidated income statement Consolidated statement

of comprehensive income

SEK thousands	Note	2016	2015
Net sales	5	952,282	701,676
Cost of goods and services sold		-370,964	-271,918
GROSS PROFIT		581,318	429,757
Selling expenses		-226,029	-164,932
Administrative expenses		-78,987	-61,354
Research and development expenses		-119,079	-103,116
Other operating income	10	0	1,230
Other operating expenses	10	-7,911	0
OPERATING PROFIT	6, 7, 8, 26	149,313	101,584
Financial income	10, 29	419	2
Financial expenses	10, 30	-9,999	-14,025
Total income from financial investments		-9,579	-14,023
PROFIT BEFORE TAX		139,734	87,561
Income tax	9	-39,269	-27,356
PROFIT FOR THE YEAR		100,466	60,205
Profit attributable to:
HMS Network AB's shareholders		100,466	60,205
Total		100,466	60,205
Earnings per share, basic, SEK	11	8.63	5.33
Earnings per share, diluted, SEK	11	8.58	5.31
Average number of outstanding shares, in thousands		11,642	11,291
Dividends per share, SEK	12	2.50	2.50

SEK thousands	Note	2016	2015
Profit (loss) for the year		100,466	60,205
Other comprehensive income:
Items that can later be reclassified to profit and loss
Cash flow hedges		483	1,787
Hedging of net investments		-9,620	11,565
Exchange differences arising from translation of foreign operations		21,662	-11,244
Income tax attributable to the items above	22	2,010	-2,937
Other comprehensive income for the year, after tax		14,535	-830
Total comprehensive income for the year		115,001	59,376
Total comprehensive income for the year attributable to:
HMS Network AB's shareholders		115,001	59,376
Total		115,001	59,376

FINANCIAL STATEMENTS

Consolidated balance sheet

SEK thousands Note	2016-12-31		2015-12-31
ASSETS
Non-current assets
Intangible assets	13
Capitalized development work		117,721	111,143
Goodwill		744,433	394,167
Customer relations and technology platforms		72,031	53,993
Brands		96,099	80,699
Total intangible assets	1,030,285		640,002
Property, plant and equipment 14, 25
Buildings and land		3,291	0
Plant and machinery		25,621	7,764
Equipment, installations and facilities		9,568	7,536
Construction-in-progress		496	0
Total property, plant and equipment		38,977	15,300
Financial assets
Deferred tax asset	22	1,440	3,239
Other long-term receivables Total financial assets		2,174 3,614	1,723 4,962
Total non-current assets	1,072,874		660,264
Current assets
Inventories	17	86,095	55,810
Accounts receivable - trade	16	123,170	81,973
Current tax assets		1,248	198
Derivative instruments	15	2,106	0
Other receivables	16	15,884	7,234
Prepaid expenses and accrued income 16, 31 Cash and cash equivalents	18	5,738 99,036	5,881 19,503
Total current assets		333,278	170,599
TOTAL ASSETS	1,406,152		830,863

SEK thousands	Note	2016-12-31	2015-12-31
EQUITY AND LIABILITIES
Equity
Share capital	19	1,170	1,132
Other contributed capital	19	218,318	125,641
Reserves		23,461	8,926
Retained earnings including profit for the year		393,495	319,783
Total equity		636,444	455,482
Non-current liabilities
Non-current interest-bearing liabilities	21	433,603	158,142
Deferred tax liability	22	88,121	72,242
Total non-current liabilities		521,724	230,384
Current liabilities
Current interest-bearing liabilities	21	86,095	38,759
Accounts payable - trade		64,275	44,704
Current tax liability		16,441	7,760
Derivative instruments	15	2,097	473
Other liabilities		25,254	10,712
Accrued expenses and deferred income	32	50,772	40,177
Other provisions	20	3,051	2,412
Total current liabilities		247,984	144,997
TOTAL EQUITY AND LIABILITIES		1,406,152	830,863

FINANCIAL STATEMENTS FINANCIAL STATEMENTS

Consolidated cash flow statement

SEK thousands Note	2016	2015
Cash flow from operating activities
Operating profit	149,313	101,584
Adjustment for items not included in cash flow:
Depreciation/amortization	36,583	33,170
Impairment of intangible assets	3,413	202
Disposal of property, plant and equipment	536	202
Share Savings Plan 8	2,430	1,737
Exchange rate differences	-3,427	-14,026
Interest paid	-9,849	-4,936
Interest received	419	0
Income tax paid	-29,887	-21,125
Cash flow from operating activities
before changes in working capital	149,530	96,808
Change in working capital
Change in inventories	-877	-2,353
Change in accounts receivables – trade	-6,631	-12,100
Change in other current receivables	-1,249	-1,091
Change in accounts payable – trade	3,291	4,087
Change in other current liabilities	11,258	4,661
Cash flow from operating activities	155,322	90,012

SEK thousands	Note	2016	2015
Investing activities
Investments in intangible assets	13	-27,778	-20,404
Investments in PPE	14	-8,504	-5,042
Investments in subsidiaries	34	-271,475	0
Change in non-current financial assets		-479	-160
Changes in current financial investments		0	208
Cash flow from investing activities		-308,236	-25,398
Financing activities
Borrowings		512,220	0
Loan amortization		-251,723	-34,644
Dividends paid to the parent company's shareholders	12	-29,184	-28,229
Cash flow from financing activities		231,313	-62,873
CHANGE IN CASH AND CASH EQUIVALENTS		78,399	1,742
Cash and cash equivalents at beginning of year	18	19,503	17,629
Exchange rate differences in cash and cash equivalents		1,135	132
Cash and cash equivalents at year-end	18	99,036	19,503

FINANCIAL STATEMENTS

Consolidated statement of change in equity

SEK thousands	Note	Share capital	Other con tributed capital	Reserves	Retained earnings including profit for the year	Total equity
Opening balance on 1 January 2015 as per the 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:							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 of other comprehensive
income	9			-2,937		-2,937
Total comprehensive income		0	0	-829	60,205	59,376	income
Transactions with shareholders in their capacity as owner:
Costs for share-based
remuneration					1,737	1,737
Dividend (SEK 2.25 per share)	12				-28,229	-28,229
Total transactions with shareholders, reported directly to equity		0	0	0	-26,492	-26,492	reported
Closing balance as of 31 December 2015		1,132	125,641	8,926	319,783	455,482

		Share	Other con tributed		Retained earnings including profit for	Total
SEK thousands	Note	capital	capital	Reserves	the year	equity
Opening balance on 1 January 2016 as per the adopted balance sheet		1,132	125,641	8,926	319,783	455,482
Comprehensive income
Profit (loss) for the year					100,466	100,466
Other comprehensive income:
Cash flow hedges	15			483		483
Hedging of net investments	15			-9,620		-9,620
Exchange rate differences				21,662		21,662
Income tax attributable to components of other
comprehensive income	9			2,010		2,010
Total comprehensive income		0	0	14,535	100,466	115,001
Transactions with shareholders in their capacity as owner:
Costs for share-based remuneration					2,430	2,430
New share issue	19, 34	38	92,677			92,715
Dividend (SEK 2.50 per share)	12				-29,184	-29,184
Total transactions with shareholders, reported
directly to equity		38	92,677	0	-26,754	65,961
Closing balance as of 31 December 2016		1,170	218,318	23,461	393,495	636,444

FINANCIAL STATEMENTS FINANCIAL STATEMENTS

Parent company's income statement

SEK thousands	Note	2016	2015
Net sales	5	14,168	11,933
GROSS PROFIT		14,168	11,933
Administrative expenses	7, 8, 26	-14,187	-11,606
OPERATING PROFIT		-19	327
Profit from financial investments
Profit from participation in subsidiaries	28	50,000	0
Interest expenses and similar items	29, 30	0	0
Total income from financial investments		50,000	0
PROFIT AFTER FINANCIAL ITEMS		49,981	327
Appropriations		0	8
Tax on profit for the year		-49	-141
PROFIT FOR THE YEAR		49,931	194

FINANCIAL STATEMENTS

Parent company's balance sheet

SEK thousands	Note	2016-12-31	2015-12-31
ASSETS
Non-current assets
Financial assets
Participations in Group companies	24, 27	337,324	244,039
Total financial assets		337,324	244,039
Total non-current assets		337,324	244,039
Current assets
Current receivables
Other receivables		203	4
Prepaid expenses and accrued income	31	52	596
Total current receivables		255	600
Cash and bank balances		406	276
Total current assets		662	876
TOTAL ASSETS		337,986	244,915

SEK thousands Note	2016-12-31	2015-12-31
EQUITY AND LIABILITIES
Equity
Restricted equity
Share capital 19	1,170	1,132
Statutory reserve	19,446	19,446
Total restricted equity	20,616	20,578
Non-restricted equity
Retained earnings	22,083	51,073
Share premium reserve	111,275	18,598
Profit (loss) for the year	49,931	194
Total non-restricted equity	183,289	69,865
Total equity	203,905	90,443
Current liabilities
Accounts payable - trade	50	667
Liabilities to Group companies	131,198	149,890
Income tax liabilities	104	30
Other liabilities	965	1,068
Accrued expenses and deferred income 32	1,764	2,817
Total current liabilities	134,081	154,472
TOTAL EQUITY AND LIABILITIES	337,986	244,915

FINANCIAL STATEMENTS FINANCIAL STATEMENTS

Parent company's cash flow statement Parent company's statement

of changes in equity

SEK thousands Note	2016	2015
Operating activities
Operating profit	-19	327
Interest paid 30	0	0
Income tax paid	25	-10
Cash flow from operating activities before change in working capital	6	317
Change in working capital
Change in other current receivables	345	-247
Change in accounts payable - trade	-617	240
Change in other current liabilities	30,151	28,002
Cash flow from operating activities	29,886	28,313
Investing activities
Costs associated with non-cash issue	-570	0
Cash flow from investing activities	570	0
Financing activities
Dividend paid	-29,184	-28,229
Cash flow from financing activities	-29,184	-28,229
CHANGE IN CASH AND CASH EQUIVALENTS	131	84
Cash and cash equivalents at beginning of year	276	192
Cash and cash equivalents at year-end	406	276

		Restricted equity Non-restricted equity
SEK thousands	Note	Share capital	Statutory reserve	Retained earnings	Share premium reserve	Profit (loss) for the year	Total
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 2.25 per share Profit (loss) for the	12			-28,229			-28,229
year Closing balance as of 31 December 2015		1,132	19,446	51,073	18,598	194 194	194 90,443

			Restricted equity	Non-restricted equity
SEK thousands	Note	Share capital	Statutory reserve	Retained earnings	Share premium reserve	Profit (loss) for the year	Total
Opening balance on 1 January 2016		1,132	19,446	51,073	18,598	194	90,443
Transfer of profit (loss) from 2015 New share issue	19, 34	38		194	92,677	-194	0 92,715
Dividend
SEK 2.50 per share Profit (loss) for the year	12			-29,184		49,931	-29,184 49,931
Closing balance as of 31 December 2016		1,170	19,446	22,083	111,275		49,931 203,905

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, IXXAT and Intesis brands, as well as products for remote monitoring under the eWON brand. Most product development and some manufacturing takes place at the company's head office in Halmstad (Sweden) as well as in Ravensburg (Germany), Igualada (Spain) and Nivelles (Belgium). Sales are conducted from the head office in Sweden and from the sales offices in Japan, China, Germany, USA, Italy, France, India, England, Belgium, Spain 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 2017.

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 from the IFRS Interpretations Committee (IFRS CC) that have been adopted by the EU.

The annual report has been prepared in accordance with the cost method, except for 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 detailed in Note 4.

Standard	Significant requirements	Impact	Enters into force as of
IFRS 9 Financial instruments	IFRS 9 covers the classification, measurement and recognition of financial assets and liabilities and intro duces new rules for hedge accounting. The full version of IFRS 9 was issued in July 2014. It replaces the parts of IAS 39, which deals with the classification and measurement of financial instruments and introduces a new impairment model.	The new hedge accounting rules in IFRS 9 are more compat ible with the company's risk management in practice. Gener ally speaking, it will be easier to apply hedge accounting because the standard introduces a more principles-based approach to hedge accounting. The new standard also intro duces expanded 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. The new model for calculating credit loss reserve is based on expected credit losses, rather than incurred credit losses in accordance with IAS 39, which may result in earlier recogni tion of credit losses. The model must be applied to financial assets carried at amortized cost, debt instruments measured at fair value through other comprehensive income, contract assets in accordance with IFRS 15 Revenue from Contracts with Customers, lease receivables, loans and certain finan cial guarantees. The Group has not yet evaluated how the Group's provision for credit losses will be affected by the new rules.	1 January 2018. In accordance with the transi tion rules in the full version of IFRS 9, early adoption was allowed in stages for financial years beginning before Febru ary 1, 2015. After that date, the rules must be applied in full. It is 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 Con struction Contracts. IFRS 15 is based on the principle that revenue is rec ognized when the customer obtains control of the goods or services sold - 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 full restrospec tive approach or a prospective approach with addi tional disclosures.	Management is currently assessing the effect of the new standard. At present, the Group is unable to assess the impact of these new rules on the financial statements. The Group will be making a detailed assessment during the coming year.	1 January 2018 It is expected to be applied by the Group as of 1 January 2018.
IFRS 16 Leasing	IFRS 16 Leases was published in January 2016 and it replaces the previous IAS 17 Leases and the related interpretations IFRIC 4, SIC-15 and SIC-27. For the lessor, presentation is essentially unchanged. But pre sentation does change for the lessee. There will no longer be a distinction between operating and finance leases. Instead, all leases will be reported in the bal ance sheet, except for short-term agreements and leases of lesser value. Reporting is based on the view that the lessee has a right to use an asset for a spe cific period of time with a simultaneous obligation to pay for that right.	The Group has started its effort of assessing the effects of introducing the standard. The standard will primarily affect the presentation of the Group's operating leases. As of the closing date, the Group had non-cancellable leases amount ing to SEK 152 million, see Note 25. The Group has not yet evaluated the extent to which these obligations will be reported as assets and liabilities, along with how this will affect the Group's earnings and its classification of cash flows. Certain obligations could be covered by the exemption for short-term contracts and leases of lesser value. Further more, some obligations could relate to arrangements that are not to be reported as leases in accordance with IFRS 16.	1 January 2019 or later. Early adoption is allowed.

1 2

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 2016 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 except for the ones detailed in the table (page 58) on IFRS:

2.2 Consolidated financial statements

a) Subsidiaries

Subsidiaries are all companies that are controlled by the Group. The Group has a controlling interest over 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 controlling interest 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 purchase 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 be an indication of impairment that requires recognition 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' earnings 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 cur-

rency 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 for each balance sheet are translated at the closing rate;
• b) income and expenses for each income statement are translated at the average exchange rate, and
• c) all resulting exchange differences are recognized in other comprehensive income.

Recognized in the consolidated financial statement (in other comprehensive income), are exchange rate differences attributable to the translation of a net investment in a foreign operation, along with exchange rate differences attributable to loans or other financial instruments designated as hedges for such investments. 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.

CONT. NOTE 2 Accounting policies

2.5 Revenue recognition

Revenue is measured 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 can be measured reliably, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group's areas of operation, as described below. The Group bases its estimates on historical outcomes, the type of customer, the type 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 is comprised of current tax calculated on net taxable income for the period using the current tax rates. Current tax expense is then 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 determined using tax rates (and tax 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 the 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 investments in subsidiaries and associates, are recognized only to the extent that the Parent Company is able to control the reversal of the temporary differences and it is probable that the difference will not reverse in the foreseeable future.

Deferred tax assets and deferred tax liabilities are offset when there is a legal right to settle the current tax assets and tax liabilities on a net basis and the tax liabilities relate to taxes levied by the same taxation authority and relate to either the same taxable entity or different taxable entities that intend to realize the asset and settle the liability at the same time.

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 lease term, finance leases are capitalized at the lower of the leased asset's fair value and the 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 reduction of the principal. 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. Items of property, plant and equipment that are obtained through a finance lease agreement are depreciated over asset's useful life or the term of the lease (whichever is shorter), provided that it cannot, with reasonable certainty be established that there is transfer of ownership to the lessee at the end of the lease period.

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.

2.8 Business combinations

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

• the transferred assets
• liabilities that the Group incurs to former owners

NOTES NOTES

• shares issued by the Group
• assets or liabilities that result from an agreement on contingent payment
• previously held equity interest in the acquired company

Identifiable acquired assets, assumed liabilities and assumed contingent liabilities assumed in a business combination are measured, with very few exceptions, initially at fair value on the acquisition date. For each acquisition, i.e. acquisition by acquisition, 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.

The costs associated with acquisitions are expensed as incurred.

Goodwill is the amount that the

• purchase sum,
• any non-controlling interest in the acquired company and
• the fair value as of the acquisition date of any previously held equity interest in the acquired company (if the business combination was done in stages) exceeds the fair value of the identifiable net assets that were acquired. 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 purchase sum is deferred, future payments are discounted to their present value at the acquisition date whenever the discounting effect is significant. The discount rate is the company's marginal lending rate, which is the interest rate the entity would have paid for financing through loans during the same period and with similar terms and conditions.

Contingent consideration is classified either as equity or financial liability. Amounts classified as financial liabilities are revalued each period at fair value. Any gains and losses from revaluation are recognized in earnings.

If a business combination is carried out in several steps, the prior equity interests in the acquired company are remeasured at the fair value at the time of the acquisition. Any profit or loss that arises from revaluation is reported in the income statement.

2.9 Impairment of non-financial assets

Goodwill and intangible assets with an indefinite useful life or intangible assets not ready for use, are not amortized. They are however, tested annually for impairment, or more often whenever there is an indication of 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 essentially independent cash flows (cash generating units). At each reporting date, an assessment is made regarding possible reversal of impairment loss on assets (other than goodwill) that have previously become impaired.

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 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 overdraft facility is 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 in the following categories: 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.

CONT. NOTE 2 Accounting policies

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

The method of recognizing the resulting gain or loss arising on revaluation depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either:

• hedge of the fair value of a recognized asset or liability or a firm commitment (fair value hedge),
• hedging of a risk linked to the cash flows of a recognized asset or liability or a highly probable forecast transaction (cash flow hedge), or
• hedge of a net investment in a foreign operation (net investment hedges).

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 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 portion of changes in fair value of a derivative, which is designated as a cash flow hedge and qualifies for hedge accounting is recognized in other comprehensive income and the accumulated amount in equity. The gain or loss attributable to any ineffective part is immediately recognized as other income or other expenses in the income statement.

Amounts accumulated in equity are reclassified to the income statement in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place).

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 the hedging instrument relating to the effective hedge is recognized in other comprehensive income and the accumulated amount in equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement as other income or other expenses.

Accumulated gains and losses in equity are reclassified to the income statement when foreign operations are sold, either entirely or in part.

2.13.2 Reporting and valuation

Purchases and sales of financial assets and liabilities 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 and liabilities reported at fair value via the income statement, are initially recognized at fair value plus transaction costs. Financial assets and liabilities measured at fair value through profit or loss are initially recognized at fair value, with the associated transaction costs reported in the income statement.

Financial assets and liabilities 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 and liabilities 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.

NOTES

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:

Machinery 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.

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 resulting from business combinations is included in intangible assets. Goodwill is not amortized, but i 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. When a unit is sold, the carrying amount of goodwill is included in the resulting gain/loss. For the purpose of impairment testing, goodwill that was acquired in a business combination is allocated to 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 correspond to the lowest level in the Group at which the goodwill is monitored as part of internal governance.

Impairment losses are immediately expensed and they are never reversed.

b) Brands

Directors' report • Financial statements • Notes • Board's affirmation • Audit report • Multi-year overview • Contents

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. Brands with a finite useful life are amortized over the estimated useful life of 10 years.

c) Customer relations and technology platforms

Customer relations and technology platforms have been acquired via business combinations and they are recognized at fair value on the acquisition date. Customer relations and technology platforms have a finite useful life and are recognized at cost less accumulated amortization and any 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.

Costs that are directly associated with the development and testing of identifiable and unique integrated circuits, strategic IP blocks, new product line platforms and costs 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 they are usually 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

CONT. NOTE 2 Accounting policies

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.

Borrowings are removed from the balance sheet when the obligations have been settled, canceled or in some other manner extinguished. 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 earnings.

Bank overdrafts are reported as borrowings among 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.

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.

When there are several 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 compensated absences that are expected to be settled within 12 months after the fiscal year-end, are recognized as current liabilities at the undiscounted amount that is expected to be paid when the liabilities are settled. The expense is recognized at the rate that employees perform the 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. They are reported as non-current liabilities.

a) Pension commitments

The Group companies have various 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 2016 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 2016, all permanent employees of the HMS Group were offered the opportunity to participate in a share savings plan, 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 purchase sum 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 in equity are comprised of hedging and translation reserves. The hedging reserve is comprised of unrealized gains and losses on futures, along with hedging of net investments, which are recognized in profit or loss in the periods that the hedged transac-

NOTES

2

tions 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 has been established. This applies even if the dividends are paid out of profits arising before the date of acquisition. However, it may be necessary to test the investment 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.

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.

Risk	Exposure arises from	Measurement	Management
Market risk – currency risk	Future business transactions. Recognized financial assets and financial assets that are not denominated in SEK.	Cash flow forecasts Sensitivity analysis	Currency forward contracts
Market risk – interest rate risk	Long-term borrowings with a variable interest rate	Sensitivity analysis	Interest rate derivatives, when they are expected to lower the Group's interest expense
Credit risk	Cash and cash equivalents, accounts receivable and derivatives	Aging analysis Credit rating	Credit limits
Liquidity risk	Borrowings and other liabilities	Rolling cash flow forecast	Access to binding credit facilities and credit

a) Derivative instruments

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

Information about the fair value of various derivative financial 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% of the exposure should be hedged for the next three months and 10 to 40% of 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 in foreign currency. Currency exposure that has arisen from the net assets obtained from the businesses acquired by the Group are primarily dealt with by borrowing in the currency concerned.

Through its operating activities, the Group is primarily exposed to changes in the exchange rate between EUR and SEK. If the SEK had weakened/strengthened by 10% against the EUR with all other variables held constant, the Group's equity as of 31 December 2016 would have been SEK 14.3 million higher/lower. If the SEK had weakened/strengthened by 10% against all other currencies, the Group's equity as of 31 December 2016 would have been SEK 28.0 million higher/lower.

If the SEK had weakened/strengthened by 5% against the EUR with all other variables held constant, the operating profit/loss as of 31 December 2016 would have been SEK 7.1 (4.8) 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, financial assets and liabilities measured at fair value through profit or loss.

If the SEK had weakened/strengthened by 5% against the USD with all other variables held constant, the operating profit/loss as of 31 December 2016 would have been SEK 4.6 (3.9) 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, financial assets and liabilities measured at fair value through profit or loss.

If the SEK had weakened/strengthened by 5% against the JPY with all other variables held constant, the operating profit/loss as of 31 December 2016 would have been SEK 2.3 (1.8) 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, financial assets and liabilities measured at fair value through profit or loss.

CONT. NOTE 3 Financial risk management

c) Interest rate risk

The Group's primary interest rate risk arises from long-term borrowings with variable interest 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 2016 and 2015, it was assessed that the use of interest rate derivatives would not decrease the Group's interest expenses.

If the interest on interest-bearing liabilities as of 31 December 2016 had been 1% higher/lower with all other variables constant then the profit before tax for the financial year would have been SEK 5.2 (2.2) higher/lower.

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

d) Credit risk

Credit risk arises from holdings in cash and cash equivalents, derivative instruments, deposits with banks and credit institutions and other credit exposures, including outstanding receivables. See Note 16 for more information about the Group's 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 interest-bearing liabilities, 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% of sales in cash, excess liquidity and unutilized credit facilities, which at year-end corresponded to approximately 10 (7)%.

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 (analysis of maturity) 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 analysis of maturity table are the contractual, undiscounted cash flows.

Analysis of maturity

As of 31 December 2016	Less than 3 months	Between 3 months and 1 year	Between 1 and 2 years	Between 2 and 5 years	More than 5 years	Total
Finance leases	-674	-1,708	-2,994	-5,627	-9,570	-20,573
Derivative instruments	-1,028	-1,069				-2,097
Bank loans	-18,197	-72,644	-68,527	-358,545	-169	-518,082
Accounts payable – trade	-64,275					-64,275
Total	-84,174	-75,421	-71,521	-364,172	-9,739	-605,028

	Less than	Between 3 months and	Between 1	Between 2	More than
As of 31 December 2015	3 months	1 year	and 2 years	and 5 years	5 years	Total
Finance leases	-135	-406	-451	-541		-1,533
Derivative instruments	-236	-237				-473
Bank loans	-10,046	-29,813	-39,143	-113,265	-9,222	-201,490
Accounts payable – trade	-44,704					-44,704
Total	-55,121	-30,456	-39,594	-113,806	-9,222	-248,200

* Amortization and interest in foreign currency have been calculated based on the closing exchange rates in effect and interest rates in effect at the time.

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 value to other stakeholders, and
• 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.

The net debt/equity ratios on 31 December 2016 and 31 December 2015 were as follows:

	2016	2015
Interest-bearing liabilities (Note 21)	519,697	196,901
Less cash and cash equivalents
(Note 18)	-99,036	-19,503
Net debt	420,661	177,398
Total equity	636,444	455,482
Total capital	1,057,105	632,880
Net debt/equity ratio	66%	39 %

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:

• 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 2016:

	Level 1	Level 2	Level 3	Total
Derivative instruments used for hedging	0	2,106	0	2,106
Total assets	0	2,106	0	2,106
Derivative instruments used for hedging		-2,097		-2,097
Total liabilities	0	-2,097	0	-2,097

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 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. Management also makes estimates when applying the Group's 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 and brands

Each year, in accordance with the accounting policies described in Note 2.9, the Group tests goodwill and brands with an indefinite useful life for impairment. The recoverable amount for the Group's cash-generating units (for the Group excl. Intesis and for Intesis separately) has been determined by calculating value-in-use. Various estimates must be made in order to make these calculations (Note 13). For the Group excl. Intesis, the reported value of goodwill amounts to SEK 627.1 (394.2) million. The value of goodwill for Intesis alone is SEK 117.3 million, bringing the total amount of goodwill to SEK 744.4 (394.2) million.

The carrying amount of brands with indefinite useful life amounts to SEK 84.5 (80.6) million.

Sensitivity analyses reveal that the return requirement after tax (9.6%) could increase to 18.2% (for the Group excl. Intesis) and 16.5% (Intesis) without needing to recognize impairment losses.

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 recorded, 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 2016, this impairment testing resulted in a write-down of SEK 3 (0) million.

CONT. NOTE 4 Important estimates and assessments for accounting purposes

d) Contingent consideration in conjunction with the acquisition of Intesis

In conjunction with the acquisition of Intesis, there was an agreement on contingent consideration. The additional consideration, which amounts to EUR 2 million is contingent on sales growth and earnings during the period 2016-2018.

Based on how the company has performed historically, and its performance during the first six months after the acquisition, management estimates that the additional consideration will be paid in full.

Should Intesis perform below expectations, a lower level of additional consideration could be paid than the amount reported as a liability on 31 December 2016. In that case, the difference would be recognized in profit or loss.

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 eWON and Intesis did not impact the Group's segmentation.

	The Group		Parent company
Net sales per country	2016	2015	2016	2015
Germany	248,078	199,260
USA	179,458	135,502
Japan	85,578	68,472
Sweden	60,642	56,591	14,168	11,933
France	45,609	30,827
China	41,456	33,452
Italy	40,243	19,613
Other countries	251,217	157,958
	952,282	701,674	14,168	11,933

The carrying amount of assets and investments in Sweden amounts to 38 (58)%, in Germany to 22 (38)% and in Belgium to 23 (0)% of the Group's total assets. The carrying amount of non-current assets in Sweden amounts to 35 (55)%, in Germany to 28 (44)% and in Belgium to 25 (0)% of the Group's total non-current assets.

Revenue of approximately SEK 39,740 (21,744) thousand is derived from a single external customer in USA.

All product groups are based on common technologies and they are marketed and sold through the shared sales channels. For this reason, complete segment accounting is not reported.

NOTE 6 Categorization by type of cost

	2016	2015
Cost of purchasing and handling materials	280,080	197,478
Costs for remuneration to employees (Note 8)	345,139	279,317
Depreciation, amortization and impairment (Note 13, 14)	42,598	34,088
Marketing costs	20,368	14,033
Freight costs	6,393	4,561
Other external costs	128,259	92,247
Capitalized development costs (Note 13)	-27,778	-20,404
Total costs for goods sold, sales
administration, research and development	795,059	601,320

NOTE 7 Remuneration to auditors

Remuneration		The Group Parent company
to auditors	2016	2015	2016	2015
PwC
Audit assignment*	1,389	1,038	872	720
Audit activities other than the audit assignment	143	0	143	0
Tax advice	1,417	824	8	0
Other services	50	0	50	0
Total	2,999	1,862	1,074	720

* 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.

NOTE 8 Remuneration to employees

	The Group		Parent company
	2016	2015	2016	2015
Salaries and other remuneration *	257,817	209,539	4,316	4,642
Social security contributions	70,249	55,812	1,524	1,410
Pension costs	17,073	13,966	692	638
Total	345,139	279,317	6,532	6,691

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

4 5 6 7 8

CONT. NOTE 8 Remuneration to employees

		2016		2015
Salaries, other remuneration and social security expenses	Social security Salaries expenses and other (of which pension remuneration expenses)		Salaries and other remuneration	Social security expenses (of which pension expenses)
Board members and CEO	12,993	3,152	(1,163)	9,271	2,771	(1,021)
Senior executives	4,984	4,632	(2,468)	4,931	3,953	(1,934)
Other employees	239,840	62,465	(13,442)	195,336	63,054	(11,011)
The Group, total	257,817	70,249	(17,073)	209,539		69,778 (13,966)

	2016			2015
Average no. of employees	Average no. employees	Of which men	Average no. of employees	Of which men
Sweden	191	141	186	139
Germany	113	91	112	96
Belgium	58	47	0	0
Spain	33	27	0	0
USA	28	20	24	16
France	3	3	2	2
Italy	6	5	5	5
Japan	13	10	12	9
China	10	9	9	8
Great Britain	5	4	5	4
Denmark	1	0	2	1
Switzerland	1	1	0	0
India	5	5	4	5
The Group, total	467	363	359	285

	2016			2015
Gender distribution of the Group (incl. subsidiaries) for Board members and other senior executives	No. on closing date	Of which men	No. on closing date	Of which men
Board members	7	5	6	4
CEO and other senior executives	10	9	8	7
The Group, total	17	14	14	11

Share-based remuneration

To promote long-term ownership commitment among employees, it is the Board's intention to present a proposal for a share savings plan each year to the AGM. As of 31 December 2016, HMS had five share savings plans. At the AGMs in 2012, 2013, 2014, 2015and 2016 it was decided to introduce a share savings plan that would be open to all permanent employees of the HMS Group.

In brief, each share savings plan 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-ofcharge, 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% of their annual gross salary and at most 3%, except for a few key employees, who may set aside up to 6% 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 the entire 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 share savings plans, the AGM decided to acquire own shares for all plans.

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 savings plan in 2013. 60% chose to participate. The number of shares acquired as part of the plan was 24,939. In conjunction with this, the company acquired 31,000 own shares in 2013 in order to fulfill obligations pertaining to future matching and performance

CONT. NOTE 8 Remuneration to employees

shares. The program ended on 2016-12-31 with 28,117 shares, of which 5,659 performance shares, distributed free-of-charge to the remaining savings schemes.

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 savings plan in 2014. 51% 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 savings plan in 2015. 47% 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 savings plan in 2016. 54% chose to participate. The number of shares acquired as part of the plan was 13,065.

Program 5

In accordance with a decision at the 2016 AGM, all permanent employees of the HMS Group were invited to participate in a share savings plan in 2017. The registration period for participation was the month of December 2016 and approximately 43% chose to participate. With this share savings plan, savings in HMS shares will be implemented during 2017.

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 savings plan are reported in accordance with IFRS 2 Share-based payment (see also the description under accounting policies). In 2016, the Group's total employee benefit expenses for the share savings plan amounted to SEK 3,963 (3,278) thousand, of which SEK 2,430 (1,737) thousand was reported under equity and SEK 1,533 (1,541) thousand was reported as a provision for future social security expenses.

NOTE 9 Income tax

2016	2015
-37,152	-31,314
-2,117	3,958
-39,269	-27,356

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:

	2016	2015
Profit before tax	139,736	87,561
Tax calculated using the Swedish tax rate (22%)	-30,742	-19,263
Tax effect of items which are non-deductible/non-taxable	-281	-2,514
Difference in foreign tax rates	-9,061	-4,234
Adjustment relating to prior years	814	-2,282
Previously unrecognized loss carry forwards for subsidiaries that have
not been utilized	0	938
Tax expense	-39,269	-27,356
Weighted average tax rate	28.1%	31.2%

Income tax relating to components of other comprehensive income amounted to, for cash flow hedges SEK 106 (393) thousand and for hedging of net investments to SEK -2,116 (2,544) thousand.

NOTE 10 Exchange rate differences – net

Exchange differences were reported in the income statement as follows:

	2016	2015
Other operating income/expenses	-7,911	1,230
Net financial items	-414	-9,289
Total	-8,325	-8,059

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.

	2016	2015
Profit attributable to parent company shareholders	100,466	60,205
Weighted average number of outstanding ordinary shares (000s)	11,642	11,291
Earnings per share, basic (SEK per share)	8.63	5.33
Earnings per share, diluted (SEK per share)	8.59	5.31
Average number of shares
basic and diluted Average number of shares used to calculate earnings per share,	2016	2015
basic Adjustment for calculation of		11,641,857 11,291,400
Earnings per share, diluted: Shares in Share Savings Plans	57,017	43,220

NOTE 12 Dividend per share

The dividend paid in 2016 was SEK 29,184 thousand and (SEK 2.50 per share). In 2015, the dividend paid was SEK 28,229 thousand (SEK 2.50 per share).

At the general meeting of shareholders on 26 April 2017 a proposal will be made to distribute SEK 46,695 thousand* as dividends for the 2016 financial year, which corresponds to SEK 4.00 per share. The proposed dividend has not been reported as a liability in these financiall statements.

* The dividend is calculated on the total number of outstanding shares as of 2016-12-31.

NOTES

8 9 10 11 12 13

NOTE 13 Intangible assets

		Capitalized development		Customers, technology
	Patents	work	Goodwill	platforms	Brands	Total
As of 1 January 2015
Cost	448	167,311	385,289	72,302	76,167	701,516
Accumulated amortization and impairment/
rate effects	-211	-58,937	15,463	-7,894	7,893	-43,686
Carrying amount	237	108,374	400,752	64,408	84,060	657,831
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	0	-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	448	187,715	385,289	72,302	76,167	721,472
Accumulated amortization and impairment/
rate effects	-448	-76,572	8,878	-18,308	4,532	-81,470
Carrying amount	0	111,143	394,167	53,993	80,699	640,002
Financial year 2016
Opening carrying amount	0	111,143	394,167	53,993	80,699	640,002
Purchases		27,778				27,778
Acquisition of subsidiaries			336,969	25,372	12,329	374,670
Exchange rate differences		18	13,297	2,745	4,017	20,076
Impairment		-3,313				-3,313
Depreciation		-17,904		-10,079	-946	-28,929
Closing carrying amount	0	117,721	744,433	72,031	96,099	1,030,284
As of 31 December 2016
Cost	0	215,493	722,258	97,674	88,496	1,123,920
Accumulated amortization and impairment/
rate effects		-97,772	22,175	-25,642	7,603	-93,636
Carrying amount	0	117,721	744,433	72,031	96,099	1,030,285

The income statement includes depreciation and amortization of SEK 27,023 (25,833) thousand for Cost of goods sold, SEK 0 (0) for Research and development costs and SEK 1,805 (0) thousand for Selling expenses.

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) was acquired, which resulted in consolidated goodwill in the form of customer relations, 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.

In 2016, the Belgian company, eWON (HMS Industrial Networks SA) was acquired, which resulted in consolidated goodwill in the form of customer relations, technology platforms and brands. Acquisition of the new company gave rise to goodwill attributable to the employees, market position and expected synergies with existing operations amounting to SEK 219,641 thousand.

In 2016, the Spanish company, Intesis Software SLU was acquired, which resulted in consolidated goodwill in the form of customer relations, technology platforms and brands. Acquisition of the new company gave rise to goodwill attributable to employee knowhow and Intensis' market position in the building automation segment amounting to SEK 117,328 thousand.

Capitalized development costs and brands are tested for impairment each year. In 2016, impairment testing resulted in a write-down of SEK 3 (0) million.

a) Test of impairment for goodwill and brands

The Group's goodwill has been evaluated in accordance with IAS
36. The Group's goodwill is attributable to the following two
cash-generating units:
The Group, excl. Intesis	627
Intesis	117
Total consolidated goodwill	744

CONT. NOTE 13 Intangible assets

The recoverable amount for the cash generating units has been based on their 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 Group's existing structure. 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 meet replacement demand, except for Intesis, where the future margins have been adjusted downwards to reflect the expected costs for the future expansion of the business.

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 was then extrapolated using an assumed annual growth rate of 2.0 (2.0)%, which is lower than the actual annual growth rate. The need for working capital (excluding cash) is, over the long term, estimated at 8 (8)% for the Group excluding Intesis and 15% for Intesis separate to the company's net sales. The weighted average cost of capital (WACC) before tax is 12.3 (12.8)% for the Group excl. Intesis and 12.1% for Intesis separately.

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

	Buildings	Machinery and	Equipment, installations and	Construction-in
	and Land	equipment	facilities	progress	Total
As of 1 January 2015
Cost		31,361	34,704		66,065
Accumulated depreciation		-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
Investments		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,
exchange rate effects		-25,340	-28,361		-55,599
Carrying amount		7,764	7,536		15,300
Financial year 2016
Opening carrying amount		7,764	7,536		15,300
Exchange rate differences			558		558
Investments		3,601	7,480		11,081
Net investments via company acquisitions	3,340	15,708	3,386	496	22,930
Sales and disposals			-536		-536
Depreciation	-49	-3,296	-7,011		-10,356
Closing carrying amount	3,291	23,777	11,413	496	38,977
As of 31 December 2016
Accumulated cost	3,340	52,413	39,068	496	104,932
Accumulated depreciation	-49	-28,636	-27,655		-65,955
Carrying amount	3,291	23,777	11,413	496	38,977

Depreciation expenses are included in Cost of goods sold for SEK 4,182 (3,610), in Selling expenses for SEK 2,058 (1,481) thousand, in administration expenses for SEK 2,058 (1,481) thousand and in research and development expenses for SEK 2,058 (1,481) thousand.

CONT. NOTE 14 Property, plant and equipment

Included in machinery and equipment are leased items that the Group holds through finance lease agreements for the following amounts (see Note 25 for more information):

Directors' report • Financial statements • Notes • Board's affirmation • Audit report • Multi-year overview • Contents

Assets held through a finance lease agreement	2016	2015
Opening carrying amount	1,533	2,164
Investments for the year	2,577	0
Added via company acquisition	15,289	0
Depreciation for the year	-958	-631
Closing carrying amount	18,442	1,533

NOTE 15 Derivatives

	2016	2015
Currency forward contracts – asset	2,106	0
Currency forward contracts – liability	-2,097	-473

Derivatives held for trading are classified as either current assets or current liabilities. The entire 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. All the Groups derivative instruments have terms that are less than 12 months in duration. During the period, the Group did not have any derivatives for trading.

The Groups accounting policies for cash flow hedges are explained in Note 2.13.

(a) Currency forward contracts

The nominal amount of outstanding currency forward contracts as of 31 December 2016 was SEK 80,616 (36,984) thousand.

The hedged (and highly probable forecast) transactions in foreign currency are expected to occur at varying times over the next 12 months. Profit and loss on currency forward contracts as of 31 December 2016, which is reported as equity, is reported in the income statement as operating profit for the periods when the hedged transaction affects earnings.

In 2016, realized currency forward contracts had a negative impact on operating profit of SEK -3,588 (-5,684) thousand.

(b) Hedging of net investments in foreign operations

The Group's borrowings in EUR amounting to SEK 300,438 (191,835) thousand are identified as a hedging of net investments pertaining to the acquisition of subsidiaries. The Group's assessment is that the fair value corresponds to the carrying amount as of 31 December 2016. The exchange loss on translation of the borrowings into SEK amounts to -9,620 (11,565) thousand for the reporting period and it has been recognized in other comprehensive income.

NOTE 16 Accounts receivable and other receivables

	2016	2015
Accounts receivable - trade	123,758	83,246
Provision for doubtful debts	-588	-1,273
Accounts receivable – net	123,170	81,973
The fair value of accounts receivables and other receivables is as follows:	2016	2015

	141,457	95,088
Prepaid costs and accrued income, see Note 30	5,739	5,881
Other receivables	12,549	7,234
Accounts receivable - trade	123,170	81,973

During the year, the Group reported improved results on the reversal and impairment of accounts receivable amounting to SEK 418 (-1,019) thousand. As of 31 December 2016, the provision for doubtful debts amounted to SEK 588 (1,273) thousand.

As of 31 December 2016, accounts receivable amounting to SEK 26,489 (20,397) thousand had fallen due. An aging analysis is presented in the table below:

	2016	2015
1-15 days	16,902	8,237
15 days to 3 months	8,000	10,570
3 to 6 months	446	669
More than 6 months	1,141	921
	26,489	20,397

In the amount for accounts receivable overdue by more than 6 months, a provision to doubtful debts has been made for SEK 588 (1,273) thousand.

No provision to doubtful debts has been made for the remaining overdue accounts receivable since they are expected to be paid in full.

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:

	2016	2015
EUR	71,196	44,305
USD	36,333	22,641
SEK	5,536	5,647
JPY	5,138	7,050
CNY	2,781	2,061
GBP	2,381	1,242
DKK	199	292
INR	195	7
Total	123,758	83,246

NOTE 18 Cash and cash equivalents

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

The Group	2016	2015
Cash and bank balances	99,036	19,503
Total	99,036	19,503

The Group has a granted, unutilized overdraft facility of SEK 30,000 (18,000) thousand.

NOTE 19 Share capital and other contributed capital

	Number of shares (000s)	Share capital (SEK t)	Other contributed capital (SEK t)	Total (000s)
As of 1 January 2015	11,322	1,132	125,641	126,773
As of 31 December 2015	11,322	1,132	125,641	126,773
As of 31 December 2016	11,673	1,170	218,318	219,488

The total number of shares is 11,704,717 (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.

In the new share issue carried out in connection with the acquisition of eWON in February 2016, 382,317 new shares in HMS Networks AB were issued, which increased equity by SEK 38 thousand in share capital and SEK 93,247 thousand before issue costs to other contributed capital.

NOTE 17 Inventories

The Group	2016	2015
Raw materials and consumables	63,870	21,352
Work-in-progress	1,866	2,546
Finished goods	20,359	31,912
Total	86,095	55,810

Costs for impairment of inventories (obsolescence) that affected the year's profit are included in cost of goods sold and negatively impacted earnings by -1,494 (120) thousand. The Group does not have sufficient financial information to calculate the proportion of material in cost of goods sold.

NOTE 20 Provisions

	2016	2015
Complaints provision	1,301	2,412
Warranty provision	1,750	0
Total	3,051	2,412

NOTES

NOTE 21 Interest-bearing liabilities

	THE GROUP		PARENT COMPANY
The Group	2016	2015	2016	2015
Non-current interest-bearing liabilities
Bank loans	394,030	157,150	0	0
Liability for contingent consideration	19,134	0
Liability pertaining to finance leases (Note 25)	18,191	992	0	0
Defined benefit pension plan	2,248	0
Total	433,603	158,142	0	0
Current interest-bearing liabilities
Bank loans	64,578	38,218	0	0
Other current financial liability	19,134	0
Liability pertaining to finance leases (Note 25)	2,382	541	0	0
Total	86,095	38,759	0	0
Total interest-bearing liabilities	519,697	196,901	0	0

The Group's exposure regarding interest-bearing liabilities at the end of the reporting period is as follows:

	THE GROUP		PARENT COMPANY
The Group	2016	2015	2016	2015
3 months or less	16,937	9,690	0	0
Between 3 months and 1 year	69,157	29,069	0	0
Between 1 and 2 years	65,602	38,668	0	0
Between 2 and 5 years	356,018	110,339	0	0
More than 5 years	11,983	9,135	0	0
	519,697	196,901	0	0

The interest rates on bank loans are variable and tied to EURIBOR. The average interest rate in 2016 was 1.59 (1.93) %. Shares in subsidiaries was provided as collateral for bank loans (Note 27).

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

The carrying amount of the Group's interest-bearing liabilities corresponds to their fair value either because the interest rate on these liabilities is in line with current market rates or because the liabilities are short-term.

The liability for contingent consideration is related to the acquisition of Intesis in 2016. See Note 34 for more information. The additional consideration is contingent on sales and earnings growth during the period 2016-2018. Management continually revalues liabilities pertaining to additional consideration to their estimated fair value based on the acquired company's performance, established budgets, business plans and projections. This means that the fair value is substantially based on unobservable inputs (Level 3 as defined in IFRS 13).

NOTE 22 Deferred tax

Deferred tax assets	Tax deficit	Pensions	Other	Total
As of 1 January 2015	869		459	1,328
Exchange rate differences	69		21	90
Reclassified to deferred tax liabilities			775	775
Reported in income statement	-938		1,983	1,045
As of 31 December 2015	0		3,238	3,238
Exchange rate differences			58	58
Reclassified to deferred tax liabilities			-2,412	-2,412
Added via acquisition		719	-341	378
Reported in income statement			178	178
As of 31 December 2016	0	719	721	1,440

	Tax	Property, plant and equipment
Deferred tax liabilities	allocation reserves	and intangible assets	Currency hedging	Other	Total
As of 1 January 2015	20,567	50,797	-5,411	-838	65,115
Reported in income statement	-1,916	6,846		73	5,003
Reported in other
comprehensive income			2,937		2,937
Reclassified to deferred tax
assets				775	775
Exchange rate differences		-1,670		82	-1,588
As of 31 December 2015	18,651	55,973	-2,474	92	72,242
Reported in income statement	-1,469	1,116	2	2,646	2,295
Reported in other
comprehensive income					0
Added via acquisition		10,827		1,428	12,255
Reclassified to current tax			2,474		2,474
Reclassified from deferred
tax assets				-2,412	-2,412
Exchange rate differences		1,267			1,267
As of 31 December 2016	17,182	69,183	2	1,754	88,121

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 2016 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 fees for pension insurance with Alecta during the year amounted to SEK 7,157 (6,362) thousand. The year's fees for pension insurance with Skandia amounted to SEK 4,214 (3,470) 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 2016, Alecta's surplus at the collective consolidation level was 149 (148) percent.

The Group has a defined benefit pension obligation in Belgium that amounts to SEK 2,248 (0) thousand. Otherwise, for foreign entities, pension obligations are classified as defined contribution plans and the amount reported in the income statement is SEK 5,333 (4,437) thousand.

NOTE 24 Pledged assets and contingent liabilities

The Group Pledged assets	2016	2015
Shares in subsidiaries	638,666	459,188
Contingent liabilities
Contingent liabilities	none	none
Parent company Pledged assets	2016	2015
Shares in subsidiaries	337,324	244,039
Contingent liabilities
Security for subsidiaries	486,437	226,630

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

	2016	2015
Cost - capitalized finance leases	37,689	13,501
Accumulated depreciation	-19,247	-11,968
Carrying amount	18,442	1,533

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

	2016	2015
Within 1 year	2,382	541
Between 1 and 5 years	8,621	992
More than 5 years	9,570
Total future leasing payments	20,573	1,533

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.

	2016	2015
Total minimum leasing fees for the
financial year	28,659	20,867
Total minimum
leasing fees	28,659	20,867

Future contractual leasing payments

	2016	2015
Within 1 year	29,722	25,379
Between 1 and 5 years	121,892	104,078
Total future leasing payments	151,614	129,457

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 general meeting of shareholders' 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 eight 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 AGM on 28 April 2016 Charlotte Brogren was re-elected as Chairman of the Board. The following individuals were also relected at the AGM to serve on the Board of Directors: Ray Mauritsson, Henrik Johansson, Kerstin Lindell and Fredrik Hansson. Karl Thedéen chose to resign from the Board, and Anders Mörck was elected as a new member of the Board.

Since the AGM of 28 April 2016 the Board has held 10 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 2016, variable remuneration for the CEO corresponded to 23 (40) percent of basic salary and for other senior executives it was 18 (18) percent.

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.

Pensions

The retirement age for the CEO is 65 years. For other senior executive, the retirement age is 65-66 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 regulary 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.

Remuneration and other benefits 2016	Basic salary*/ Board fees	Variable remunera tion	Pension expenses	Total 2016	Options held	Board attendance
Chairman of the Board, Charlotte Brogren	400			400		100%
Board member, Ray Mauritsson	175			175		90%
Board member, Henrik Johansson	175			175		100%
Board member, Fredrik Hansson	175			175		100%
Board member, Anders Mörck	175			175		100%
Board member, Kerstin Lindell	175			175		100%
Total, Board	1,275	0	0	1,275	0
CEO Staffan Dahlström	2,467	574	692	3,733
Other senior executives (8)	10,900	1,937	2,939	15,777
Total	14,642	2,511	3,631	20,785	0

Remuneration and other benefits 2015	Basic salary*/ Board fees	Variable remunera tion	Pension expenses	Total 2015	Options held	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 Thedéen	175			175		85%
Board member Kerstin Lindell	175			175		100%
Total, Board	1,275	0	0	1,275	0
CEO Staffan Dahlström	2,088	790	638	3,516
Other senior executives (7)	8,521	1,532	2,316	11,585
Total	11,884	2,322	2,954	16,376	0

*Including other remuneration

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

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 2016 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 other appointed Board member who is appointed by the Board.

NOTE 27 Shares in subsidiaries

Shares owned by parent company	Registered office	CIN	Share	No. of shares	With quotient value	161231	151231
HMS Industrial Networks AB	Halmstad, Sweden	556529-9251	100%	6,540	100	244,039	244,039
HMS Industrial Networks SA	Nivelles, Belgium	450350907	33%	431	100	93,285	0
Shares owned by subsidiary	Registered office	CIN.	Share	Equity	Profit (loss)
HMS Electronics AB	Halmstad, Sweden	556463-9374	100%	247	0
HMS Industrial Networks ApS	Copenhagen, Denmark	33363842	100%	404	-6
HMS Industrial Networks GmbH	Karlsruhe, Germany	35006/39876	100%	18,800	5,085
HMS Industrial Networks Inc	Chicago, USA	5983-659-5	100%	71,943	-672
HMS Industrial Networks India Pvt. Ltd.	Pune, India	138298	100%	493	113
HMS Industrial Networks K.K	Tokyo, Japan	0200-01-060118	100%	3,974	1,473
HMS Industrial Networks Ltd.	Coventry, England	7521411	100%	641	127
HMS Industrial Networks S.r.l.	Milan, Italy	5260930960	100%	644	184
HMS Technology Center Ravensburg GmbH	Ravensburg, Germany	29724241	100%	73,108	49,960
HMS Industrial Networks SA* **	Nivelles, Belgium	450350907	67%	142,467	78,710
eWON Inc	Pittsburgh, USA	27-3369241	100%	4,337	1,691
eWON KK	Tokyo, Japan	3-0100-0115-6936	100%	-2,492	-964
Intesis Software SLU	Igualada, Spain	B62202460	100%	45,569	8,990
Intellicom Innovation AB	Halmstad, Sweden	556537-7826	100%	8,360	0
FAR Sprl	Nivelles, Belgium	0462.305.661	100%	5,774	-68

HMS Industrial Networks Limited (UK Company Number 07521411)

We hereby confirm that the consolidated accounts for the ultimate parent company HMS Networks AB (publ) for the year ended 31st December 2016 include the figures of the UK subsidiary, HMS Industrial Networks Limited (UK Company Number 07521411) for the year ended 31 December 2016. We confirm that the UK subsidiary is claiming exemption from UK audit under section 479A of the Companies Act 2006.

• * During the year, eWON SA changed its name to HMS Industrial Networks SA.
• ** HMS Industrial Networks SA's equity and earnings, above, are included at 100 % since the parent company, together with subsidiaries, owns 100 % of the company.

26 27 28 29 30 31 32 33 34

NOTE 28 Earnings from participations in Group companies

		Parent company
	2016	2015
Anticipated dividends	50,000	0
Total	50,000	0

NOTE 29 Financial income

	The Group			Parent company
	2016	2015	2016	2015
Interest income	419	2	0	0
Total	419	2	0	0

NOTE 30 Financial expenses

	The Group			Parent company
	2016	2015	2016	2015
Interest expenses and other banking
costs	-9,585	-4,736	0	0
Exchange rate differences	-414	-9,289	0	0
Total	-9,999	-14,025	0	0

NOTE 31 Prepaid expenses and accrued income

	The Group			Parent company
	2016	2015	2016	2015
Rents	2,556	2,507	0	0
Accrued income	0	241	0	0
Other items	3,183	3,133	52	596
Total	5,738	5,881	52	596

NOTE 32 Accrued expenses and deferred income

	The Group		Parent company
	2016	2015	2016	2015
Accrued salaries	14,213	11,586	506	790
Vacation pay	12,794	8,308	390	418
Social security contributions	10,999	10,246	674	976
Deferred income	544	0	0	0
Other items	12,222	10,037	194	633
Total	50,772	40,177	1,764	2,817

NOTE 33 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 34 Business combinations

On February 5, 2016, the Group acquired 100% of the share capital of the Belgian company, eWON SA. eWON was founded in 2001 and it is headquartered in Nivelles, Belgium. With subsidiaries in the United States and Japan, eWON offers communication products and services for remote access of industrial applications and controllers (PLCs), data collection software and cloud-based software.

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 has been financed through a bank loan of EUR 19 million. The acquisition generates a consolidated goodwill of approximately SEK 233 million. The new issue of shares, was in accordance with authorization to the Board of Directors that was granted at the 2015 Annual General Meeting, resulted in share dilution of 3.27%. Acquisition-related costs, excluding issue costs amounted to SEK 2.8 million.

The acquired company is included in the HMS Group's income statement and balance sheet as of the acquisition date. In the eleven months since acquisition, eWON has contributed SEK 152 million to the Group's sales. The acquisition's contribution to operating profit, including amortization of acquired goodwill and acquisition costs, amounted to SEK 37 million. If the acquisition had occurred at the beginning of the financial year, the contribution to sales would have been SEK 165 million and the contribution to operating profit, including acquisition costs and amortization of acquired goodwill, would have amounted to SEK 41 million.

The acquisition analysis was based on valuation of identifiable intangible assets. According to the acquisition analysis, the purchase sum, acquired net assets and goodwill amount to the following:

Purchase sum:
Cash and cash equivalents	178,981
Shares issued	93,285
Total purchase sum	272,266

The fair value of the 382,317 shares issued as part of the purchase sum for eWON (SEK 93,285 thousand) was based on the quoted share price on 5 February 2016 of SEK 244 per share. Transaction costs of SEK 570 thousand, which are directly attributable to the share issue, have been reported as a deduction from the value of the transferred shares and from equity.

CONT. NOTE 34 Business combinations

The assets and liabilities recognized in conjunction with the acquisition are as
follows:	Fair value
Intangible assets
- Customer relations	12,355
- Brands	7,663
- Deferred tax liabilities	-6,406
Property, plant and equipment	21,551
Inventories	19,253
Accounts receivable and other receivables	32,455
Deferred tax assets	378
Cash and cash equivalents	26,783
Non-current interest-bearing liabilities	-31,179
Accounts payable and other liabilities	-30,228
Total identifiable net assets	52,625
Goodwill*	219,641
Acquired net assets	272,266

*Goodwill is attributable to the employees, the market position and expected synergies with existing operations. No part of the recognized goodwill is expected to be tax deductible.

Purchase sum – outflow of cash:	2016
Cash consideration	178,981
Acquired cash and cash equivalents	-26,783
Net outflow of cash	152,198

On 29 June 2016, the Group acquired 100% of the share capital of the Spanish company, Intesis Software S.L.U. Intesis was founded in 2000 and is headquartered in Igualada Spain, near Barcelona. Intesis provides advanced gateway solutions and products for communication in building automation segment. The majority of sales are derived from the company's industrial building automation solution, IntesisBox. Intesis closely collaborates globally with many leading manufacturers of air conditioning and building automation systems. The company currently has 33 employees, 9 of which are product development engineers.

The acquisition price amounted to EUR 13 million on a debt free basis and a performance-based additional consideration of EUR 2 million. The maximum contingent consideration of EUR 2 million is based on sales growth and earnings for the period 2016-2018. The acquisition has been financed through a bank loan of EUR 16 million. The acquisition generates a consolidated goodwill of approximately SEK 131 million. Acquisition-related costs amounted to SEK 2.4 million. The acquired company is included in the HMS Group's income statement and balance sheet as of 30 June 2016. During the six months since acquisition, Intesis has contributed SEK 29 million to the Group's sales. The acquisition's contribution to operating profit, including amortization of acquired goodwill and acquisition costs, amounted to SEK 9 million. If the acquisition had occurred at the beginning of the financial year, the contribution to sales would have been SEK 57 million and the contribution to operating profit, including acquisition costs and amortization of acquired goodwill, would have amounted to SEK 21 million.

During the fourth quarter of 2016, the acquisition analysis was updated based on preliminary valuations of identifiable intangible assets. The changes affect the distribution of various categories of intangible assets without any impact on reported earnings for previous quarters. According to the preliminary acquisition analysis, the purchase sum and acquired net assets amount to the following:

Purchase sum:
Cash and cash equivalents	147,682
Contingent additional consideration	18,846
Total purchase sum	166,528

The assets and liabilities recognized in conjunction with the acquisition are as follows:	Fair value
Intangible assets
- Customer relations	13,017
- Brands	4,666
- Deferred tax liabilities	-4,421
Other non-current assets	1,588
Current assets	16,215
Cash and cash equivalents	28,686
Deferred tax liabilities	-1,428
Current liabilities	-9,123
Total identifiable net assets	49,200
Goodwill*	117,328
Acquired net assets	166,528

* Goodwill is attributable to employee know-how and Intensis' market position in the building automation segment. No part of the recognized goodwill is expected to be tax deductible.

Purchase sum – outflow of cash:	2016
Cash consideration	147,682
Acquired cash and cash equivalents	- 28,686
Net outflow of cash	118,996

NOTES

34 35 36 37

NOTE 35 Financial assets and financial liabilities

	Derivative instruments used	Financial assets measured at
Financial assets	for hedging	amortized cost	Total
2016
Accounts receivable and other receivables		130,305	130,305
Cash and cash equivalents		99,036	99,036
Derivatives	2,106		2,106
Total	2,106	229,341	231,447
2015
Accounts receivable and other receivables		85,609	85,609
Cash and cash equivalents		19,503	19,503
Total		105,112	105,112

	Derivative instruments used	Liabilities measured at
Financial liabilities	for hedging	amortized cost	Total
2016
Interest-bearing liabilities		519,697	519,697
Derivative instruments	2,097		2,097
Accounts payable and other liabilities		70,182	70,182
Total	2,097	589,879	591,976
2015
Interest-bearing liabilities		196,901	196,901
Derivative instruments	473		473
Accounts payable and other liabilities		46,083	46,083
Total	473	242,984	243,457

Note 36 Subsequent events

Based on the authorization from the Annual General Meeting April 28, 2016, the Board of HMS Networks AB (publ) ("HMS") has decided to purchase own shares in a share repurchase program for a maximum value of SEK10.4 million. The aim of the repurchase is to ensure that HMS is able to meets its obligations of delivering shares under the HMS Share Savings Plan.

NOTE 37 Proposed distribution of profit in the Parent Company

The following profits are at the disposal of the AGM

Profit brought forward and other non-restricted reserves	133,358,069
Profit (loss) for the year	49,931,489
SEK	183,289,558

The Board of Directors and CEO propose the following appropriation of profits: Distributing dividends to shareholders of SEK 4.00/share* 46,694,868

Carried forward	136,594,690
SEK	183,289,558

* * The dividend is calculated on the total number of outstanding shares as of 2016-12-31.

BOARD'S AFFIRMATION AND SIGNATURES

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.

Directors' report • Financial statements • Notes • Board's affirmation • Audit report • Multi-year overview • Contents

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 26 April 2017 for adoption.

Halmstad, 21 March 2017

Charlotte Brogren Chairman of the Board Staffan Dahlström CEO

Kerstin Lindell Board member Ray Mauritsson Board member

Fredrik Hansson Board member

Anders Mörck Board member Henrik Johansson Board member

Tobias Persson Employee representative

Our audit report was submitted on 24 March 2017 Öhrlings PricewaterhouseCoopers AB

Fredrik Göransson Authorized Public Accountant

AUDIT REPORT

Audit report

To the general meeting of shareholders of HMS Networks AB (publ) CIN: 556661-8954

Report on the Annual Report and Consolidated Financial Statements

Opinion

We have conducted an audit of the annual report and consolidated financial statements of HMS Networks AB (publ) for the year 2016. The company's annual report and consolidated financial statements are provided on pages 46-82 of this document.

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 2016 and of its financial performance and cash flow 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 2016 and of its financial performance and cash flow 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 general meeting of shareholders should adopt the income statements and balance sheets for the parent company and the Group.

Basis for opinion

We conducted the audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing practices in Sweden. Our responsibility as per these standards is described in the section, Auditor's responsibility. We are independent of the Company and the Group in accordance with the auditor's oath in Sweden and have otherwise fulfilled our ethical responsibilities under these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate as a basis for our opinion.

Our audit work

Focus and scope of the audit

We designed our audit by establishing the level of materiality and

assessing the risk of material misstatement in the financial statements. We gave extra consideration to the areas in which the CEO and the Board made subjective judgments, for example, significant accounting estimates made on the basis of assumptions and projections about future events, which by their nature are uncertain. As with all audits, we also considered the risk of the Board or CEO overriding internal controls, and among other things, considered whether there is evidence of systematic deviations resulting in a risk of material misstatement due to fraud.

We adapted our audit to ensure that it would be effective, with the aim of being able to express an opinion on the financial statements as a whole, taking into account the Group's structure, accounting processes and controls, and the industry in which it operates.

When we designed our Group audit strategy and Group audit plan, we assessed the degree of auditing required by the Group audit team and other auditors from the PwC network. As a result of the Group's decentralized financial organization, a substantial amount of the financial reporting occurs in entities outside Sweden. This means that a significant portion of the audit must be performed by auditors operating in the PwC network in other countries.

When we assessed the degree of auditing required at each entity, we considered the group's geographic distribution, the size of each entity, as well as the specific risk profile of each entity. With that in mind, we assessed that, in addition to the Parent Company in Sweden, a full audit would be performed on the financial information prepared by two major subsidiaries (in two foreign countries).

For entities where we assessed that it was not necessary to conduct a full audit, specifically defined procedures were performed on a total of four entities and the Group team performed these procedures on one of them. For other entities, which were assessed as being individually immaterial as regards the consolidated audit, the Group audit team performed analytical procedures at Group level.

In cases where the entity's auditors carry out work that is essential to our audit of the Group, we evaluate, in our capacity as Group auditors, the need and degree of involvement in the work of the entity auditors in order to determine whether sufficient audit evidence has been obtained as the basis for our opinion on the consolidated audit report. With that in mind, the Group audit team regularly meets with the entity auditors and significant subsidiaries.

Materiality

The scope and focus of the audit was impacted by our assessment of materiality. An audit is designed to achieve a reasonable degree of assurance about whether the financial statements are free from material misstatement. Errors may occur as a result of fraud or error. They are regarded as material if individually or collectively, they can reasonably be expected to influence the economic decisions that users make based on the financial statements.

Based on professional judgment, we established certain quantitative materiality thresholds, including ones for the financial statements as a whole. We used these thresholds, along with qualitative assessments, to establish the scope and focus of the audit, along with the nature of the audit procedures, timing and scope, along with assessing the effect of individual and cumulative errors in the financial statements as a whole.

AUDIT REPORT

Particularly important areas

Areas that are particularly important to the audit are those which, according to our professional assessment, are the most significant for the audit of the financial statements for the current period. These areas were dealt with as part of both the audit, and our overall assessment of the financial statements. However, we do not provide separate opinions on these areas.

Particularly important area	How our audit took into consideration this particularly important area
Test of impairment on goodwill As of 31 December 2016, goodwill amounted to SEK 744.4 million, which corresponds to 53 percent of the Group's total assets. As described in Note 13, the Group's goodwill is associated with two sepa rate cash generating units, HMS Networks Group excluding Intesis and Intesis separately. In accordance with IAS 36, the Group tests annually whether there is an impairment of goodwill. Impairment is determined by considering each cash-generating unit's recoverable amount compared to its carrying amount. The recoverable amount was determined by management, by calculating the operations' ability to generate cash flow in the future. Impairment testing is essential for our audit because goodwill represents significant amounts in the balance sheet. Furthermore with a test of impairment, management must make significant estimates and assumptions about the future. Based on management's impairment test, the Board has concluded that no impairment of goodwill exists as of 31 December 2016. The most significant assumptions used in the impairment test are described in Note 13.	Our audit procedures included an assessment of the mathematical accuracy of the cash flow calcula tion, along with a reconciliation of cash flow forecasts against the adopted budget for 2017 and the business plan for 2018-2019. We have evaluated and assessed that the company's valuation is consistent with accepted valua tion techniques. We have tested the reasonableness of the assumptions that have the greatest impact on the impair ment test, which include sustainable growth, sustainable operating margin and discount rate. By making our own sensitivity analyses, we have challenged management's assumptions and tested the existing safety margins to assess the risk that impairment could occur. We have also evaluated whether the Company has provided enough information in the annual report about the assumptions which, should they change, could lead to impairment of goodwill in the future.
Particularly important area	How our audit took into consideration this particularly important area
Acquisition of eWON and Intesis – preparation of acquisition analysis As detailed in Note 34 of the annual report, the Group made two acquisitions in 2016. In February 2016, acquisition of eWON was completed and in June 2016, the acquisition of Intesis was made. For eWON, the total purchase sum, which consisted of own shares and cash, totaled SEK 272.3 million. Relatively speaking, Intesis is a minor acquisition, with a total purchase sum of SEK 166.5 million. The acquisitions that were made, were important to our audit because the amounts were significant. Furthermore, preparation of acquisition analyses is a complex process requiring management to make significant estimates and assessments. When preparing acquisition analyses, management allocates the purchase sum to different cate gories of assets based on an assessment of fair value as of the acquisition date. In conjunction with that, management determines the amounts for such things as the identifiable intangible assets like customer relations and brands. During this process, management makes estimates and assumptions about such things as the acquired businesses' future cash generation ability, useful lives of identified intangible assets and discount rates.	Our audit procedures to assess the accounting of the acquisitions have included the following. • We have read the sales and purchase agreements in order to understand the important terms and conditions, along with their impact on the acquisition analyses. • As regards the portion of the purchase sum for eWON settled through own shares, we have reviewed whether the established fair value of the Parent Company's shares correspond to the actual share price on the date of transaction. • We have enlisted the services of PwC's own valuation experts to, independently evaluate the models and assumptions used by management to identify and value intangible assets. • We have assessed the applied useful lives of identified, separable intangible assets to determine whether they are consistent with our understanding of the assets' useful lives and the Group's accounting policies. • We have assessed whether there are any differences between the Group's accounting policies and the accounting policies used by the acquired companies, along with the impact this has had on the acquisition analyses. Finally, we have assessed the accuracy of disclosures that the Group has provided in Note 34 about

AUDIT REPORT AUDIT REPORT

Other information besides what is shown in the financial statements and consolidated financial statements

This document contains other information besides the financial statements and consolidated financial statements and it is found on pages 1-31 and 86-89. The Board and the CEO are responsible for this other information.

Our opinion on the financial statements and consolidated financial statements does not include this other information, and we make no statement of assurance regarding this other information.

In connection with our audit of the financial statements, it is our responsibility to read the information identified above and consider whether the information is substantially incompatible with the financial statements and consolidated financial statements. During this review, we also take into account knowledge we obtained during the audit and we assess whether the information in general seems to contain material misstatements.

If, based on the work that has been conducted on this information, we conclude that the other information contains a material misstatement, we are obliged to report it. We have nothing to report in that regard.

The Board of Directors' and CEO's responsibilities

The Board and the CEO are responsible for preparing financial statements and consolidated financial statements that provided a true and fair view in accordance with the Annual Accounts Act and with regard to the consolidated financial statements in accordance with IFRS as adopted by the EU. The Board of Directors and CEO are also responsible for any internal control they deem necessary for preparing financial statements and consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements the Board and CEO are responsible for assessing the ability of the Company and Group to continue operations. They must disclose, when applicable, any circumstances that may affect the ability to continue operations and apply the assumption of continued operations. However, the assumption of continued operations is not applied if the Board and CEO intend to liquidate the company, cease operations, or if they have no realistic alternatives than either of these two options.

The Audit Committee must monitor the company's financial reporting without it impacting the Board's responsibilities and tasks in general.

Auditor's responsibility

Our goal is to achieve a reasonable degree of assurance about

whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to submit an audit report containing our opinions. Reasonable assurance is a high degree of assurance. However, it does not guarantee that an audit performed in accordance with ISA and generally accepted auditing standards in Sweden will always detect a material misstatement if one exists. Errors may occur due to fraud or error, and they are deemed material if, individually or together they can reasonably be expected to influence the economic decisions that users make based on the financial statements and consolidated financial statements.

A more detailed description (in Swedish) of our responsibility for the audit of the financial statements and consolidated financial statements is available on the website of the Supervisory Board of Public Accountants: www.revisorsinspektionen.se/rn/showdocument/documents/rev_dok/revisors_ansvar.pdf. This description is a part of the audit report.

Report on other requirements in accordance with legislation and other regulations

Opinion

In addition to our audit of the financial statements and consolidated financial statements, we have performed an audit of the Board's and Managing Director's administration of HMS Networks AB (publ) for the year 2016 and the proposed appropriation of the profit or loss.

We recommend to the general meeting of shareholders 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.

Basis for opinion

We conducted our audit in accordance with generally accepted auditing standards in Sweden. Our responsibility in accordance with this is described in the section, Auditor's responsibility. We are independent of the Company and the Group in accordance with the auditor's oath in Sweden and have otherwise fulfilled our ethical responsibilities under these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate as a basis for our opinion.

The Board of Directors' and CEO's responsibilities

The Board of Directors is responsible for the proposed appropriation of the company's profit or loss. With proposal of a dividend, this includes an assessment of whether the dividend is justifiable considering the demands that the nature of operations, scope and risks place on the size of the Parent Company's and Group's equity, consolidation requirements, liquidity and position in general.

The Board is responsible for the company's organization and management of its affairs. This includes, for example, assessment of the company's and Group's financial situation on an ongoing basis and ensuring that the company is organized such that there are adequate controls on its bookkeeping, fund management and other financial matters. The CEO is responsible for ongoing management that is in accordance with the Board's guidelines and instructions, including taking the actions necessary to ensure that the company's accounting complies with law and that assets are managed in a satisfactory manner.

Auditor's responsibility

Our goal regarding the audit of the administration, and therefore our opinion, is to obtain audit evidence that with a reasonable degree of certainty enables us to determine whether any Board member or the CEO in any material respect: has undertaken any action or been guilty of any omission, which could give rise to liability to the Company, or in any other way acted in contravention of the Swedish Companies Act or the Articles of Association.

Our goal regarding the audit of the proposed appropriation of the profit or loss, and thus our statement on this, is to, with a reasonable degree of certainty, assess whether the proposal is consistent with the Swedish Companies Act.

Reasonable certainty is a high degree of certainty, but no guarantee that an audit performed in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that could give rise to a liability to the Company or that a proposal for the appropriation of the profit or loss is not consistent with the Swedish Companies Act.

A more detailed description (in Swedish) of our responsibility for the audit of administration is available on the website of the Supervisory Board of Public Accountants: www.revisorsinspektionen.se/ rn/showdocument/documents/rev_dok/revisors_ansvar.pdf. This description is a part of the audit report.

Halmstad, 24 March 2017 Öhrlings PricewaterhouseCoopers AB

Fredrik Göransson Authorized Public Accountant

			INTRO HMS STOCK MARKET OUR BUSINESS PRODUCTS SUSTAINABILITY CORPORATE GOVERNANCE GLOSSARY FINANCIAL NOTICE OF AGM		CONTENTS SEARCH
			Directors' report • Financial statements • Notes • Board's affirmation • Audit report • Multi-year overview • Contents

MULTI-YEAR OVERVIEW

Financial data in summary (SEK m)	2016	2015	2014	2013	2012
Net sales	952	702	589	501	382
Growth in net sales, %	36	19	18	31	-0.5
Gross profit	581	430	367	314	229
Gross margin, %	61	61	62	63	60
Operating income before depreciation (EBITDA)	188	136	126	105	75
Operating margin before depreciation (EBITDA), %	20	19	21	21	20
Operating income after depreciation/amortization (EBIT)	149	102	98	87	64
Operating margin after depreciation/amortization (EBIT), %	16	15	17	17	17
Profit for the period	100	60	63	63	52
Order intake	966	682	611	516	424
Earnings per share, basic, SEK	8.63	5.33	5.59	5.56	4.64
Earnings per share, diluted, SEK	8.59	5.31	5.58	5.55	4.64
Dividend per share, SEK*	4.00	2.50	2.50	2.25	2.25
Total assets	1,406	830	832	771	418
Equity	636	455	423	378	342
Equity per share, SEK	55	40	37	33	30
Equity/assets ratio, %	45	55	51	49	82
Net debt/equity ratio %	66	39	54	65	-9
Return on shareholders' equity, %	18	14	16	17	16
Return on capital employed, %	17	15	15	18	20
Investments in non-current assets	36	25	38	57	42
Cash flow from operating activities	155	90	93	89	83
Cash flow from operating activities per share, SEK	13.32	7.97	8.26	7.93	7.38
Average number of employees	467	362	352	338	241
Sales per employee	2.0	1.9	1.7	1.5	1.6

* Board's proposal

HMS NETWORKS ANNUAL REPORT 2016 87

Welcome to the AGM • Shareholders information

Welcome to the AGM

The shareholders of HMS Networks AB (publ) are hereby invited to the Annual General Meeting, which will be held at 10.30 a.m on Thursday 26 April 2017 at HMS headquarters, Stationsgatan 37, Halmstad. Registration for the Annual General Meeting will begin at 9.30 AM.

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 Thursday 20 April 2017 and give notice of their intention to participate at the Meeting to the Company no later than Thursday 20 April 2017.

Registration must be communicated in one of the following ways: by phone: +46 (0)35-17 29 00, in writing: HMS Industrial Networks AB, c/o Computershare AB, Box 610, 182 16 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 done at Euroclear Sweden no later than Thursday 20 April 2017, which means that shareholders must notify their intentions on this matter to the nominee well in advance of the stated date.

Halmstad, March 2017 HMS Networks AB (publ) The Board of Directors

FINANCIAL CALENDAR
April 25, 2017	Q1 Report 2017
April 26, 2017	Annual General Meeting
July 20, 2017	Q2 Report 2017
Oktober 27, 2017	Q3 Report 2017
February, 2018	Year-end report 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 ir@hms.se.

Follow HMS – www.hms-networks.com

https://www.facebook.com/HMSIndustrialNetworks/ https://twitter.com/hmsnetworks

https://www.linkedin.com/company/ hms-industrial-networks

https://www.youtube.com/user/ HMSIndustrialNetwork

World-leading experts in industrial communication

We provide reliable solutions for connecting equipment like robots, control systems, motors and sensors to all industrial networks.

Our products and expertise help customers reach a larger market and connect equipment regardless of the network environment. It makes our technology attractive to system integrators and manufacturers of industrial equipment seeking to be active on a global market.

Our vast experience, large installed base and broad market coverage makes us the clear market leader in our fi eld.

Get connected!

Box 4126, 300 04 Halmstad Phone: +46 35 17 29 00 info@hms.se, www.hms.se

hms networks GRI APPENDIX 2016

Information, methods and assumptions used for sustainability information presented in the annual report

New Reporting Format

HMS sustainability report 2016 is in accordance with Global Reporting Initiative. The report has been prepared in accordance with G4 Core, and will be presented annually as a part of the annual report. No third party has audited the sustainability report and HMS will evaluate the need for external assurance.

GRI INDEX

The following list references the GRI disclosures that HMS report on.

AR = Annual report; GRI = GRI Appendix

GENERAL STANDARD DISCLOSURES REFERENCE		GENERAL STANDARD DISCLOSURES		REFERENCE
G4-1	CEO's statement on the organisation's sustainability strategy	AR, p. 2-3	G4-19	Material aspects of sustainability identified	GRI, p. 4
G4-3	Name of the organisation	AR, p. 4	G4-20	Aspect boundaries within the organisation	GRI, p. 3-4
G4-4	Primary products and services	AR, p. 14-23	G4-21	Aspect boundaries outside the organisation	GRI, p. 3-4
G4-5	Location of organisation's headquarters	AR, p. 13	G4-22	Restatements of information	GRI, p. 2
G4-6	Countries where operations are conducted	AR, p. 12-13	G4-23	Significant changes from previous reports	GRI, p. 2
G4-7	Nature of ownership and legal form	AR, p. 4-5	G4-24	Stakeholder groups with whom the organisation is engaged	GRI, p. 3
G4-8	Markets served, where the organisation is active	AR, p. 8-15	G4-25	Basis for identification and selection of stakeholders	GRI, p. 3
G4-9	Size of the organisation	AR, p. 1, 5, 12	G4-26	Approaches to stakeholder engagement	GRI, p. 3
G4-10	Total number of employees	GRI, p. 5	G4-27	Topics and concerns raised through stakeholder engagement	GRI, p. 3
G4-11	Employees covered by collective bargaining agreements	GRI, p. 5	G4-28	Reporting period	GRI, p. 2
G4-12	Describe the organisation's supply chain	AR, p. 11, 30-31, 49	G4-29	Date of publication of most recent report	GRI, p. 2
G4-13	Significant changes during the reporting period	AR, p. 1	G4-30	Reporting cycle	GRI, p. 2
G4-14	Organisation's compliance with the precautionary principle	GRI, p. 4	G4-31	Contact person for questions regarding the report	GRI, p. 5
G4-15	External initiatives that the organisation subscribes or endorses	None	G4-32	Reporting level and GRI Index	GRI, p. 2
G4-16	Memberships of associations	GRI, p. 5	G4-33	External audit	GRI, p. 2
G4-17	Entities included in the scope of the report	GRI, p. 3	G4-34	Governance structure for the company	AR, p. 33-41
G4-18	Process for defining report content	GRI, p. 3-4	G4-56	The organisation's values, codes of conduct etc.	AR, p. 26-27

SPECIFIC STANDARD DISCLOSURES REFERENCE
DMA	Indirect economic impacts	AR, p. 28-29
G4-EC8	Significant indirect economic impacts	AR, p. 28-29
DMA	Energy	AR, p. 28-29
G4-EN3	Organisation's energy consumption	AR, p. 28 and GRI, p. 4
G4-EN5	Energy intensity	AR, p. 28
DMA	Emissions	AR, p. 28-29 and GRI, p. 4
G4-EN15	Direct greenhouse gas emissions	AR, p. 28 and GRI, p. 4
G4-EN16	Energy indirect greenhouse gas emissions	AR, p. 28 and GRI, p. 4
G4-EN17	Other indirect greenhouse gas emissions	AR, p. 28 and GRI, p. 4
G4-EN18	Greenhouse gas emissions intensity	AR, p. 28
DMA	Effluents and waste	AR, p. 29 and GRI, p. 4
G4-EN23	Total weight of waste by type and disposal method	GRI, p. 4
DMA	Products and services	AR, p. 28-29
G4-EN27	Extent of mitigation environmental	AR, p. 28-29
	impacts of products and services
DMA	Customer privacy	AR, p. 30
G4-PR8	Complaints regarding customer privacy	AR, p. 30
	and customer data
DMA	Training and education	AR, p. 26-27
G4-LA9	Average hours of training	GRI, p. 3
G4-LA11	Performance reviews	GRI, p. 5
DMA	Anti-corruption	AR, p. 30-31
G4-SO4	Communication and training on anti-corruption	AR, p. 30-31
DMA	Supplier human rights assessment	AR, p. 31 and GRI, p. 3
G4-HR10	New suppliers that were screened using	AR, p. 31 and GRI, p. 3
	human rights criteria

SUSTAINABILITY

BOUNDARIES AND OMISSIONS

All our material sustainability aspects impact our business operations. Some of the aspects have an impact beyond HMS organisational boundaries, such as supplier assessment. In the sustainability report, the impact of each sustainability aspect, both within and outside the company are described. This is the first year of reporting in accordance with GRI and the systems for measuring all indicators are not completely developed. Our aim is to include the data for G4-LA9 and G4-HR10 within the next three years.

STAKEHOLDER DIALOGUE

In 2016, HMS conducted a number of interviews and surveys with stakeholders. The aim was to identify the sustainability aspects that our customers, employees, investors and owners consider most important. The process started with a first prioritization of sustainability aspects by HMS Corporate Management Team. The importance of the topics was then confirmed through dialogues with stakeholders. HMS conducted an employee survey and in-depth interviews with owner representatives. We have continuous contact with all our stakeholders during the year and their inputs are valuable for HMS future development.

KEY STAKEHOLDERS FORUM FOR DIALOGUE KEY ISSUES AND CONCERNS

Owners/investors	Regular contact and meetings.	Risk management Transparency.
Employees	Continuing dialogue, surveys	Environmental impact from prod
	and performance reviews.	ucts and services. Professional
		development. Transports of
		goods and Energy efficiency.
		Supplier Human Rights follow-up.
Customers	Continuing dialogue	Product compliance with
	and questionnaires.	environmental EU laws. Conflict
		Minerals Reporting. Transparency.
Suppliers	Regular contact and	Clear expectations.
	procurement requirements.
	On site audits.

The table shows HMS key stakeholders and the forum for dialogue.

MATERIALITY ANALYSIS

The materiality analysis is based on HMS strategy and the stakeholder dialogue. The material sustainability aspects identified are environmental impacts of products and services, energy consumption, emissions, electronic waste, anti-corruption, customer privacy, indirect economic impact, employee education and supplier assessment of human rights.

HMS MATERIAL SUSTAINABILITY ASPECTS

Economic	The increased productivity and indirect economic impacts from the use of HMS products
Environmental	Energy consumption, emissions, electronic waste and reduced environmental impact
Social	Employee education, supplier assessments, anti-corruption and customer privacy

ENVIRONMENT

HMS work continuously to reduce our internal environmental impact and we take the precautionary principle into account. One of our material aspects are electronic waste and the table below show the amount of electronic waste that has been recycled during 2015 and 2016. The recycled electronic waste increased by 17 percent.

Recycling of electronic waste	2016	2015
Electronic waste (ton)	2,14	1,82

In 2016, the energy consumption from HMS three business units was 2 410 MWh and the share of renewable energy was 94 percent. Energy consumption is reported in MWh. To convert energy consumption from MWh to GJ, use the conversion factor of 3.6. Greenhouse gas emissions from HMS three business units are divided in three scopes according to Greenhouse Gas Protocol. Direct emissions in Scope 1 includes fuel for vehicles used for business purposes. The indirect energy consumption in Scope 2 is from electricity, district heating and cooling. Scope 3 includes inbound transportation of material to Sweden (made on own account). The emissions have been calculated in the carbon footprint module of the CEMAsys tool. The CEMAsys carbon footprint module is based on the international standard Greenhouse Gas Protocol Initiative (The GHG Protocol) and includes a database covering worldwide emission factors.

SCOPE	ACTIVITY
Scope 1	Fuel from travel in company vehicles
Scope 2	Electricity
	District heating
	District cooling
Scope 3	Transportation of materials or products

MEMBERSHIPS IN ORGANIZATIONS

HMS are members of a number of associations to create understanding and to drive innovation and business development. The memberships defined as strategic are listed here.

MEMBERSHIPS

• Association for High Technology Distribution
• CLPA CC-Link Partner Association
• Control System Integrators Association
• ETG EtherCAT Technology group
• ODVA (Employee from HMS holds the position as Chairman and has an officer position)
• PI Profibus International
• Rockwell Automation Global Encompass Partner
• Schneider Electric CAPP Collaborative Automation Partner Program
• VDMA (organization of machine manufacturers and plant builders)

SOCIAL

The table presents the total number of employees per employment contract per 31/12.

TOTAL NUMBER OF EMPLOYEES	2016
Number of permanent employees	495
- Full time	454
- Part time	41
Number of temporary employees	8
Total number of employees	503

All employees have the right to join a trade union, 44 percent of the employees were covered by collective bargaining agreeements in the end of 2016. The share of employees receiving performance reviews during 2016 was 96 percent.

Percentage employees receiving performance reviews	2016
Share of all employees	96%

CONTACT

For questions regarding our sustainability report, contact Katarina Lekander, Quality and Sustainability Manager, kal@hms.se.