Sectra — Interim / Quarterly Report 2018

Dec 7, 2018

Interim report for the May–October 2018 period:

Stronger cash flow and increased order bookings in the US

Sectra is growing in the medical IT and cybersecurity markets through collaboration with new and existing customers. Future ventures in new markets and new product areas are having a dampening effect on earnings but are expected to make a positive contribution to long-term growth.

REPORT PRESENTATION

with President Torbjörn Kronander and CFO Mats Franzén. The presentation will be held in English.

Time: December 7, 2018 at 10:00 a.m.

Follow online via:

www.sectra.com/irwebcast

More information on page 13.

THE PERIOD AND THE QUARTER IN BRIEF

Figures in parentheses pertain to the corresponding period/quarter in the preceding year.

Six-month period, May–October 2018

• Order bookings amounted to SEK 637.2 million (654.4).
• Net sales increased 9.5% to SEK 633.4 million (578.5). Adjusted for currency fluctuations, sales increased 4.6%.
• Operating profit totaled SEK 94.7 million (104.1), corresponding to an operating margin of 14.9% (18.0). Adjusted for currency fluctuations, operating profit decreased 17.1%.
• Profit before tax rose 7.3% to SEK 97.3 million (90.7).
• Cash flow after changes in working capital amounted to SEK 97.7 million (74.7).

Second quarter, August–October 2018

• Order bookings amounted to SEK 350.7 million (426.8). Of the order bookings during the quarter, an estimated 60–70% pertains to invoicing within 12 months after the end of the quarter.
• Net sales increased 4.5% to SEK 327.4 million (313.4). Adjusted for currency fluctuations, sales decreased 0.7%.
• Operating profit totaled SEK 48.4 million (59.8), corresponding to an operating margin of 14.8% (19.1). Adjusted for currency fluctuations, operating profit decreased 27.7%.
• Profit before tax amounted to SEK 54.5 million (61.9).
• Cash flow after changes in working capital amounted to SEK 78.3 million (50.4).

		The quarter			The period			12 months
SEK million	Q2	Q2	Change	Q1–2	Q1–2	Change	Rolling 12	Full-year	Change
	18/19	17/18	%	18/19	17/18	%	months	17/18	%
Order bookings	350.7	426.8	-17.8	637.2	654.4	-2.6	1,475.3	1,492.5	-1.2
Net sales	327.4	313.4	4.5	633.4	578.5	9.5	1,321.4	1,266.5	4.3
Operating profit (EBIT)	48.4	59.8	-19.1	94.7	104.1	-9.0	229.7	239.1	-3.9
Operating margin, %	14.8	19.1	n/a	14.9	18.0	n/a	17.4	18.9	n/a
Profit before tax (EBT)	54.5	61.9	-12.0	97.3	90.7	7.3	255.9	249.3	2.6
Profit margin, %	16.6	19.8	n/a	15.4	15.7	n/a	19.4	19.7	n/a
Profit after tax	43.2	49.8	-13.3	76.5	72.3	5.8	202.5	198.3	2.1
Earnings per share, SEK 1	1.13	1.31	-13.7	2.01	1.91	5.2	5.31	5.22	1.7
Cash flow 2	78.3	50.4	55.4	97.7	74.7	30.8	245.7	222.7	10.3
Cash flow per share 2	2.05	1.33	54.1	2.56	1.97	29.9	6.45	5.84	10.4
Average no. of employees	696	640	8.8	688	640	7.5	669	645	3.7
1

Prior to dilution. ²Cash flow from operations after changes in working capital.

This information constitutes information that Sectra AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation and/or the Swedish Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out below, at 8:15 a.m. CET on December 7, 2018.

Sectra AB (publ), www.sectra.com, Corporate Registration Number 556064-8304, email info@sectra.com

CEO'S COMMENTS

The order volume in the second quarter was favorable, but as expected did not reach the exceptional level reported in the corresponding quarter in the preceding year. The US operation doubled its order bookings and accounted for the largest increase during the period.

Many of the new customer contracts in Imaging IT Solutions pertain to solutions for consolidating medical diagnostic imaging across geographically dispersed enterprises. We offer outstanding products, but our main strength is nevertheless our customers' experiences of our employees and corporate culture. It therefore feels particularly gratifying to meet new customers who openly and spontaneously tell other healthcare providers about how the actions of our employees set us apart, which is exactly what I experienced at an international conference a few weeks ago.

The trend for Secure Communications is positive. Among other developments, we have been entrusted to deliver our secure mobile phone Sectra Tiger/S to NATO. The operating area's operating profit was burdened by long-term investments in the area of critical infrastructure and in the expansion of secure mobile communications—activities that are expected to continue generating favorable growth for a long time to come.

The order book is healthy. All operating areas and geographic markets reported an increase in sales for the six-month period. Although the second quarter was slightly weaker than the comparative quarter, we are used to relatively large fluctuations between quarters and are well above our financial goals for the most recent 12-month period.

A winning strategy

At the end of November, Sectra participated in the Annual Meeting of the Radiology Society of North America (RSNA), one of the world's largest radiology trade fairs held annually in Chicago. Radiology has experienced a significant increase in workload in recent years, without an equivalent increase in terms of resources in the field. This increase is due to a continuously growing need for complex diagnostics and monitoring, not least in the field of cancer care, where most survivors become lifelong patients who are monitored to ensure the cancer does not return. Another prevalent trend is the consolidation of the healthcare sector, with geographically dispersed hospitals and healthcare units being merged. This trend is driving IT development toward scalable systems that do not need to be replaced, which is one of Sectra's specialties.

RSNA devoted considerable focus to productivity in healthcare and artificial intelligence (AI). The latter is an area that is currently exploding in the field of medicine and where Sectra holds a strong position. We presented solutions that save time for our customers and support cancer diagnostics and monitoring as well as diagnosis of diseases affecting the elderly. Many visitors were also interested in our open platform for integrating AI applications from Sectra and other companies. Based on the response we have received from users and potential customers, I am convinced we are on the right track with our strategy for both our services and the product area—solutions that can handle all types of medical images, with a primary focus on cancer diagnostics.

We also took the opportunity to highlight Sectra's work related to the IT security of our medical products. We are seeing growing synergies between our two niche areas as cybercrime is also becoming an increasingly serious threat in the healthcare sector. Hospitals have become targets for organized cyberattacks, and the US Department for Homeland Security recently drew attention to the serious vulnerabilities of medical imaging systems (PACS) of several other established suppliers. Sectra possesses unique expertise in computer security and has extensive experience of protecting information at the highest security levels both nationally and internationally. We also leverage this know-how when designing, implementing and, in particular, selling our medical IT solutions.

Outlook

Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies like Sectra. With stable underlying operations with favorable profitability and long-term customer contracts, we have laid a solid foundation for growth. We have secured orders through important procurements in the US, where we are now experiencing our fastest growth in order bookings. These successes have provided us with favorable conditions for sustained growth in the US market. We also have a number of exciting projects in the pipeline and new geographic markets that could eventually become significant, although, as always, there are no guarantees with such initiatives.

Our high customer satisfaction, our fantastic employees—who make a difference in society and for their fellow human beings—and our exciting future initiatives will serve as the basis for our long-term success. I am therefore optimistic when it comes to our ability to continue this positive trend going forward.

Torbjörn Kronander, President and CEO

Diagrams

Unless otherwise stated, bars show the outcome per quarter, lines show the outcome for the rolling 12-month period and amounts are restated in SEK million.

EVENTS

Second quarter

• Sales success for Sectra's enterprise imaging systems in the US. Sectra announced that the prominent university hospital Stanford Health Care and Lucile Packard Children's Hospital had selected Sectra as their supplier. Multiyear agreements were signed with various healthcare providers, including Kettering Health Network in Ohio, Regional Health in South Dakota and Deaconess Health System, which cares for patients in Indiana, Kentucky and Illinois.
• Sectra's medical IT operations received "Cyber Essentials" national cybersecurity certification in the UK.
• Announcement of NATO order for the encrypted mobile phone Sectra Tiger/S 7401 for communication of classified information.
• The Annual General Meeting (AGM) resolved to elect Jan-Olof Brüer as the new Chairman of the Board and Birgitta Hagenfeldt as a new Board member.
• Sectra implemented a share redemption program through the distribution of SEK 4.50 per share, totaling SEK 171.5 million.

After the end of the reporting period

• Sectra provides Northern Pathology Imaging Co-operative (NPIC), a major UK research project in cancer diagnostics, with a vendor-neutral platform for AI.
• Sectra initiated a partnership in South Korea, signing a distribution agreement for digital pathology with HuminTec.

Over 100 shareholders took part in the 2018 AGM. Employees welcomed the shareholders with musical entertainment. After the AGM, an open house was held at the head office in Linköping, where shareholders enjoyed light refreshments and a demonstration of Sectra's products for a healthier and safer society.

FINANCIAL GOALS

All of the financial goals have been achieved. Goals in order of priority:

4 (23)

SECTRA'S MARKETS

Sectra plays a key role in meeting the needs in the areas of medical imaging IT and cybersecurity, two changing, growing markets with additional scope for expansion. The combination of medical IT and information security operations in the same Group makes the company unique.

Sectra's customers operate in some of society's most critical functions. The company's job is to help its customers become more efficient and give them the tools to—in turn—make people's lives healthier, safer and more secure. By following Sectra's vision, this is how the company creates value for its customers, shareholders and society as a whole.

IT support for more efficient care and medical education

Today's demographic development and increased survival rates among cancer patients are putting pressure on healthcare. To maintain a high quality of care, the healthcare sector is being forced to accomplish more with the same or fewer resources. The growing population of senior citizens is shining a spotlight on diseases affecting the elderly. The treatment of patients with cancer and skeletal diseases—some of the most costly and resource-intensive areas in the healthcare sector—entails enormous challenges. These areas are dependent on medical diagnostic imaging—a niche market in which healthcare providers across the globe use Sectra's expertise and solutions to increase productivity, improve the quality of care and coordinate their resources. Sectra also helps to raise the quality of medical education by providing solutions for interacting with medical images and sharing educational materials. Sectra's work enables hospitals across the world to become more productive, and thus take care of more patients and save more lives. This work is carried out in the Imaging IT Solutions and Business Innovation operating areas.

IT solutions for a more stable and safer society

The ability to safely and efficiently handle and transmit sensitive information is central to the stability and security of society, particularly when it comes to important social functions and critical infrastructure. The players in these areas rely on products and services that increase cybersecurity—a niche market where Sectra has extensive experience of protecting society's most critical communications, and is a strong brand in the area of encryption and secure mobile communications. IT developments in society, political instability in the world, and the growth of cybercrime are creating a greater need for Sectra's expertise and product offerings. Sectra helps customers to provide increased security for society's most critical communication and control systems, thereby contributing to a more stable and safer society. This work is carried out in the Secure Communications operating area.

Read more about the Group's markets, financial position and focus activities in Sectra's 2017/2018 Annual Report: www.sectra.com/annual_report

COMMENTS ON THE GROUP'S FINANCIAL OUTCOME FOR THE PERIOD AND THE QUARTER

Order bookings and net sales

Order bookings for the six-month period amounted to SEK 637.2 million, of which SEK 350.7 million pertained to the second quarter. The outcome was affected by lower order bookings in Imaging IT Solutions' operations in the Netherlands and Secure Communications compared with the corresponding quarter in the preceding year. However, significant variations between individual quarters are common in all business areas. In the US—where Sectra so far has a low market share but the highest customer satisfaction in the market—the company is devoting particular focus to growth. After several successful procurements in the US recently, Sectra has doubled its order bookings in the market compared with the year-earlier period.

Net sales rose 9.5% to SEK 633.4 million, of which SEK 327.4 million pertained to the second quarter. More than 70% of Sectra's net sales are carried out in foreign currency, primarily EUR, USD and GBP. Adjusted for currency fluctuations (refer to page 16), sales increased 4.6% year-on-year.

Sales per operating area and geographic markets

All operating segments and geographic areas reported increased sales compared with the year-earlier period. Geographically, Sectra reported its most significant relative increase in Rest of Europe and Rest of World, but it should be noted that individual transactions can be substantial and therefore result in major variations between quarters. Salesrelated Group eliminations amounted to a negative SEK 80.2 million (neg: 88.3). Eliminations primarily pertained to ongoing internal sales and Group-financed managed-services agreements with customers. At the Group level, sales from these managed-services agreements will be recognized as revenue over the duration of the agreements, which is normally between five and ten years.

Sales trend per operating area

Compared with the corresponding period in the preceding fiscal year

Sales trend per geographic market

Compared with the corresponding period in the preceding fiscal year

Earnings

The Group's operating profit amounted to SEK 94.7 million, of which SEK 48.4 million pertained to the second quarter. This corresponds to an operating margin of 14.9% (18.0) for the six-month period and 14.8% (19.1) for the second quarter. Adjusted for currency fluctuations, operating profit decreased 17.1% during the period. Operating expenses increased 14.0% during the period, mainly due to higher personnel and consulting costs as a result of intensified growth initiatives in new and existing product areas and in Other Operations. The net change in eliminations related to operating profit amounted to SEK 14.3 million (26.0) and was partly attributable to Group-financed managed-services agreements.

The Group's net financial items increased SEK 16.0 million from an expense of SEK 13.4 million to income of SEK 2.6 million, of which SEK 6.1 million (2.1) pertained to the second quarter. Currency fluctuations (refer to page 16) had an impact of SEK 1.8 million (neg: 12.6) on the Group's financial items. Sectra does not hedge its operations, and currency fluctuations therefore have an immediate impact.

Profit for the period after net financial items increased 7.3% to SEK 97.3 million, of which SEK 54.5 million pertained to the second quarter. This outcome corresponds to a profit margin of 15.4% for the period and 16.6% for the quarter. Earnings per share totaled SEK 2.01 (1.91) for the period, of which SEK 1.13 (1.31) pertained to the second quarter.

Financial position and cash flow

After adjustment for exchange-rate differences, the Group's cash and cash equivalents at the end of the reporting period amounted to SEK 190.6 million (150.0). During the second quarter, Sectra distributed SEK 171.5 million (170.8) to its shareholders through a share redemption program.

The Group's debt/equity ratio was 0.12 (0.17) as of the balance-sheet date. Interest-bearing liabilities amounted to SEK 57.5 million (75.1) and pertained to convertible loans held by employees and Board members.

Cash flow from operations after changes in working capital amounted to SEK 97.7 million (74.7) for the period. This increase was mainly attributable to a decrease in capital tied up in accounts receivable. Cash flow per share amounted to SEK 2.56 (1.97) for the period, of which SEK 2.05 (1.33) pertained to the second quarter.

Cash flow from investing activities amounted to a negative SEK 13.9 million (neg: 21.1) for the period. These investments mainly pertained to assets in development projects.

The Group's total cash flow was a negative SEK 87.3 million (neg: 118.6). These figures include the share redemption program for shareholders. Excluding the share redemption program, total cash flow increased to SEK 84.2 million (52.2).

Investments and depreciation/amortization

Group investments during the period amounted to SEK 13.9 million (21.1), of which SEK 9.0 million (10.5) was attributable to the second quarter. Investments mainly pertained to capitalized development costs. Depreciation/amortization for the period totaled SEK 33.5 million (30.9), of which the second quarter accounted for SEK 16.7 million (16.1).

Hardware-related investments in Group-financed customer projects during the period amounted to SEK 2.6 million (0.4), of which SEK 2.3 million pertained to the second quarter. At the end of the period, the net carrying amount for Group-financed customer projects totaled SEK 88.4 million (140.5).

Capitalization of development costs during the period amounted to SEK 11.0 million (9.5), of which SEK 6.3 million (5.6) was attributable to the second quarter. Amortization of capitalized development projects during the period totaled SEK 12.5 million (9.7), of which SEK 6.7 million (5.6) pertained to the second quarter. At the end of the period, capitalized development costs amounted to SEK 103.1 million (97.8).

Capitalized development costs

Sectra maintains a high pace of innovation and continuously invests in new and ongoing development. Development takes place in close dialogue with customers.

10–15 %

of consolidated sales are invested in research and development every year.

Seasonal variations

Sectra's seasonal variations entail that most of the company's invoicing and earnings have traditionally been generated at the end of the fiscal year. For the Group as a whole, these seasonal variations have diminished in recent years since a major portion of sales is derived from pay-per-use or pay-by-month agreements with long durations. In many cases, however, the equalization effect does not impact the individual operating areas where the completion of major customer projects can still have a significant impact on the outcome for the individual quarter. The variation in order volumes in individual quarters can also be substantial when customers sign major multiyear agreements with the company, for example, for medical IT projects or encryption systems.

IMAGING IT SOLUTIONS

		The quarter			The period			12 months
	Q2	Q2	Change	Q1–2	Q1–2	Change	Rolling 12	Full-year	Change
	18/19	17/18	%	18/19	17/18	%	months	17/18	%
Sales, SEK million	264.7	250.9	5.5	518.0	484.7	6.9	1,065.7	1,032.3	3.2
Operating profit, SEK million	52.2	48.0	8.8	100.6	87.0	15.6	232.8	219.2	6.2
Operating margin, %	19.7	19.1	n/a	19.4	17.9	n/a	21.8	21.2	n/a

Sales and earnings

An expanded customer base and continued confidence among existing customers contributed to the trend in terms of Imaging IT Solutions' sales and profitability. The largest increase in sales compared with the year-earlier period was reported by the operations in the Netherlands, where Sectra secured orders through a number of major procurements in the preceding fiscal year, as well as the operations in Scandinavia. Combined with a lower share of third-party products, increased sales contributed to a positive earnings trend and a higher operating margin.

The operating area is implementing long-term growth initiatives in new product areas, such as digital pathology and cardiology, and expanding into additional geographic markets through the establishment of its own operations and through new distributors. The operating area aims to reduce the amount of resold hardware wherever this is permitted by customers. This is resulting in lower sales but higher margins. Although these initiatives and activities are a burden on operating profit and, to a certain extent, are resulting in less sales, they are necessary to enable continued favorable growth going forward.

At the RSNA 2018 international radiology trade fair in Chicago, Sectra demonstrated how the company's solutions for enterprise imaging and cancer diagnostics can save valuable time and simplify the work of radiologists when it comes to diagnostics.

SECTRA CUSTOMER FINANCING

		The quarter			The period			12 months
	Q2	Q2	Change		Q1–2	Q1–2	Change	Rolling 12	Full-year	Change
	18/19	17/18	%		18/19	17/18	%	months	17/18	%
Sales, SEK million	34.4	34.5	-0.3		71.6	69.3	3.3	147.3	145.0	1.6
Operating profit, SEK million	1.7	1.0	70.0		2.6	1.7	52.9	5.8	4.9	18.4
Operating margin, %	4.9	2.9	n/a		3.6	2.5	n/a	3.9	3.4	n/a

Sectra Customer Financing is Sectra's unit for the financing of major managed-services agreements with healthcare customers and asset management.

Sales and earnings

The segment continued to report increased sales. However, adjusted for currency fluctuations, sales decreased 3.8% year-on-year. The majority of sales come from long-term customer contracts in the UK. Accordingly, the segment has a significant currency exposure to the GBP and the movement of the GBP in relation to the SEK has a major impact on the operating area's future revenue.

The growth of the area in recent years is linked to Imaging IT Solutions' successful sales of multiyear managed-services agreements for medical IT systems, particularly in the UK in 2014–2016. Financing of major managed-services agreements is usually handled by Sectra Customer Financing, which takes over projects after deployment and thereafter recognizes revenue and earnings over the duration of the managed-services agreement. Within Imaging IT Solutions, most of the revenue and expenses for managed-services agreements are recognized in conjunction with installation and deployment at the customer's site, which are then eliminated at the Group level. For more information, visit www.sectra.com/customerfinancing.

BUSINESS INNOVATION

		The quarter			The period			12 months
	Q2	Q2	Change	Q1–2	Q1–2	Change	Rolling 12	Full-year	Change
	18/19	17/18	%	18/19	17/18	%	months	17/18	%
Sales, SEK million	16.6	15.1	9.9	28.1	26.3	6.8	72.1	70.3	2.6
Operating profit/loss, SEK million	-3.9	-0.7	-457.1	-7.9	-2.8	-182.1	1.9	7.0	-72.9
Operating margin, %	-23.5	-4.6	n/a	-28.1	-10.6	n/a	-3.9	10.0	n/a

Business Innovation is Sectra's incubator for early-stage business units, projects and ideas that are not yet large enough to become independent operating areas and/or are not a natural match with the existing areas. Sectra also reports the costs for its long-term research activities in this area, which largely focus on initiatives in the field of AI for medical applications. Within Business Innovation, the company evaluates and utilizes opportunities to:

• Commercialize new technologies and new segments in the Group's core and related areas.
• Participate in research that can lead to a better quality of life for the individual as well as increased customer value and productivity in the healthcare sector.

The segment comprises the smaller Orthopaedics and Medical Education business units as well as the research department. Sectra's patent portfolio is also managed and developed within Business Innovation.

Sales and earnings

The performance of Business Innovation's two relatively small business units varies significantly between quarters and periods. Sectra is currently undergoing a generational shift in both Orthopaedics and Medical Education, which is impacting its financial results. Both business units have new products that have attracted considerable market attention, and new managers were appointed during the preceding fiscal year, who are now working to accelerate the development and launch of the new products. The company's products are increasingly being sold as a service. This means that an order initially generates lower sales, but the total sales from the service are spread over a longer period of time and provide greater stability for the future.

SECURE COMMUNICATIONS

	The quarter				The period			12 months
	Q2	Q2	Change	Q1–2	Q1–2	Change	Rolling 12	Full-year	Change
	18/19	17/18	%	18/19	17/18	%	months	17/18	%
Sales, SEK million	36.1	35.1	2.8	68.1	63.5	7.2	147.5	142.9	3.2
Operating profit, SEK million	0.3	0.2	50.0	0.2	0.4	-50.0	6.7	6.9	-2.9
Operating margin, %	0.8	0.6	n/a	0.3	0.6	n/a	4.5	4.8	n/a

Sales and earnings

Secure Communications is continuing to grow. The operating area's increase in sales was attributable to products and development assignments in the secure communications product area and to increased service sales in critical infrastructure. Operating profit was burdened by intensified growth initiatives in the critical infrastructure product segment and costs to further strengthen the offering in the secure communications segment and expand into additional geographic markets.

Operating profit

During the second quarter, the business area announced an order from NATO for the encrypted mobile phone Sectra Tiger/S 7401 (left in the image above). The product is part of Sectra's ecosystem of security-approved products for secure communications. The system also covers solutions for secure smartphone use and secure fixed telephony. The ecosystem enables secure communications between different security domains. This means that users can securely communicate with colleagues in NATO and the EU as well as in their respective national networks using a single phone, which is unique in the crypto industry.

OTHER OPERATIONS

		The quarter			The period				12 months
	Q2	Q2	Change		Q1–2	Q1–2	Change		Rolling 12	Full-year	Change
	18/19	17/18	%		18/19	17/18	%	months		17/18	%
Sales, SEK million	14.4	11.4	26.3		27.8	23.0	20.9		51.8	47.0	10.2
Operating loss, SEK million	-8.0	-6.0	33.3		-15.1	-8.2	84.1	-24.4		-17.5	39.4
Operating margin, %	-55.6	-52.6	n/a		-54.3	-35.7	n/a	-47.1		-37.2	n/a

Other Operations pertain to Sectra's joint functions for administration, recruitment, Group finances, IT, regulatory affairs, marketing communications and investor relations activities.

Sales and earnings

The outcome for Other Operations was charged with higher costs for consultants, which were largely temporary in nature.

PARENT COMPANY

The Parent Company, Sectra AB, includes the operating segments Business Innovation and Sectra Customer Financing as well as the head office's functions for Group finances, IT, regulatory affairs, marketing communications, and investor relations activities. The Parent Company's income statement and balance sheet are reported on page 18.

THE SHARE

2018 share redemption program and recalculation of conversion prices

During October 2018, Sectra carried out a share redemption program, whereby SEK 4.50 per share was distributed to the shareholders through a 2:1 share split, combined with a mandatory redemption process and a bonus issue to restore the share capital. The corresponding distribution to the shareholders in the preceding year was SEK 4.50 per share.

In your Swedish tax assessment, a redemption or sale of redemption shares (designated SECT IL A and SECT IL B) is to be declared as a sale of shares on Form K4. The calculation of the acquisition fees for redemption shares can be carried out in one of two ways:

• According to the general advice issued by the Swedish Tax Agency, which entails that you allot a certain portion of the relevant acquisition fees for the original shares to redemption shares.
• Alternatively, the standard rule can be applied if the transaction pertains to Class B redemption shares.

According to the general advice issued by the Swedish Tax Agency regarding the redemption program, 98.2% of the acquisition fees for an original Class A or Class B share in Sectra AB should be attributed to remaining shares and 1.8% to redemption shares of the respective class. For more information, visit www.sectra.com/redemption.

Due to the share redemption program for 2018, the Board decided to recalculate the conversion prices for outstanding convertible programs. This recalculation means that the financial compensation to the holders of convertibles in relation to the shareholders is reasonable. For dilution effects and current conversion prices after the recalculation, refer to the information on https://www.sectra.com/investor/sectra_share/share-based_incentive_programs.html.

Share-related incentive programs

On the balance-sheet date, Sectra's share capital totaled SEK 38,119,669, distributed between 38,119,669 shares. Of these shares, 2,620,692 are Class A shares and 35,498,977 are Class B shares.

The AGM, held on September 6, 2018, resolved to issue additional convertibles to the Group's employees and external Board members. The convertibles were subscribed during the period October 1–11, 2018. Employees were subsequently allocated 6,800 convertibles and external Board members were allocated 1,000 convertibles, corresponding to a total of 7,800 Class B shares at a combined nominal amount of SEK 3.0 million. The dilution effect of the two convertible programs is 0.02% of the share capital and 0.01% of the voting rights. The conversion price for convertibles to employees is SEK 376.80, and the duration is November 1, 2018–January 31, 2022. Conversion is possible during the period January 10– 14, 2022. The conversion price for convertibles to external Board members is SEK 388.90, and the duration is November 1, 2018–January 31, 2023. Conversion is possible during the period January 9–13, 2023. The low subscription volumes were attributable to a significant deterioration in subscription terms due to circumstances that are beyond the company's control. Accordingly, Sectra will initiate an investigation into how the company's incentive programs should be structured in the future.

As of the publication date of this report, on full exercise of outstanding convertibles, the number of Class B shares will increase by 411,239, corresponding to 1.1% of the share capital and 0.7% of the voting rights in the company.

Authorizations

The 2018 AGM authorized the Board, for the period until the next AGM, to decide on the new issue of not more than 3,700,000 Class B shares for consideration in the form of cash payment, offsetting of debt or contribution in kind whereby offsetting of debt and contribution in kind may deviate from shareholders' preferential rights. If the authorization is fully exercised, the dilution effect will be approximately 10% of the share capital and approximately 6% of the voting rights.

The AGM also resolved to authorize the Board, on one or more occasions, during the period until the next AGM, to make decisions on the acquisition and transfer of Class B treasury shares. A condition for the authorization is that the company's holding of treasury shares at no time exceeds 10% of all shares in the company.

At the time of publication of this interim report, the Board had not utilized these authorizations.

2019 AGM and Nomination Committee

The 2018 AGM resolved to appoint a Nomination Committee comprising four members, one of whom is the Chairman of the Board and three of whom represent the largest shareholders in the company based on the number of votes. The Nomination Committee was formed based on known shareholdings in the company on October 31, 2018. In accordance with the resolution of the AGM, the following Nomination Committee was appointed:

• Torbjörn Kronander (largest shareholder and CEO)
• Carl-Erik Ridderstråle (representing Jan-Olof Brüer, the second-largest shareholder)
• Jan Särlvik (representing Nordea Investment Funds, the fourth-largest shareholder)
• Jan-Olof Brüer (in his role as Chairman of the Board)

Carl-Erik Ridderstråle, who represents the company's second-largest shareholder in terms of votes, will be appointed Chairman of the Nomination Committee. Torbjörn Kronander, the company's largest shareholder in terms of votes, has decided to abstain from the chairmanship due to his role as CEO of Sectra AB.

The AGM is scheduled for September 5, 2019 in Linköping, Sweden. The Nomination Committee's proposals will be presented in the notice of the AGM and be available on the company's website not earlier than six weeks and not later than four weeks prior to the Meeting date.

The Nomination Committee will prepare and submit proposals regarding:

• election of and fees to the Chairman of the Board and other Board members, and fees for committee work
• election of and fees to the auditors and deputy auditors
• resolution on principles governing the composition of the Nomination Committee
• Chairman of the AGM

Shareholders who wish to submit proposals to the Nomination Committee may do so in writing by email: info.investor@sectra.se or by mail: Sectra AB, Attn. Nomination Committee, Teknikringen 20, SE-583 30 Linköping, Sweden.

RISKS AND UNCERTAINTIES

Through its operations, Sectra is exposed to such business risks as dependence on major customers and partners, the effect of exchange rates on pricing in the markets in which the Group is active, and property and liability risks. Sectra is also exposed to various types of financial risks such as currency, interest-rate, credit and liquidity risks. A detailed description of the risks

and uncertainties as well as Sectra's strategies and tactics for minimizing risk exposure and limiting adverse effects are provided in the Administration Report in the Group's Annual Report for the 2017/2018 fiscal year and in Note 30 on page 76. No significant events have occurred that would alter the conditions reported.

FOR FURTHER INFORMATION

Contact Sectra's CEO Torbjörn Kronander, telephone +46 13 23 52 27 or email info.investor@sectra.se.

Presentation of the interim report

A teleconference will be held by Torbjörn Kronander, President and CEO of Sectra AB, and Mats Franzén, CFO of Sectra AB. The presentation will be held in English.

Time: December 7, 2018 at 10:00 a.m. (CET).

To participate, call:

SE +46856642662

UK +442030089808

US +18557532236

The report presentation can also be followed live online: www.sectra.com/irwebcast. A recorded version will also be available via this link after the conference.

Financial calendar, Capital Markets Day and AGM

Capital Markets Day	January 17, 2019
Nine-month interim report	March 6, 2019 at 08:15 a.m. (CET)
Year-end report	May 28, 2019 at 08:15 a.m. (CET)
2019 AGM	September 5, 2019 at 3:30 p.m. (CET)

For other IR events, visit: http://www.sectra.com/investor/calendar/

ASSURANCE

The Board of Directors and the President of Sectra AB (publ) hereby assure that the interim report for the period May to October 2018 provides a true and fair view of the Parent Company's and Group's operations, financial position and earnings and describes the significant risks and uncertainties facing the Parent Company and other companies in the Group.

Linköping, December 7, 2018

Torbjörn Kronander Jan-Olof Brüer Christer Nilsson President, CEO and Board member Chairman Board member

Board member Board member Board member

Tomas Puusepp Deborah Capello Bengt Hellman Board member Board member, Board member, employee representative employee representative

Ulrika Hagdahl Anders Persson Birgitta Hagenfeldt

Review

This report was not reviewed by the company's auditor.

GROUP FINANCIAL SUMMARY

Consolidated income statements

SEK thousand	3 months	3 months	6 months	6 months	12 months	Full-year
	Aug–Oct	Aug–Oct	May–Oct	May–Oct	Nov 2017–	May–Apr
	2018	2017	2018	2017	Oct 2018	2017/2018
Net sales	327,360	313,407	633,428	578,527	1,321,397	1,266,496
Capitalized work for own use	6,340	5,561	10,965	9,460	29,733	28,228
Other operating income	1,516	514	2,051	1,372	4,385	3,706
Goods for resale	-46,451	-48,191	-88,330	-83,548	-192,565	-187,783
Personnel costs	-171,438	-146,170	-324,101	-278,638	-629,566	-584,103
Other external costs	-52,194	-49,203	-105,797	-92,199	-236,039	-222,441
Depreciation/amortization and	-16,741	-16,122	-33,552	-30,904	-67,647	-64,999
impairment
Operating profit	48,392	59,796	94,664	104,070	229,698	239,104
Net financial items	6,100	2,125	2,625	-13,374	26,166	10,167
Profit after net financial items	54,492	61,921	97,289	90,696	255,864	249,271
Taxes	-11,331	-12,083	-20,820	-18,356	-53,471	-51,007
Profit for the period	43,161	49,838	76,469	72,341	202,393	198,264
Profit for the period attributable to:
Parent Company owners	43,161	49,838	76,469	72,341	202,393	198,264
Non-controlling interest	0	0	0	0	0	0
		0
Earnings per share
Before dilution, SEK	1.13	1.31	2.01	1.91	5.31	5.22
After dilution, SEK	1.12	1.29	1.99	1.88	5.25	5.15
No. of shares
Before dilution	38,119,669	37,935,001	38,119,669	37,935,001	38,119,669	38,119,669
After dilution 1	38,515,550	38,499,137	38,515,550	38,499,137	38,515,550	38,515,550
Average, before dilution	38,119,669	37,935,001	38,119,669	37,927,515	38,108,531	38,012,454
Average, after dilution	38,515,550	38,499,137	38,515,550	38,499,137	38,514,310	38,506,104

1. Dilution of the number of shares is based on the convertible programs issued in 2014/2015 (29,190), 2015/2016 (226,150) and 2016/2017 (140,541). On full exercise of convertibles, the number of shares will increase by 395,881.

Consolidated statement of comprehensive income

SEK thousand	3 months Aug–Oct 2018	3 months Aug–Oct 2017	6 months May–Oct 2018	6 months May–Oct 2017	12 months Nov 2017– Oct 2018	Full-year May–Apr 2017/2018
Profit for the period	43,161	49,838	76,469	72,341	202,393	198,264
Change in translation differences for the period from translating foreign subsidiaries	5,432	-4,641	-4,854	-12,317	23,511	16,048
Total other comprehensive income for the period	5,432	-4,641	-4,854	-12,317	23,511	16,048
Total comprehensive income for the period	48,593	45,197	71,615	60,024	225,904	214,312

Consolidated balance sheets

SEK thousand	Oct 31,	Oct 31,	Apr 30,
	2018	2017	2018
Assets
Intangible assets	182,320	176,848	188,087
Tangible assets	74,064	92,983	90,251
Financial assets	36	1,799	37
Deferred tax assets	26,423	23,377	26,061
Total fixed assets	282,843	295,007	304,436
Other current assets	639,672	591,672	647,631
Cash and cash equivalents	190,612	150,040	282,341
Total current assets	830,284	741,712	929,972
Total assets	1,113,127	1,036,719	1,234,408
Equity and liabilities
Equity (incl. profit for the period)	490,448	446,303	605,998
Provisions	21,886	21,240	21,078
Deferred tax liabilities	6,398	26,081	5,889
Long-term liabilities	29,388	56,611	28,528
Current liabilities	565,007	486,484	572,915
Total equity and liabilities	1,113,127	1,036,719	1,234,408

No material changes have occurred in pledged assets and contingent liabilities since the 2017/2018 Annual Report.

Consolidated statement of changes in equity

SEK thousand	6 months	6 months	Full-year
	May–Oct	May–Oct	May–Apr
	2018	2017	2017/2018
Equity at start of period	605,998	554,515	541,412
Adjustment IFRS 15 (Note 2)	-15,625	0	0
Adjusted equity at start of period	590,373	554,515	541,412
Comprehensive income for the period	71,615	60,024	214,312
Dividend/redemption of shares	-171,539	-170,707	-170,707
Settlement of share-related payments	0	2,471	20,983
Equity at end of period	490,448	446,303	605,998

Consolidated cash-flow statements

SEK thousand	6 months	6 months	Full-year
	May–Oct	May–Oct	May–Apr
	2018	2017	2017/2018
Cash flow from operations before changes in working capital	91,271	99,205	253,344
Cash flow from operations after changes in working capital	97,686	74,664	222,692
Investing activities	-13,924	-21,091	-41,974
Financing activities	-171,024	-172,212	-172,604
Total cash flow for the period	-87,262	-118,639	8,114
Change in cash and cash equivalents
Cash and cash equivalents, opening balance	282,341	273,216	273,216
Exchange-rate difference in cash and cash equivalents	-4,467	-4,537	1,011
Cash and cash equivalents, closing balance	190,612	150,040	282,341
Unutilized credit facilities	15,000	15,000	15,000

Alternative performance measures for the period and full-year

	6 months	6 months	12 months	Full-year
	Oct 31,	Oct 31,	Oct 31,	Apr 30,
	2018	2017	2018	2018
Order bookings, SEK million	637.2	654.4	1,475.3	1,492.5
Operating margin, %	14.9	18.0	17.4	18.9
Profit margin, %	15.4	15.7	19.4	19.7
Average no. of employees	688	640	669	645
Cash flow per share, SEK	2.56	1.97	6.43	5.84
Cash flow per share after full dilution, SEK	2.54	1.94	6.38	5.78
Value added, SEK million	418.8	382.7	859.3	823.2
P/E ratio, multiple	n/a	n/a	44.9	37.2
Share price at end of period, SEK	238.6	164.0	238.6	194.2
Return on equity, %	13.9	14.5	36.9	34.2
Return on capital employed, %	16.6	15.9	42.5	38.7
Return on total capital, %	8.4	8.3	21.9	20.9
Equity/assets ratio, %	44.1	43.0	44.1	49.1
Liquidity, multiple	1.5	1.5	1.6	1.6
Equity per share, SEK	12.87	11.76	12.87	15.90
Equity per share after full dilution, SEK	12.73	11.59	12.73	15.73

Exchange rates

Currency		Average rates in SEK	Closing rates in SEK
	Q2 2018/2019	Q2 2017/2018	Change	Oct 31, 2018	Oct 31, 2017	Change
US dollar, 1 USD	8.88	8.25	7.6%	9.11	8.29	9.9%
Euro, 1 EUR	10.34	9.59	7.8%	10.35	9.64	7.4%
British pound, 1 GBP	11.61	10.78	7.7%	11.61	10.91	6.4%

Quarterly consolidated income statement and alternative performance measures

SEK million	2018/2019			2017/2018				2016/2017
	Q2	Q1	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
Net sales	327.4	306.1	387.9	300.1	313.4	265.1	340.8	294.2	275.4	230.5
Capitalized work for own use	6.3	4.6	7.7	11.1	5.6	3.9	6.2	8.0	9.4	5.7
Reversal of contingent consideration	0	0	0	0	0	0	0	12.4	0	0
Other operating income	1.5	0.5	0.9	1.5	0.5	0.9	0.8	1.1	0.1	0.4
	-	-	-	-	-	-	-	-	-	-
Operating expenses	270.1	248.1	295.4	244.7	243.6	210.8	258.7	241.3	224.1	190.1
Depreciation/amortization and impairment	-16.7	-16.8	-17.4	-16.7	-16.1	-14.8	-14.6	-27.1	-14.4	-14.4
Operating profit	48.4	46.3	83.7	51.3	59.8	44.3	74.5	47.1	46.4	32.1
Net financial items	6.1	-3.5	29.8	-6.3	2.1	-15.5	3.9	-1.3	-2.0	-0.9
Profit after net financial items	54.5	42.8	113.5	45.0	61.9	28.8	78.4	45.8	44.4	31.2
Tax on earnings for the period	-11.3	-9.5	-22.7	-9.9	-12.1	-6.3	-19.8	-10.8	-9.8	-6.9
Profit for the period	43.2	33.3	90.8	35.1	49.8	22.5	58.6	35.0	34.6	24.3
Order bookings, SEK million	350.7	286.5	500.3	337.9	426.8	227.6	349.6	302.9	299.6	225.5
Operating margin, %	14.8	15.1	21.6	17.1	19.1	16.7	21.9	16.0	16.8	13.9
Cash flow per share, SEK	2.05	0.51	2.68	1.21	1.33	0.64	1.59	2.76	1.40	0.47
Cash flow per share after full dilution, SEK	2.03	0.50	2.65	1.20	1.31	0.63	1.56	2.72	1.37	0.46
Earnings per share, SEK	1.13	0.87	2.38	0.92	1.31	0.59	1.55	0.92	0.92	0.65
Return on equity, %	8.3	5.7	15.7	6.6	10.0	4.0	10.8	6.8	7.0	4.1
Return on capital employed, %	9.0	6.5	17.6	7.6	10.8	4.6	12.6	7.8	7.9	4.8
Equity/assets ratio, %	44.1	51.1	49.1	46.5	43.0	49.1	47.3	45.8	45.4	52.7
Equity per share, SEK	12.87	16.09	15.90	13.14	11.76	14.80	14.29	12.87	11.73	15.37
Share price at end of period, SEK	238.6	240.0	194.2	189.4	164.0	152.5	162.5	153.0	139.5	133.0

Five-year summary

	2017/2018	2016/2017	2015/2016	2014/2015	2013/2014
Order bookings, SEK million	1,492.5	1,177.7	1,322.0	1,471.5	925.7
Net sales, SEK million	1,266.5	1,140.9	1,073.6	961.4	853.8
Operating profit, SEK million	239.1	200.1	165.5	150.3	128.1
Profit after net financial items, SEK million	249.3	199.7	154.8	164.4	141.5
Profit for the period after tax, SEK million	198.3	152.6	125.7	126.1	103.9
Operating margin, %	18.9	17.5	15.4	15.6	15.0
Profit margin, %	19.7	17.5	14.4	17.1	16.6
Earnings per share before dilution, SEK	5.22	4.04	3.35	3.38	2.80
Earnings per share after dilution, SEK	5.15	3.97	3.29	3.31	2.73
Dividend/redemption program per share, SEK	4.50	4.50	4.50	4.50	4.50
Share price at end of year, SEK	194.20	162.50	110.75	119.50	77.75
P/E ratio, multiple	37.2	40.2	33.0	35.3	27.8
Return on equity, %	34.2	28.1	21.7	20.6	16.3
Return on capital employed, %	38.7	32.5	24.2	25.1	21.1
Return on total capital, %	20.9	17.9	14.2	15.8	13.7
Equity per share before dilution, SEK	15.90	14.29	14.55	16.44	16.49
Equity per share after dilution, SEK	15.73	14.06	14.23	16.01	16.05
Equity/assets ratio, %	49.1	47.3	49.5	56.1	60.7

OPERATING SEGMENTS

Sales by business segment

SEK million	3 months Aug–Oct 2018	3 months Aug–Oct 2017	6 months May–Oct 2018	6 months May–Oct 2017	Rolling 12 months	Full-year May–Apr 2017/2018
Imaging IT Solutions	264.7	250.9	518.0	484.7	1,065.7	1,032.3
Sectra Customer Financing	34.4	34.5	71.6	69.3	147.3	145.0
Secure Communications	36.1	35.1	68.1	63.5	147.5	142.9
Business Innovation	16.6	15.1	28.1	26.3	72.1	70.3
Other Operations	14.4	11.4	27.8	23.0	51.8	47.0
Group eliminations	-38.8	-33.6	-80.2	-88.3	-163.0	-171.0
Total	327.4	313.4	633.4	578.5	1,321.4	1,266.5

Operating profit by business segment

SEK million	3 months Aug–Oct 2018	3 months Aug–Oct 2017	6 months May–Oct 2018	6 months May–Oct 2017	Rolling 12 months	Full-year May–Apr 2017/2018
Imaging IT Solutions	52.2	48.0	100.6	87.0	232.8	219.2
Sectra Customer Financing	1.7	1.0	2.6	1.7	5.8	4.9
Secure Communications	0.3	0.2	0.2	0.4	6.7	6.9
Business Innovation	-3.9	-0.7	-7.9	-2.8	1.9	7.0
Other Operations	-8.0	-6.0	-15.1	-8.2	-24.2	-17.5
Group eliminations	6.1	17.3	14.3	26.0	6.9	18.6
Total	48.4	59.8	94.7	104.1	229.7	239.1

Sales by geographic market

SEK million	3 months Aug–Oct 2018	3 months Aug–Oct 2017	6 months May–Oct 2018	6 months May–Oct 2017	Rolling 12 months	Full-year May–Apr 2017/2018
Sweden	84.6	86.7	162.6	157.3	351.5	346.2
US	73.7	79.8	134.0	131.2	287.4	284.6
UK	49.5	48.3	102.1	96.1	203.6	197.6
Netherlands	28.9	25.6	52.5	44.6	111.3	103.4
Rest of Europe	73.4	60.4	147.1	124.2	290.5	267.6
Rest of World	17.3	12.6	35.1	25.1	77.1	67.1
Total	327.4	313.4	633.4	578.5	1,321.4	1,266.5

PARENT COMPANY

Parent Company income statements

SEK thousand	3 months Aug–Oct 2018	3 months Aug–Oct 2017	6 months May–Oct 2018	6 months May–Oct 2017	12 months Nov 2017– Oct 2018	Full-year May–Apr 2017/2018
Net sales	32,495	27,614	57,526	50,953	127,851	121,278
Capitalized work for own use	0	1,098	241	1,098	5,660	6,517
Other operating income	345	381	1,295	747	3,379	2,831
Goods for resale	-4,620	-3,774	-7,970	-6,589	-18,773	-17,392
Personnel costs	-19,603	-14,709	-34,582	-25,997	-61,872	-53,287
Other external costs	-15,949	-12,751	-31,813	-24,438	-63,748	-56,373
Depreciation/amortization	-2,289	-1,848	-4,540	-3,402	-8,789	-7,651
Operating loss	-9,621	-3,989	-19,843	-7,628	-16,292	-4,077
Net financial items	6,569	6,774	1,425	-9,342	23,453	12,686
Profit/loss after net financial items	-3,052	2,785	-18,418	-16,970	7,161	8,609
Appropriations	0	0	0	0	226,629	226,629
Profit/loss before tax		2,785	-18,418	-16,970	233,790	235,238
Tax on earnings for the period	561	-671	3,941	3,733	-51,726	-51,934
Profit/loss for the period	-2,491	2,114	-14,477	-13,237	182,064	183,305
Comprehensive income for the
period	-2,491	2,114	-14,477	-13,237	182,064	183,305

Parent Company balance sheets

SEK thousand	Oct 31, 2018	Oct 31, 2017	Apr 30, 2018
Assets
Intangible assets	13,588	10,925	14,896
Tangible assets	17,586	19,921	19,150
Financial assets	256,553	242,361	258,498
Total fixed assets	287,727	273,207	292,544
Other current assets	305,373	304,298	446,655
Cash and cash equivalents	117,438	75,568	212,709
Total current assets	422,811	379,866	659,364
Total assets	710,538	653,073	951,908
Equity and liabilities
Equity (incl. profit for the period)	298,659	269,621	484,674
Untaxed reserves	0	87,629	0
Long-term liabilities	29,388	56,611	28,528
Current liabilities	382,491	239,212	438,706
Total equity and liabilities	710,538	653,073	951,908

Pledged assets and contingent liabilities

SEK thousand	Oct 31, 2018	Oct 31, 2017	Apr 30, 2018
Chattel mortgages	11,000	11,000	11,000
Total pledged assets	11,000	11,000	11,000
Guarantees on behalf of Group companies	132,827	158,688	154,074
Total contingent liabilities	132,827	158,688	154,074

NOTE 1 Accounting policies

This interim report has been prepared in accordance with IAS 34 Interim Financial Reporting, the Swedish Annual Accounts Act and the Swedish Securities Markets Act. The consolidated accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS) and statements from the International Financial Reporting Interpretations Committee (IFRIC) as approved by the European Commission for application within the EU.

The Group applies the European Securities and Markets Authority (ESMA) Guidelines on Alternative Performance Measures. In accordance with these guidelines, the Group's alternative performance measures are defined on page 22 of the interim report. The Group applies alternative performance measures since the company believes they provide valuable supplementary information for management and investors given that they play a central role when it comes to understanding and evaluating the Group's operations.

The accounting policies and calculation methods applied are consistent with those described in Sectra's 2017/2018 Annual Report, with the exception of IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments (see below).

New and amended standards and interpretations as of May 1, 2018

As of May 1, 2018, Sectra applies IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.

IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement, and application of the standard is mandatory for fiscal years starting January 1, 2018 or later. IFRS 9 contains new requirements for classification and measurement of financial instruments, derecognition, impairment and general hedge accounting. The new standard introduces a new model for impairment of accounts receivable, which entails that impairment is recognized for expected credit losses rather than credit losses that have already occurred. IFRS 9 has not had any material impact on Sectra's financial statements since its historical loss patterns, on which the IFRS 9 model is based, have a low forecast value with respect to expected credit losses. Individual circumstances, which are also considered under IFRS 9, have a much more significant impact on the assessment of expected credit losses and are already taken into account. Sectra does not apply hedge accounting.

IFRS 15 Revenue from Contracts with Customers replaces IAS 11 Construction Contracts and IAS 18 Revenue, and application of the standard is mandatory for fiscal years starting January 1, 2018 or later. IFRS 15 introduces a control-based revenue recognition model and provides more detailed guidance in many areas that were not previously described in the applicable IFRS, such as how to recognize contracts containing several performance obligations, variable consideration, the customer's right of return and repurchase rights of suppliers. The selected transition method to IFRS 15 entails that the accumulated effect of the transition is recognized against equity as of the transition date of May 1, 2018 and is presented in Note 2 on page 20 of this interim report.

Imaging IT Solutions' customer contracts include various combinations of deliveries of licenses, installation services, support and maintenance services and upgrades, hardware, and hardware support and maintenance. Significant integration and adaptation of licenses and installation services normally takes place, which is considered a distinct performance obligation and is to be recognized in revenue during the installation phase. Under IFRS 15, support and maintenance services and upgrades are considered to be distinctly separate from installations and are recognized in revenue over the contract period as a separate performance obligation. The introduction of IFRS 15 entails differences in terms of when revenue is recognized. The difference is attributable in all material respects to the fact that under the previous standards, the significant risks and benefits are considered to have been transferred for the first year of license upgrades as of the installation date, while under IFRS 15, they are considered to be separate performance obligations that are to be recognized as of the installation date and one year forward.

Secure Communications' customer contracts include various combinations of pre-studies, component deliveries, installation services, support and maintenance services and upgrades, and product deliveries. Pre-studies are considered a separate performance obligation and are recognized as revenue when the pre-study is completed. Installation services and components are delivered as a combined solution and are therefore deemed to jointly comprise a performance obligation that is recognized as revenue during the installation phase. Support and maintenance services are considered a distinct performance obligation according to the contracts and are recognized as revenue over the contract period. No material effects from the implementation of IFRS 15 have been identified.

Business Innovation's customer contracts include various combinations of licenses, hardware, upgrades and expanded warranty offerings. Licenses and hardware are considered to comprise a distinct performance obligation. Revenue is recognized at the point in time when delivery is made to the customer. Upgrades are considered a distinct performance obligation and are recognized as revenue over the contract period. Expanded warranties are considered to comprise a separate performance obligation, with revenue recognized over the expanded warranty period. No material effects from the implementation of IFRS 15 have been identified.

Sectra Customer Financing's customer contracts primarily include operations for financing major managed-services agreements with healthcare customers and are considered to comprise a coherent distinct performance obligation. Revenue is recognized over the contract period. No material effects on opening equity had been identified as of May 1, 2018.

New and amended standards and interpretations that have not yet come into effect

IFRS 16 Leasing replaces IAS 17 Leases and application of the standard is mandatory for fiscal years starting January 1, 2019 or later. IFRS 16 entails that all contracts with a term of more than 12 months of a certain monetary materiality are to be recognized as assets and liabilities in the balance sheet, with depreciation, amortization and interest expenses recognized in profit or loss. Accordingly, contracts that are currently recognized as operating leases will be capitalized in the balance sheet. The Group has initiated an assessment of the impact of the standard on the financial statements. The process of analyzing the company's leases and assessing their effects is ongoing, and the company intends to present the effects in the fourth quarter. The disclosures provided in Note 4 of the Annual Report with respect to operating lease expenses give an indication of the scope of the leases that existed on April 30, 2018.

NOTE 2 Effects of transition to IFRS 15 Revenue from Contracts with Customers

Consolidated balance sheets

SEK thousand	Apr 30,	Effect	Apr 30,
	2018	Opening	2018
	IAS 11/18	balance	IFRS 15
Assets
Intangible assets	188,087	-	188,087
Tangible assets	90,251	-	90,251
Financial assets	37	-	37
Deferred tax assets	26,061	-	26,061
Total fixed assets	304,436	-	304,436
Other current assets	647,631	-19,089	628,542
Cash and cash equivalents	282,341	-	282,341
Total current assets	929,972	-19,089	910,883
Total assets	1,234,408	-19,089	1,215,319
Equity and liabilities
Equity (incl. profit for the period)	605,998	-15,625	590,373
Provisions	21,078	-	21,078
Deferred tax liabilities	5,889	-	5,889
Long-term liabilities	28,528	-	28,528
Current liabilities	572,915	-3,464	569,451
Total equity and liabilities	1,234,408	-19,089	1,215,319

Consolidated income statements

SEK thousand	May–Oct	May–Oct	May–Oct
	2018	2018	2018
	IAS 11/18	Effect	IFRS 15
Net sales	631,518	1,910	633,428
Capitalized work for own use	10,965	-	10,965
Reversal of contingent consideration	-	-	-
Other operating income	3,805	-1,753	2,051
Goods for resale	-88,330	-	-88,330
Personnel costs	-324,101	-	-324,101
Other external costs	-105,797	-	-105,797
Depreciation/amortization and	-35,537	1,985	-33,552
impairment
Operating profit	92,523	2,142	94,664
Net financial items	1,272	1,353	2,625
Profit after net financial items	93,795	3,495	97,289
Taxes	-19,747	-1,073	-20,820
Profit for the period	74,048	2,421	76,469

Sales by business segment

SEK million	May–Oct	May–Oct	May–Oct
	2018 IAS 11/18	2018 Effect	2018 IFRS 15
Imaging IT Solutions	516.3	1.7	518.0
Sectra Customer Financing	71.4	0.2	71.6
Secure Communications	68.1	-	68.1
Business Innovation	28.1	0.0	28.1
Other Operations	27.8	-	27.8
Group eliminations	-80.2	-	-80.2
Total	631.5	1.9	633.4

Operating profit by business segment

SEK million	May–Oct 2018 IAS 11/18	May-Oct 2018 Effect	May–Oct 2018 IFRS 15
Imaging IT Solutions	98.9	1.7	100.6
Sectra Customer Financing	2.2	0.4	2.6
Secure Communications	0.2	-	0.2
Business Innovation	-7.9	0.0	-7.9
Other Operations	-15.1	-	-15.1
Group eliminations	14.3	-	14.3
Total	92.6	2.1	94.7

Sales by geographic market

SEK million	May–Oct 2018 IAS 11/18	May-Oct 2018 Effect	May–Oct 2018 IFRS 15
Sweden	162.8	-0.2	162.6
US	132.9	1.1	134.0
UK	101.1	1.0	102.1
Netherlands	52.5	-	52.5
Rest of Europe	147.1	0.0	147.1
Rest of World	35.1	0.0	35.1
Total	631.5	1.9	633.4

DEFINITIONS OF ALTERNATIVE PERFORMANCE MEASURES

Equity per share	Adjusted equity divided by the number of shares at the end of the period.
Equity per share after full dilution	Adjusted equity divided by the number of shares after full dilution.
Value added	Operating profit plus labor costs.
Adjusted equity	Recognized equity plus 78% of untaxed reserves.
Cash flow per share	Cash flow from operations after changes in working capital divided by the number of shares at the end of the period.
Cash flow per share after full dilution	Cash flow from operations after changes in working capital divided by the number of shares after full dilution.
Liquidity	Current assets divided by current liabilities.
Average no. of employees	Average number of full-time employees during the period.
Order bookings	Value of new orders received or changes to earlier orders during the reporting period.
P/E ratio	Share price at the end of the period in relation to the 12-month period's earnings per share.
Return on equity	Profit after tax as a percentage of average adjusted equity.
Return on capital employed (ROCE)	Profit before tax plus financial expenses as a percentage of average capital employed.
Return on total capital	Earnings after net financial items plus financial expenses as a percentage of average total assets.
Operating profit	Profit before net financial items and income tax.
Operating margin	Operating profit after depreciation/amortization as a percentage of net sales.
Debt/equity ratio	Interest-bearing liabilities divided by equity.
Equity/assets ratio	Adjusted equity as a percentage of total assets.
Capital employed	Total assets reduced by non-interest-bearing liabilities.
Growth in operating profit per share over a five-year period	Operating profit per share on the balance sheet date less operating profit per share on the balance-sheet date five years earlier divided by operating profit per share on the balance-sheet date five years earlier.
Earnings per share	Profit/loss after tax divided by the average number of shares. This performance measure is defined in accordance with IFRS.
Earnings per share before dilution	Profit/loss after tax divided by the average number of shares at the end of the period.
Earnings per share after dilution	Profit/loss after tax divided by the average number of shares at the end of the period after dilution.
Profit margin	Earnings after net financial items as a percentage of net sales.

GLOSSARY

Artificial intelligence (AI)

A collective term for the scientific field that studies the creation of machines and computer programs that display intelligent behavior. AI research encompasses numerous disciplines, including everything from studying philosophical issues to developing tangible technological solutions in such areas as medical diagnostics.

Cloud

Cloud computing, meaning that computer power is distributed over the Internet or company-specific intranets and not on individual computers.

Critical infrastructure

Basic infrastructure that is essential for the functioning of society, such as roads, bridges and electricity and water supply.

Crypto

Equipment that uses mathematical manipulations (algorithms and keys) to encrypt information, so that it can be interpreted or read only by the intended recipient. To read encrypted information, the recipient must have the correct key and algorithm.

Integrated diagnostics

Diagnostic collaboration between different medical specialties, for example, between pathologists and radiologists for diagnosing, treating and monitoring cancer patients.

Machine learning

A discipline within AI (see above) where algorithms (computer programs) learn to solve tasks using analyzed data. One example involves allowing a program to train on a large sampling of test images, where information is provided about which images show healthy or sick patients, after which the program can also make accurate predictions regarding unfamiliar images.

Mammography

A radiology-based breast examination used to detect breast cancer at an early stage in asymptomatic women.

Orthopaedics

A surgical specialty for disorders affecting the musculoskeletal system.

Pathology/histopathology/microscopy

A specialized medical area that uses tissues and body fluids for diagnostic purposes.

Picture archiving and communication system (PACS) A system for managing medical images, such as digital radiology images.

Radiology

A health science discipline and medical specialty that uses technologies for imaging the human body, such as X-ray, magnetic resonance imaging (MRI) and ultrasound.

Vendor-neutral archive (VNA)

IT solution for managing and archiving files such as medical images, audio files and film sequences in a shared multimedia archive.

About Sectra

Vision

To contribute to a healthier and safer society.

Mission statements

To increase the effectiveness of healthcare, while maintaining or increasing the quality of care.

To strengthen the stability and efficiency of society's most important functions through solutions for critical IT security.

Operating areas/business models

Imaging IT Solutions helps hospitals across the world to become more efficient, enabling them to care for more patients and save more lives. Increased use of medical images and aging populations that are living longer pose huge challenges to healthcare. Sectra's IT solutions and services for medical diagnostic imaging enable greater efficiency and contribute to healthcare advancements. Sectra has more than 1,800 installations of medical IT systems, and customers include some of the largest healthcare providers in the world.

Secure Communications helps society's critical functions, government officials and diplomats to use modern technology to exchange information securely, thereby contributing to a stable and secure society. Sectra's solutions and services increase cybersecurity by protecting some of society's most sensitive information and communications. Several of the business area's products are approved by the EU, NATO, and national security authorities.

Business Innovation gathers smaller activities that could eventually lead to major growth in Sectra's main areas or related niches.

Sectra Customer Financing is where the company's strong financial position is used to finance major managed-services agreements with healthcare customers.

Group-wide strategies

• Customers and customer satisfaction are always assigned top priority to enable long-term growth.
• International expansion mainly in areas and regions where Sectra holds an established position. This will primarily be achieved through organic growth, supplemented by acquisitions that strengthen the Group's organic growth.
• Expansion into new geographic markets following thorough analysis and at a controlled pace as Sectra achieves a strong position in existing markets.
• Close relationships with demanding customers to ensure that Sectra's solutions meet market demands for quality, functionality, and usability.
• A strong, innovative corporate culture to attract and retain talented employees with the ability to solve our customers' problems and meet—and in many cases, exceed—their expectations.
• Close collaboration with universities and research institutions to capture ideas and new product areas that Sectra's customers may find useful.

For further information, visit www.sectra.com/investor

Ten good reasons to invest in Sectra

• Growth potential in the healthcare, secure communications, and critical infrastructure sectors.
• Established brand in niche areas, where customer confidence is a critical success factor.
• Stable, profitable company, with more than 50% of sales comprising recurring revenue from long-term customer contracts.
• Multinational reach and thousands of customers worldwide.
• High level of customer satisfaction and the aim to make customers even more satisfied.
• Products and services that contribute to improved quality of life and a safer society.
• Self-financed portfolio of exciting innovation projects with reported and controlled costs. While some of these projects are unlikely to succeed, a single success story would be sufficient to add significant value.
• Members of management are shareholders.
• Principal owner dedicated to the longterm development of the company.
• A very strong corporate culture based on the employees' expertise and attitudes and their drive to solve customer problems.

Are you a Sectra shareholder?

Your feedback is important to us! Please take the time to answer nine questions in Sectra's shareholder survey at:

www.sectra.com/irsurvey