Contents Ceo’s Statement Strategic Focus Positioned For Profitable Growth

Transcript

Contents th. anagement o f in ym g r d ne t i s r e e e p can l l ex a v nic f human o t efi Munters AB (publ) g energy costs a r isin e inc dr an r nters’ ener g y g Mu -e ffi s. d indoor ng ove cli pr m mance for Globa lw ar m in e s s s a e n c db ro p u l a ild tri i ontribute to us c y l i t as mfort, per co 2 CEO’s statement 4 Strategic focus 6 Positioned for profitable growth for the b en ate m d heal an eed for su he n c c e gt ss si n fu roducts an ea d tp tec en h ci Annual Report 2007 10 Personnel 12 Dehumidification division 18 Moisture Control Services (MCS) division 24 HumiCool division 30 Risks and risk management 32 The share and shareholders 34 Corporate governance report 38 Board of Directors and Auditor 39 Guidelines for compensation to senior managers 40 10-year review 42 12-quarter review 44 Comments on the performance during the year 45 Income statement 46 Balance sheet 48 Cash-flow statement 49 Statement of the Group’s recognized income and expense 50 Accounting principles and notes 70 Proposed distribution of earnings 71 Auditor’s report 72 Group Management 73 Definitions of financial key figures and glossary The Board of Directors’ report compromises pages 4–33, 39–44 and 70. Financial information Interim Report January–March April 22 Annual General Meeting April 22 Interim Report January–June Interim Report January–September Year-End Report Annual Report 2008 August 12 October 23 February 2009 March 2009 The Annual Report is sent to all shareholders registered with VPC, the Swedish Securities Register Center. Munters AB (publ) Isafjordsgatan 1, Kista Entrance Box 1188, SE-164 26 Kista, Sweden Phone +46-8-626 63 00 Fax +46-8-754 68 96 [email protected] www.munters.com The Annual Report is a translation of the Swedish Annual Report. MUNTERS ANNUAL REPORT 2007 In event of any discrepancies, the Swedish version shall apply. Contents th. anagement o f in ym g r d ne t i s r e e e p can l l ex a v nic f human o t efi Munters AB (publ) g energy costs a r isin e inc dr an r nters’ ener g y g Mu -e ffi s. d indoor ng ove cli pr m mance for Globa lw ar m in e s s s a e n c db ro p u l a ild tri i ontribute to us c y l i t as mfort, per co 2 CEO’s statement 4 Strategic focus 6 Positioned for profitable growth for the b en ate m d heal an eed for su he n c c e gt ss si n fu roducts an ea d tp tec en h ci Annual Report 2007 10 Personnel 12 Dehumidification division 18 Moisture Control Services (MCS) division 24 HumiCool division 30 Risks and risk management 32 The share and shareholders 34 Corporate governance report 38 Board of Directors and Auditor 39 Guidelines for compensation to senior managers 40 10-year review 42 12-quarter review 44 Comments on the performance during the year 45 Income statement 46 Balance sheet 48 Cash-flow statement 49 Statement of the Group’s recognized income and expense 50 Accounting principles and notes 70 Proposed distribution of earnings 71 Auditor’s report 72 Group Management 73 Definitions of financial key figures and glossary The Board of Directors’ report compromises pages 4–33, 39–44 and 70. Financial information Interim Report January–March April 22 Annual General Meeting April 22 Interim Report January–June Interim Report January–September Year-End Report Annual Report 2008 August 12 October 23 February 2009 March 2009 The Annual Report is sent to all shareholders registered with VPC, the Swedish Securities Register Center. Munters AB (publ) Isafjordsgatan 1, Kista Entrance Box 1188, SE-164 26 Kista, Sweden Phone +46-8-626 63 00 Fax +46-8-754 68 96 [email protected] www.munters.com The Annual Report is a translation of the Swedish Annual Report. MUNTERS ANNUAL REPORT 2007 In event of any discrepancies, the Swedish version shall apply. Munters 2007 Definitions of financial key figures and glossary The year in brief Global Munters DEFINITIONS OF FINANCIAL KEY FIGURES Capital employed – Total assets minus Munters Order intake rose by 11 percent to SEK 6,407 M (5,761).  Net sales amounted to SEK 6,262 M (5,712), an increase of 10 percent. Division Dehumidification Net profit increased to SEK 336 M (328). Division HumiCool Division Moisture Control Services (MCS) Earnings per share amounted to SEK 4.49 (4.40). A dividend of SEK 2.50 per share (2.25) is proposed. Earnings Trend (rolling four-quarter figures) Two global product divisions focused on industrial-process air treatment, comfort-oriented climate control and climate control for the AgHort industry, and a global service organization within damage restoration and temporary climate control. Manufacturing, sales and service take place with more than 4,300 employees in companies in more than 30 countries. The Munters share has been listed since 1997 on the OMX Nordic Exchange Stockholm in the Mid Cap segment. SEK M 7,000 700 6,000 600 5,000 500 4,000 400 3,000 300 2,000 200 1,000 Q4 97 Q4 98 Q4 99 Order intake Keydata Q4 00 Q4 01 Q4 02 Q4 03 Net sales Q4 04 Q4 05 Q4 06 Q4 07 Produktionsanläggningar, sälj- och servicebolag Operating earnings 8000 Change, % Adjusted change, %1 800 2007 2006 Order intake, SEK M 6,407 5,761 11 6 Net sales, SEK M 6,262 5,712 10 6 566 529 7 600 500 7000 EBIT, SEK M EBIT margin, % 6000 9.0 9.3 Earnings after financial items, SEK M 526 514 2 Net earnings, SEK M 4000 336 328 2 5.4 5.7 Earnings per share, SEK 3000 4.49 4.40 Operating cash flow, SEK M 189 375 Net margin, % 5000 2000 Return on equity, % 25.7 22.5 Return on capital employed, % 24.8 28.0 Return on operating capital, % 31.8 32.7 2.7 3.0 1,068 257 1000 Capital turnover rate, times Net debt, SEK M Equity ratio, % Number of employees at year-end 1 31 48 4,043 3,552 Adjusted for currency and acquisitions and sale of operations. –50 700 400 300 Dehumidification och servicebolag for controlling humidity. Products and completeSälj-solutions (300 servicedepåer är ej markerade på kartan) Customer manufacturing and storage processes are made more efficient. Product quality and hygiene are improved. Dehumidification in combination with cooling creates an ideal indoor climate. Dehumidification division’s share of: 30% 38% Net sales MCS (Moisture Control Services) Services for water and fire damage restoration and temporary climate control. A complete service offering for the insurance industry that lowers costs through drying and renovating rather than rebuilding. Operating earnings MCS division’s share of: 42% 21% 200 100 14 P/E (price/earnings) ratio – Share price on closing date divided by earnings per share. Return on capital employed – Earnings after financial items plus financial expenses (excluding exchange-rate differences) divided by average capital employed calculated on the opening and closing balances in the past four quarters. Return on operating capital – Operating earnings divided by the average operating capital using the past 12 months’ opening and closing balances as a base. Return on equity – Net earnings divided by average equity calculated on the opening and closing balances of the last four quarters. Minority interest is excluded from earnings as well as shareholders’ equity. Evaporative cooling – Cooling that occurs PowerPurge™ – New, patented technology to recover energy from the dehumidification process. By returning surplus heat from the dehumidification rotor to the regenerated air and simultaneously reducing the need for after cooling of the process air, energy costs can be reduced by up to 40%. RH, Relative Humidity – Expresses the relationship between the water content of air at a given temperature and the maximum amount that the air can hold at the same temperature. Silica Gel – A moisture-absorbing substance (silicon dioxide) that is used in sorption rotors. Sorption rotor – A rotor for dehumidification through sorption. The Humidity Expert – A concept for positioning Munters. VOC – Volatile Organic Compounds. Zeol – An operation within Munters focused on adsorption of VOC from air with zeolites, a substance that adsorbs VOCs. GLOSSARY 100 Q4 96 Net debt – Interest-bearing liabilities plus defined-benefit commitments to employees minus interest-bearing assets minus cash and cash equivalents. Net debt/equity ratio – Net debt divided by equity (including minority interests). Operating assets – Intangible assets excluding goodwill plus tangible assets plus inventories etc. plus accounts receivable. Operating capital – Operating assets minus operating liabilities. Operating cash flow – Cash flow from current operations and investing activities excluding acquisitions of operations and the sale of operating segments. Operating earnings – Operating earnings corresponds to EBIT excluding goodwill impairments and surplus values depreciation. Operating liabilities – Advances from customers plus accounts payable. Operating margin – Operating earnings divided by net sales. Operating working capital – Inventories etc. plus accounts receivable minus advances from customers minus accounts payable. Net sales HumiCool Products and systems for evaporative cooling and humidification. Cooling systems for the poultry and horticulture industries. Technique and products for mist elimination, e.g. for treatment of flue gases. Operating earnings HumiCool division’s share of: 28% 41% Absolute humidity – The volume of water that air contains as generally measured in grams per kilogram of air. Absorption – Accumulation of moisture, for example, by a substance, which then changes chemically or physically. Adsorption – Accumulation of moisture, for example, by a substance, which does not change, either chemically or physically. AgHort – Agriculture and Horticulture. CELdek ® – A product of specially impregnated cellulose for evaporation and cooling of air. Cooling tower – A facility for evaporative cooling of water. Dehumidification – A division within Munters whose products are based on dehumidification. Dehumidifier – Equipment for dehumidification of air. DesiCool™ – A technology for cooling air through a combination of dehumidification and evaporative cooling. Dew point – The temperature to which air must be cooled for the water vapor in the air to condense. when a liquid, such as water, evaporates. FGD – Flue-gas desulfurization is a technology applied in coal-fired power plants to clean flue gases from sulfur emissions that cause so-called acid rain. GLASdek ® – A product of specially impregnated spun glass for humidification and cooling of air. HumiCool – A division within Munters whose products are based on evaporative cooling and humidification. Leak detection – A search method which exploits changes in moisture, temperature and sound waves that leaks cause. Lithium chloride – A moisture absorbing substance that is used in sorption rotors. MCS, Moisture Control Services – A division within Munters focused on moisture technology services with an emphasis on the restoration of water and fire damages. Mist eliminator – A component for removing drops of liquid from a flow of gas. Mollier diagram – A diagram that shows the correlation between absolute humidity, relative humidity, temperature and energy. Munters Annual Report 2007 SEK M non-interest-bearing provisions minus noninterest-bearing liabilities. Capital turnover rate – Net sales divided by average capital employed calculated on the opening and closing balances for the past four quarters. Cash and cash equivalents – Cash and bank balances plus current investments with maturity periods not exceeding three months. Earnings per share – Net earnings divided by the weighted average number of shares. EBIT margin – EBIT divided by net sales. Equity per share – Equity (excluding minority interest) divided by the number of shares outstanding on the closing date. Equity/assets ratio – Equity (including minority) interest divided by total assets. Interest coverage ratio – Earnings after financial items plus financial expenses (excluding exchange-rate differences) divided by financial expenses (excluding exchangerate differences). ProduCtion: CitigateStockholm.COM PRINT: Strokirk Landströms. PHOTO COVER: © Yann Arthus-BertranD/Altitude. PHOTO: Peter Knutsson (PORTRAIT), Net sales Operating earnings Jan Bengtsson/Etsabild, Per Magnus Persson/Johnér, Lars strandberg, Stefan Isaksson/briljans.se, Matton Bildbyrå AND Johnér bildbyrå. 73 Munters 2007 Definitions of financial key figures and glossary The year in brief Global Munters DEFINITIONS OF FINANCIAL KEY FIGURES Capital employed – Total assets minus Munters Order intake rose by 11 percent to SEK 6,407 M (5,761).  Net sales amounted to SEK 6,262 M (5,712), an increase of 10 percent. Division Dehumidification Net profit increased to SEK 336 M (328). Division HumiCool Division Moisture Control Services (MCS) Earnings per share amounted to SEK 4.49 (4.40). A dividend of SEK 2.50 per share (2.25) is proposed. Earnings Trend (rolling four-quarter figures) Two global product divisions focused on industrial-process air treatment, comfort-oriented climate control and climate control for the AgHort industry, and a global service organization within damage restoration and temporary climate control. Manufacturing, sales and service take place with more than 4,300 employees in companies in more than 30 countries. The Munters share has been listed since 1997 on the OMX Nordic Exchange Stockholm in the Mid Cap segment. SEK M 7,000 700 6,000 600 5,000 500 4,000 400 3,000 300 2,000 200 1,000 Q4 97 Q4 98 Q4 99 Order intake Keydata Q4 00 Q4 01 Q4 02 Q4 03 Net sales Q4 04 Q4 05 Q4 06 Q4 07 Produktionsanläggningar, sälj- och servicebolag Operating earnings 8000 Change, % Adjusted change, %1 800 2007 2006 Order intake, SEK M 6,407 5,761 11 6 Net sales, SEK M 6,262 5,712 10 6 566 529 7 600 500 7000 EBIT, SEK M EBIT margin, % 6000 9.0 9.3 Earnings after financial items, SEK M 526 514 2 Net earnings, SEK M 4000 336 328 2 5.4 5.7 Earnings per share, SEK 3000 4.49 4.40 Operating cash flow, SEK M 189 375 Net margin, % 5000 2000 Return on equity, % 25.7 22.5 Return on capital employed, % 24.8 28.0 Return on operating capital, % 31.8 32.7 2.7 3.0 1,068 257 1000 Capital turnover rate, times Net debt, SEK M Equity ratio, % Number of employees at year-end 1 31 48 4,043 3,552 Adjusted for currency and acquisitions and sale of operations. –50 700 400 300 Dehumidification och servicebolag for controlling humidity. Products and completeSälj-solutions (300 servicedepåer är ej markerade på kartan) Customer manufacturing and storage processes are made more efficient. Product quality and hygiene are improved. Dehumidification in combination with cooling creates an ideal indoor climate. Dehumidification division’s share of: 30% 38% Net sales MCS (Moisture Control Services) Services for water and fire damage restoration and temporary climate control. A complete service offering for the insurance industry that lowers costs through drying and renovating rather than rebuilding. Operating earnings MCS division’s share of: 42% 21% 200 100 14 P/E (price/earnings) ratio – Share price on closing date divided by earnings per share. Return on capital employed – Earnings after financial items plus financial expenses (excluding exchange-rate differences) divided by average capital employed calculated on the opening and closing balances in the past four quarters. Return on operating capital – Operating earnings divided by the average operating capital using the past 12 months’ opening and closing balances as a base. Return on equity – Net earnings divided by average equity calculated on the opening and closing balances of the last four quarters. Minority interest is excluded from earnings as well as shareholders’ equity. Evaporative cooling – Cooling that occurs PowerPurge™ – New, patented technology to recover energy from the dehumidification process. By returning surplus heat from the dehumidification rotor to the regenerated air and simultaneously reducing the need for after cooling of the process air, energy costs can be reduced by up to 40%. RH, Relative Humidity – Expresses the relationship between the water content of air at a given temperature and the maximum amount that the air can hold at the same temperature. Silica Gel – A moisture-absorbing substance (silicon dioxide) that is used in sorption rotors. Sorption rotor – A rotor for dehumidification through sorption. The Humidity Expert – A concept for positioning Munters. VOC – Volatile Organic Compounds. Zeol – An operation within Munters focused on adsorption of VOC from air with zeolites, a substance that adsorbs VOCs. GLOSSARY 100 Q4 96 Net debt – Interest-bearing liabilities plus defined-benefit commitments to employees minus interest-bearing assets minus cash and cash equivalents. Net debt/equity ratio – Net debt divided by equity (including minority interests). Operating assets – Intangible assets excluding goodwill plus tangible assets plus inventories etc. plus accounts receivable. Operating capital – Operating assets minus operating liabilities. Operating cash flow – Cash flow from current operations and investing activities excluding acquisitions of operations and the sale of operating segments. Operating earnings – Operating earnings corresponds to EBIT excluding goodwill impairments and surplus values depreciation. Operating liabilities – Advances from customers plus accounts payable. Operating margin – Operating earnings divided by net sales. Operating working capital – Inventories etc. plus accounts receivable minus advances from customers minus accounts payable. Net sales HumiCool Products and systems for evaporative cooling and humidification. Cooling systems for the poultry and horticulture industries. Technique and products for mist elimination, e.g. for treatment of flue gases. Operating earnings HumiCool division’s share of: 28% 41% Absolute humidity – The volume of water that air contains as generally measured in grams per kilogram of air. Absorption – Accumulation of moisture, for example, by a substance, which then changes chemically or physically. Adsorption – Accumulation of moisture, for example, by a substance, which does not change, either chemically or physically. AgHort – Agriculture and Horticulture. CELdek ® – A product of specially impregnated cellulose for evaporation and cooling of air. Cooling tower – A facility for evaporative cooling of water. Dehumidification – A division within Munters whose products are based on dehumidification. Dehumidifier – Equipment for dehumidification of air. DesiCool™ – A technology for cooling air through a combination of dehumidification and evaporative cooling. Dew point – The temperature to which air must be cooled for the water vapor in the air to condense. when a liquid, such as water, evaporates. FGD – Flue-gas desulfurization is a technology applied in coal-fired power plants to clean flue gases from sulfur emissions that cause so-called acid rain. GLASdek ® – A product of specially impregnated spun glass for humidification and cooling of air. HumiCool – A division within Munters whose products are based on evaporative cooling and humidification. Leak detection – A search method which exploits changes in moisture, temperature and sound waves that leaks cause. Lithium chloride – A moisture absorbing substance that is used in sorption rotors. MCS, Moisture Control Services – A division within Munters focused on moisture technology services with an emphasis on the restoration of water and fire damages. Mist eliminator – A component for removing drops of liquid from a flow of gas. Mollier diagram – A diagram that shows the correlation between absolute humidity, relative humidity, temperature and energy. Munters Annual Report 2007 SEK M non-interest-bearing provisions minus noninterest-bearing liabilities. Capital turnover rate – Net sales divided by average capital employed calculated on the opening and closing balances for the past four quarters. Cash and cash equivalents – Cash and bank balances plus current investments with maturity periods not exceeding three months. Earnings per share – Net earnings divided by the weighted average number of shares. EBIT margin – EBIT divided by net sales. Equity per share – Equity (excluding minority interest) divided by the number of shares outstanding on the closing date. Equity/assets ratio – Equity (including minority) interest divided by total assets. Interest coverage ratio – Earnings after financial items plus financial expenses (excluding exchange-rate differences) divided by financial expenses (excluding exchangerate differences). ProduCtion: CitigateStockholm.COM PRINT: Strokirk Landströms. PHOTO COVER: © Yann Arthus-BertranD/Altitude. PHOTO: Peter Knutsson (PORTRAIT), Net sales Operating earnings Jan Bengtsson/Etsabild, Per Magnus Persson/Johnér, Lars strandberg, Stefan Isaksson/briljans.se, Matton Bildbyrå AND Johnér bildbyrå. 73 Environmentally friendly and energy-efficient technologies Environmentally friendly and energy-efficient technologies Munters’ vision is to be a globally leading supplier of energyefficient solutions for air treatment and damage control based on its expertise in technologies for humidity and climate control. Strategic focus From its original focus on humidity control, Munters has gradually expanded its business concept to adjacent areas. In this process, Munters continues to focus on customer-driven applications and advanced, energy-efficient and high-quality production solutions and services that are related to Munters’ traditional areas of expertise. By gradually expanding the product and service portfolio and through forward integration, Munters’ business captures a larger portion of the value chain within selected niches, while the market potential increases. An important part of the strategic work is to further strengthen the company’s position to leverage the following global trends: Increasing demand for energy-efficient and environmentally friendly solutions Increased requirements on indoor climate Consolidation and quality demands within food production and distribution Consolidation within the insurance industry Economic expansion in Asia Focus on gross margin Leverage on global market trends Strengthened presence in Asia Profitable growth Expansion from selected niches Munters Annual Report 2007 Complementary acquisitions More efficient product development – global platforms Munters’ strategic initiatives create synergies for achieving its overall goals. 1 CEO’s statement Record earnings despite unsatisfactory profitability within the MCS division Now that the 2007 fiscal year has ended, we can note that Munters reported its best-ever earnings. One positive note during the year was that recent acquisitions developed very favorably. Another was that our expanded production facility in China was opened at the end of the year, which will be of great importance for our growth ambitions in the Asian market. Profitability within MCS, however, was not satisfactory. Over the coming period, we will devote considerable effort to strengthening profitability in the Group. An extensive efficiency and margin improvement program will provide the foundation for this work. The Group’s development during 2007 was characterized by stable growth and strong order intake. However, profitability within our largest division, MCS, was not satisfactory. During the first half of the year, MCS was negatively affected by very dry weather in Europe, the US and Australia. In addition, some costs of a temporary nature arose that were not foreseen at the beginning of the year. To reverse the weak margin trend, a costreduction program was initiated within MCS during the summer. The MCS division’s sales and operating margin improved during the second half of the year, primarily as a result of weather in northern Europe that was more favorable for Munters, but also as a result of a marked improvement in German operations. During February 2008, an extensive action program was initiated that creates potential for significant margin improvements within MCS, as well as in the other two divisions. The Dehumidification division performed well during the year. The market for industrial dehumidifiers was strong throughout the year. The division’s investments in Asia resulted in major orders in that region toward the end of the year. The HumiCool division also noted stable order intake and a favorable earnings trend during the year, despite weak market demand during the first half of the year in the largest business area, AgHort. Demand for Munters’ products favored by global trends The general factors driving Munters’ growth are that customers need to increase productivity while also seeking to improve the quality of both their products and manufacturing processes. At the same time, increasingly higher demands are being placed on indoor climate in both commercial and industrial facilities. Rising energy prices and increasingly strict emission regulations also increased demand for energy-efficient and environmentally friendly products and production processes. Munters’ energyefficient solutions for controlling indoor climate often satisfy these requirements. Broad economic growth in large parts of Asia has had the result that a greater proportion of the population is able to adopt Western consumption patterns, which in turn increases demand for Munters’ products. Another trend driving the market is consolidation in many of our customer segments. Within the insurance industry, the players are becoming fewer and larger and are increasingly electing to partner with national and to a certain extent international damage-restoration companies. Today, Munters is one of the few companies in this area with a global organization. In addition, rapid con- solidation and regulation is taking place in the agricultural and food industries. Consumption of meat in developing countries is increasing in pace with regional economic growth. This in turn results in higher prices and a need for more effective production methods, thus driving the consolidation trend. Munters’ systems for controlling the indoor climate for animal breeding increase productivity and can also reduce the risk of disease. Strategic initiatives for profitable growth Munters’ long-term strategic plan for increasing profitability, while positioning Munters to leverage these global trends in the best possible manner, can be summarized in the following strategic initiatives: Leverage on global market trends – As mentioned above, Munters is well-positioned with respect to a number of global trends. Most of Munters’ strategic initiatives are intended to further exploit these trends. One example is that we are currently already well-positioned to secure a major breakthrough order for energy-efficient industrial air conditioning for a plant in the Philippines being constructed by a global electronics company. Strong presence in Asia – During 2007, significant effort was devoted to increasing the Group’s presence in Asia. At the end of the year, expansion of the plant in Beijing was completed, which in practice meant that Munters’ production capacity in China was doubled. At the same time, the sales force was strengthened by the addition of well-trained personnel. The plant, which is shared by Dehumidification and HumiCool, will be one of our most versatile production facilities when production is transferred from Europe and North America. It will be the global producer of small heaters from Sial and also constitute the hub in purchasing for several parts of the organization. During the year, Munters opened its first sales office in India, which is a market with substantial potential. Much of this work will show tangible results starting in 2008. Expansion from selected niches – Munters has a historically strong position in a number of niches based on the company’s core technologies. Based on these positions, Munters is expanding the company’s offering to enable us to satisfy a greater proportion of customer needs. One example is the AgHort business area, where we for a long period have had a high market share in evaporative cooling media. In recent years, we have also built a strong position in ventilation products for the agricultural industry and are now introduc- CEO’s statement “During 2008, we will take further decisive steps to improve profitability and are highly confident that our investments in new markets and products will increase sales volumes.” February 2008, an extensive efficiency and margin-improvement program was launched under the name Munters Efficiency Program Phase 2 or MEP2. The new program is an enhancement of the original MEP program introduced in 2004, which was based on the principles of resource-efficient manufacturing, short lead times and high employee involvement. Within the framework of the MEP2 program, the mobile IT platform Field.Link will be rolled out to most service technicians. Field.Link is intended to industrialize the management of business processes, which will improve productivity both in the field and within support functions. In conjunction with this project, a capital-efficiency project is also being conducted that is intended to reduce tiedup capital in accounts receivable. In addition to the measures within MCS, MEP2 involves increased efforts to improve production efficiency within HumiCool and Dehumidification. Prospects for 2008 Looking ahead to 2008, there are several factors that are important to bear in mind. We estimate that 25-30 percent of our sales volumes normally follow economic cycles. This means that most of Munters’ sales are more affected by the long-term trends mentioned above than short-term economic fluctuations. During 2008, Munters will take additional decisive steps to strengthen profitability, and we are confident that investments in new markets and new products will result in increased sales volumes. The unsatisfactory profitability in MCS is being addressed during the year with the introduction of a more efficient business model based on the implementation of Field.Link. In this context, I would like to welcome Morten Andreasen to Munters. Morten assumed his position as manager of our largest division MCS at the beginning of March and is now a member of Group management. Morten has broad international experience and in-depth knowledge of service operations, and I am convinced that he is the right person to further strengthen MCS’ position as a leading service company in a market undergoing consolidation. In closing, I would also like to thank Munters’ employees for outstanding individual performance that contributed to a successful 2007. A focus on goals and unrelenting work by the entire organization have laid the foundation for continued success in 2008. Munters Annual Report 2007 ing new products in heating and control systems. Another example is mist elimination, where we have traditionally held a dominant market position in cleaning of emissions from coal-fired power plants. This technology has now been enhanced for applications in the chemical processing industry, a segment in which Munters has noted rapid growth. Complementary acquisitions – In April, Des Champs Technologies was acquired, which significantly strengthened Dehumidification’s position as a leading supplier of energyefficient systems for climate control for commercial buildings and provides opportunities for greatly improved market coverage with respect to both climate zones and customer applications. The acquisition of Turbovent during the summer strengthened HumiCool’s position as a leading supplier of climate control equipment and air and odor purification systems within the AgHort segment, while supplementing Munters’ product range with products for colder climates. We are currently analyzing several companies and intend to make additional acquisitions during 2008. More efficient product development – Munters has always placed great emphasis on product development. Our starting point in developing new or enhancing existing technology is that the new models must be more energy-efficient than the old ones. Our investments in research and development increased by 35 percent during 2007. To ensure future growth, product development operations will be further strengthened during 2008. A number of well-received products were introduced in the market during 2007. One example is Oasis, developed within Des Champs, which is a system that combines indirect evaporative cooling in the first step with traditional air conditioning in the second step. The result is that the air is cooled without adding moisture, which reduces energy consumption by half, compared with using air conditioning only. Another example is ESAC, an evaporative cooling product for industrial applications. During 2008, we will launch a number of very interesting products. One example is DryCool ERV, a dehumidification system that combines dehumidification and reclaiming of energy. The system is based on the third generation of Munters’ patented HCU platform for cooling and dehumidification in combination with the energy-recovery technology from the newly acquired Des Champs. Focus on gross margin – During the year, we continued the effort to increase efficiency and reduce costs to ensure high productivity and profitability within Munters over the long term. In Kista, March 11, 2008 Lars Engström President and CEO 3 Strategic focus Strategic focus Munters has built a world-leading position within energy-efficient and environmentally friendly air treatment based on extensive experience and specialized expertise within thermodynamics. Munters focuses on market segments with favorable growth potential in which the Group can create strong global positions and favorable profitability. By successively expanding the product and service portfolio and through forward integration, Munters captures a greater share of the value chain within selected niches, while increasing its market potential. Munters estimates that the annual value of the potential market is about SEK 70 billion, of which Munters has a market share of about 10 percent. High  employee satisfaction, low personnel turnover and attractive career opportunities Vision Munters vision is to be a global leader in energy-efficient air treatment solutions and restoration services based on expertise in humidity and climate-control technologies. High  efficiency and short lead times via integrated IT systems Financial targets Global divisions Shareholder value shall be created through high growth combined with good margins and a high rate of capital turnover. The Board of Directors has established the following financial targets: Within the product divisions, three focused markets can be distinguished: Industrial-process  air treatment Comfort-oriented  climate control Sales  growth of 10 percent per year over a period of several years EBIT  margin of 10 percent Climate  control for the AgHort industry Within these focus markets, Munters applies a number of core technologies: Capital  turnover rate of 3 times Each division and business unit has individual targets for these key figures that have been adapted to suit their particular conditions. Operative targets Global  leadership in selected segments Leading  in energy efficiency High  quality and productivity and efficient resource utilization through continuous improvement work Dehumidification  Air  cooling and heating Mist  elimination Contaminant  elimination Humidification  Heat-exchange  technology Within the MCS service division, Munters continues to build on its position as a world leader in damage restoration and temporary climate control by leveraging the ongoing global consolidation within the insurance and damage restoration sectors. Strategic initiatives Sales growth Munters’ strategic initiatives create synergies for achieving these general targets and can be summarized in the following illustration: 25 % SEK M 20 Focus on gross margin Leveraging on global market trends 2,200 15 Strong presence in Asia 10 1,800 5 0 Profitable growth 1,400 –5 02 03 04 05 06 07 1,000 Complementary acquisitions Target Sales growth Organic growth in current structure Expansion from selected niches More efficient product development – global platforms % 14.0 Strategic focus % 25 Focus by division Munters develops a strategic plan for each division that is reviewed each year. A number of strategic initiatives are established at the division level and set the direction and focus for the business. For the coming period, the three divisions will focus on the following areas: The Dehumidification division will focus on continued profitable growth through a strengthened presence in Asia, increased efficiency in production and the launch of global product families based on modular thinking and energyefficient solutions in industrial operations. Within commercial operations, the focus will be on expanding successful and energy-efficient solutions from North America to the % European and Asian markets and on ensuring rapid launch 25 and commercialization of new technical solutions. 20 15 The MCS division will focus on increasing profitability in 10 each country by establishing an integrated IT platform that enables efficiency to be increased not only in service delivery, 5 but also in support functions. At the same time, cost flexibil0 ity in operations will be increased through more effective use –5 of sub-contractors and flexible component solutions. Within 02 03 04 05 06 07 major damage-restoration projects, profitability will be increased by strengthening expertise in project management. 20 At the same time, initiatives are being taken to leverage the 15 growth opportunities created by consolidation in the insur10 ance and damage-restoration sectors through national and 5 regional contracts and professional key-account management. 0 The –5 HumiCool division will focus on profitable growth through expansion product offering to07achieve 02 03of the existing 04 05 06 a higher proportion of total solutions for customers. Joint Target Sales growth product-development projects and standardization of the Organic growth in current structure product program, as well as global employment of the division’s product applications increase the rate of expansion of the product portfolio. Continuous forward integration in the value chain is also in progress in carefully selected market segments. Further improvements in profitability will be % achieved by improving production efficiency and increasing SEK M 14.0 2,200 production in low-cost countries. SEK M 2,200 1,800 1,400 1,000 0 Order intake Operating e 12.5 11.0 1,800 9.5 25 8.0 1,400 20 6.5 5.0 1,000 Target Sales growth Organic growth in current structure 15 02 03 04 05 02 03 04 05 Target EBIT margin Order intake Net sales Operating earnings (right-hand scale) 06 06 07 07 10 5 0 -5 Capital turnover rate % Times 14.0 3.50 14,0 12.5 3.25 12,5 11.0 3.00 11,0 9.5 2.75 8.0 2.50 25 6.5 2.25 20 5.0 2.00 15 02 Target 03 04 EBIT margin 05 06 07 10 5 0 -5 9,5 8,0 6,5 02 Target 03 04 05 06 07 5,0 Capital turnover rate 3,50 3,25 3,00 3.50 3.25 5 2,75 Times 14,0 2,50 Munters Annual Report 2007 EBIT margin Positioned for profitable growth Positioned for profitable growth A few years ago, Munters could be regarded primarily as a humidity expert and component supplier with a base in dehumidification and humidification. Today, the Group has become an expert in climate control and a globally leading supplier of solutions for air treatment and damage restoration. All of Munters’ products are based on the company’s environmentally friendly and energy-efficient technology. The global industrial restructuring process that has been in progress for some time has meant that companies to an increasing extent want fewer but larger suppliers with a global presence. To ensure high product quality, production environments must be identical, regardless of climate zone. These trends continue and favor Munters, which has a strong brand and an organization that supports the strategy of being a global, customer-oriented and highly specialized supplier. Furthermore, Munters is favored by the following five global and increasingly general trends: Increased demand for energy-efficient and environmentally friendly solutions. Munters strives to make it possible for customers to reduce resource consumption and environmental impact. Compared with alternative solutions, technology from Munters often results in lower energy consumption and less resource waste. Several of the Group’s products are used to reduce emissions of harmful substances, such as sulfur dioxide that contributes to the greenhouse effect. Higher energy prices – in combination with greater environmental awareness – increase demand for environmentally friendly and energy-efficient products and production processes. Also in this respect, Munters contributes to improving the environment, primarily through very energy-efficient solutions for climate control. Munters’ damaged restoration services contribute to renovating and reusing damage material instead of demolition and rebuilding. Increased demands on indoor climate. Requirements for energy savings are increasing. These savings are often achieved through tighter insulation and reduced ventilation. This often results in problems with mold, moisture and allergies. Munters can reduce these problems in two ways, through fixed installation of units that prevent the problems from arising and permit energy-efficient ventilation or through MCS services that can be quickly deployed in environments that are already affected. Consolidation and regulation within food production and distribution. Rapid global consolidation and regulation of the agricultural and food industries is taking place. Both of these trends result in increased investment in equipment to increase productivity and improve hygiene. Munters has solutions for all aspects of the food industry, from production and manufacturing via transport and storage to sales in stores. Munters’ climate-control systems for livestock breeding increase produc- tivity and reduce the risk of disease. Within food production and distribution, eliminating moisture restricts the growth of bacteria and mold, while improving quality and shelf life. Extensive consolidation in the insurance industry has been taking place for some time. Many insurance companies want to take advantage of opportunities for reducing costs for handling damage and restoration by working with fewer national or international suppliers. Munters is uniquely positioned to take advantage of this trend via its MCS (Moisture Control Services) division. With its wide geographic representation, Munters is an ideal business partner for these increasingly larger and more international insurance companies via long-term national or regional contracts with fixed prices. Water and fire damage represents a large portion of insurance companies’ costs. Munters’ technology reduces waste of building materials and fittings. The Group is the technology leader, and its services, which are characterized by high quality, broad geographic coverage and rapid response, are based largely on Munters’ own dehumidifiers. By taking even greater responsibility for damage control and IT-based documentation, Munters’ MCS also reduces the insurance company’s administrative costs. Consolidation in the insurance industry. Economic growth in Asia. The broad and protracted economic expansion taking place in Asia, primarily in China and India, means that an increasingly large proportion of the population is now able to adopt western consumption patterns. This in turn results in rapidly increasing demand for products that need technology from Munters in the production process. This also results in increased demands on indoor climate, etc. These demands must be met in an energy-efficient manner, which Munters can do. During 2007, Munters took forceful initiatives for growth in Asia by expanding local production capacity and improving sales channels. Munters responds to these trends in part by continuously reviewing its product and services offering and production structure and by developing new energy-efficient and environmentally friendly solutions, thus creating prerequisites for continued, sustainable and profitable growth. Global product divisions Over several decades, Munters has largely created its own growth by continuously expanding its offering, developing new application areas and increasing forward integration. This Strategic acquisitions Since the autumn of 2006, Munters has expanded its product portfolio and thus redefined the potential market in a decisive manner. This expansion was accomplished both organically and through three strategic acquisitions. Sial is Europe’s leading manufacturer of mobile heaters for applications in industry, agriculture and commercial premises, which strengthens Munters’ position as the marketleading supplier of energy- and cost-efficient solutions for climate control within the HumiCool division. Des Champs Technologies are experts in air treatment and energy recovery, which strengthens Munters’ position as a leading supplier of energy-efficient solutions for climate control for commercial buildings in the Dehumidification division. is Northern Europe’s leading supplier of ventilation systems and air purification systems for the agricultural industry, which complements Munters’ AgHort product portfolio within the HumiCool division. Turbovent These acquisitions support Munters’ strategy to strive for total solutions that expand the Group’s expertise and application competence in a number of areas. During 2008, the first products will be launched that are based on technical integration. Core values Munters’ core values are expressed in a number of guidelines and policies that were developed with the intention of defining the Group’s fundamental approach to environmental, social and ethical issues. Work with these guidelines and policies is a process that enables Munters’ operations to reflect local, national and international changes in legislation, market conditions and social and cultural values. These documents include specific policies for information, the environment, a code of conduct, working conditions and equal rights, for example. Each manager has considerable freedom in exercising responsibility within the framework of these guidelines and policies. MEP2 – the next step in further rationalizing operations In February 2008, Munters introduced an extensive program for increasing efficiency and improving the EBIT margin under the name Munters Efficiency Program Phase 2 or MEP2. The program is based on the Munters Efficiency Program launched in 2004, which was based on the principles of resource-efficient manufacturing, short lead times and high employee involvement. The new program includes an increased focus on production efficiency within the HumiCool and Dehumidification divisions and implementation of a mobile IT platform (Field.Link) for service technicians within the MCS division, which creates a platform for sharply improved productivity. Within MCS, a capital efficiency project is also being introduced that is linked to Field.Link. Within the Dehumidification and HumiCool divisions, extensive changes in plant layout and production flow will be implemented in seven of the largest product units in parallel with investments in productivity-enhancing machines. In addition, production of a number of products will be relocated to the company’s plants in Mexico and China in order to reduce manufacturing costs. Within the MCS division, a mobile IT platform for service technicians called Field.Link was developed during 2007 and is now ready for roll-out. The platform is based on the successful concept used in the UK in recent years. During 2008, Field.Link is expected to be rolled out to about 1,000 service technicians, or about 75 percent of the total potential. Increased productivity both in the field and within support functions is expected during the latter part of 2008 as a result of more efficient and industrialized management of business processes. In conjunction with this project, a capital efficiency project will also be conducted that is intended to improve business processes and reduce capital tied-up in accounts receivable. Improvement work within MCS will be supported by a new organizational structure with three global market areas with dedicated management focused on operational quality within the business units. The market areas will be supported by central functions for finance, human resources, sales and marketing and business support. The goal of MEP2 is to achieve an annual reduction in cost levels of SEK 75 M while reducing tied-up capital by SEK 170 M. During 2008, the program is expected to result in extra investments of SEK 45 M and a negative impact on earnings of SEK 50 M. The positive effect on operating earnings is estimated at SEK 50 M in 2009 and at SEK 75 M annually thereafter, compared with the start. Munters Annual Report 2007 has made the company a global market leader in a number of selected niches. To meet customer demands for global solutions and to secure and strengthen Munters’ long-term competitiveness, the organization was restructured in three global product divisions during 2005. This structure created a holistic view of both the customer and product portfolio, with increased crossselling across borders as one result and facilitated the introduction of successful applications in new geographic markets. At the same time, a number of benefits were realized, since purchasing, production and product development can be coordinated in a global perspective. The next step is that business areas and business units can work along these lines to a greater extent. Case Positioned for profitable growth 7 Positioned for profitable growth During 2006, guidelines for Munters global responsibility policy were drawn up. The policy is based on the UN’s Universal Declaration of Human Rights and the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work. It also addresses such themes as business ethics, corporate culture, health, safety, corruption and regard for the environment, and provides a code of conduct that applies to employees of Munters and to the entire value chain of suppliers, partners and customers. (The policy in its entirety can be found at www.munters.com.) Munters – a technology and environmental company Munters is not only a technology company, but also, in all essential respects, an environmental company. Munters’ ambition is to develop its business to achieve sustainable solutions that provide both environmental and economic benefits for its customers and for society as a whole. The Group’s products should contribute to a better environment through products with lower energy consumption from the Dehumidification and HumiCool divisions, while the MCS division’s damage restoration services result in less resource waste. Munters also has an ambition to manufacture products in a manner that results in the least possible environmental impact. The Group works with continuous improvement based on a clear environmental policy. Examples of general environmental principles include: Prevailing  legislation in the environmental area shall be respected and if possible exceeded. The  environmental benefits of using Munters’ products and services shall be marketed. All  key persons shall be involved and trained in environmental issues. Increased  control of all waste volumes at all levels. Increased  reuse of materials in damage restoration. Environmentally  focused work processes. Quality throughout the value chain Munters’ position as the world leader for humidity control places high demands on continuous efforts aimed at ensuring quality within all operational areas. Munters has a quality assurance policy to guide these efforts, which can be found at www.munters.com. Munters’ ambition is to offer products, systems and services with a high level of performance and a consistently high level of quality. “The right product to the right customer at the right time,” is a motto at Munters. This can only be achieved via a complete chain of coordinated and well-planned work processes throughout the Group. Satisfying this policy demands that Munters’ operations are managed according to the following principles: Each  employee must be aware of, and understand the importance of quality. A prerequisite for this is that employees receive regular training and development opportunities. The  organization and delegation of responsibility and authority with respect to all activities that involve quality work must be documented. Customer  focus, cost efficiency and the requirements of ISO 9001:2000 or the equivalent must be the basis for all activities. All  research and development of products, systems and service must be based on the customer’s needs. Routines,  processes and methods that ensure that the requested quality is documented and attained. Only  suppliers with the ability to meet Munters’ quality requirements are contracted. Marketing  and sales activities may only create customer expectations that Munters is able to satisfy. Development  of quality work is continuously followed up. All  quality-related work is directed by annual targets for quality improvement. Case Global responsibility policy Cleaning of flue gas from coal-fired power plants Emissions of air contaminants in conjunction with combustion in coal-fired power plants has long been an important environmental issue. Soot emissions were debated at an early stage. These emissions consist of small particles that are formed through incomplete combustion of coal, oil, bio-fuels and other fuels. When measurement of acidification of soil and waterways began in the early 1970s, the focus was initially on emissions of acidic compounds, such as sulfur oxides and later also sulfur dioxides. During the 1980s, attention was focused on emissions of carbon dioxides and other incompletely combusted hydrocarbons as a problem for air pollution. Today, requirements on flue-gas cleaning are high. Soot emissions have negative effects primarily on human health. Apart from contamination, soot can contain poisonous substances, such as heavy metals that cause substantial damage to the environment, depending on the dust’s characteristics. A third problem is that the particles emitted to the atmosphere have an impact on the radiation balance. Sulfate particles, which originate from emissions of sulfur dioxide, reflect incoming sunlight and reduce the amount of solar energy reaching the earth. Munters’ mist eliminators are part of what is called a scrubber or a moisture separator. In a scrubber, water is normally used to separate solid particles from the fluegas flow. In the mixture zone, strong turbulence is created in which the water is pulverized into small drops of water, which facilitates particle elimination because the particles in the flue gas are captured in the water drops. The water that is separated in the mist eliminator is then fed back to a sediment pool, while the cleaned gas is emitted to the atmosphere. The sediment is collected in a separate container that must be emptied periodically. By added calcium to the water, sulfur dioxide can also be eliminated. The sulfur dioxide then reacts with the calcium and forms gypsum. Some of this gypsum is reused in the construction industry. Positioned for profitable growth To achieve continuous improvement and unambiguous results, quality work is guided by measureable targets according to Munters Efficiency Program (MEP), the Group’s working model for increased efficiency. MEP covers some 30 different areas relating to quality improvement and contributes to increasing participation and leverages the expertise and resources available throughout the entire organization. Sustainable business By continuously improving the quality of products and services, Munters contributes to economically and environmentally sustainable development in industries and businesses all over the world. Intensive work is in progress to further develop the Group’s program for social responsibility. This work will provide guidance for business in all countries. Munters overall goal is to contribute towards turning development in society toward reduced energy consumption and lower emissions. Within the framework of the Munters CSR (Corporate Social Responsibility) program, there has been a special focus since 2006 on sustainable development. Work during 2007 was focused on basic efforts, such as training all environmental managers and formulating a requirements analysis for each business area with respect to environmental and sustainability issues. Environmental work must be linked to Munters’ quality work. A practical consequence is the development of locally adapted activity plans within the framework of the general quality and environmental policy. Progress in environmental work is also reported regularly to Munters’ key customers. An overriding goal is that ethical and environmental work should be perceived as a fully integrated part of core business for the entire Group. Products and services contributing to sustainable development Dehumidification division Customer segment (example) Environmental aspects Dehumidifier Storage premises Creates optimal storage conditions without having to heat the premises, which reduces energy consumption. Dehumidifier Production processes Munters’ patented technology, PowerPurge™, reduces energy consumption by up to 40 percent compared with competing absorption-based solutions. DesiCool™ Process and manufacturing industries Energy-saving technology for control of temperature and humidity. Transforms waste heat into environmentally friendly cooling. Cooled air is created in the summer from the surplus heat in the premises. In the winter, DesiCool™ delivers very high heat recovery. HomeDry Suspended foundations, cellars, attics, garages, summer cottages and boats Used for dehumidification and to ventilate stale air and radon gas. The technology is energy-efficient and as a result, inexpensive and environmentally sound to use. The dehumidifier provides warm, dry air that automatically benefits the property. Electronics and semiconductor industries The product cleans emissions of solvents in various industrial processes. HCU Department stores and commercial premises HCU is a patent-protected product that uses the waste heat from air-conditioning equipment for highly effective dehumidification of ventilating air in warm, damp climates. DryCool ERV Schools and commercial premises DryCool ERV is based on the HCU platform and uses heat-exchange technology to further reduce energy consumption. Oasis Commercial premises in warm and dry climates Oasis uses direct and indirect evaporative cooling for exceptionally effective cooling in warm and dry climates. Zeol MCS division Dehumidifier Dry ice Services for water and fire damage. The technology makes possible dehumidification and repair instead Insurance industry of demolition and new construction, which reduces consumption of building materials and waste. Services for water and fire damage. Cleaning of surfaces and technical and electronic equipment of Insurance industry soot, greases and oils without the use of environmentally hazardous chemicals. Evaporative cooling system Agricultural industries and commercial applications Environmentally friendly and energy effective cooling and ventilation. Mist eliminator (flue-gas cleaning) Coal-fired power plants Reduces the amount of environmentally hazardous flue gas emissions by approximately 90 percent. Precooler for gas turbines Gas-turbine-driven power plants, This technique cools the combustion air, which increases the particularly in countries with warm output of the gas turbine by up to 20 percent, while simultaneclimates. ously reducing damaging emissions of NOx. Munters Annual Report 2007 HumiCool division 9 Personnel Entrepreneurial spirit with customer focus Case Munters’ company culture is characterized by customer orientation, youthfulness and dynamism, as well as a global perspective. In many respects, this attitude has its roots in an innovative entrepreneurial spirit and delegated leadership. These are prerequisites for Munters’ ability to continuously maintain and strengthen its competitiveness and to create profitable and sustainable growth. Knowledge is vital Munters’ training is primarily matched to individual needs, but the Group also has a number of established educational programs. Munters Growth Academy Munters Growth Academy is a forum for global leadership training and exchange of experience. Through seminars, lectures and discussions, participants gain new insight into strategy, leadership, communication, marketing and technical development. Munters University Munters University is a program that is constantly ongoing and which is matched to individual needs and conducted in cooperation with Advanced Management Services, the American Management Association and PrimeLearning. Technical training is provided via online solutions supplemented by lectures. Dr. Moisture This training is tailored to technicians and project managers within the MCS division and provides in-depth knowledge of moisture mechanics and related areas. The training also provides access to an international network of moisture experts. A diploma provides participants with the knowledge needed to support co-workers and customers in dealing with complicated moisture problems. Munters is a global and decentralized company in which small units grow and develop in their local markets within the framework of joint business management. This means that goals and guidelines are clear, while providing freedom to allow employees in each unit to develop the business based on their unique expertise and local prerequisites. With entrepreneurial spirit as a guiding principle, a strong and living company culture has emerged in Munters’ subsidiaries around the world. Munters’ business is growing and is constantly expanding to include new markets, customer segments and applications. Recruiting and retaining key persons in these new areas is a growing challenge, and toward the end of the year, Munters intensified work with talent management from a more strategic perspective. Increased emphasis was placed on the process in which overall goals are translated into practical activities and individual targets. As part of this process, current and future needs for personnel and expertise are also clarified. The objective of personnel work at Munters is to leverage every employee’s ability and potential. The work environment at Munters offers both support and real challenges, which instill motivation in all individuals to develop. The clear responsibility for own development which is given to all employees is combined with sound support for all managers in their personnel work. An important tool for managers and supervisors in this respect is Munters Management Manual, which is a section of the intranet where the company’s guidelines, instructions, practical tips and advice are collected. Careers and personal development The company culture offers opportunities for employees to develop rapidly in their professional roles and to expand their work assignments. Opportunities for pursuing a career are constantly increasing in pace with growth of the Group’s business. Munters strives mainly to recruit internally when new positions become available, and the company is now creating better processes to facilitate international careers for Personnel employees. Using a working model for succession planning called Munters Continuity Planning, sound guidance is offered in matching the company’s competence requirements with employee ambitions with respect to careers and personal development. Munters’ development as a company offers exciting challenges for skilled employees in several areas of knowledge, in the business operations and the global support functions. However, a common denominator for all employees is an entrepreneurial spirit with a customer focus. Global perspective In a broader perspective, skills development requires seeing the company’s needs as a whole. To this end, it is important to create arenas for employees to share knowledge and experience. Munters organizes regular international meetings for managers and key persons in order to identify new ideas that can contribute to improving the business and strengthening competitiveness at the local level. Munters conducts regular opinion surveys among all employees to assess the work climate. The results are presented internally and provide a foundation for development within each company area. Munters UK receives high ratings and was once again ranked among the 100 most popular employers in 2007 by the Sunday Times. In pace with Munters’ growth in new markets and in new customer segments, additional demands are placed on global personnel processes, and toward the end of the year, the HR function’s role in the Group was further strengthened with the establishment of a global HR Management team. Net sales per employee Incentives with clear targets Within Munters, there is a strong link between individual performance and the company’s earnings growth. The company has various programs for variable compensation that include a standardized reward system for sales and service personnel and a bonus program directed toward senior managers and other key persons in the Group. These programs take into consideration sales and earnings trends, capital turnover rate and individual targets. To increase commitment in the company, key persons are also invited to participate in a warrants program. Outstanding programs are described in Note 29. Employees in figures The average number of employees, including temporary employees, was 4,268 during the year, an increase of 17 percent compared with 2006. The increase was in large part due to the acquisitions of Des Champs and Turbovent. The proportion of women amounted to 19 percent (19). Personnel turnover, defined as the number of permanent employees who left the company during the year divided by the average number of employees, declined to 13 percent (14) for the Group as a whole. There are several reasons why this relatively high level continued. Europe has a large proportion of MCS personnel, which is traditionally the personnel category with high mobility. Asia consists of several young companies with a large proportion of production, where personnel mobility remains relatively high. Munters is to a great extent a young company. Fully 53 percent of the work force is under the age of 40. The average age is 38 (39). Added value per employee Average number of employees 000s 000s Number 1,700 800 5,000 1,600 700 4,000 1,500 600 3,000 1,400 500 2,000 1,300 400 1,000 1,200 300 0 02 03 04 05 06 07 01 02 03 04 05 06 07 1 600 1 200 800 400 0 01 02 Men Age distribution % 1,500 30 1,200 24 900 18 600 12 300 6 0 0 21–30 31–40 41–50 51–60 04 05 06 07 Personnel turnover Number <20 03 Women 61– Europe Americas Asia Munters Annual Report 2007 01 Mkr 2 000 Group 11 Mkr 500 400 300 200 100 0 01 Dehumidification division Food. Medicines. Hospitals. Schools. In places where products are manufactured and people meet, indoor air is extremely important. Even small changes in temperature and humidity can result in frost and bacteria and mold growth that can seriously compromise both health and product quality. This in turn can have severe consequences for the producer companies, their products and brands. Dehumidification offers products and complete solutions for controlling humidity and thus creating an optimal indoor climate for both production and personnel. Facts “Trends were extremely positive during 2007. We reported record earnings for the fourth quarter and the full-year. I am particularly pleased that we have now developed global product platforms, which will be highly significant for our ability to reduce costs. The acquisition of Des Champs was successful and in 2008, we will launch a number of key products that are based on a combination of the Munters and Des Champs technologies.” Mike McDonald, Division President Development during 2007 Acquisition of Des Champs Technology New plant in China completed at the end of the year The division’s presence in Asia strengthened Global product platforms launched in all regions The Dehumidification division performed well in 2007 and work with global product platforms began to generate results. The market for industrial dehumidifiers was strong throughout the year, with solid demand in Europe and North America. The division’s efforts in Asia led to an increasing number of orders in the region. The new plant in Beijing was opened at the end of the year and the manufacturing capacity is now considerably larger, which will contribute positively to our expansion in Asia. Demand was also strong in the commercial segment. The acquisition of Des Champs Technologies at the beginning of April further strengthened the market position of Commercial Dehumidification within energy-efficient solutions for intake air for commercial spaces. The market for Zeol’s products for the semiconductor industry improved during the second half of the year following an extended period of low activity. Key data 2007 Adjusted growth, %1 2006 Growth, % SEK M SEK M 3,000 300 Order intake, SEK M 2,001 1,693 18 12 2,500 250 Net sales, SEK M 1,936 1,635 18 13 2,000 200 Operating earnings, SEK M 234 194 21 1,500 150 Operating margin, % 12.1 11.9 1,000 100 Return on operating capital, % Capital turnover rate No. of employees, 31 Dec. 1 52.0 500 50.4 4.3 4.2 1,180 900 50 0 0 01 31 Preceding year restated at 2007 exchange rates and adjusted for acquisitions. 02 03 04 05 06 07 Order intake Net sales Operating earnings (right-hand scale) Share of consolidated net sales Net sales per geographic region Market segments Share of consolidated operating earnings Share of Group employees 30% Asia 10% 38% 29% Americas 54% Food 10% Pharmaceuticals 7% Europe 36% Other 40% Aftermarket 16% Commercial premises 27% Munters Annual Report 2007 2007 3000 300 2500 250 2000 200 1500 150 1000 100 500 50 0 13 0 Dehumidification division Work with global product platforms yields results The Dehumidification division offers energy-efficient products and solutions for controlling humidity and improving the quality of indoor air. Advanced technological expertise and global presence, combined with a strong customer focus, have contributed to Munters’ leading global position within its market segments. While the US and Europe are its largest markets, Asia is growing in significance. Services and offerings The division consists of three business areas: Industrial Dehumidification, Commercial Dehumidification and Zeol. All of the business areas offer products and complete solutions for improving customers’ air quality, thereby creating more efficient production processes and storage conditions. In turn, improved hygiene and product quality are achieved. The division’s products and systems are based on the Munters dehumidifier rotor, which is designed to absorb humidity. Controlling the climate is a critical factor in many manufacturing processes. Small changes in humidity and temperature can create a breeding ground for mold and bacteria. This, in turn, can affect the safety and quality of the manufactured products, as well as health and productivity in the workplace. Traditional air-conditioning systems are often used to regulate indoor climates in commercial premises. However, these systems require large amounts of energy. Munters’ solutions are based on the knowledge that less cooling is required when the humidity level in a premises is reduced, resulting in lower energy consumption. Increased environmental awareness among the general public and authorities, combined with historically high energy prices, is driving development toward more energysaving products. Munters offers the most energy-efficient products on the market and, as a technological leader, the company strives to improve the environmental features of all of its products. Product development focuses on improving the performance of the dehumidifier rotor to achieve improved performance with reduced energy utilization. An example of an energy-saving innovation is Power Purge™, which can reduce the energy consumption of a dehumidification system by up to 40 percent. Manufacturing takes place at plants in Sweden, the US, Mexico, Brazil, Japan and China. Customers and market The global market value for Munters dehumidification products and systems is estimated at approximately SEK 15 billion. Munters’ total market share is approximately 15 percent. Within rotor-based dehumidification, Munters hold a 50percent market share. is the largest business area and accounts for approximately 65 percent of the division’s sales. The business area offers air treatment and control for industrial processes, using dehumidification as its foundation. The food and pharmaceutical industries represent the largest customer segments, while aftermarket accounts for slightly less than 10 percent of sales. Another customer area comprises the electronics and semiconductor industries. Humidity can have serious adverse effects on the quality of food and pharmaceuticals during the production, handling and storage stages. Global food producers strive to achieve identical flavors, odors and appearances for their products regardless of the climate zone in which the food products are produced. Cold and frozen products represent a more difficult challenge. The Munters dehumidification system enables customers to control humidity, making it possible to regulate the formation of frost and ice during the production process. The division’s customers include such global companies as Texas Instrument, General Electric, Pfizer and Nestlé. In addition to an intensified focus on energy-efficient solutions, major customers within the food and pharmaceutical industries are increasingly searching for global partners to ensure that product standards are reached and achieve greater efficiency in their purchasing routines. Industrial Dehumidification is one of few global players with manufacturing, sales and service divisions in North and South America, Europe and Asia in an otherwise fragmented market. Competitors are primarily regional players operating in local markets or within specific segments. The business area’s market share is approximately 13 percent of an estimated total market of slightly more than SEK 9 billion. Work within the business area focuses on developing and introducing global product platforms that serve as the foundation of the Munters dehumidifier range. Based on these modular platforms, cost-efficient products are developed that provide economies of scale and the ability to adapt to the widely varying requirements of the customer segments. The most important product is the Integrated Custom Airhandler (ICA) platform, which consists of large industrial systems and accounts for onethird of sales to industrial customers in the US market. Industrial Dehumidification Case Dehumidification division The Swedish Property Agency (SPA) is responsible for managing the government’s buildings so that the national cultural heritage is accessible for the public and cultural values are protected and preserved. Many of SPA’s buildings are living institutions in Swedish society and include theaters, museums, castles and residences. Others properties with their grandeur in the past include old castles and forts and military facilities. SPA’s assignments also include large areas of state-owned forest and land, particularly in northwestern Sweden. The government buildings in the Rosenbad block were built around 1900. They are national historical buildings and managed by SPA. The Rosenbad building itself was designed in typical art nouveau style by Ferdinand Boberg, one of Sweden’s most renowned architects, and was completed in 1902. In 1981, the Cabinet Office took over the Rosenbad block, which has since become a symbol of the Swedish government. Making Rosenbad a functional workplace includes creating an indoor climate with the appropriate temperature and humidity. SPA previously used a traditional air-conditioning system. In pace with the volume of heat generated in the premises by computers and other electronic equipment, air conditioning also increased to the point where the limits of its capacity were reached. When SPA needed to increase capacity, it decided to replace the traditional air cooling with Munters’ DesiCoolTM air-conditioning system, which uses waste heat and thus cools just as effectively, but with significantly lower energy costs. Munters’ DesiCool technology consists of a combination of dehumidification, heat exchange and evaporative cooling technology. The dehumidification is driven by waste heat, and the more waste heat that is used, the colder the intake air introduced into the building. During the cold season, the DesiCool system has two heat exchangers in operation. When they operate at maximum, the system achieves a temperature efficiency of 90 percent. This high efficiency means that DesiCoolTM virtually eliminates the need to heat ventilation air during the winter. For SPA and the Cabinet Office, this means that there is virtually no need for heating during the winter half of the year, and the low heating cost during the winter means that SPA was able to reduce its energy costs by 35 percent, compared with a conventional air-conditioning system. And as a bonus, SPA further strengthens its environmental profile. Munters Annual Report 2007 DesiCool uses waste heat to cool Rosenbad 15 Dehumidification division Commercial Dehumidification specializes in humidity and temperature control for commercial spaces where large numbers of people live or work, such as department stores, schools, restaurants and hospitals. The business area accounts for one-third of the division’s sales and the aftermarket for approximately 7 percent of sales. Department stores represent the largest customer segment and Wal-Mart is the largest customer. Munters’ systems create comfortable indoor climates for Wal-Mart customers and personnel and the dry air prevents ice from forming on the coolers used for frozen foods. A growing customer group is schools, in which high humidity often results in mold that can cause students to suffer from allergies. Kitchens, premises where food is served and hospital operating rooms are other examples of spaces where it is extremely important to limit bacteria growth and mold. The majority of the world’s population resides in climates with high temperatures and humidity and it is these areas that experience the greatest need. Awareness is increasing and the financial conditions for managing these problems are improving in many regions. To date, the highest sales figures for Munters’ systems have been reported in the US, where a large part of the country has a hot climate and high humidity. Des Champs Technology primarily manufactures customer-adapted ventilation and air-conditioning systems for commercial buildings based on its expertise within heat exchangers, dehumidification and indirect evaporative cooling. Des Champs also manufactures industrial heat exchangers. The acquisition in April dramatically strengthened Munters’ position as a leading supplier of energy-efficient systems for climate control in commercial buildings. The Commercial Dehumidification business area’s main competitors within indoor climate regulation in commercial buildings are traditional air-conditioning companies such as Trane and Carrier. However, these air-conditioning systems often have no means to control the relative humidity of the supplied air. This results in a humid indoor climate, which leads to a risk of mold and bacteria growth. Munters is a small player in the market for commercial air conditioning. However, following a niche strategy that focuses on products with leading technology, such as the DesiCool™ products, Munters has attained a strong market position and the company is currently at the forefront of products that control temperature and humidity. Examples of Munters’ energyefficient innovations for managing temperature and humidity include DesiCool™ and the DryCool Humidity Control Unit (HCU). The business area’s market share is approximately 10 percent of the estimated total market of SEK 5 billion. The Zeol business area, which accounts for 4 percent of the division’s sales, manufactures systems for removing solvents from emissions caused by production processes. Service accounts for 14 percent of sales. Zeol operates in a much smaller market than the other two business areas, but is highly profitable in its selected niches. The largest customer group is the semiconductor industry, but automotive paint shops are showing significant growth. The investment character of the semiconductor and automotive sectors is cyclical, which, consequently, affects the business area’s earnings pattern. Changes in emissions regulations concerning exhaust, as well as requirements for indoor air quality, are driving demand for Zeol’s products. The largest customer is Intel, but several manufacturers of advanced semiconductors are purchasing the Munters Zeol systems. The business area’s market share is approximately 14 percent. Developments during 2007 The Dehumidification division continued to report strong sales in 2007 and lead times improved as a result of the work conducted within the Munters Efficiency Program, which had a positive effect on the margin. The increased focus on Asia has started to yield results within the Industrial and Commercial business areas. Throughout the year, the industrial sector experienced strong demand from our traditional markets and the focus on the Asian market resulted in several important orders. DesiCool remained successful in the Commercial business area, partly as a result of strong cooperation with Wal-Mart, the single largest customer. The business area continued its expansion outside the US. Demand for Zeol systems improved during the second half of the year, following an extended period of weak growth. During 2007, the Dehumidification division adopted a new vision: “Global specialist within energy-efficient air treatment for comfort, process and environmental applications”. Much of the year’s work comprised the development of global product platforms, which will continue during 2008. The acquisition of Des Champs Technology at the beginning of April strengthened the division’s position with Commercial Dehumidification and broadened the portfolio beyond our traditional rotor-based and dehumidification technology. Most importantly, integrating Des Champs’ products into Munters’ patented HCU technology will generate new products during the coming year that will exceed today’s technology in terms of energy-efficiency and performance. During 2007, Munters’ activities in Asia were intensified. In late autumn, a new plant was completed in Beijing and the company’s marketing operations were strengthened, particularly in China. Increasing  customer focus on energy conservation and life-cycle costs. Significant  increase in sales of system solutions. Munters’  price premium under pressure due to major competitors. Competition  strategy includes price weapon. Price  advantage is maintained through product innovation (Power Purge, GTR rotor, ICA). International  customers expect the same products, systems and service in the global arena. Strategy Develop  global product platforms to achieve cost savings. Expansion  in Asia. Increase  energy efficiency of products. Stronger  focus on energy-efficient industrial air conditioning with HCU and DesiCool. Expand  Zeol operations into new segments and geographic areas. Improve  the margin through global sourcing, relocation of production and globalization of the product range. Acquisitions  that will benefit from Munters’ leadership within energy-efficiency and dehumidification. Focus 2008 During the past year, Dehumidification continued its efforts to utilize the economies of scale that are associated with a global organization within its sourcing and production. In 2008, the division will further concentrate its product portfolio to include fewer global product families based on a modular philosophy. Product development is focused on energy-efficient solutions. Considerable efforts will focus on strengthening the presence in Asia and ensuring that production in the new Chinese plants develops according to plan. Another goal is to introduce the products successfully selling in the US Commercial markets to both Europe and Asia. A broad product portfolio is being manufactured in China and the plant will serve as the production center for Asia and the global center for purchasing low-cost components. Progress is being made in combining the Munters and Des Champs technologies in new products, which will be launched during the year. The Zeol business area is focusing on improving the rotor so that a higher concentration of harmful emissions is attained, which will open new application areas. Margin management conducted within the next phase of Munters Efficiency Program will permeate the work of the entire division. Condensation elimination saves both time and energy for poultry producer Tyson Foods, Inc. founded in 1935 with head offices in Springdale, Arkansas, is the world’s largest producer of chicken, beef and pork. The company supplies a variety of various meat-based food products to customers across the US and in slightly more than 80 other countries. The company’s plant for chicken production in Nashville had problems with condensation in connection with the cooling equipment used in the premises for cleaning and cutting. The great differences in air temperature resulted in the roof “sweating” moisture. A number of employees were therefore fully occupied with drying the roof, light fixtures and pipes. Various attempts were made to reduce condensation, in part by hanging sheets of plastic over the cooling units and increasing air flow through the facility with fans. This did not help, however, since the fans at times pumped in air with higher humidity and also created imbalances in the airflow which only increased condensation somewhere else. Tyson Foods contacted Munters’ to solve the condensation problems once and for all. Munters’ first action was to measure the airflow through the cutting room to identify how the air flowed and what temporal patterns it exhibited. The measurement data was then analyzed to determine what steps should be taken to create ideal airflows. Put simply, it was determined that air should flow from the parts of the plant further ahead in the production process and back to the cutting department before being pumped out. Based on this analysis, Munters’ highly effective dehumidification system was installed. The system was also equipped with PowerPurge™, Munters’ patented technology for recovery of waste heat, which reduces energy consumption by about 35 percent, compared with a conventional system. Within just a few hours after installation, the condensation began to recede. “After we started using the dehumidification system, we have not needed to hang plastic over the cooling unit and also have not had to spend hours wiping off condensation every morning,” says Mike Hanson, plant manager at Tyson Foods in Nashville. “So far, we are very pleased with the results, and we will use the same technology in the future if we need to eliminate condensation in another part of the plant.” Munters Annual Report 2007 Market trends Case Dehumidification division 17 Moisture Control Services (MCS) division Autumn storms. Flooding. Ruptured water mains. Broken electrical lines. Fire and water damage causes damage costing enormous sums each year. By choosing dehumidification and renovation instead of rebuilding when restoring, insurance companies can save time and money. This also results in resource savings in terms of building materials and thus less environmental impact. MCS offers a variety of services from identifying risk areas, which can prevent damage from occurring, to environmentally friendly restoration when damage has occurred. Facts “It is with great hope that I assume my position as division President of MCS. Moisture Control Services has a strong global position that I want to develop further. In 2008, much of the division’s focus will be on improving gross margins and the broad launch of the Field.Link system during the year will contribute strongly to that goal.” Morten Andreason, Division President (appointed in March 2008) Development during 2007  weak beginning of the year was followed by increased A market activity during the autumn Market shares increased in large parts of Europe  Unanticipated costs of approximately SEK 23 M had an effect on the operating margin Reorganization and capital-efficiency program initiated The MCS division’s sales were virtually unchanged, compared with the preceding year. On the whole, the division’s earnings were not satisfactory. However, a favorable earnings trend was noted in most of Europe, despite a weak beginning of the year. A mild winter was followed until the end of June, by warm and dry weather in Europe, the US and Australia that was very unfavorable for MCS. Heavy rain and flooding in Northern and Western Europe, particularly in the UK, however, resulted in increasing orders as of July. The long-term consolidation trend with a constantly increasing share of fixed framework agreements continued, and a new framework agreement with the Grouparna insurance company was signed during the autumn. German operations are now stable and profitable, although the pace of improvement was negatively affected by the very mild winter, which resulted in relatively low market activity. No major weather events took place in the US during the year, which had a slowing effect on market trends in that region. Weak business and accounts receivable processes in Italy, France and Australia resulted in write-offs during both the fourth quarter and earlier in 2007. In total, these write-offs amounted to approximately SEK 23 M. In part as a result of this, a process and capital efficiency program is being implemented in parallel with a reorganization within the division. A more efficient business model based on a new mobile IT system for service technicians will be implemented in large parts of the division during 2008 and enable significantly improved productivity. Key data 2007 Adjusted growth, %1 2006 Growth, % 2007 SEK M SEK M 3,000 300 Order intake, SEK M 2,630 2,541 4 5 2,500 250 Net sales, SEK M 2,624 2,618 0 2 2,000 200 Operating earnings, SEK M 129 159 –19 1,500 150 Operating margin, % 4.9 6.1 1,000 100 Return on operating capital, % 15.5 19.7 500 3.2 3.3 0 1,918 1,845 321 302 Capital turnover rate, multiple No. of employees, 31 Dec. No. of service depots 0 01 4 02 03 04 05 06 07 Order intake Net sales Operating earnings (right-hand scale) Preceding year restated at 2007 exchange rates. Share of consolidated net sales Net sales per geographical region Market segments Share of consolidated operating earnings Share of Group employees 42% Asia 6% Americas 12% Other 3% Leasing 11% Reconstruction 16% Fire damage restoration 22% Water damage restoration 48% 21% 48% Europe 82% Munters Annual Report 2007 1 50 3000 2500 2000 1500 19 MCS division World leader in restoration after water and fire damage The Moisture Control Services (MCS) division is the world leader in restoration after water and fire damage, primarily for insurance companies, and in temporary moisture and temperature control in the construction industry, for example. The MCS division’s method for restoration is based on drying and renovation instead of demolition and rebuilding in conjunction with fire and water damage. This results in cost savings for the insurance companies by minimizing the scope of the damage and reducing administration, while saving resources in the form of building materials, thus reducing environmental impact. Within temporary moisture and temperature control, the customer’s costs are reduced primarily because the time required to complete the project is reduced. Services and offering The MCS division works with two main segments. The largest area of operations is restoration following water, moisture and fire damage, which accounts for slightly more than 75 percent of sales. Other services that the division provides are leakage detection and minor renovation services. The division’s services for temporary moisture and temperature control, in part for the construction industry, comprise about 10 percent of the division’s sales. Within damage restoration, it is often significantly more cost-effective to regulate insurance claims through drying and renovation than demolition and rebuilding. A common rule of thumb is that renovation reduces costs by 50 percent, compared with rebuilding. This also results in savings in building materials, thus reducing environmental impact. MCS offers a variety of services that can be coordinated at both the national and international levels. The division has a strong local presence in many geographic markets through its slightly more than 300 service depots and nearly 2,000 employees and is thus able to offer high availability. The MCS division’s services are characterized by high quality, availability and fast service. For water damage, time is a critical factor, and the flexibility of Munters’ technology results in short response times, which is a critical factor in limiting the extent of water and moisture damage. MCS offers a total undertaking and often acts as project manager on behalf of the insurance companies by coordinating other sub-contractors employed at the site of damage. The technology and equipment employed is selected to meet high demands and includes high-capacity dehumidifiers, fans and heaters that are designed for effective logistics and sound ergonomics. A smaller but significant and equally volatile part of the MCS division’s business is restoration of water damage after hurricanes and floods. In the markets in which these weather phenomena are frequent occurrences, MCS has an organization that can respond quickly and which has extensive experience of handling such catastrophic situations. MCS also offers services for temporary moisture and temperature control for the construction industry, for example. Effective drying of concrete and other construction materials reduces completion time and weather dependencies for construction projects. In addition, quality is secured and the risk of guarantee problems is reduced for the customer. MCS also offers climate control to prevent corrosion on cleaned steel surfaces, such as those in shipyards. The petrochemical industry may also need temporary dehumidification in such applications as construction and maintenance work on pipelines and in cisterns. Companies working with painting and surface finishing are similarly dependent on moisture control to guarantee the finish and quality of coatings and lacquering. One area in which MCS sees significant business potential is services for preventative damage control. This includes such services as measuring heat leakage in buildings, thermographic detection of water leakage in water pipes and exterior roofs, inspection of electrical wiring to prevent the occurrence of fire and consulting assignments intended to increase energy efficiency in large buildings. Today such services account for a small part of Munters’ sales, but the favorable trend in recent years motivates MCS to view this segment as a prioritized area. Customers and markets The global market for restoration after water and fire damage is estimated at slightly less than SEK 35 billion. The MCS division’s market share within this segment is estimated at about 6 percent. The total market for temporary moisture and damage control is estimated at slightly more than SEK 5 billion, of which MCS has a share of about 5 percent. Underlying growth is stable and is considered to be on par with GDP growth. However, demand can be influenced strongly from year to year by major assignments in conjunction with various types of natural catastrophes. Both the insurance and the damage restoration industries have traditionally been very fragmented, with over half of assignments going to small, local players. Water and fire-damage Case MCS division Flooding in the UK in the summer of 2007 from the Netherlands, Belgium and Italy were brought in. Nonetheless, each project manager had more than 120 assignments to handle. The field technicians collected all data in their mobile IT devices and were able to forward a large volume of information from the site to insurance companies and claims adjusters that were trying to get an overall picture of the scope of damage during the weeks following the flooding. This proved to be a very important competitive advantage for MCS. In addition, MCS had ample access to fans and pumps so that technicians could immediately install equipment for all assignments received. Nonetheless, it took several weeks in some areas and towns for drainage systems to be unclogged and water pools pumped away before actual restoration work could begin. There was a constant need for field work for an extended period after the flooding. MCS personnel did a heroic job, and many technicians worked for weeks on end in the field without seeing their families. Assignments continued to be received as late as in December, when previously hidden problems after the summer’s flooding began to become apparent. The Munters UK organization emerged strengthened from this challenging period during which resources were limited and working conditions at times chaotic. Munters handled the assignments more rapidly than its competitors, and contacts with customers were managed in a very professional manner. The Munters Customer Satisfaction Index was maintained at 97 percent, which was a fantastic accomplishment. There is no doubt that the Munters brand was strengthened in the UK. Munters Annual Report 2007 On June 12, 2007, reports were received by Munters UK of flooding in Belfast in Northern Ireland. During an extended period, the UK company had experienced a relatively low level of activity as a result of the mild winter and warm spring. Munters responded quickly and immediately dispatched personnel to get an overview of the damage. Nearly 60 damage reports were filed, and the organization prepared for a challenge. However, no one could imagine that this was just a preview of what was to come just three days later. On June 15, torrential rains fell over areas stretching from northeastern England down to the Midlands. In just a few days, several major cities and villages were flooded with damage to buildings numbering in the 10,000s. A month later it happened again. In some places, more rain fell in one hour than normally falls in a month. Water levels in England’s two largest rivers, the Severn and the Thames, exceeded the levels in 1947, which was a catastrophic year of flooding in England. Large portions of the country of Gloucestershire were drowned by flooding, and hundreds of thousands of people were without electricity or fresh water. The MCS UK organization faced its most difficult challenge to date. Between June and August, Munters received more than 7,000 restoration assignments in addition to the normal workload of 2,000 water damage assignments per month. Of these, more than 1,000 related to commercial properties. The MCS call center handled more than 1,000 calls per day plus all the faxes that poured in. Munters’ teams from all over the UK were gathered in the disaster areas, and in just a few days, restoration work was proceeding at full speed. Personnel and equipment 21 MCS division restoration remains in large part a local business. The consolidation taking place in the insurance industry, however, has resulted in large insurance companies, such as Zurich, AXA and Norwich Union, wanting to increase efficiency and simplify the process of procurement and administration of damage claims. Insurance companies are seeking to an increasing extent to sign national and in some cases international framework agreements that are negotiated centrally and at fixed prices. To be attractive as a supplier, the damage-restoration company must be able to offer a standardized portfolio of services that are also administered at the national level. This trend also includes giving the supplier a greater role in coordinating damage restoration in which many different subcontractors are employed. For customers, this means fewer contact points and a professional partner that takes responsibility for all phases of restoration work from the first inspection to the final documentation. The development of framework agreements began in the UK and is spreading to additional markets, including the Nordic countries. This trend has the result that smaller damage-restoration companies find it difficult to compete for major contracts. Munters is one of the few damagerestoration companies working globally. In Munters assessment, framework agreements will eventually amount to about 40 percent of sales within MCS, up from the current level of about 30 percent. The MCS division’s competitors are in part large international players, such as Belfor and ISS Damage Control and in part small, local entrepreneurs. Mobile IT supports rapid and effective damage restoration Assignments within MCS are numerous, while the value of each assignment is usually relatively small. This creates opportunities for economies of scale and rationalization. A prioritized area within MCS is a mobile IT system being launched in large parts of the organization during 2008. The MCS division’s ambition is to greatly simplify and improve daily communication both internally between damage technicians and administrators, but also externally with customers in insurance cases. In addition to reducing the time devoted to administration of various projects for such tasks as filling in forms, damage reports and action plans, more efficient work methods can reduce the number of visits to damage sites and create clearer documentation. Experience from the UK market where the system has been in use for three years shows substantial potential for reducing costs while improving customer services, primarily through clearer online information flows and more rapid processing and service to key customers. Apart from the UK, the system is now in a pilot phase in Norway and the Netherlands, and it will be rolled out in 2008 to about 1,000 users, corresponding to about 75 percent of the total user potential. Another prioritized area within MCS is work with key account management. This means consolidating contacts with the leading insurance companies through systematic work processes and clear information flows that make it easier for both Munters and the customer to follow project progress. A large portion of the MCS division’s operations are located in Europe, where the Nordic countries account for a significant portion of sales. The division is underrepresented in the North American and Asian markets but is well-prepared to increase its presence in these regions. Munters has an ambition to grow in these markets with a broad service offering, and expansion will take place both organically and through selected acquisitions. Development during the year During the year, MCS signed a national framework agreement in Sweden with Folksam regarding water damage. In December, it was announced that Morten Andreasen had been appointed as new president of Moisture Control Services. Morten has broad international experience and in-depth knowledge of service operations, including several management positions at SAS Service Partner, Top Flight Catering and most recently LSG Sky Chefs. With this recruitment, MCS sees excellent prospects for further strengthening its position as a leading service company in a market undergoing consolidation. After assuming his position in March 2008, Morten became a member of Group management. Strategy Continued  focus on margin improvements throughout the division. Launch  of mobile IT solutions on a broad front in the organization. Expanded  customer offering including services for preventative damage control, for example. Geographic  expansion in the US both organically and through selected acquisitions. Expanding  operations for temporary temperature and climate control. Increasing  market shares through innovative customer solutions and professional key account management. Increasing  flexibility in the composition of service personnel. Measures within the framework of MEP 2 Within the MCS division, a new organization will be implemented in which today’s six market areas will be restructured to include three global market areas: Northern  Europe Continental  Europe Americas  and Asia Dedicated regional management groups will focus on operations efficiency within the business units, which will also be assisted by central functions for finance, HR, sales and marketing. During 2007, a mobile IT platform for service technicians called Field.Link was developed. In 2008, Field.Link is expected to be rolled out to some 1,000 service technicians, corresponding to about 75 percent of the total potential. Munters made an environmentally friendly project possible Abbotsford is located in British Columbia in the middle of the scenic Fraser Valley. Many of the city’s 130,000 residents have chosen to live there for its proximity to Vancouver without giving up the advantages of a smaller community. From Abbotsford, there is a view of the majestic Mount Baker rising 3,285 meters above sea level and located just over the US border in Washington State. This area is renowned for its heavy snowfall, and in the winter of 1998–99, a world-record was noted in the Mount Baker Ski Area with 29 meters of precipitation during a single season. Canada’s first hospital built entirely according to the LEED Silver Standard directives is nearing completion in Abbotsford. Abbotsford Regional Hospital and Cancer Center has a budget of CAD 355 M (SEK 2.3 billion) and will be taken into operation in May 2008. The hospital with its 300 beds will serve the local city, as well as 330,000 people in the surrounding Fraser Valley. Improved productivity both in the field and in support functions is expected starting in the latter part of 2008 as a result of a more effective and industrialized management of business processes. In conjunction with this project, a capital efficiency project will be conducted with the objective of improving business processes and reducing capital tied up in accounts receivable. Together, these measures are expected to significantly improve productivity. Focus in 2008 Work to improve the division’s profitability and to deliver results within the strategic initiatives will continue. The now completed flexible mobile IT system for service technicians will be launched in the MCS division’s major markets during 2008. Starting in 2009, this will make possible significant When PCL Constructors Westcoast Inc., one of Canada’s leading contractors, received the assignment to build the hospital, they soon faced major problems. During the entire autumn and winter, the region experienced very severe changes in weather. Record rain in November was followed by strong and icy storm winds in December. During January and February, large amounts of snow fell, and temperatures plummeted to –20˚ C. The large volume of precipitation in combination with a cold climate gave rise to high humidity in the area during long periods. Humidity was at times a full 95 percent for several days on end. PCL quickly realized that the weather risked delaying the construction project, which would result in substantial penalties for each day the contracted delivery date was exceeded. In addition to the severe cold, drying time for the hospital’s cement floors and surface finishing on interior walls was deemed a critical threat to the timetable. The construction company contacted Munters’ experts who came to the site and analyzed the situation. PCL gave Munters’ demanding requirements specifications according to which the interior temperature was to be a constant 18–20˚ C with a relative humidity of 22–24 percent. Installing bulky dehumidification and heating equipment was impossible, since it would disturb the 450 construction workers in their daily work. The solution was to install nine DHI-125-ESU dehumidifi­ cation units on the hospital’s exterior roof during the months that indoor work was in progress while placing heaters in strategic locations. The DHI-125 is a sophisticated desiccators-based dehumidification system that is powered by both gas and electricity. The unit also uses the patented PowerPurge™ technology to recover energy in the dehumidification process, which makes it extremely energy-efficient for its size. The temporary climate system exceeded all expectations, and all Munters units were removed in April, when the building could rely on its own HVAC system for controlling the indoor climate. Rob Ireland, PCL’s project manager comments: “By using Munters’ equipment and expertise, we were able to meet the project deadline, despite the fact that construction took place under a very challenging climate period. That would have been an impossible task without Munters’ help.” efficiency improvements for our service technicians and within the support functions. Great effort will be devoted to increased flexibility in the division’s fixed-cost base to better adapt to seasonal variations with respect to weather impact and major natural disasters. These initiatives include various measures to more effectively utilize the damage technicians’ work over the year and to increase geographic mobility. Seasonal work, sub-contracting and broader job descriptions will be implemented during the year. Increased centralization of support functions is also planned to reduce costs. During 2008, the MCS division will expand operations in temporary moisture and temperature control. These operations currently account for 10 percent of the division’s sales. The division will also devote considerable effort to strengthening the partnerships with key customers in the insurance industry. Munters Annual Report 2007 Case MCS division 23 HumiCool division Animal breeding. Greenhouses. Coal-fired power plants. In very different businesses, in different climate zones and during different times of the year, there is always a need for heating, cooling and humidification. The objective is often to optimize production, improve quality or remove environmentally harmful substances from the air. Cleaning, cooling or heating is costly, however. HumiCool’s cost-effective systems for humidification, cooling and heating make it possible to create a controlled indoor climate in an extremely environmentally friendly and energy-efficient manner. Rubrik Facts “After strong growth in sales and earnings, we are now continuing to expand geographically. At the same time, we expanded our customer offering through the acquisition of Turbovent. I see excellent prospects during 2008 for continued growth both organically and through complementary acquisitions.” Per Segerström, Division President Development during 2007 Stable demand in all areas Favorable growth in AgHort during the second half of the year Acquisition of Turbovent expanded the customer offering Record earnings for the fourth quarter and the year as a whole The HumiCool division’s sales increased by 17 percent, compared with the preceding year. Market growth for the AgHort business area was limited during the first six months, in part due to a strong comparison period in the preceding year, but also due to the weak USD. The warm summer in Europe improved order intake noticeably, while the increase in meat prices that began in the spring contributed to a more advantageous financial situation for farmers in the US. The acquisition of Danish Turbovent during the summer strengthened HumiCool’s position as the leading manufacturer of climate-control equipment, air-cleaning and odor-elimination systems within the agricultural segment and expanded Munters’ portfolio with products for colder climates. During most of 2007, Mist Elimination noted strong growth in demand from manufacturers of cleaning units for coal-fired power plants, particularly in the US, but also in China. Overheating of the market, however, resulted in capacity shortages at the customer level during the latter part of the year. This in turn resulted in extensive construction delays, which had a slowing effect on order intake. Demand for pre-coolers for gas turbines was very high. Margins were positively affected in part by completion of the transfer of production of cooling media from North America to Mexico. Key data 2007 Adjusted growth, %1 2006 Growth, % SEK M SEK M 3,000 300 Order intake, SEK M 1,837 1,585 16 2 2,500 250 Net sales, SEK M 1,765 1,514 17 5 2,000 200 Operating earnings, SEK M 251 213 18 1,500 150 Operating margin, % 14.2 14.1 Return on operating capital, % 1,000 100 52.3 51.1 500 3.6 0 Capital turnover rate, multiple No. of employees, 31 Dec. 1 3.7 924 789 17 50 0 01 02 03 04 05 06 07 Order intake Net sales Operating earnings (right-hand scale)  receding year restated at 2007 exchange rates P and adjusted for acquisitions and divestments. Share of consolidated net sales Net sales per geographical region Market segments Share of consolidated operating earnings Share of group emplyees 28% Asia 8% Pre-coolers 5% 41% 23% Americas 37% Europe 55% Munters Annual Report 2007 2007 HVAC 28% Mist Elimination 28% AgHort 39% 3000 300 2500 250 2000 200 1500 150 1000 100 500 0 2550 0 HumiCool division Pioneer and market leader in evaporative cooling HumiCool offers environmentally friendly and energy-efficient solutions for creating an optimal indoor climate for animals, plants and humans, as well as for industrial processes. The technology is primarily based on evaporative cooling that occurs when water evaporates. This is nature’s own method for cooling the surrounding air. In addition, the division offers effective products for reducing harmful emissions, primarily for the coal-fired power industry. Munters’ is actively seeking new acquisitions to expand the existing product portfolio with energy-efficient and environmentally friendly solutions that ensure sustainable development. Services and offering The division is divided into four business areas, AgHort (Agriculture & Horticulture), Mist Elimination, HVAC (Heating, Ventilation and Air Conditioning) and GTEC (Gas Turbine Evaporative Cooling). AgHort, which is the largest business area, offers systems for climate control primarily for facilities for livestock breeding and for cultivation of plants and vegetables. Mist Elimination manufactures components called mist eliminators primarily for flue-gas cleaning systems for coalfired power plants. The HVAC and GTEC business areas offer products for climate control for indoor environments and products for air cooling for gas turbines. The division has production facilities in the US, Germany, Italy, Denmark, Japan, Thailand, Australia. China, South Africa, Brazil and Mexico. Munters’ technologies in the AgHort, HVAC and GTEC business areas are based on evaporative cooling. Warm and dry air passes through Munters’ special CELdek® or GLASdek® cooling pads, which are sprayed with water. As the air passes over the pads, the water evaporates, making the air cool and moist. This environmentally friendly cooling technology, which is based on Munters’ own innovations, is very costeffective. Within Mist Elimination, the technology is based on mechanical separation of liquid droplets. In flue-gas cleaning, this technology is used to remove water droplets arising earlier in the cleaning process. An increasingly broad product range, in-depth application expertise and global presence are some of the competitive advantages within HumiCool. Customers and market The total market for HumiCool’s products is estimated at SEK 13 billion. The division’s market share is about 15 percent, but in the product areas flue-gas cleaning and cooling pads and fans for livestock enclosures, the market share is significantly higher. The AgHort business area accounts for about 40 percent of sales within HumiCool. The business area is the world leader in energy-efficient climate control for buildings primarily intended for livestock breeding. Munters supplies its systems both to manufacturers of enclosures for livestock breeding and horticulture and directly to breeders and farmers. In addition, components are sold to other system integrators. Together, this customer segment dominates sales. In warm climates, cooling of indoor air is required in livestock breeding to achieve satisfactory productivity. For customers in the AgHort sector, cost efficiency and productivity are decisive factors. Munters’ evaporative systems provide the most costeffective cooling, compared with other technologies. Demand is primarily driven by consumption trends for chicken and pork, but technical development within livestock breeding is toward increasingly advanced and more large-scale production. The largest markets are the US, the Middle East, Russia, Italy and Thailand. Major customers include GSI, Hog Slat and Bridgeport. Competitors are mainly local players with relatively small-scale production. Greenhouses are another important segment within AgHort, with the southern European countries as the most important markets. The defined global market is estimated at about SEK 6.5 billion for the entire business area. During the year, Munters completed that acquisition of Danish Turbovent, one of Northern Europe’s leading suppliers of ventilation systems for breeding of poultry, pigs and cattle in Scandinavia, Germany and Eastern Europe. The acquisition broadens Munters’ product range and geographical coverage in the pig and cattle segments, while at the same time allowing the division to offer equipment suitable for northern climates, which significantly increases the market potential. Turbovent is also on the leading edge with respect to air purification and odor elimination systems for the agricultural industry, where reduction of odors, ammonia and soot emissions are of great importance. HumiCool division Munters’ ventilation fans in Italy Val di Noto lies in southeastern Italy in the Ragusa province. In 1693, a major earthquake occurred that destroyed virtually all buildings in the region. The small cities were rebuilt in a baroque style, and many of these beautiful buildings are still standing today. In 2002, eight cities in Val di Noto were listed on Unesco’s World Heritage list with the motivation that they embody the culmination and peak of the late baroque era in Europe, In addition to these grand buildings, the area is renowned for its many greenhouses that produce “primizie” (early fruit) that is sold throughout Italy. In the city of Scicli, the Muriana family has been working the land for generations. This family enterprise began with The HVAC and GTEC business areas together account for slightly more than 30 percent of the division’s sales. Within the HVAC segment, sales consist partly of components to manufacturers of evaporative cooling systems for homes, commercial and industrial premises in warm and dry climates, such as Australia and the Southwestern US and partly of mobile heaters, which with the acquisition of Italian Sial expand the business area’s product range. Products are primarily offered to the HVAC segment in Europe, although sales have also begun in other markets, such as North America and northern Asia, as well as within the AgHort business area, where the need for heaters is substantial in certain markets. Munters is the market leader and the only supplier able to offer significantly or targeted climate control throughout the year. Within GTEC, products are offered for cooling systems for the intake air for gas turbines called pre-coolers, which increase the turbine’s efficiency and thus produce more rose cultivation, and it was not until 2003 that Guiseppe Muriana began cultivating cherry tomatoes in his greenhouses. About 40 percent of all tomatoes consumed in Italy are cherry tomatoes. Currently the family’s cultivated area amounts to 10,000 m2, and its annual production of about 100 tons of cherry tomatoes is sold entirely in the domestic market. Mild winters and hot, dry summers in combination with the humid winds from the Mediterranean make the area ideal for tomato cultivation. The high salt content in irrigation water contributes to the high quality of the crops. However, a cold spell of just a few days during the winter can cause major problems for the growers. If the temperature falls below freezing, the entire crop may be lost, and if the temperature only climbs a few degrees above freezing, the tomato plant’s structure is weakened and the ripening process is delayed. During the warm season, problems relate to the high humidity that arises in the greenhouses. High relative humidity and reduced temperatures often result in bacteria and mold growth. Giuseppe Muriana was well aware of the problems that can arise in a greenhouse due to moisture, cold and heat and contacted Munters to obtain help with these problems. A Munters team analyzed the situation, and the solution was a complete climate control system. Munters GP130 air heaters, equipped with oil burners, were installed to maintain the temperature at an even level during the cold period and to prevent the plants from dying from the cold. To reduce the time and energy used for heating, EMT30 air circulation fans are used to quickly distribute the heated air evenly in the greenhouse. The circulation fans keep the humidity at the correct level, which reduces the risk of harmful infections in the delicate tomato plants. Finally, Munters installed EM50 exhaust fans that help to reduce the relative humidity in the greenhouses during the early morning and reduce the temperature during hot summer days. Giuseppe Muriana is very satisfied with the results after using Munters’ climate control system for a number of years. His assessment is that the entire climate control system paid for itself in just five years. Munters Annual Report 2007 Case Mist Elimination accounted for slightly less than 30 percent of the division’s sales during the year. This business area is the market leader in energy-efficient mechanical gas cleaning and separation of gas and liquids. The dominant customer segment consists of system suppliers for cleaning systems for coal-fired power plants, where Munters’ mist eliminators are used in the cleaning process for emissions. Demand for energy from coal-fired power plants has been increasing over a number of years due to rising prices for oil and natural gas. This, in combination with more stringent environmental requirements in both China and the US, mean that the fast-growing coal-based power industry needs effective solutions for reducing hazardous emissions. Another significant customer segment is the process industry, where markets in China and India in particular are growing significantly. Competitors include Koch, Peerless and Premaberg. The defined global market is estimated at slightly less than SEK 2 billion. 27 HumiCool division Case energy per cubic meter of natural gas. Although traditional technology still dominates the market, demand for Munters’ pre-cooler systems is increasing in pace with rising energy prices and increased use of gas as an energy source. Customers primarily consist of suppliers of gas turbines, such as General Electric and Siemens. The total defined global market for the business area is estimated at about SEK 5 billion. Munters’ mist eliminators at the sugar mill At the sugar mill in Vale do Ivaí in Brazil, some two million tons of sugarcane are pressed each year in the manufacture of a number of different sugar products. A considerable portion of the sugarcane juice is distilled into cachaça, the trademarked Brazilian alcoholic beverage. In the manufacturing process, the sugarcane juice is heated so that the water content evaporates, thus increasing the sugar content. In this process, steam is sprayed back and forth through the sugarcane juice until the desired concentration is achieved. This process caused expensive problems. The first was that the steam that was sprayed back and forth through the juice also took up some liquid sugar, thus reducing the volume of the finished product. In addition, it was not possible to reuse the steam in condensed form in the heating process, since it contained sugar particles. Cleaning of the waste water was expensive. During the harvest season, when the mill was closed for maintenance, management contacted Munters to discuss a pilot project. Munters’ technicians analyzed the production process and elected to install a T271® mist eliminator in a pre-evaporation tank. When production resumed, the researchers found that there was no trace of sugar in the condensation water and that the water did not need any post-processing before being reused in the process. The cost of installation of Munters’ mist eliminators was expected to be saved after just one harvest, in part because the sugar yield increased and in part because the cleaning process for the condensation water became unnecessary. Management therefore decided to install Munters mist eliminators in all production tanks. Development during the year The first six months were characterized by weak market growth for the largest AgHort business area, in part due to a strong comparison period in the preceding year, but also due to the weak USD. The warm summer in Europe improved order intake noticeably, while the increase in meat prices that began during the autumn contributed to a more advantageous financial situation for farmers in the US. The acquisition of Danish Turbovent during the summer strengthened HumiCool’s position as the leading manufacturer of climate-control equipment and air-cleaning and odor-elimination systems in the agricultural segment, and expanded Munters’ product portfolio with products for colder climates. During large parts of 2007, Mist Elimination experienced strong demand from manufacturers of cleaning systems for coal-fired power plants, primarily in the US, but also in China. However, overheating of the market resulted in capacity shortages during the latter part of the year. This in turn resulted in extensive construction delays, which had a slowing effect on order intake. Demand for pre-coolers for gas turbines was also very favorable. Margins were positively affected in part through the completion of relocation of cooling media from North America to Mexico. During the late autumn, expansion of the plant in Beijing was completed. This plant will be utilized jointly by HumiCool and Dehumidification. Production capacity as of 2008 will double, compared with prior years. Strategy Global  product platforms to achieve growth and cost savings. Market  leader in energy-efficient solutions. Geographic  expansion with emphasis on Asian markets. Greater  focus on product development. Expanding  the product offering through acquisitions. Measures within the framework of MEP 2 Within the HumiCool division extensive changes in plant layout and production flow will be implemented in four of the largest production units. The objective is to achieve significantly greater production efficiency and, by extension, improved gross margins. These changes will affect the plants in Monterrey (Mexico), Mondovi (Italy), Aachen (Germany) and the production unit in Mason (US). These measures will be implemented in parallel with investments in productivityenhancing machines and additional employee training. In addition, manufacture of a number of products will be transferred to the Group’s plants in Mexico and China in order to reduce manufacturing costs. HumiCool division Focus in 2008 offering and expanding operations to new geographic areas. Expansion of the production plant in Beijing creates significant market potential not only in China, but also increases Munters’ presence in the entire Asian market. Furthermore, work will continue to increase coordination internally within the division in such areas as product development, manufacturing and purchasing, as well as with such external measures as customer contacts and distribution. These measures are expected to result in further savings and efficiency gains during 2008. During the year, resources for product development will be increased to guarantee Munters’ leading position within its chosen segments. Case Work will continue to be characterized by measures to increase growth and profitability with the objective of strengthening the gross margin and leveraging the advantages provided by a global organization. Productivity-enhancing initiatives will be taken in several of the division’s production units, and an increasing share of production will be transferred to plants in China and Mexico. The action plan also includes actively seeking additional acquisitions that expand the existing product offering in line with the most recent acquisitions of Turbovent and Sial. Acquisition work is focused on moving towards a more solutions-oriented A sub-supplier to several of the world’s major car manufacturers produces engine valves in Northern Italy. Considerable heat is generated in the manufacturing process, with a very negative effect on employees. At times, productivity dropped noticeably, particularly during the summer period, while absence due to illness was at a constant high level. Munters’ technicians were asked what they could do to improve the situation. The solution was to install six ESAC FC35B evaporative coolers on the plant’s exterior roof. The result was an immediate success. Not only was indoor air both cooled to a comfortable temperature, the former smoke odor was also eliminated. Absence due to illness among employees dropped dramatically, and productivity rose from day one. The water cost for operations of the six cooling units was estimated at a total of SEK 20 per day for the entire summer period. This is to be compared with the cost of electricity, which amounted to about SEK 170 per day. According to company management, the cost of installation and operation was negligible in relation to the increase in productivity that was achieved. Munters Annual Report 2007 Engine valves in Northern Italy 29 Risks and risk management Risks and risk management Risk management is an important process in the operational management of the Munters Group. In addition to analyzing the risks that Munters faces and evaluating them, it is important to reduce the significant risks through continuous preventive measures. This involves the type of risks that could cause serious disturbances in production or jeopardize the Company’s financial position. Risk management The Group’s risks have been identified, valued and ranked based on how great an impact they would have on the Group’s valuation and the risk that they will arise. Some risks are beyond Munters’ direct control, while others can be controlled by the Group. Most of the risks are of a strategic nature, which emphasizes the importance of constantly working with a clear risk awareness. Work to formulate risk definitions and action plans is constantly in progress throughout the entire Group. Operational risks Munters is an entrepreneurial company with many small organizational units. The dependency on key persons is relatively great, and employee resignations may therefore be a threat. This applies particularly within MCS and product development within Dehumidification and HumiCool. A portion of Munters sales consists of components, products and equipment that are used in complex customer processes. Quality and contract obligations can result in warranty claims. Munters’ expansion within MCS increases its exposure to the insurance industry. Changes in insurance products, new supplier relationships and financial problems in the insurance industry could pose a threat to Munters. Alternative technologies may constitute a risk. Companies currently active in air conditioning could establish operations in Munters’ niches. The Group’s primary strength is its unique application and service expertise in humidity control in a global organization with a strong entrepreneurial spirit. Its weakness is a relatively diversified business that results in high costs. Strengths and weaknesses for Munters’ three divisions are described below under each division. Dehumidification division – Munters is the leading manufacturer of adsorption rotors, which are one of the company’s core components, and has a broad product portfolio in dehumidification. The combination of cooling and dehumidification is considered to have substantial future potential. A strong brand, long market presence, a global marketing organization with leading application expertise and an established service organization are other strengths. High indirect costs for creating market growth, a somewhat unstructured product portfolio and many small organizational units are the division’s weaknesses. Competition consists primarily of smaller local companies. Moisture Control Services (MCS) division – Competition comes from both international players, such as Belfor and ISS Damage Control, and small local contractors. MCS is the quality and technology leader with a strong brand and a complete service offering. Broad local presence in geographically diverse markets is a strength. The division’s weaknesses consist of volatile revenues and a relatively fixed cost structure, combined with low barriers to entry for competitors. Excessively high dependency on fixed contracts with the insurance industry may also constitute a risk. HumiCool division – Munters has high market shares in selected segments. The division is characterized by strong brands, technical leadership and broad application expertise. Weaknesses can be considered to be the many small organizational units and dependency on few OEM (Original Equipment Manufacturers) customers. Competitors are local companies with small-scale production. Financial risk management In its business operations, Munters is exposed to many different financial risks: market risk (primarily currency and interest risk), credit risk and liquidity risk. Munters’ management and control of financial risks are regulated by a policy established by the Board of Directors. Risk management and financing activities are primarily concentrated to the Parent Company in Sweden. Details regarding financial instruments are provided in Note 18. Market risk Currency risk – Munters’ financial reporting is in SEK, but the Group has operations worldwide and is thus exposed to currency risks due to changes in exchange rates that can have a negative effect on earnings, recognized assets and liabilities and investments in foreign currency. A significant share of Munters’ sales and costs are generated in foreign currencies. The geographic distribution of Munters’ production plants results in significant matching of revenues and costs in local currencies, which limits currency exposure. The shares of net sales and costs for the most significant currencies during the year are shown below. Share on net sales, % Share of costs, % Currency 2007 2006 2007 2006 EUR USD NOK GBP SEK Other currencies 35.8 31.6 6.8 7.2 4.2 14.4 34.3 33.1 6.8 6.8 4.9 14.1 35.3 30.5 7.0 6.5 8.7 12.0 34.1 31.5 7.0 6.4 9.6 11.4 100.0 100.0 100.0 100.0 Total Transaction exposure consists of the net of operative (export/import) and financial (interest/amortization) incoming and outgoing flows in various currencies. Munters’ policy is that currency hedging and trading shall be concentrated to the subsidiaries with Group internal sales. The goal of the currency-hedging policy is to hedge 100 percent of contracted net flows in foreign currency. Transaction exposure – Risks and risk management Exchange-rate movements also affect the Group’s translation of the income statements and balance sheets of foreign subsidiaries, as well as any goodwill in conjunction with acquisitions. Munters’ sensitivity to variations in certain currencies in translating EBIT is presented in the table below. The analysis is based on EBIT for 2006 and assumes that all other factors (such as changes in competition) that could affect earnings are unchanged. Translation exposure – Estimated translation effect on EBIT SEK +1% compared with EUR USD NOK GBP SEK M –2.3 –2.4 –0.3 –0.8 2007 % SEK M –0.4 –0.4 –0.1 –0.1 –2.0 –2.6 –0.3 –0.6 2006 % –0.4 –0.5 –0.1 –0.1 Liquidity risks Munters’ borrowing from banks consists in part of a syndicated credit facility with five banks and in part of individually approved bank loans to subsidiaries, of which the latter are generally in conjunction with acquisitions. The syndicated credit facility amounts to SEK 2,000 M with a maturity period of five years, which may be extended by two years. The credit facility may be utilized in several currencies. The interest-rate period has amounted to three to 12 months. When surplus liquidity is generated, it is primarily used to pay down loans. At present, virtually all external borrowing is in SEK. Liquidity risks is the risk of not being able to fulfill obligations associated with financial liabilities. The Group’s remaining contract periods for payments relating to financial liabilities are presented in Note 16. Capital management Interest risk Interest risk is the risk that changes in interest rates will negatively affect consolidated interest net and/or cash flow. Since the Group does not have any significant interest-bearing assets, the Group’s income and cash flow from current operations is essentially independent of changes in interest rates. The Group’s interest risk arises through interest-bearing borrowing. Munters’ sources of funding are primarily equity, cash flow from current operations and borrowing. Munters’ finance policy establishes guidelines for fixed interest for borrowing and the average maturity periods. The Group’s policy is that the interest periods for debt should normally be between 0 and 12 months. Interest-bearing liabilities are reported in Note 20. Interest exposure Munters’ profitability is affected by interest-rate fluctuations. The estimated effect on earnings after financial items of a change in interest rates of one percentage point amounts to slightly less than SEK 7 M (3), primarily as an effect of higher/ lower interest expenses for borrowing at floating interest rates. Credit risk Credit risk is the risk that the counterparty in a transaction will not fulfill its financial obligations and that any collateral will not cover the company’s claims. For Munters, the dominant portion of credit risk relates to accounts receivable. An approved credit rating is required in order for a counterparty to be approved. With respect to accounts receivable, the risk is spread over a large number of customers, primarily companies in different industries and with substantial geographic diversity, which limits concentration of the credit risk. Within the MCS division, insurance companies account for a large share of the counterparties. Credit risk in other financial assets, such as cash and cash equivalents, amounts to the carrying amount of these assets. Details regarding credit risks in accounts receivable are presented in Note 16. The Group’s management of capital is regulated by a policy adopted by the Board of Directors according to which cash and cash equivalents are minimized by amortizing external loans. Surplus liquidity is invested in government bonds with low risk or placed in bank accounts. Surplus liquidity in subsidiaries shall be placed with the Parent Company. Munters is subject to external capital requirements in the syndicated credit agreement that was entered in 2007. The capital requirements relate to net debt/earnings before interest, tax and impairment and interest coverage. Munters complied with these capital requirements. Munters’ managed assets consist of shareholders’ equity amounting to SEK 1,202 (1,596). The change is primarily due to the redemption of shares during 2007. The motivation for the share redemption procedure was the Munters Group’s strong earnings and cash flow and strong balance sheet. Munters’ intention is to apply a dividend policy that the dividend level is matched to Munters’ earnings level, financial position and other factors that the Board of Directors considers relevant. The annual dividend shall correspond to approximately half of the Group’s average net profit over a period of several years. Insurable risks Sound risk management and understanding identify the areas in which insurance is effective. Insurance protection is regulated by central guidelines. Several insurance policies are managed at the Group level to enable coordination gains. This insurance comprises several different areas, such as general liability, product liability, property, interruptions, cargo, crime, Directors and Officers Liability and Employment Practice Liability. Legal processes Munters is involved in a small number of commercial disputes. None of these disputes is deemed to have any negative effect on the company’s financial positions or earnings. A more detailed description is presented in Note 24. Munters Annual Report 2007 EBIT for 2006 translated at 2007 exchange rates would result in a total translation effect of a loss of SEK 16 M (loss: 3), corresponding to 2.9 percent (0.5) of the year’s earnings. The effect on equity in translating the net assets of foreign subsidiaries to SEK amounted to a profit of SEK 10 M (loss: 132) during the year. 31 The share and shareholders The share and shareholders The Munters share has been listed since October 21, 1997 on the OMX Nordic Exchange Stockholm. Market capitalization amounted to SEK 5.8 billion on December 31, 2007. Share capital and number of shares Distribution of shares as of 31 December 2007 On December 31, 2007, Munters’ share capital amounted to SEK 131,250 M distributed among 75,000,000 shares, each with a par value of SEK 1.75. The company has one class of stock. Each share carries one vote without restrictions at the Annual General Meeting. All shares carry equal rights to the company’s assets and earnings. There are no restrictions on transfer of shares according to law or the company’s Articles of Association, The Annual General Meeting on April 24, 2007 decided unanimously to implement a 4:1 share split with automatic redemption of every fourth share and to increase the share capital through a non-cash issue. Shareholding No. of shares Proportion, % 1,980 417,746 501–5,000 2,715 3,472,186 4.6 286 3,911,467 5.2 5,001–50,000 50,001– Total 0.6 120 67,198,601 89.6 5,101 75,000,000 100.0 Trading volume Ownership structure As of year-end, Munters had 5,101 shareholders (5,267). The ten largest shareholders control 60 percent (60) of the voting rights. The proportion of shares owned by Swedish institutional investors corresponded to 49 percent (47), while foreign investors held 25 percent (28) of the capital. Shareholders on December 31, 2007 No. of owners 1–500 During 2007, 13.3 million Munters shares (14.0) were traded with a total value of SEK 3,314 M (3,615). The average share price during the year was SEK 92.24 (85.90). The highest price paid during the period was SEK 116.75 on July 16. The lowest price paid was SEK 65.00 on November 19. The beta value is a relative measure of the risk in the share measured as its correlation with the market index over the past 48 months. On December 31, 2007, the Munters share had a beta value of 0.92 (0.24), meaning that it had moved 92 percent (24) relative to the index. On December 31, 2007, the share price was SEK 76.75 (105.66), corresponding to a decline of 27 percent (45) during the year. During the same period, the OMX Stockholm index fell by 6 percent (24). No. of shares Share of capital, % Share of votes, % Latour 10,950,000 14.6 14.8 Dividend policy AB Industrivärden 10,950,000 14.6 14.8 5,836,100 7.8 7.9 6.2 The Board of Directors’ intention is to apply a dividend policy according to which the dividend level is adjusted to Munters’ earnings level, financial position and other factors that the Board of Directors considers relevant. The annual dividend shall correspond to approximately half of the Group’s average net profit measured over a period of several years. AFA Försäkring Swedbank Robur funds 4,582,194 6.1 State of New Jersey, USA 3,600,000 4.8 4.9 First AP fund 2,506,950 3.3 3.4 AMF Pension 2,090,000 2.8 2.8 Nordea funds 1,507,698 2.0 2.0 Enter funds 1,338,600 1.8 1.8 Dividend For the 2007 fiscal year, the Board of Directors proposes that the Annual General Meeting approve a dividend of SEK 2.50 (2.25) per share. The dividend corresponds to 55 percent (51) of net profit for the year. SHB/SPP funds 1,280,559 1.7 1.7 Total, ten largest shareholders 44,642,101 59.5 60.3 Other owners 29,290,949 39.1 39.7 Outstanding shares 73,933,050 98.6 100.0 1,066,950 1.4 – 75,000,000 100.0 – Treasury shares Total Treasury shares Repurchases, divestments and holdings of treasury shares are presented in Note 19. Incentive program Outstanding incentive programs are presented in Note 29. The share and shareholders Appointment and dismissal of Board members and amendment of the Articles of Association Members and deputy members of the Board of Directors are elected at the Annual General Meeting for the period until the closing of the next Annual General Meeting. Amendments to the Articles of Association are decided by the Annual General Meeting. Firm Analyst Telephone ABG Sundal Collier Tobias Ottosson +46 8 566 286 49 Carnegie Adam Nyström +46 8 676 86 97 Danske Bank Patrik Setterberg +46 8 568 805 70 Enskilda Securities Anders Eriksson +46 8 522 296 39 Handelsbanken Capital Linn Hansson +46 8 701 12 75 Kaupthing Bank Carl-Johan Blomqvist +46 8 791 48 55 Analysts who continually monitor Munters Redeye Henrik Alveskog +46 8 545 013 45 The market analysts listed below monitor Munters continuously. It should be noted that the opinions and forecasts regarding Munters that they express are their own and thus not Munters’ own or the opinions and forecasts of its management. Swedbank Capital Markets & Securities Mats Larsson +46 8 585 925 42 Key figures per share1, 5 Earnings per share, SEK Earnings per share after dilution, SEK Average no. of outstanding shares, 000s No. of outstanding shares on closing date, 000s Treasury stock, 000s Operating cash flow per share, SEK Equity per share, SEK4 Equity per share after dilution, SEK Dividend per share, SEK Share price on closing date, SEK Market capitalization on closing date, SEK M3 P/E ratio, multiple Return on equity, %4 2007 2006 2005 2004 2003 4.49 4.49 73,898 73,933 1,067 2.56 16.16 16.16 2.50 2 76.75 5,756 17.1 25.7 4.40 4.40 73,749 73,785 1,215 5.08 20.33 20.33 2.25 105.67 7,925 24.0 22.5 3.39 3.39 73,614 73,743 1,257 2.46 19.42 19.45 1.83 73.00 5,475 21.5 19.3 2.74 2.73 73,134 73,134 1,866 1.66 15.65 15.63 1.33 66.67 5,000 24.3 17.8 2.35 2.34 73,260 73,134 1,866 1.70 14.84 14.79 1.17 58.00 4,350 24.7 15.8 1 As of 2004, the amounts are in accordance with IFRS accounting principles, which mainly means that goodwill is no longer amortized. Years prior to 2004 are in accordance with prevailing accounting principles at the time. 2 According to the Board of Directors’ proposal. 3 T he market capitalization is based on all shares, including treasury stock. Effective 1 January 2006, Munters accounting is in accordance with the changes implemented in IAS 19. Key figures were recalculated according to those changes. 4 5 Historical figures for the share were adjusted for the share split, redemption and non-cash issue implemented in 2007. 110 © OMX AB Trend since listing in 1997 120 © OMX AB Trend in 2007 120 100 80 100 60 90 40 70 60 7,000 15,000 5,000 10,000 3,000 1,000 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec 20 15 The Share OMX Stockholm_PI Total shares traded Carnegie Small Cap Index (000s incl. aftermarket) Per-share data Equity % 5 4 3 2 1 0 25 20 15 10 5 0 35 28 21 14 7 0 04 05 06 07 03 99 00 01 02 Liquidity SEK Earnings Dividend Operating cash flow 98 04 05 06 Equity Return on equity (right-hand scale) 03 04 The Share OMX Stockholm_PI Carnegie Small Cap Index SEK 03 5,000 07 Times 03 06 07 Total shares traded (000s incl. aftermarket) Dividend policy SEK M 25 20 15 10 5 0 05 Munters Annual Report 2007 90 04 05 06 07 Average turnover per trading day Turnover rate (right-hand scale) 1.0 0.8 0.6 0.4 0.2 0.0 % 60 50 40 30 20 10 03 04 05 06 07 Target Actual dividend 33 Corporate governance report Corporate governance report Munters AB (publ) applies the applicable rules contained in the Swedish Code of Corporate Governance (“the Code”). In accordance therewith, the Company has prepared this corporate governance report. Division of responsibility Responsibility for management and control of the Group is divided among the shareholders at the Annual General Meeting, the Board of Directors and its appointed committees and the President, in accordance with the Swedish Companies Act, other legislation and regulations, prevailing rules for exchangelisted companies, the Company’s Articles of Association and the Board of Directors’ internal control instruments. Shareholders On December 31, 2007, the Company had 5,101 shareholders. The proportion of the share capital owned by Swedish institutions amounted to 49 percent. Foreign investors owned 25 percent of the share capital. The ten largest owners together had holdings corresponding to 60.3 percent of the share capital. For further information on ownership on December 31, 2006, see page 32 of the Annual Report. Annual General Meeting 2007 The Annual General Meeting is the Group’s highest governing body. The Annual General Meeting is normally held in April in Stockholm. The 2007 Annual General Meeting was held on April 24, 2007. Berthold Lindqvist was elected Chairman of the Meeting. The following decisions were taken: The Annual General Meeting adopted the Parent Com- pany income statement and balance sheet, the consolidated income statement and balance sheet, decided to dispose of earnings in accordance with the proposed distribution of earnings resulting in a dividend of SEK 6.75 per share (corresponding to SEK 2.25 after the implemented share split) for the 2006 fiscal year, and discharged the Board of Directors and the President from liability. The Annual General Meeting approved decisions in accordance with the Nominating Committee’s proposal – that the number of members of the Board of Directors elected by the Annual General Meeting shall be eight and that no deputy members shall be elected; – that fees to the Board of Directors shall be paid in a total amount of SEK 1,925,000 of which (i) SEK 450,000 to the Chairman, (ii) SEK 200,000 to each of the Board members elected by the Annual General Meeting who is not an employee of the Company, (iii) SEK 100,000 to the Chairman of the Audit Committee and SEK 50,000 to each of the other members and (iv) that fees shall be paid to the other member of the Compensation committee in an amount of SEK 50,000 to the Chairman and SEK 25,000 to each of the other members. It was also noted that the 2004 Annual General Meeting decided that fees shall be paid to the auditors on account; – that Berthold Lindqvist, Anders Ilstam, Bengt Kjell, Eva-Lotta Kraft, Sören Mellstig, Sven Ohlsson and Jan Svensson were to be re-elected, that Lars Engström was to be newly elected to the Board of Directors and that Berthold Lindqvist was to be Chairman of the Board. It was noted that the employee organizations had appointed Pia Nordqvist and Kjell Wiberg as members with Tommy Morin and Ulf Vallén as deputy members of the Board of Directors. The Annual General Meeting approved a request from the Nominating Committee to adjust the Committee’s instructions in accordance with its proposal. The Annual General Meeting approved the Board of Directors’ proposal to establish guidelines for compensation to senior executives. The Annual General Meeting unanimously approved the Board of Directors’ proposal and the auditor’s recommendation to adopt a redemption plan including a) amendment of the Articles of Associations, b) a share split, c) a reduction of the share capital and d) an increase of the share capital through a non-cash issue. The Annual General Meeting approved the Board of Directors’ proposal to introduce an employee options program involving transfer of treasury shares. The Board of Directors approved the Board of Directors’ proposal to authorize the Board of Directors for a period at most until the next Annual General Meeting to raise loans on one or more occasions in accordance with Chapter 11 section 11 of the Swedish Companies Act for which the interest is dependent on the company’s earnings or financial position (participating loan). This authorization was not utilized during the year. Nominating Committee In accordance with the 2006 Annual General Meeting, the Nominating Committee is to be elected annually through the Chairman of the Board contacting the company’s four largest shareholders, in terms of voting rights, based on the owner information in VPC AB’s share register on the last banking day in August each year. Each of these owners is then entitled to appoint a representative to, jointly with the Chairman comprise the Nominating Committee for the period up until the end of the next Annual General Meeting or, if applicable, until a new Nominating Committee has been elected. If a member resigns from the Nominating Committee before completion of his/her duties, if applicable, a replacement shall be elected by the same shareholder who elected the resigning member or, if that shareholder is no longer one of the four largest shareholders, by the newest shareholder joining the group. If the ownership structure in the company changes before the Nominating Committee has completed its work, the Committee has the right to change its composition in the Corporate governance report Since October 2007, the Nominating Committee includes the following persons: Carl-Olof By (AB Industrivärden), Gustaf Douglas (Latour), Anders Algotsson (AFA Försäkring), and Jan Andersson (Swedbank Robur Funds). In addition to the above list, Berthold Lindqvist, Chairman of the Board of Munters is also included. The Nominating Committee will prepare a proposal to the 2008 Annual General Meeting regarding the Chairman of the Annual General Meeting, composition of the Board of Directors and Board fees, as well as election of auditors and their fees. The Nominating Committee held two meetings during 2007. No compensation was paid to the Nominating Committee. Work of the Board of Directors General – According to the Company’s Articles of Association, the Board of Directors shall consist of four to eight members elected each year by the Annual General Meeting for the period until the end of the next Annual General Meeting. The Articles of Association permit the election of deputies, but no deputies were elected by the Annual General Meeting. By law, the employees appoint two members and two deputy members to the Board of Directors. In 2007, Pia Nordqvist and Kjell Wiberg were appointed as employee representatives on the Board, with Tommy Morin and Ulf Wallén as deputies. The Group’s CFO participates in Board meetings as does the Board’s secretary, who is a lawyer and independent of the company. Other employees participate in Board meetings as presenters of special issues or when otherwise deemed appropriate. The members of the Board of Directors are presented on page 38 of the Annual Report. The Board of Directors establishes a written Working Procedure each year that regulates the Board’s work and the internal distribution of responsibility, including its committees, decision procedures within the Board, the order of meetings and the Chairmen’s duties. The Board of Directors has also issued instructions for the President and instructions for financial reporting to the Board. Furthermore, the Board of Directors has adopted a number of other policies, which are described below under the heading Policy documents. The Board of Directors is responsible for the company’s organization and the administration of its business and in so doing, must ensure that the organization is appropriate and dimensioned in such a manner that accounting, capital management and other financial matters are managed and monitored in a satisfactory manner. Furthermore, the Board of Directors is responsible for ensuring that the Company has adequate internal controls and for continuously reviewing the internal control systems. The Board of Directors is also responsible for developing and following up the Company’s strategies in the form of plans and goals. The Board of Directors continuously monitors the work of the President and operative management. Among the members of the Board of Directors elected by the Annual General Meeting, there are persons with ties to the Company’s major owners – Industrivärden and Latour – and persons who are independent of these parties. In accordance with the rules of the Code and the listing requirements of the OMX Nordic Exchange Stockholm, seven of the Board members elected by the Annual General Meeting, excluding the President Lars Engström, are independent of the Company. Of these, five are independent of the Company’s major owners and meet all established requirements for experience. Chairman – At the statutory meeting of the Board of Directors on April 24, 2007, Berthold Lindqvist was elected Chairman until the end of the next Annual General Meeting. The Chairman organizes and leads the Board of Directors work so that it is conducted in accordance with the Swedish Companies Act, other laws and regulations, prevailing rules for exchange-listed companies (including the Code) and the Board’s internal control instruments. The Chairman follows business development through regular contact with the President and is responsible for ensuring that Board members receive sufficient information and supporting materials for decisions. The Chairman is responsible for ensuring that the Board of Directors continuously updates and increases its knowledge of the Company and in other respects receives the training required to be able to conduct Board work effectively. In addition, the Chairman ensures that an annual evaluation is conducted of the Board of Directors’ work and that this information is provided to the Nominating Committee. The Chairman represents the Company in ownership matters. According to the Work Procedures currently in effect, the Board of Directors shall meet not less than five times per year and for one statutory meeting per year. It shall also be convened at other times when the situation so demands. During 2007, the Board of Directors held five ordinary meetings, one statutory meeting and two by correspondence. Board work during the year was focused on strategic, financial and accounting issues. All decisions were taken unanimously. At each Board meeting, the President reports on the Group’s development. As evident in the table below, attendance at the year’s meetings was highly favorable. Work procedures – Board ­meetings Audit Compensation Committee Committe Berthold Lindqvist1 Anders Ilstam Bengt Kjell3 Eva-Lotta Kraft3 Sören Mellstig Sven Ohlsson2 Jan Svensson 8 8 8 8 8 8 6 1 Total number of meetings 8 1 2 3 2 2 1 4 4 4 1 Chairman of the Board of Directors and the Compensation Committee Chairman of the Audit Committee Member of the Audit Committee during the first and last part of the year, respectively. Munters Annual Report 2007 manner it deems appropriate. One of the owner representatives in the Nominating Committee shall be its Chairman. The Nominating Committee’s assignment is to prepare and present proposals for the election of the Chairman and other members of the Board of Directors, Chairman of the Annual General Meeting, fees and associated matters and, as appropriate, election of auditors. Information about the Nominating Committee’s composition shall be published not less than six months prior to the Annual General Meeting. The members of the Nominating Committee may not receive fees, but any costs in conjunction with their work will be paid by the company after approval by the Nominating Committee. At the statutory meeting of the Board of Directors on April 24, 2007, the Board decided to appoint Sven Ohlsson (Chairman), Jan Svensson and Eva-Lotta Kraft as members of the Audit Committee for the period until the next statutory Board meeting. The Audit Committee is charged with preparing issues regarding the procurement of auditing services and audit fees, following up the auditors’ work and internal control systems, monitoring the current Audit Committee – 35 Corporate governance report risk situation and the company’s financial reporting and handling other issues assigned by the Board of Directors. The Audit Committee’s work is regulated by special instructions adopted by the Board of Directors as part of its Work Procedures. During 2007, the Audit Committee held four meetings at which all members were in attendance. At its meetings, the Audit Committee met with and reviewed reports from the company’s external auditors. During 2007, the Board of Directors met with and received reports from the company’s external auditors. The auditors’ proposals for various improvements in routines and internal controls were accepted but did not result in any special measure from the Board. Compensation Committee – At the statutory meeting of the Board of Directors on April 24, 2007, the Board decided to appoint Berthold Lindqvist (convener) and Sören Mellstig as members of the Compensation Committee for the period until the next statutory meeting. The Compensation Committee is charged with considering and preparing proposals regarding salaries, bonuses, pensions, severance pay, options and warrants for the President and other senior managers who report directly to the President and for such other similar issues assigned by the Board of Directors. On assignment from the Board, the Compensation Committee will present proposals on principles for compensation and other compensation terms for company management to be approved by the Annual General Meeting. The Compensation Committee’s work is regulated by special instructions adopted by the Board of Directors as part of its Working Procedures. During 2007, the Compensation Committee held one meeting at which all members were in attendance and had regular contact within the Committee in conjunction with employment and other compensation issues. Fees to the members of the Board of Directors elected by the Annual General Meeting are decided by the Annual General Meeting based on the proposal by the Nominating Committee. For the period from the 2007 Annual General Meeting through the 2008 Annual General Meeting, the fee paid to the Chairman was SEK 450,000. Other members elected by the Annual General Meeting, who are not employees of the company, were paid fees of SEK 200,000. Furthermore, a fee of SEK 100,000 was paid to the Chairman of the Audit Committee and SEK 50,000 to each of the other members of the Audit Committee, and fees of SEK 50,000 to the convener of the Compensation Committee and SEK 25,000 to the other member were paid. No further compensation was paid to any Board member. Compensation – Reporting and control The Board of Directors and the Audit Committee supervise the quality of financial reporting and the company’s internal control systems and monitor the company’s risk exposure. This takes place in part through instructions to the President and the establishment of requirements on the contents of the reports on financial circumstances that are regularly submitted to the Board of Directors, as well as through reviews with management and the auditors. The Board of Directors and the Audit Committee review and verify the quality of financial reporting, including the year-end report and the Annual report and have delegated responsibility to Company management to verify the contents of press releases containing financial information and presentation materials used in conjunction with meetings with the media, owners and financial institutions. Company management The President leads operations in accordance with the Swedish Companies Act and within the framework established by the Board of Directors. In consultation with the Chairman of the Board of Directors, the President prepares the information and supporting materials for decisions required for Board meetings, presents matters for consideration by the Board and motivates proposals for decision. The President leads Group management’s work and takes decisions in consultation with others in management. Group management currently consists of five persons. Company management conducts regular business reviews under leadership of the President 12 times each year, often in conjunction with visits to various Group units. The President and other members of Group management are presented on page 72 of the Annual Report. General – Compensation – At the 2007 Annual General Meeting, the Chairman of the Board of Directors informed the shareholders about the principles for compensation to senior executives. Current compensation levels are presented on page 39 and in Note 28. The proposal for guidelines for the determination of salaries and other compensation paid to senior executives will be submitted to the 2008 Annual General Meeting for approval. Internal audit The Company has a simple legal and operative structure with established management and internal control systems. The Board of Directors and the Audit Committee monitor the Company’s assessment of internal controls, in part through contact with the Company’s auditors. For these reasons, the Board of Directors has elected not to have a dedicated internal audit function. Auditors The 2004 Annual General Meeting elected the auditing firm Ernst & Young as the Company’s auditor for the period up until the 2008 Annual General Meeting, with Björn Fernström as auditor in charge. The auditors are presented on page 38 of the Annual Report. The auditors work in accordance with an audit plan, in which opinions from the Audit Committee and the Board of Directors were included, and reported its observations to the Audit Committee and the Board of Directors, in part during the audit itself and in part in conjunction with adoption of the 2007 year-end report on February 20, 2008. The auditors also participate in the Annual General Meeting at which they report on their work and observations. During the year, the auditors had consulting assignments apart from auditing, primarily relating to taxes. Internal controls The Code specifies that the Board of Directors shall issue a report on internal controls with respect to those portions relating to how financial reporting is organized and how well it has functioned during the year. The report shall also be reviewed by the company’s auditor. Munters’ Board has elected to follow the statement issued by the Swedish Corporate Governance Board on September 5, 2006 that it is sufficient for 2006 and until further notice if the Board of Directors in its Corporate Governance Report limits the report on internal controls to a description of how internal control is organized in respect to financial reporting, without expressing an opinion on how well it functions and without review by the auditor. Corporate governance report Effective working procedures on the part of the Board of Directors are the basis for satisfactory internal controls. Munters’ Board of Directors has an established Working Procedure for its work and instructions for the Board’s committees. One aspect of the Board’s work consists of formulating and approving the policies that govern the Company’s work with internal controls. Another aspect is creating prerequisites for an organizational structure with clear roles and responsibilities that encourage effective management of business risks. Senior management is responsible for implementing the guidelines to maintain satisfactory internal controls. Risk assessment and control activities – Munters’ management annually presents its view of significant risks for the Board of Directors’ Audit Committee. The Company’s most important risks relating to accounting and reporting are revenue recognition, valuation of accounts receivable and guarantee commitments, plus the Group’s many small subsidiaries, which lack critical mass with respect to accounting personnel. To effectively manage significant risks, Munters has established control structures that in part consist of an organization, which, from an international perspective, permits appropriate delegation of responsibility from the standpoint of control activities in the work performed on compiling the financial reports. During 2006, the company reviewed its internal control policy and introduced a formalized process whereby all Group business units implement a self-assessment of their compliance with the rules stipulated in the internal control policy. This self assessment is then reviewed by representatives of Group management according to a rolling schedule, and by the company’s external auditors. In the event of discrepancies, improvement plans and activities are prepared. Information and communications – Munters’ policies for internal control are primarily communicated through the Munters Management Manual and the Munters Financial Manual. These manuals are updated continuously and are easily accessible to all concerned personnel via Lotus Notes internal databases. The Munters Management Manual includes the Munters Information Policy, which provides guidelines for how external communication shall take place. The objective of the policy is to ensure that all information obligations are fulfilled in a correct and comprehensive manner. Follow-up – The Board of Directors evaluates business performance and results each month using an appropriately structured reporting package containing outcomes, forecasts and analyses of important key parameters. The Board of Directors receives regular reports from the meetings held between the Audit Committee and senior management and the auditors. The Audit Committee’s work also includes regularly following up the effectiveness of internal controls. The Committee’s work also includes evaluation and discussion of key technical issues relating to accounting and reporting techniques. Furthermore, the Audit Committee has initiated an annual process to ensure that appropriate measures are taken to address and implement recommended measures in regard to deficiencies that arise in part from internal follow-ups as described above and in part through the external auditors’ examinations. Control environment – Articles of Association The company’s Articles of Association regulate such matters as the objective of the company’s operations, the number of Board members and auditors, how notification of the Annual General Meeting shall take place, matters to be addressed by the Annual General Meeting and where the Meeting shall be held. The Articles of Association currently in effect and adopted on April 24, 2007 are available on the company’s web site at www.munters.com, under investor relations/ corporate governance. Policy documents In addition to the budget and strategic plan, which are required and approved by the Board of Directors, Munters has two primary control systems that specify authority and responsibilities for the leaders of Munters’ many business units. Firstly, there is Munters Management Manual, which, in addition to a number of general policies for the Group’s business and its employees, contains detailed descriptions of authorization and responsibility in business management. The following policies are included in Munters Management Manual. Ethical guidelines – The Group’s ethical guidelines were formulated with the objective of documenting the Group’s basic view on ethical issues both within the organization and externally towards customers and suppliers. Information policy – The Group’s information policy is a document that describes the Group’s general principles for the dissemination of information. Insider policy – The Group’s insider policy regulates the handling of insider issues and responsibility for these issues and contains instructions for insiders and others within the organization regarding how to act in insider-related matters. Visual Guidelines – The Group’s Visual Guidelines describe the manner in which Munters shall be visible in its marketing and business operations. Environment policy – The Group’s environment policy provides guidelines for environmental work within the Group. Secondly, there is Munters Financial Manual. The Financial Manual describes the rules and guidelines that apply for decisions on financial matters, how financial reporting is organized and what is reported. The accounting instructions in Munters Financial Manual comply with IFRS standards. In addition to accounting instructions, the manual contains the following policies. Financial policy – The Group’s Finance function works according to the instructions established by the Board of Directors, which provide a framework for how the Group’s operations shall be financed and how currency and interest risks, for example, must be managed. Internal control policy – The internal control policy provides instructions for maintaining order and control within the business units. General policies are reviewed and approved by the Board of Directors. The Company’s application of the Code Munters Annual Report 2007 Description of how internal controls are organized The Code is built on the “follow or explain” principle. This means that companies applying the Code may deviate from individual rules but must provide explanations and reasons for each reported deviation. Munters has not deviated from the rules of the Code. Review This Corporate Governance Report has not been reviewed by the Company’s auditors. 37 Board of Directors and Auditor 4 1 2 3 7 5 8 9 6 11 10 12 ningen, Samhall AB, Morphic Technologies AB and Svolder AB. Shares held: 4,500 4. Sven Ohlsson 1. Berthold Lindqvist
 Chairman. Born 1938. Chairman since 1997. Background: BSc Eng, MD Hon., Executive Vice President Wilh. Soneson AB, President and CEO Gambro AB, Board member of Securitas AB, JM AB, Cardo AB, Trelleborg AB. Shares held: 6,000 (directly and via company). 2. Lars Engström President and CEO. Acting President of MCS division. Born 1963. Employed since 2006. Background: M.Sc. Linköping Technical University. Various positions within Atlas Copco in Sweden and Australia, most recently as President of Atlas Copco Underground Rock Excavation Division. Shares held: 36,000. Options held: 25,000. 3. Eva-Lotta Kraft Member since 2004. Born 1951. Background: MSc Chem Eng, MBA. Employed earlier by AGA and Alfa Laval, Division Manager and Executive Vice President at Siemens-Elema AB, Department Manager FOI (The Swedish Defense Research Agency). Board member of AB Ångpanneföre- Member since 1997. Born 1944. Background: Chairman of Audit Committee, BSc Econ. President of Scancem among other executive positions. Board member of Dacke PMC AB and Scan Coin AB. Shares held: 6,000 5. Anders Ilstam Member since 2005. Born 1941. Background: Commercial engineer, Vice President Sandvik AB, President Sandvik Mining and Construction, CTT Tools, SKF Tools and several companies within Beijerinvest AB. Chairman of Seco Tools AB, Beijer Electronics AB, Air Liquide AB and Grimaldi Industri AB. Board member of Isaberg Rapid AB, Tylö AB and others. 6. Bengt Kjell Member since 2003. Born 1954. Background: BSc from Stockholm School of Economics. Executive Vice President of AB Industrivärden. Authorized Public Accountant, Head of Corporate Finance Securum, Senior Partner Navet AB. Chairman of Kungsleden AB and Indutrade AB. Board member of Helsingborgs Dagblad AB, Höganäs AB, Isaberg Rapid AB and Pandox AB. 7. Sören Mellstig Member since 1997. Born 1951. Background: MSc Econ. CFO and Executive Vice President of Incentive, Business Area Manager Gambro Renal Products and Executive Vice President Gambro, CEO and President of Gambro AB. Chairman of Aleris AB and Vatus Medical AB. Board member of Ferrosan A/S, PaloDex Oy, DakoA/S and Rindi Energi AB. Shares held: 20,400 8. Jan Svensson Member since 2004. Born 1956. Background: BSc Mech Eng and BSc Econ, the Stockholm School of Economics. President and CEO of Investment AB Latour. Chairman of OEM International AB. Board member of Fagerhult AB, Loomis AB and Oxeon AB. Shares held: 5,000 9. Kjell Wiberg Member since 2005. Born 1958. Background: Plumber. Employee representative appointed by the Swedish Trade Union Confederation. Shares held: 100 10. Tommy Morin Deputy member since 2005. Born 1951. Background: Electrical designer and electrical safety officer. Employee representative appointed by the Swedish Union of Clerical and Technical Employees in Industry. 11. Ulf Wallén Deputy member since 2007. Born 1963. Background: Installer. Employee representative appointed by the Swedish Trade Union Confederation. 12. Pia Nordqvist Member since 2004. Born 1973. Background: Order/ production planning, IT Support for business systems. Employee representative appointed by the Swedish Union of Clerical and Technical Employees in Industry Board secretary Peter Idsäter, Lawyer, born 1960. Partner Mannheimer Swartling Advokatbyrå AB. Auditor Auditing firm Ernst & Young AB. Auditor since 2004. Supervising auditor: Björn Fernström. Authorized Public Accountant. Born 1950. Information is as of March 11, 2008. Guidelines for compensation to senior managers The Board of Directors’ proposal concerning guidelines for compensation to senior managers in Sweden are covered by the ITP plan, to which a certain premium-based pension may be added. For such programs, the total premium allocation shall amount to between 20 and 35 percent of pension-entitling salary. Senior managers not residing in Sweden may be offered pension plans that are competitive in the countries where they reside. Each year, the Board of Directors shall consider whether or not share-related incentive programs shall be proposed to the Annual General Meeting. Share-related incentive programs that are not approved by the Annual General meeting are not allowed. Fees for Board members are established by the Annual General Meeting. If a Board member is employed by the company, compensation shall be paid to the Board member according to these guidelines, whereby special compensation for the assignment as a Board member shall not be paid. If a Board member performs assignments for the company that are not Board assignments, compensation shall be paid on market terms with consideration taken to the nature of the assignment and the work involved. These guidelines shall apply to those persons who during the period in which the guidelines apply are members of Group management, other managers in senior positions who report directly to the President and Board members of the company. The guidelines apply for contracts entered after the closing of the Annual General Meeting and in cases in which changes are made in existing contracts after that date. The Board of Directors shall have the right to deviate from these guidelines if there are special reasons in an individual case, subject to the condition that this decision is reported and motivated at a later date. Munters Annual Report 2007 The most recently approved guidelines are presented in Note 28. The Board of Directors of Munters AB proposes that the Annual General Meeting on April 22, 2008 approve guidelines for compensation to senior managers in the company according to the following. Salaries for senior managers shall be competitive and on market terms and with other terms of employment that correspond to the manager’s responsibility, authority, expertise and experience. Reconciliation of total compensation against market statistics and other information shall be performed regularly. In addition to a fixed annual salary, senior managers may also receive a variable salary, which will be based on the Group’s earnings per share for the President and for other managers on improvements in the manager’s area of responsibility with respect to earnings per share, sales, net operating profit and capital turnover rate, as well as the outcome of individual activity plans. The variable salary component shall correspond to at most 50 percent of the fixed annual salary for the President and at most between 30 and 50 percent for other senior managers. The company may subsidize or compensate interest expenses for senior managers’ acquisition of shares for which the manager assumes all risk. The notice period between senior managers and the company shall not be longer than six months, and severance pay shall not amount to more than 18 months (base salary) for the President and 12 months (base salary) for other senior managers. The President is covered by a premium-based pension plan according to which the premium may amount to at most 35 percent of the base salary. Other senior managers residing 39 10-year review GROUP IFRS1 Order intake, sales and profit Prior accounting principles1 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Order intake, SEK M 6,407 5,761 5,340 4,598 4,305 4,727 3,945 3,322 2,608 2,384 Net sales, SEK M 6,262 5,712 5,130 4,543 4,308 4,666 3,894 3,179 2,594 2,401 9.6 11.3 12.9 5.5 –7.7 19.8 22.5 22.5 8.0 9.3 566 529 405 334 298 465 401 306,2 237 205 EBIT margin, % 9.0 9.3 7.9 7.3 6.9 10.0 10.3 9.6,2 9.1 8.5 Earnings after financial items, SEK M 526 514 391 318 280 436 389 289,2 231 198 Net earnings, SEK M 336 328 252 200 172 266 239 184 144 124 1,202 1,506 1,437 1,148 1,086 1,114 1,012 821 655 545 25.7 22.5 19.3 17.8 15.8 25.6 26.7 26.0 24.8 25.9 1,242 Growth, % EBIT, SEK M Return figures and balance sheet 3 Equity, SEK M Return on Equity, % Capital employed, SEK M 2,340 1,915 1,802 1,606 1,553 1,617 1,360 1,006 763 Return on capital employed, % 24.8 28.0 22.8 21.0 19.1 30.8 31.8 28.3,2 29.9 29.5 Return on operating capital, % 31.8 32.7 26.2 23.1 22.2 33.7 29.3 26.0 26.0 25.8 Capital turnover rate, multiple 2.7 3.0 2.8 2.8 2.7 3.1 3.0 2.8 3.1 3.3 3,862 3,144 2,946 2,440 2,365 2,732 2,228 1,993 1,689 1,252 31.1 47.9 48.8 47.0 46.1 41.0 45.4 41.2 38.8 43.6 1,068 257 315 351 338 365 196 333 230 135 Total assets, SEK M Equity/assets ratio, % Net debt, SEK M Net debt/equity ratio, multiple 0.89 0.17 0.22 0.31 0.31 0.33 0.19 0.41 0.35 0.25 Interest-coverage ratio, multiple 10.7 25.0 20.2 17.7 11.3 14.2 16.3 11.7,2 13.1 11.6 Investments in tangible assets, SEK M 185 153 126 108 130 183 140 148 114 109 Operating cash flow, SEK M 189 375 181 121 125 230 236 –31 –55 1 4,268 3,644 3,303 3,207 3,162 3,100 2,541 2,311 2,086 2,011 Other key figures Average number of employees 1 Financial statements from 2004 have been prepared in accordance with IFRS. The main difference compared with prior accounting principles is that goodwill is no longer amortized according to plan. 2 E xcluding items affecting comparability in an amount of SEK 15 M relating to surplus funds from pension management in Alecta. 3 From January 1, 2006, Munters has changed its accounting in accordance with the changes in IAS 19. Key figures for 2005 are restated to comply with changes. Definitions are presented on page 73. Division Dehumidification Division MCS SEK M SEK M Division HumiCool SEK M SEK M SEK M SEK M 3,000 300 3,000 300 3,000 300 2,500 250 2,500 250 2,500 250 2,000 200 2,000 200 2,000 200 1,500 150 1,500 150 1,500 150 1,000 100 1,000 100 1,000 100 500 0 50 500 0 99 00 01 02 03 04 05 06 07 0 Order intake Net sales Operating earnings (right-hand scale) 99 00 01 02 03 04 05 06 07 500 0 0 Order intake Net sales Operating earnings (right-hand scale) SEK M Times 5 50 30 400 1,200 4 40 24 300 900 3 30 18 200 600 2 20 12 100 300 1 10 6 0 0 0 0 02 03 04 05 06 07 Operating cash flow Net debt 01 02 03 Capital turnover rate 04 05 06 07 Return on capital employed 0 % 1,500 01 99 00 01 02 03 04 05 06 07 Return on equity % 500 0 50 Order intake Net sales Operating earnings (right-hans scale) Capital turnover rate and return on capital employed Operating cash flow and net debt SEK M 50 01 02 03 04 05 06 07 10-year review DIVISIONS Division Dehumidification 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Order intake, SEK M 2,001 1,693 1,500 1,352 1,275 1,482 1,532 1,346 1,132 1,039 Net sales, SEK M 1,936 1,635 1,514 1,344 1,262 1,503 1,501 1,284 1,094 1,067 Growth, % 18.4 8.0 12.6 6.5 –16.0 0.2 16.9 17.4 2.5 11.2 Operating earnings, SEK M 234 194 159 138 109 163 152 136 81 102 Operating margin, % 12.1 11.9 10.5 10.3 8.7 10.8 10.1 10.6 7.4 9.6 Operating capital, SEK M 481 383 422 362 369 380 438 426 402 389 Return on operating capital, % 52.0 50.4 40.9 39.2 29.3 40.6 34.2 35.0 21.6 31.2 1,180 900 853 781 771 816 798 802 739 772 Order intake, SEK M 2,630 2,541 2,444 2,102 1,987 2,041 1,331 1,008 835 730 Net sales, SEK M 2,624 2,618 2,335 2,095 1,982 2,004 1,338 961 833 721 Growth, % 0.2 12.1 11.5 5.7 –1.1 49.7 39.3 15.4 15.5 9.3 Operating earnings, SEK M 129 159 153 141 122 192 153 83 97 62 Number of employees at year-end Division MCS Operating margin, % Operating capital, SEK M Return on operating capital, % 4.9 6.1 6.5 6.7 6.2 9.6 11.4 8.6 11.7 8.6 895 811 862 683 580 682 450 377 292 243 15.5 19.7 21.8 23.0 19.6 33.4 36.3 25.4 38.6 29.1 1,918 1,845 1,706 1,615 1,618 1,620 1,135 940 827 695 Order intake, SEK M 1,837 1,585 1,460 1,178 1,080 1,258 1,108 993 669 636 Net sales, SEK M 1,765 1,514 1,343 1,138 1,103 1,215 1,079 966 689 633 16.5 12.8 18.0 3.2 –9.2 12.6 11.8 40.2 8.9 5.0 Operating earnings, SEK M 251 213 135 88 127 164 139 139 84 77 Operating margin, % 14.2 14.1 10.1 7.8 11.5 13.5 12.9 14.4 12.2 12.1 Number of employees at year-end Division HumiCool Growth, % Operating capital, SEK M 497 391 440 432 474 513 470 476 392 273 Return on operating capital, % 52.3 51.1 29.2 18.2 24.6 31.6 28.6 31.5 27.2 28.8 Number of employees at year-end 924 789 668 649 661 737 634 623 567 496 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 3,838 3,412 3,056 2,705 2,658 2,731 1,949 1,674 1,404 1,325 12.5 11.6 13.0 1.8 –2.7 40.2 16.4 19.3 6.0 11.2 Operating capital, SEK M 1,207 1,016 962 894 898 996 717 698 582 480 Number of employees at year-end 2,516 2,331 2,144 2,056 2,090 2,156 1,662 1,470 1,347 1,153 2,041 1,872 1,683 1,501 1,347 1,577 1,592 1,231 970 885 9.1 11.2 12.1 11.4 –14.6 –0.9 29.4 26.9 9.6 12.1 GEOGRAPHIC REGIONS Europe Net sales, SEK M Growth, % Net sales, SEK M Growth, % Operating capital, SEK M Number of employees at year-end 478 388 583 409 338 399 483 428 355 307 1,108 830 754 726 663 701 621 647 559 591 510 529 484 419 372 427 408 335 279 238 –3.6 9.3 15.6 12.7 –12.9 4.7 21.8 20.1 16.9 –9.0 Munters Annual Report 2007 Americas Asia Net sales, SEK M Growth, % Operating capital, SEK M 177 176 181 154 168 158 139 130 117 113 Number of employees at year-end 397 372 330 265 299 316 284 245 227 223 41 12-quarter review GROUP 2006 2007 Order intake, net sales and earnings Q4 Q3 Order intake, SEK M 1,518 Net sales, SEK M 1,737 1,597 Growth, % Q2 Q1 Q4 1,674 1,688 1,527 2005 Q3 Q2 1,311 1,362 1,573 1,524 1,404 Q1 Q4 Q3 Q2 Q1 1,515 1,440 1,422 1,294 1,462 1,408 1,456 1,386 1,543 1,184 1,317 1,192 1,079 8.3 18.7 13.4 4.7 1.3 –5.2 6.9 22.1 28.5 21.4 16.9 3.7 EBIT, SEK M 171 149 119 127 143 140 129 118 155 112 74 64 EBIT margin, % 9.8 9.3 7.8 9.0 9.8 9.9 8.8 8.5 10.1 8.5 6.2 5.9 Net earnings, SEK M 101 87 70 78 92 86 79 71 104 68 43 37 42 56 53 34 53 44 26 30 37 37 31 21 161 –25 8 45 61 138 110 66 37 75 37 32 1,068 1,245 Other key figures1 Investments in tangible assets, SEK M Operating cash flow, SEK M Net debt, SEK M Net debt/equity ratio, multiple 1,138 209 257 127 258 229 315 318 397 296 0.89 1.16 1.07 0.13 0.17 0.09 0.19 0.15 0.22 0.23 0.31 0.23 8.9 8.9 11.1 22.2 21.1 28.3 27.2 24.9 33.6 27.7 12.3 12.3 3,552 3,449 3,400 3,365 3,245 3,180 3,122 3,128 Interest-coverage ratio, multiple Number of employees at period-end 4,043 3,982 3,915 3,669 Share data1,2 Earnings per share, SEK 1.34 Shareholders’ equity per share, SEK 16.16 0.95 1.04 14.51 14.36 1.16 22.13 0.92 0.57 0.50 20.33 19.66 18.48 20.04 19.42 18.28 1.23 17.45 17.06 58 63 Share price at period-end, SEK 76.75 93.00 107.50 100.67 106 Market capitalization at period-end, SEK M 5,756 6,975 8,063 7,550 7,925 1.15 1.06 95 0.96 80 1.40 88 73 61 7,100 6,013 6,613 5,475 4,575 4,325 4,750 1 From January 1, 2006, Munters has changed its accounting in accordance with the changes in IAS 19. Key figures from Q4 2005 to Q3 2006 are restated to comply with changes. 2 Historical data for the share has been adjusted for the share split, redemption and bonus issue implemented in 2007. Definitions are presented on page 73. Group order intake SEK M 2,000 1,500 1,000 500 0 98 99 00 01 02 03 04 05 06 07 98 99 00 01 Q1 02 03 04 05 06 07 98 99 00 01 Q2 02 03 04 05 06 07 98 99 00 01 Q3 02 03 04 05 06 07 04 05 06 07 04 05 06 07 Q4 Group net sales SEK M 2,000 1,500 1,000 500 0 98 99 00 01 02 03 04 05 06 07 98 99 00 01 Q1 02 03 04 05 06 07 98 99 00 01 Q2 02 03 04 05 06 07 98 99 00 01 Q3 02 03 Q4 Group EBIT SEK M 200 150 100 50 0 98 99 00 01 02 03 Q1 04 05 06 07 98 99 00 01 02 03 Q2 04 05 06 07 98 99 00 01 02 03 Q3 04 05 06 07 98 99 00 01 02 03 Q4 12-quarter review DIVISIONS Division Dehumidification Order intake, SEK M 2006 2007 2005 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 460 541 556 444 355 443 465 430 355 412 389 344 Net sales, SEK M 534 504 527 371 432 423 419 360 431 404 354 325 Growth, % 23.6 19.0 26.0 2.8 0.4 4.8 18.4 10.8 8.9 25.1 1.0 18.0 Operating earnings, SEK M Operating margin, % Operating capital, SEK M 72 55 69 38 65 51 49 29 58 45 32 24 13.5 11.0 13.1 10.2 15.0 11.9 11.8 8.1 13.5 11.2 9.1 7.3 481 477 488 384 383 394 392 395 422 408 395 384 1,180 1,151 1,126 913 900 890 877 867 853 848 831 826 Order intake, SEK M 673 690 634 633 636 601 654 650 769 665 501 509 Net sales, SEK M 739 666 605 614 686 638 635 660 775 562 504 494 Growth, % 7.8 4.4 –4.6 –7.0 –11.5 13.5 26.0 33.6 25.0 9.8 5.1 2.2 Operating earnings, SEK M 39 42 10 38 45 39 29 46 74 32 14 31 Operating margin, % 5.3 6.3 1.7 6.2 6.5 6.1 4.6 7.0 9.6 5.8 2.9 6.4 895 885 790 805 811 779 779 824 862 715 666 658 1,706 1,650 1,625 1,641 Number of employees at period-end Division MCS Operating capital, SEK M Number of employees at period-end 1,918 1,903 1,916 1,906 1,845 1,842 1,830 1,784 Division HumiCool Order intake, SEK M 395 460 518 465 333 340 462 450 330 366 419 345 Net sales, SEK M 476 446 414 429 361 367 411 376 347 374 352 269 Growth, % 31.9 21.6 0.7 14.1 3.9 –2.0 16.7 39.9 31.6 24.8 5.8 11.4 Operating earnings, SEK M 73 64 55 59 44 56 62 51 30 46 41 18 Operating margin, % 15.3 14.3 13.3 13.8 12.2 15.2 15.2 13.6 8.7 12.4 11.8 6.5 Operating capital, SEK M 497 494 492 452 391 392 399 436 440 514 527 442 Number of employees at period-end 924 911 855 832 789 698 672 695 668 663 647 642 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 942 1,020 1,008 940 802 785 908 891 774 813 808 746 656 GEOGRAPHIC REGIONS Europe Order intake, SEK M Net sales, SEK M Growth, % Operating capital, SEK M 2006 2007 2005 1,124 960 861 893 947 814 845 806 874 785 741 18.7 18.0 1.8 10.8 8.3 3.6 14.1 22.9 16.9 19.3 8.5 6.4 1,207 1,170 1,051 1,035 1,016 958 916 953 962 995 966 921 Americas Order intake, SEK M 430 551 599 498 414 464 541 516 562 502 388 342 Net sales, SEK M 499 550 560 432 412 487 498 474 567 429 363 324 Growth, % 21.1 13.0 12.4 –8.9 –27.3 13.5 37.2 46.3 31.2 10.8 –5.3 8.7 Operating capital, SEK M 478 495 531 419 388 443 488 528 583 465 448 402 119 Order intake, SEK M 177 123 105 121 119 138 148 130 123 130 126 Net sales, SEK M 142 121 135 112 138 132 134 126 127 125 115 117 Growth, % 3.1 –7.7 0.5 –11.2 8.7 4.9 16.4 7.5 14.3 20.6 8.0 20.0 Operating capital, SEK M 177 182 176 182 176 161 164 173 181 178 177 163 Munters Annual Report 2007 Asia 43 Comments on the performance during the year Comments on the performance during the year The following comments refer to the performance of the Group during the year. Comments on the performance of the divisions are provided on pages 12–29. Financial items Net financial items decreased to an expense of SEK 40 M (expense: 15), mainly as a result of increased indebtedness combined with higher interest rates. Order intake and net sales During the year, the Group’s order intake rose 11 percent (adjusted for currencies and acquisition and divestment of operations, by 6 percent) to SEK 6,407 M (5,761). All divisions reported highly favorable order growth during the year. The order backlog increased by 34 percent and was SEK 1,152 M (859) at year-end. Net sales during the year rose 10 percent (currency-adjusted, by 6 percent) to SEK 6,262 M (5,712). The Dehumidification and HumiCool divisions reported favorable growth during the year. Financial position Gross earnings increased by 10 percent to SEK 1,759 M (1,604). The gross margin remained unchanged at 28.1 percent (28.1). The equity/assets ratio at year-end amounted to 31 percent (48 on January 1). Interest-bearing assets amounted to SEK 276 M (201 on January 1) and interest-bearing provisions and liabilities amounted to SEK 1,344 M (458 on January 1). Net debt rose during the year by SEK 811 M to SEK 1,068 M, as a result of a redemption program amounting to SEK 494 M, the acquisitions of Des Champs Technologies and Turbovent totaling SEK 337 M and the ordinary dividend of SEK 166 M (135). During the year, Munters AB received SEK 11 M from the sale of treasury shares in conjunction with the maturity of the option program. The Group has SEK 1,019 M (522) in unutilized credit facilities. Indirect costs Taxes Selling and administrative costs increased by 8 percent to SEK 1,117 M (1,031), corresponding to 17.8 percent (18.0) of net sales. Research and development costs amounted to SEK 70 M (52), corresponding to 1.1 percent (0.9) of net sales. Development costs in conjunction with customer order projects and development costs for the service concept for the MCS operations are reported as a cost in the operating activities. The tax expense for the year amounted to SEK 190 M (186), corresponding to an effective tax rate of 36 percent (36). This exceeds the tax rate of 28 percent in Sweden, due to the fact that a significant portion of the Group’s profits are generated in subsidiaries in countries with higher tax rates, non-income-related taxes in certain countries and also owing to non-tax-deductible costs. Gross earnings Parent Company EBIT EBIT rose 7 percent to SEK 566 M (529). The EBIT margin declined slightly to 9.0 percent (9.3). Capital expenditures The Group’s investments during the year in tangible assets amounted to SEK 185 M (153). The largest item, amounting to SEK 82 M (63), refers to investments in MCS equipment. The remaining increase is primarily attributable to investments in new plants in San Antonio in the US and Beijing in China. Investments in intangible assets, excluding goodwill and other acquisition-related intangible assets, amounted to SEK 25 M (6). Depreciation and impairments amounted to SEK 152 M (136). The operations of Munters AB encompass Group-wide functions and certain functions of the MCS division. Earnings after financial items during the year amounted to SEK 257 M (929). This includes SEK 258 M (963) in dividends received from subsidiaries. There were no net sales outside the Group. Interest-bearing assets at year-end amounted to SEK 75 M (22), while net debt amounted to SEK 1,099 M (281). Investments in tangible fixed assets during the year amounted to SEK 8 M (11). Income statement Group Amounts in SEK M Net sales Note 2007 2006 2007 2006 4 6,262 5,712 51 37 –4,503 –4,108 – – 1,759 1,604 51 37 3 Cost of goods sold Gross earnings Other operating income Parent Company 0 14 2 Selling costs –653 –617 0 0 Administrative costs –464 –414 –78 –64 5 Research and development costs Other operating expenses EBIT – Earnings before interest and tax –70 –52 – – 5 –6 –6 –1 –1 6, 7 566 529 –26 –25 980 Financial income 8 14 7 325 Financial expenses 8 –54 –22 –42 –26 526 514 257 929 –15 – –190 –186 4 8 336 328 246 937 332 325 – – 4 3 – – 336 328 – – Earnings after financial items Change in tax allocation reserve Tax 9 Net earnings Attributable to: Shareholders in the Parent Company Minority interest Earnings per share1 – before dilution, SEK 10 4.49 4.40 – – – after dilution, SEK 10 4.49 4.40 – – Attributable to shareholders in the Parent Company. Munters Annual Report 2007 1 45 Balance sheet Group Amounts in SEK M at December 31 Note Parent Company 2007 2006 2007 2006 ASSETS Fixed assets Buildings and land 11 172 166 – – Plant and machinery 11 144 134 – – 15 7, 11 262 228 19 Construction in progress 11 22 10 – – Patents, licenses, brands and similar rights 12 110 43 17 3 Goodwill 13 794 543 – – Participation in subsidiaries 14 – – 690 659 – – 1,385 891 15 2 4 – – 19 14 2 – Equipment, tools, fixtures and fittings Receivables from subsidiaries Participation in associated companies Other financial assets Deferred tax assets 9 Total fixed assets 62 62 – – 1,587 1,204 2,113 1,568 190 196 – – 73 50 – – Current assets Raw materials and consumables Products in process Finished products and goods for resale 170 134 – – Work in progress 91 73 – – Advances to suppliers 12 5 – – Accounts receivable 16 1,292 1,132 – – Prepaid expenses and accrued income 17 65 56 6 3 – – 82 92 18 0 1 – – 48 33 4 4 Receivables from subsidiaries Derivative instruments Current income taxes Other financial assets 58 59 6 7 276 201 75 22 Total current assets 2,275 1,940 173 128 TOTAL ASSETS 3,862 3,144 2,286 1,696 Cash and cash equivalents Balance sheet Group Amounts in SEK M at December 31 Note Parent Company 2007 2006 2007 2006 EQUITY AND LIABILITIES Equity Attributable to shareholders in the Parent Company 19 Share capital 131 125 131 125 Statutory reserve – – 76 76 Share premium reserve – – 2 2 Profit brought forward – – 703 1,066 – Reserves –37 –46 – 1,101 1,421 – – 1,195 1,500 912 1,269 7 6 – – 1,202 1,506 912 1,269 – – 15 – 20 1,168 16 1,137 – Provisions for pensions and similar commitments 21 162 162 37 35 Other provisions 22 3 8 – – 3 2 – – 47 32 – – 1,383 220 1,174 35 268 Retained profit Minority interest 19 Total equity Untaxed reserves Long-term liabilities Interest-bearing liabilities Other liabilities Deferred tax liabilities 9 Total long-term liabilities Interest-bearing liabilities 20 Advances from customers Accounts payable Accrued expenses and deferred income 23 Liabilities to subsidiaries Derivatives 18 Current income taxes Other liabilities 32 299 – 99 117 – – 496 435 6 3 377 323 10 10 – – 152 109 1 0 – – 70 60 – 0 136 125 17 2 Provisions for pensions and similar commitments 21 10 5 – – Other provisions 22 56 54 – – Total current liabilities 1,277 1,418 185 392 TOTAL EQUITY AND LIABILITIES 3,862 3,144 2,286 1,696 Pledged assets 24 5 5 – – Contingent liabilities 24 3 2 110 86 Munters Annual Report 2007 Current liabilities 47 Cash-flow statement Group Amounts in SEK M Note Parent Company 2007 2006 2007 2006 526 514 257 929 156 1 1 –20 –1 136 –4 4 16 3 3 1 1 – – 2 0 –2 0 –337 137 155 5 –337 –187 –181 6 12 476 488 268 604 OPERATING ACTIVITIES Earnings after financial items Reversal of items not affecting liquidity Depreciation and impairments Earnings from divestment and disposals of fixed assets Provisions for pensions and similar commitments Other provisions Other profit/loss items not affecting liquidity 6 Taxes paid Cash flow from operating activities before changes in working capital Cash flow from changes in working capital Changes in inventory –28 22 – – –102 5 0 2 Changes in other receivables –15 –19 –441 –117 Changes in accounts payable 31 19 4 –2 Changes in other liabilities 33 15 57 –262 –81 42 –380 –379 395 530 –112 225 –316 – –185 –25 4 – –159 27 –153 –6 4 – – – –8 –14 – –33 – – –11 –3 – –110 –522 –287 –55 –124 – 1,061 –214 –166 –494 11 2 696 –772 –135 – 3 1,083 –214 –166 –494 11 2 696 –652 –135 – 3 198 –206 220 –86 71 37 53 15 Cash and cash equivalents at the beginning of the year Exchange-rate differences in cash and cash equivalents 201 4 176 –12 22 – 7 – Cash and cash equivalents at the end of the year 276 201 75 22 Changes in accounts receivable Cash flow from operating activities INVESTING ACTIVITIES Acquisitions of enterprises Sale of business segments Investments in tangible assets Investments in intangible assets Sales of tangible assets Changes in other financial assets Cash flow from investing activities 3, 13 5 11 12 FINANCING ACTIVITIES Payments received for issued options Loans raised Amortization of loans Dividend paid Redemption of treasury shares Sales of treasury shares Cash flow from financing activities Cash flow for the year Interest received by the Group amounts to 8 (7), and by the Parent Company, 61 (21). Interest paid by the Group amounts to 44 (12), and by the Parent Company, 41 (17). OPERATING CASH FLOW Operating cash flow 189 375 – – Short-term interest-bearing liabilities Long-term interest-bearing liabilities Defined-benefit pension plans Interest-bearing assets 32 1,168 144 –276 298 16 144 –201 – 1,137 37 –75 268 – 35 –22 Net debt 1,068 257 1,099 281 NET DEBT Statement of the Group’s recognized income and expense Group Amounts in SEK M 2007 2006 3 3 0 0 Income and expenses reported directly under equity Actuarial gains and losses pertaining to remunerations after termination of employment, including special employer’s contribution Cash-flow hedges: – profit/(loss) reported in shareholders’ equity – transferred to income statement for the period Exchange-rate differences on translation of foreign subsidiaries Tax on items reported directly in or transferred from shareholders’ equity –1 5 10 –132 0 –3 12 –127 Profit for the period reported in the income statement 336 328 Total income and expenses reported for the period 348 201 344 198 Total income and expenses reported directly under equity Attributable to: Parent Company’s shareholders Minority interests 4 3 348 201 Munters Annual Report 2007 Refer also to Note 19. 49 Notes Amounts shown in millions of Swedish kronor (SEK M) unless otherwise stated. Amounts in parentheses indicate values for the preceding year. Contents, Notes Note 2 ACCOUNTING PRINCIPLES 2.1 Regulations applied The consolidated accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS). Since the Parent Company is an EU company, only IFRSs approved by the EU are applied. Moreover, the consolidated accounts have been prepared in accordance with Swedish law through the application of the Swedish Financial Reporting Board’s Recommendation RFR 1.1 (Supplementary Accounting Rules for Groups). The Parent Company’s annual report has been prepared in accordance with Swedish law and through application of the Swedish Financial Reporting Board’s Recommendation RFR 2.1 (Accounting for Legal Entities). This implies that the IFRS valuation and disclosure rules are applied, with the exception of the deviations indicated in the section entitled “Parent Company’s accounting principles.” Both Recommendations RFR 1.1 and 2.1 are to be applied to the presentation of the financial statements that pertain to fiscal years beginning January 1, 2008 or later, although earlier application is encouraged. Munters has decided to apply these Recommendations in the 2007 Annual Report. Note Page 1 2 50 50 Company information Accounting principles 3 54 Business combinations 4 56 Segment reporting 5 57 Other operating income and operating expenses 6 57 Depreciation and impairments 7 57 Leasing 8 58 Financial income and expenses 9 58 Income taxes 10 58 Earnings per share 11 59 Tangible assets 12 59 Patents, licenses, brands and similar rights 13 60 Goodwill 14 60 Participation in subsidiaries 15 60 Participation in associated companies 16 61 Credit and liquidity risk 17 61 Prepaid expenses and accrued income 18 61 Financial instruments 19 62 Equity 20 64 Interest-bearing liabilities 21 64 Provisions for pensions and similar commitments 22 66 Other provisions 2.3 Basis of consolidation 23 66 Accrued expenses and deferred income 24 66 Pledged assets and contingent liabilities 25 26 66 66 27 67 28 68 Transactions with related parties Average number of employees, absence due to illness, gender distribution Wages, salaries and other remuneration and social security expenses Remuneration to Board members and senior executives 29 69 Outstanding incentive programs 30 69 Fees to auditors 31 69 Events after closing date The consolidated accounts encompass the Parent Company and its subsidiaries. The financial statements for the Parent Company and its subsidiaries that are included in the consolidated accounts refer to the same period and have been prepared in accordance with the accounting principles that apply to the Group. All intra-Group transactions, revenues, costs, profits or losses that arise in transactions between companies included in the consolidated accounts have been entirely eliminated. Subsidiaries Subsidiaries refers to a company in which the Parent Company directly or indirectly holds more than half of the voting rights or otherwise has a controlling influence. A subsidiary is included in the consolidated accounts as of the time of its acquisition, which is the day when the Parent Company acquires a controlling influence, and is included in the consolidated accounts until the day on which the controlling influence ceases. Subsidiaries are reported in accordance with the purchase method, entailing that identifiable assets and liabilities in the acquired company are reported at the fair values determined by the purchaser on acquisition date. Minority interest The minority interest is the portion of earnings and of net assets of non-wholly owned subsidiaries that accrues to owners other than the Parent Company’s owners. The minority share in the company’s net earnings is included in the earnings reported in the consolidated accounts and the share in its net assets is included in the shareholders’ equity reported in the consolidated balance sheet. Associated companies Associated companies refers to companies in which the Parent Company directly or indirectly has a long-term holding corresponding to not less than 20 percent and not more than 50 percent of the voting rights or otherwise holds a significant influence. Associated companies are reported in accordance with the equity method. This means that the consolidated balance sheet includes the acquisition cost of the shares, plus the Group’s share Note 1 COMPANY INFORMATION Munters AB (publ) is a Swedish public limited company registered with the Swedish Companies Registration Office. Its Corporate Registration Number is 556041-0606. The registered office of the Board Directors of Munters is in the Municipality of Sollentuna in Sweden. The principal operations of the Group are described in Note 4. The Company’s shares are listed on the OMX Nordic Exchange Stockholm. The consolidated accounts for the fiscal year ended December 31, 2007 were approved by the Board and the President on March 11, 2008 and will be presented to the Annual General Meeting on April 22, 2008 for adoption. 2.2 Basis on which the accounts have been prepared The consolidated accounts are based on historical acquisition values, with the exception of derivative financial instruments, financial assets available for sale and financial assets valued at their fair value via the income statement. Notes Average rate Closing rate of exchange Currency Country 2007 2006 2007 2006 AUD Australia 5.66 5.55 5.66 5.44 CAD Canada 6.31 6.51 6.59 5.92 CNY China 0.89 0.92 0.89 0.88 DKK Denmark 1.24 1.24 1.27 1.21 EUR Euro 9.25 9.25 9.47 9.05 GBP United Kingdom 13.53 13.58 12.91 13.49 JPY Japan 0.057 0.063 0.057 0.058 NOK Norway 1.15 1.15 1.19 1.09 4.49 SGD Singapore 4.48 4.64 4.47 THB Thailand 0.21 0.19 0.22 0.19 USD USA 6.76 7.38 6.47 6.87 ZAR South Africa 0.96 1.10 0.94 0.99 2.4 Changed accounting principles The applied accounting principles are the same as the principles applied in the preceding year with the exceptions described below. During the year, Munters introduced the following new and revised standards and statements from the IFRIC, as approved by the EU. IFRS 7 Financial Instruments – Disclosures This standard requires that the Company submit information that will make it possible for users to evaluate the Company’s financial instruments and associated risks. IFRS 7 has no effects on the income statement or balance sheet, rather it entails only a supplementary disclosure requirement regarding financial assets and liabilities. The disclosure requirement entails qualitative descriptions of the nature of the risks arising through financial instruments and the aims, policies, organization and methods/processes applied to manage such risks, and also entails quantitative information on the risk and capital situation. Addendum to IAS 1 This addendum requires that the Company submit additional information, which will make it possible for users of its financial reports to assess the Company’s goals, principles and methods for the management of assets. The addendum has no effects on the income statement or balance sheet, rather it entails only a supplementary disclosure requirement regarding the Group’s management of assets. IFRIC 10 Interim Financial Reporting and Impairment The state­ ment implies that a company cannot reverse an impairment that was reported in a previous interim period pertaining to goodwill, investment in equity instruments or financial assets reported at acquisition value. The statement has not resulted in any effects on the income statement or balance sheet. 2.4.1 Introduction of new accounting principles When the consolidated accounts were prepared, a number of standards and statements were published which had not come into effect. Revised IAS 1 Presentation of Financial Statements The standard has been revised to enhance the usefulness of information presented in the financial statements. Among other, equity transactions with owners shall be presented in a separate statement whereas other equity transactions shall be presented either together with income statement transactions in a statement of comprehensive income or in a separate statement. The revised IAS 1 becomes effective for annual periods beginning on or after January 1, 2009. IFRS 8 Operating Segments This standard entails increased disclosure requirement pertaining to the reporting of business segments, which may consist of products and services or geographical areas or a combination of both. These business segments may be presented in accordance with the principles that management applies for operating control. IFRS 8 shall apply for fiscal years beginning January 1, 2009 or later. IAS 23 (Revised) Borrowing Costs This standard requires the capitalization of borrowing costs when such costs are attributable to assets for which significant amounts of time are necessary to complete the intended use or sale. The revised IAS 23 shall apply for fiscal years beginning January 1, 2009 or later. IFRIC 11 IFRS 2 Group and Treasury Share Transactions This statement requires that agreements whereby an employee is allotted a right to a company’s equity instrument are to be reported as equitysettled share-based payment, even if the Company purchases the instrument from an external party or the shareholders provide the equity instrument required. IFRIC 11 shall apply for fiscal years beginning March 1, 2007 or later. IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Mimimum Funding This statement addresses the issue of how an asset limit and minimum funding under defined-benefit pension plans are to be calculated in accordance with IAS 19 Employee Benefits. IFRIC 14 shall apply for fiscal years beginning January 1, 2008 or later. The new standards and interpretations will not have any significant effect on Munters’ earnings or financial position, but may affect the scope of disclosures provided. A documentation of the specific effects for Munters has been initiated. 2.5 Use of assessments In order to prepare accounts in accordance with GAAP, Company management and the Board must make assessments and assumptions that affect the financial statements and the information presented. These assessments are based on past experience and on the various assumptions that management and the Board consider reasonable under the prevailing circumstances. Conclusions drawn form the basis of determinations concerning carrying amounts of assets and liabilities, in cases where they cannot readily be determined from information from other sources. The actual outcome can differ from these assessments, if other assumptions are made or other conditions apply. Assessments can have a significant effect on Munters’ earnings and financial position, particularly in the areas of income recognition and doubtful debts, goodwill valuation, other intangible assets, restructuring measures, provisions for pensions and legal disputes, and contingent liabilities. Munters Annual Report 2007 in the earnings of associated companies after acquisition and after deduction of dividends received. The consolidated income statement includes the participation in the earnings of the associated companies after tax, with deduction, where applicable, of impairments of goodwill and amortization of surplus values. Translation of the accounts of foreign subsidiaries The subsidiaries’ items in the balance sheet are valued in the relevant functional currency, which would normally be identical to the local currency in the particular country. The consolidated financial statements are presented in Swedish kronor, which is the Parent Company’s functional currency. The income statement and balance sheets for the foreign subsidiaries are translated into Swedish kronor. The balance sheets are translated at the closing rates of exchange. The income statements are translated at the average exchange rate during the period. Exchange-rate differences do not affect earnings, but are reported directly under shareholders’ equity. The following currency rates have been used in currency translations. 51 Notes 2.6 Accounting principles applied Business combinations IFRS 3 (Business combinations) is applied to acquisitions of operations carried out on or after January 1, 2004, which complies with IFRS 1 and is consequently an exception from the main rule on retroactive application of IFRS. IFRS 3 implies that the fair value of the identifiable assets and liabilities of the acquired operations is established at the time of acquisition. These fair values also include participations in the assets and liabilities attributable to any remaining minority owners of the acquired operations. Identifiable assets and liabilities also include assets, liabilities and provisions, including commitments and claims from external parties that are not reported in the balance sheet of the acquired operations. Provisions are not made for expenses concerning projected restructuring measures resulting from the acquisition. The difference between the acquisition value of the acquisition and the acquired share in the fair value of the net assets of the acquired operations is classified as goodwill and reported in the balance sheet. The useful life of each intangible asset is established and amortized over the period of useful life. If the useful life is deemed indefinite, no impairment takes place. An assessment that causes the useful life of an intangible asset to become indefinite takes all relevant circumstances into account and is based on the premise that there is no predictable maximum time limit for the net cash flow generated by the asset. The useful life of goodwill is generally assumed to be indefinite. Fixed assets Fixed assets are reported on the balance sheet at acquisition value with deduction of accumulated depreciation according to plan and any applicable impairments. The assets of acquired companies are reported at fair value on the date of acquisition with deduction of accumulated depreciation. The acquisition value of the asset is depreciated according to the straight-line method down to the estimated residual value over the expected useful life of the asset. Anticipated useful lives are specified in Note 6. The assets’ remaining useful life is reviewed on every closing date and is adjusted if necessary. Buildings, machinery and equipment Land is not subject to depreciation since it is considered to have an indefinite useful life. Normal maintenance and repair costs are expensed as they arise. More extensive renovation and upgrade costs are reported as an asset and depreciated over the remaining useful life of the object. Goodwill Goodwill is the value by which the acquisition price exceeds the fair value of the net assets acquired in conjunction with the acquisition of a company or an acquisition of assets and liabilities. Goodwill arising from the acquisition of associated companies is included in the carrying amount of the associated company. Patents, licenses and similar intangible rights Direct external expenses for the development of software for internal administrative use are capitalized, provided future efficiency gains are likely and exceed the expenses committed. Activities during the preliminary study phase, and maintenance and training costs, are expensed on a regular basis. Impairment testing The value of the fixed assets is regularly impairment-tested. Goodwill and other intangible assets with an indefinite useful life are impairment-tested at least once a year. When there is an indication that an asset’s value has declined, the carrying amount of the asset, including goodwill, is assessed. If an asset’s carrying amount exceeds its estimated recoverable amount, the asset is impaired to its recoverable amount. The recoverable amount is the higher of net sale value and value in use. The recoverable amount is assessed for each cash-generating unit individually. “Net sale value” refers to the most likely sale price in a normally functioning market, with deduction of selling costs. ”Value in use” refers to the present value of the estimated future cash flows that are expected to result from the use of the asset and the estimated residual value at the end of the asset’s useful life. Value in use is generally measured using discounted cash-flow models, which requires assumptions of such parameters as a discount rate, future cash flows and the expenses necessary to create the assessed cash flows. Any previously reported impairment is reversed if the recoverable amount is considered to exceed the carrying amount. No reversal occurs of an amount greater than what would cause the carrying amount to correspond to what it would have been if no impairment had been reported in a prior period. Goodwill is impairment tested using the following method. The goodwill value established on the date of acquisition is distributed among cash-generating units or groups of cash-generating units, which are expected to contribute advantages from synergistic effects resulting from the acquisition. Assets and liabilities already in the Group at the time of acquisition can be assigned to these cash-generating units. Each such cash flow to which goodwill is distributed corresponds to the lowest level of the Group at which goodwill is monitored in the management of the Company. This is a unit of the Group that is not larger than a segment – that is, a division or geographic region in the Group’s segment reporting. Goodwill impairment is not reversed. Inventories Inventory is valued at the lower of acquisition cost or net sales value (fair value). Required impairments are made for obsolescence based on each item’s age and inventory turnover rate. Acquisition value is determined by applying the first-in, first-out method or weighted average prices, if that method results in a good approximation of the first-in, first-out method. For internally manufactured products, the acquisition value consists of direct manufacturing costs plus a reasonable share of indirect manufacturing costs. Interest expenses are not included in inventories. Normal capacity utilization has been taken into account in valuations. Work in progress on behalf of another party Work in progress consists of committed expenses attributable to currently incomplete work. Receivables Receivables are reported in the amounts at which they are expected to be paid, based on individual assessment. Accounts receivable Accounts receivable are initially reported at fair value, thereafter reduced by a provision for any decrease in value. A provision for decrease in value of accounts receivables is made when there are strong indications that the Group will not receive the amounts due according to the original conditions of the receivable. Cash and cash equivalents Cash and cash equivalents are defined as cash and bank balances plus current investments with maturity periods not exceeding three months. Utilized overdraft facilities are reported under short-term loans. Shareholders’ equity Expenses for the purchase of treasury shares reduce shareholders’ equity in both the Parent Company and the Group. When these shares are sold, the proceeds of the sale are included in shareholders’ equity. Borrowings Borrowings are initially reported in the amounts received, net after deduction of transaction costs. During subsequent periods, borrowings are reported as the total of outstanding payment obligations in accordance with the effective interest method. Interest expenses are reported in the income statements for the various periods. Provisions Provisions are reported when the Group has or may be considered to have an obligation as a result of events that have occurred and where it is probable that payment will be required to fulfill the obligation. An additional prerequisite is that it must be possible to reliably estimate the amount to be paid. A provision is made for restructuring measures when a detailed, formal plan of the measures exists and well-founded expectations have been created among those who will be affected by the measures. Notes contribution plans and several defined-benefit plans and other long-term employee benefits, including some with management assets in special trusts or the equivalent. Pension plans are mainly funded through premiums paid by the various Group companies and by the employees. Independent actuaries compute the amount of the commitments of the various plans and reassess plan commitments every year. Regarding defined-benefit plans, pension costs are calculated using the Projected Unit Credit Method, so that the cost is distributed over the employee’s working life. These commitments are valued at the present value of the anticipated future payments calculated using a discount rate that corresponds to the interest on high-quality commercial paper or government bonds with a remaining term that approximately corresponds to that of the commitments. For funded plans, the pension commitment is reported net after deduction of the plan assets. Funded plans with net assets – that is, with assets in excess of their commitments – are reported as financial assets. Actuarial gains and losses are reported against shareholders’ equity, net after deferred tax, in the period they occurred. In Sweden, special employers’ contributions pertaining to actuarial gains/losses are reported in shareholders’ equity. Other long-term employee benefits include benefits in conjunction with anniversaries or other benefits to long-term employees. Reporting of these benefits differs from defined-benefit plans whereby actuarial gains and losses are reported in the income statement and all expenses pertaining to employment during previous periods are reported immediately. The Group’s payments relating to defined-contribution plans are reported as an expense during the period the employee performed the services to which the contribution relates. Stock options program Employees have paid a market premium for the stock options program that Munters has implemented (see Note 29). The stock option programs contain a subsidy implying that the employee receives the equivalent of 40 or 60 percent, respectively, of the option premium in the form of a cash bonus, provided the option holder is employed during the period when the options may be exercised. This subsidy and the related social security payments are calculated and allocated as a personnel cost over the vesting period – that is, from the time of issuance of the options until the vesting conditions have been fulfilled. Warranty commitments Warranty costs are reported as cost of goods sold. Provisions for warranty costs are calculated at a standard rate in an amount that corresponds to average warranty costs in relation to sales in the most recent 24-month period, with an adjustment for known warranty claims exceeding the standard provision. Provisions for warranty commitments are related to the stated warranty period. Leases Leases are classified either as finance or operating lease. Leases in which Munters adopts essentially the same legal position as in direct ownership of the asset are classified as finance lease. Reporting of finance leases entails recognizing a fixed asset as an asset item in the balance sheet, at the lower of the market value of the asset and the estimated present value of the underlying lease payments, and initially reporting a corresponding liability. The asset is depreciated according to plan over its useful life, while the lease payments are reported as interest and amortization of the liability. For operating lease, the lease payments are expensed in the income statement over the lease period. Revenue Net sales are reported at the sale value after deduction of discounts and value added tax and other taxes. Income from the sale of goods is reported upon delivery, at which point essentially all risks and rights are transferred to the purchaser. This normally implies that sales are reported on delivery to the customer in accordance with the conditions of sale. Income from major project assignments is reported in relation to the degree of completion on the closing date, provided the profit can be reliably calculated. Degree of completion is determined mainly on the basis of committed project costs in relation to estimated project costs upon completion. Any expected losses are expensed directly. In the MCS division, there are numerous small projects with short completion periods (the average being between two and 12 weeks). For practical reasons, income from such projects is reported on completion in connection with the issuing of a final invoice to the customer. Key categories of revenue are defined in Note 4, whereby Dehumidification and HumiCool refer to the sale of goods and MCS refers to services rendered. Interest income on receivables is calculated using the effective interest method. Interest income includes the accrued amount of transaction costs and possible discounts, premiums and other differences between the original value of the receivable and the amount received when due. Research and development costs The Group’s expenses for research and development do not meet the established requirements for reporting as assets and have thus, as in previous years, been expensed as they were incurred during the year. Borrowing costs Borrowing costs are reported as costs in the period in which they arise, regardless of how the borrowed funds are employed. Government grants Government grants are reported at fair value when it may be presumed with reasonable certainty that a grant will be received and that the Group will fulfill all the conditions attached thereto. Government grants related to the acquisition of assets are reported in the balance sheet through the reduction by the grant of the carrying amount of the asset. Government grants attributable to costs are reported as deferred income and recognized as revenue as the costs that the grant is designed to offset arise. When a government grant is attributable neither to the acquisition of assets nor to remuneration of costs, it is reported as other income. Transactions in foreign currency Transactions in foreign currency are translated at the exchange rate on the transaction date. Monetary assets and liabilities in foreign currencies are translated at the closing rate of exchange and any resulting translation differences are reported to earnings. Accordingly, both realized and unrealized exchange-rate differences are reported in the income statement. Exchange-rate differences concerning operating receivables and liabilities are reported under operating earnings, while exchange-rate differences attributable to financial assets and liabilities are reported as a financial expense. Financial derivatives Financial derivatives are initially reported at acquisition cost in the balance sheet, and thereafter at the prevailing market value on subsequent closing dates. The method of reporting any gains or losses that arise varies depending on the character of the risk-hedged interest. When a derivative contract is purchased, it is classified either as 1) a hedge of the market value of a reported asset or liability (market-value hedging), 2) a hedge of a planned transaction or definite undertaking (cash-flow hedging), 3) a hedge of a net investment in a foreign company, or 4) a derivative that does not meet the requirements for hedge accounting. Changes in the market value of such derivatives that are classified as, and meet the requirements for, market-value hedging, and that can be objectively established, are reported in the income statement with any market value changes of the asset or liability to which the risk hedging pertains. Changes in the market value of such derivatives that are classified as, and meet the requirements for, cash-flow hedging, and that can be objectively established, are reported under shareholders’ Munters Annual Report 2007 Employee benefits Within the Group, there are several defined- 53 Notes equity as a hedge reserve until the day when the hedged interest is reported. When the hedged interest is reported, earnings arising from any related derivatives are reported in the income statement. If a planned transaction or a commitment undertaken is no longer expected to take place, any related gains or losses reported to shareholders’ equity must be immediately transferred to the income statement. Certain derivative transactions do not fulfill the requirements for hedge accounting in accordance with IAS 39 (Financial instruments: Recognition and Measurement), although they are economically justified in accordance with the Group’s risk management policy. Changes in the market value of such unqualified hedging transactions are reported immediately in the income statement. Munters does not hedge net investments in foreign subsidiaries. Accumulated translation differences Translation differences relating to investments in foreign operations must be reported as a separate item in shareholders’ equity in accordance with IAS 21 (Effects of Changes in Foreign Exchange Rates). In conjunction with the sale of foreign operations, accumulated translation differences must be reported as part of the gain/loss from the divestment. Munters has elected to set accumulated translation differences at zero as per January 1, 2004 in accordance with the transition rules in IFRS 1. Income taxes Income taxes in the consolidated financial statements consist of current and deferred income tax. Current income taxes are based on each company’s taxable income as reported in its tax return for the year. This includes an adjustment for current income tax attributable to previous periods. Deferred income tax is calculated to correspond to the tax effect that arises when final tax is triggered. It is based on temporary differences between carrying amounts in the balance sheet and residual values for tax purposes. The amounts are calculated using the tax rates that were effective or had been announced on the closing date. Temporary differences arise in conjunction with company acquisitions as the difference between the value of assets and liabilities in the consolidated balance sheet and their value for tax purposes. Deferred tax assets relating to loss carryforwards are reported to the extent that it is deemed likely that loss carryforwards will be used to offset future surpluses. Deferred tax liabilities referring to temporary differences attributable to investments in subsidiaries and associated companies are not reported, since in all such cases, the Parent Company can control the time of the reversal of the temporary differences, a capital gain/loss on a sale are not subject to taxation and it is considered unlikely that a reversal will occur in the near future. Contingent liabilities Contingent liabilities are reported when there are possible obligations relating to transpired events that will only become actual obligations given the occurrence or non-occurrence of one or more uncertain future events that are completely outside the control of Munters. Contingent liabilities may also be an obligation arising from transpired events but which is not reported as a liability or a provision because it is not probable that the obligation will be settled or because the settlement amount cannot be calculated with sufficient reliability Information concerning related parties Companies related to Munters include the Parent Company, subsidiaries and associated companies. “Related physical persons” are defined as Board members, senior management and close family members of such persons. Information on transactions with related parties that entail a transfer of resources, services or obligations between related parties is disclosed, regardless of whether remuneration was paid or not. The disclosure contains information as to the character of the relationship and the effect of the relationship on the financial statements. Events after the closing date If events arise that are significant, but that should not be taken into account when the amounts in the income statement and balance sheet are established, information will be provided in the Board of Directors’ Report and notes as to the character of the event and if possible an estimate of its financial effect. The term “significant” implies that a disclosure of the information could influence financial decisions made by users of the financial statements. Significant events that confirm the relationship that existed on the closing date and that occur after the closing date but prior to the signing of the Annual Report result in adjustments in the amounts in the Annual Report. Accounting principles of the Parent Company The Parent Company has prepared its annual accounts in accordance with the Swedish Annual Accounts Act, the Swedish Financial Reporting Board’s Recommendation RFR 2.1 Accounting for Legal Entities and the Financial Reporting Board’s applicable statements (UFR). RFR 2.1 implies that the Parent Company, in the annual report for the legal entity whose securities are listed on a regulated market in Sweden on the closing date, applies all EU-approved IFRS/IAS and statements to the extent this is possible within the framework of the Annual Accounts Act and the law on safeguarding of pension commitments pertaining to the connection between the accounting and taxation. RFR 2.1 is to be applied from fiscal years beginning January 1, 2008 or later, although earlier application is encouraged. RFR 2.1 also entails extended disclosure requirements compared with RR 32:05 primarily regarding remuneration to the Board of Directors and senior executives. The Parent Company primarily applies the principles pertaining to the Group described above. The differences between the Group’s and the Parent Company’s accounting principles are stated below. Pensions The Parent Company’s pension commitments are calculated and reported based on the law on safeguarding of pension commitments, which deviates from IAS 19. The principles from accounting based on this law are found in FAR SRS’s accounting Recommendation No 4 Accounting of Pension Liabilities and Pension Costs, RedR 4. Application of the law on safeguarding of pension commitments is a prerequisite for the right to tax deductions. Financial instrument The Parent Company does not apply IAS 39 Financial Instruments: Recognition and Measurement, instead valuations are based on the acquisition value of assets and liabilities. Group contributions and shareholders’ contributions The Parent Company reports Group contributions and shareholders’ contributions in accordance with the Statement from the Swedish Financial Reporting Board (UFR). Shareholders’ contributions are reported directly against the receiver’s shareholders’ equity and capitalized in the shares and participations of the provider, to the extent that impairment is not required. Group contributions are reported according to financial significance. This means that Group contributions that are made to minimize the Group’s total tax are reported directly against profit brought forward after deductions of current tax effects. Untaxed reserves The amounts for which provisions have been made to untaxed reserves comprise taxable temporary differences. Due to the connection between accounting and taxation, the deferred tax liabilities attributable to the untaxed reserves are not reported separately in the legal entity. Note 3 BUSINESS COMBINATIONS Des Champs Technologies US company Des Champs Technologies was acquired on April 4, 2007. Munters acquired 100 percent of the shares in Entrodyne Corporation, which is Des Champs’ holding company. The company holds a technology-leading position in energy-efficient air treatment solutions and principally manufactures custom air conditioning equipment for commercial buildings. The company was consolidated from April 2007. The acquired operations contributed revenues of SEK 196 M for the period April 1, 2007 to December 31, 2007. If the acquisition had occurred on January 1, 2007, the company would have contributed SEK 245 M in revenues for the Group. Notes Information about the acquired net assets and goodwill is listed below: The acquired company’s net assets on the date of acquisition: Purchase price – cash purchase price paid – fees directly attributable to the acquisition 225 3 Total acquisition cost 228 Fair value for acquired net assets –57 Goodwill (note 13) 171 The acquisition price for the company was SEK 254 M, of which SEK 29 M pertained to payments to options holders that were settled by Des Champs Technologies prior to the acquisition. Goodwill is attri­ butable to estimated future synergies through product integration, technology and distribution. In addition to synergy effects, the company’s expertise in heat-exchanger technology and the company’s future earning capacity represent components in the goodwill item. The acquired company’s net assets on the date of acquisition: Reported amounts Fair value adjustment Fair value 13 0 13 0 85 48 0 48 85 Cash and cash equivalents 5 0 5 Interest-bearing liabilities Interest-free liabilities (including deferred tax liability) 0 0 0 –75 –19 –94 28 29 57 Net identifiable assets and liabilities Cash purchase price paid and fees directly attributable to acquisition Cash and cash equivalents in the acquired company Changes in the Group’s cash and cash equivalents at acquisition 223 Information about the acquired net assets and goodwill is listed below: 0 4 0 28 7 0 7 28 Cash and cash equivalents Interest-bearing liabilities Interest-free liabilities (including deferred tax liability) 1 0 1 –2 0 –2 –21 –3 –24 10 4 14 Net identifiable assets and liabilities Cash purchase price paid and fees directly attributable to acquisition Cash and cash equivalents in the acquired company 83 –1 Changes in the Group’s cash and cash equivalents at acquisition 82 Sial During the fourth quarter of 2006, 100 percent of Italian company Sial S.p.A. was acquired. The company manufactures mobile heaters, evaporative cooling products and mobile dehumidifiers with sales in Europe, the US and China. The company was consolidated from December 1, 2006. The acquired operations contributed revenues of SEK 32 M for the period December 1, 2006 to December 31, 2006. If the acquisition had occurred on January 1, 2006, the company would have contributed SEK 236 M in revenues to the Group under 2006. – cash purchase price paid – fees directly attributable to the acquisition 176 5 Purchase price paid 181 Additional purchase price – fixed 9 Total acquisition cost 190 Fair value for acquired net assets –7 197 Goodwill (note 13) Goodwill declined by SEK 3 M during the year due to the actual outcome of the additional purchase price. The size of the additional purchase price is based on Sial’s results for the period ended in March 2007. Goodwill is attributable to estimated future synergies through an expanded product offering. In addition to synergy effects, future earning capacity also represents a component in the goodwill item. The acquired company’s net assets on the date of acquisition: Purchase price – cash purchase price paid – fees directly attributable to the acquisition 81 2 Purchase price paid 83 Additional purchase price – estimated Goodwill (note 13) 4 Tangible fixed assets Intangible assets – brands and technology (note 12) Non-interest-bearing receivables Purchase price –5 The Danish companies Turbovent Agro A/S and Turbovent Environment A/S were acquired on July 1, 2007. Munters acquired 100 percent of both of the companies. Turbovent primarily manufactures ventilation equipment for poultry, pigs and cattle in Scandinavia, Germany and Eastern Europe. Turbovent is also in the forefront of air-cleaning and odor-removal solutions for the agricultural industry. The companies were consolidated from July 2007. The acquired operations contributed revenues of SEK 58 M for the period July 1, 2007 to December 31, 2007. If the acquisition had occurred on January 1, 2007, the companies would have contributed SEK 100 M in revenues for the Group. Fair value for acquired net assets Fair value Information about the acquired net assets and goodwill is listed below: 228 Turbovent Total acquisition cost Fair value adjustment 3 86 –14 72 The additional purchase price pertains to estimated future royalties and product-development subsidies to the seller. Goodwill is attributable to estimated future synergies in product integration. Tangible fixed assets Intangible assets – brands (note 12) Non-interest-bearing receivables Cash and cash equivalents Interest-bearing liabilities Interest-free liabilities (including deferred tax liability) Net identifiable assets and liabilities Reported amounts Fair value adjustment Fair value 23 0 147 20 –94 0 25 0 0 0 23 25 147 20 –94 –119 23 Munters Annual Report 2007 Tangible fixed assets Intangible assets – brands and technology (note 12) Non-interest-bearing receivables Reported amounts –9 –128 16 –7 The change in the Group’s cash and cash equivalents in conjunction with the acquisition in 2006 was SEK 159 M. The change in 2007 was SEK 11 M due to the paid additional purchase price. 55 Notes Note 4 SEGMENT REPORTING Munters is a global leader in energy-efficient air treatment solutions and restoration services based on expertise in humidity and climate control technologies. ples as for the Group as a whole. Transactions between divisions are based on market terms. The Dehumidification division manufactures and markets products and complete solutions for controlling humidity and indoor climate. The MCS division provides service for water and fire damage restoration and temporary climate control. The HumiCool division manufactures and markets products and systems for evaporative cooling, heating and humidification. No income statement items after EBIT are allocated to the divisions. Divisions The Group’s operations are managed and reported mainly through the three divisions: Dehumidification, MCS and HumiCool. The consolidation of the divisions is presented according to the same princi- Dehumidification 2007 2006 MCS 2007 HumiCool Eliminations, etc. Total 2006 2007 2006 2007 2006 2007 2006 Income statement External net sales Internal net sales 1,881 1,584 55 51 2,623 2,618 1 0 1,758 7 1,510 4 – –63 – –55 6,262 – 5,712 – Net sales 1,936 1,635 2,624 2,618 1,765 1,514 –63 –55 6,262 5,712 234 194 129 159 251 213 6 –2 620 564 –4 – – – –3 – –3 – –3 – – – – –44 – –32 –10 –44 –3 –32 230 194 126 156 248 213 –38 –34 566 529 Operating assets 672 548 1,040 923 764 675 61 26 2,537 2,172 Goodwill 163 2 173 164 458 377 – – 794 543 – – – – – – – – 2 – 4 – – 529 – 425 2 529 4 425 Total assets 835 550 1,213 1,087 1,224 1,056 590 451 3,862 3,144 Operating liabilities Other liabilities 191 – 165 – 145 – 112 – 267 – 284 – –8 –8 2,065 1,084 595 553 2,065 1,084 Total liabilities 191 165 145 112 267 284 2,057 1,076 2,660 1,637 Investments 52 29 129 110 42 28 1 0 224 168 Depreciation and impairments 24 21 86 82 39 33 3 – 152 136 1,180 900 1,918 1,845 924 789 21 18 Operating earnings Amortization of surplus values and impairment of goodwill Undistributed costs EBIT Balance sheet Participations in associated companies Other assets Other data Number of employees at year-end 4,043 3,552 Geographic regions Africa. The Americas Region includes North America, Central America and South America. The Asia Region includes Asia, except the Middle East, and Australia. The Group’s operations are divided into three geographic regions that constitute secondary segments: Europe, the Americas and Asia. The Europe Region includes Europe, the Middle East and Europe 2007 Net sales Operating assets Americas 2006 3,838 3,412 1,586 1,392 Asia Eliminations, etc. Total 2006 2007 2006 2007 2006 2007 2006 2,041 1,872 637 540 510 250 529 237 –127 64 –101 3 6,262 2,537 5,712 2,172 2007 Operating liabilities 379 376 159 152 73 61 –16 –36 595 553 Investments 129 80 70 78 25 10 – 0 224 168 2,516 2,331 1,108 830 397 372 22 19 Number of employees at year-end 4,043 3,552 Notes Note 5 Note 7 OTHER OPERATING INCOME AND OPERATING EXPENSES leases Operating leases Group Parent Company 2007 2006 2007 2006 – – 14 – – 2 – 3 0 14 2 3 Other operating income Other operating expenses Impairment of participations in associated companies Goodwill impairment Loss on divestment of fixed assets Reversal of provisions Exchange-rate differences –2 –1 –2 – – – – – – –1 –2 – – –4 –1 – – – – –1 –6 –6 –1 –1 Divestment of operations pertains to the Water business area, which was divested in 2006.. Note 6 DEPRECIATION AND IMPAIRMENTS Depreciation and amortization of intangible and tangible assets are based on the historical acquisition cost and the estimated useful lives for various types of assets. For assets acquired during the year, depreciation or amortization is calculated from the acquisition date. Depreciations and amortization are deducted primarily straight-line over the following useful lives. Improvement measures in leased premises Equipment within MCS operations Patents, licenses and brands Machinery and equipment Buildings Land lease 3–7 years 6 years 3–10 years 3–10 years 20–30 years 50 years The useful life of acquired brands is based on the number of years that the brand is estimated to contribute revenues to the Group in its current form. The remaining useful lives for the brands are six years and six months, eight years and 11 months and nine years and three months. Goodwill impairment is reported among other operating expenses. See also Note 13. Depreciation, amortization and impairments for the year were charged against the income statement as shown below. Group Cost of goods sold Selling costs Administrative costs Research and development costs Other operating expenses 2008 162 2009–2012 2013 and later 304 41 507 Most of the vehicles used in service operations are currently classified as operating leases. Finance leases Assets held through finance lease contracts are reported as equipment. The year’s total payments relating to the assets amounted to SEK 6 M (2). Depreciation during the year amounted to SEK 5 M (2). Assets held under a finance lease refer primarily to vehicles. The minimum lease fee comprises a capital portion and an interest portion. The interest portion is variable and follows market interest rates existing in each country. Assets held under a finance lease are reported as equipment in the following amounts: Acquisition cost – capitalized finance leases Accumulated depreciation Carrying amount Liabilities pertaining to finance leases – minimum lease fees Within one year Between one and five years 2007 2006 26 –13 32 –17 13 15 2007 2006 5 8 4 11 13 15 Future financial costs for finance leases –3 –2 Present value of future minimum lease fees 10 13 3 7 4 9 10 13 Present value of finance leases liabilities Within one year Between one and five years Parent Company 2007 2006 2007 2006 116 13 21 1 1 108 7 21 0 – – – 3 – – – – 2 – – 152 136 3 2 Munters Annual Report 2007 Divestment of operations Royalty from subsidiaries The year’s costs for operating leases of assets, such as leased premises, machinery and major computer and office equipment are reported among operating costs and amounted to SEK 180 M (164). Minimum future costs for non-revocable operating lease contracts have the following maturity. Amortization of acquisition-related intangible assets amounted to SEK 7 M (0) and is included in the item Selling costs. Impairment of inventories Impairment of inventories totaled 12 (5) and is included in Cost of goods sold. No reversals of previous impairments occurred. 57 Notes Note 8 FINANCIAL INCOME AND EXPENSES Group Deferred tax assets Group Parent Company 2007 2006 2007 2006 Dividends from subsidiaries – – 258 963 Impairment of shares in subsidiaries – – – Interest income, subsidiaries – – Interest income, other Exchange-rate differences 8 6 14 Financial income 9 13 8 12 Accounts receivable 10 9 1 1 –4 Provisions 3 4 60 20 Accrued expenses and deferred income 29 19 7 – 1 6 1 – 7 325 980 – – –1 –7 Interest expenses, other –44 –12 –40 –10 Exchange-rate differences Other financial expenses – –10 –1 –9 – –1 –9 – –54 –22 –42 –26 –40 –15 283 954 Total financial income and expenses 2006 Machinery and equipment Inventory Prepaid expenses and accrued income Financial expenses Interest expenses, subsidiaries 2007 Derivative instruments 0 0 Loss carryforwards 10 10 Provisions for pensions 14 12 0 –27 3 –16 62 62 Other Offsetting Deferred tax assets for pension provisions pertain to the difference between the calculation of defined-benefit pension obligations according to local tax rules and IAS 19 Employee Benefits. Group Deferred tax liabilities Note 9 INCOME TAXES Buildings Machinery and equipment Group Current tax expense Tax relating to prior years/ withholding tax Deferred tax related to temporary differences and loss carryforwards Non-income-related taxes Tax expenses reported in the income statement Parent Company 2007 2006 2007 2006 187 184 –4 –8 –2 –8 – – –2 7 5 5 – – – – 190 186 –4 –8 Tax items reported directly against shareholders’ equity Deferred tax attributable to pensions 0 0 526 514 242 929 146 143 67 260 32 17 38 20 – 0 – 0 –12 –11 –71 –269 7 5 – – Reconciliation of effective tax Earnings before tax Tax according to prevailing tax rate for the Parent Company Difference attributable to foreign tax rates Non-deductible expenses Non-taxable income Non-income-related taxes Tax relating to prior years/ withholding tax Other Tax expenses –2 2 –8 –1 0 – – 1 190 186 –4 –8 Technology 2007 2006 5 15 5 13 8 – 19 10 Goodwill 5 3 Inventories 0 0 11 9 Provisions 6 1 Other Offsetting 5 –27 7 –16 47 32 Brands Untaxed reserves Deferred tax assets relating to unutilized loss carryforwards are reported to the extent that it is deemed likely that they will be used to offset taxable surpluses. The unutilized loss carryforwards amounted to SEK 33 M (31) at year-end, of which SEK 27 M (31) was unlimited in time and SEK 5 M (0) expires between 2008 and 2012. Loss carryforwards for which deferred tax assets are not reported amounted to SEK 5 M (1), of which SEK 0 M (1) was unlimited in time and SEK 5 M (0) expires between 2008 and 2012. Loss carryforwards totaling SEK 28 M (30) were thus suitable for reporting as deferred tax assets. Note 10 EARNINGS PER SHARE Group Net earnings, attributable to shareholders in the Parent Company Weighted average number of shares, 000s – shares outstanding after dilution, 000s 2007 2006 332 325 73,898 73,913 73,749 73,770 Earnings per share, SEK 4.49 4.40 – after dilution 4.49 4.40 The number of shares and earnings per share are restated with respect to the 4:1 share split, redemption and the bonus issue that were implemented in 2007. Notes Note 11 TANGIBLE ASSETS Depreciation is based on the asset’s acquisition cost and the estimated useful lives as specified in Note 6. The carrying amount of land amounted to SEK 25 M (24). Taxation values of buildings in Sweden amounted to SEK 15 M (10). The taxation value of land in Sweden amounted to SEK 2 M (1). Previously approved relocation grants amounted to SEK 7 M (7) in the Group. Relocation grants reduced the acquisition cost of buildings. Note 12 PATENTS, LICENSES, BRANDS AND SIMILAR RIGHTS Group Other intangible Brands Technology assets Amount on January 1 26 – 44 70 Acquisition of subsidiaries (note 3) 28 24 – 52 Capital expenditure for the year – – 25 25 Reclassifications Translation differences for the year – – 2 2 Amount on December 31 Land and buildings Group Equipment, tools, ConstrucPlant and fixtures and tion in machinery fittings progress Acquisition cost Amount on January 1 Acquisition of subsidiaries (note 3) 27 27 5 1 12 1 Amount on December 31 5 2 33 40 Closing carrying amount 50 22 38 110 20 – – 6 1 –8 2 –2 6 – 310 592 983 22 Accumulated depreciation 134 397 653 – – 28 16 – –5 –19 –40 – – – –1 – 10 43 87 – –1 –1 6 – Amount on December 31 138 448 721 – Closing carrying amount 172 144 262 22 Equipment, tools, fixtures and fittings Acquisition cost Amount on January 1 24 Capital expenditure for the year Sales and scrapping 8 –1 Amount on December 31 31 Brands This item includes the brands Sial in the amount of SEK 24 M, Des Champs Technologies, SEK 24 M, and Turbovent, SEK 2 M, which were valued when these operations were acquired. Technology This item includes ventilation and air conditioning systems for commercial buildings in the amount of SEK 17 M, and ventilation and air cleaning technology in the amount of SEK 5, which was received and valued in conjunction with the acquisitions of Des Champs Technologies and Turbovent. Other intangible assets Other intangible assets include SEK 3 M relating to patents, SEK 28 M relating to capitalized development expenses for business and Group accounting systems, as well as SEK 5 M relating to a lease in China. Parent Company Other intangible assets Acquisition cost Amount on January 1 Capital expenditure for the year 4 14 Amount on December 31 18 Accumulated amortization Amount on January 1 Amortization for the year Accumulated depreciation Amount on January 1 Depreciation for the year – 2 – – 115 Parent Company 0 5 – 10 –43 Depreciation for the year Translation differences for the year Amount on January 1 Amortization for the year Reclassifications 23 41 Sales and scrapping Accumulated amortization 881 –21 Reclassification 1 150 37 –5 Acquisition of subsidiaries (note 3) – 71 531 12 Amount on January 1 – 24 1 Sales and scrapping Amount on December 31 1 55 300 Capital expenditure for the year Reclassifications Translation differences for the year Total Acquisition cost 9 3 Amount on December 31 12 Closing carrying amount 19 Munters Annual Report 2007 Earnings per share (before dilution) are calculated by dividing the net earnings attributable to shareholders in the Parent Company with the weighted average number of shares outstanding during the year. In the calculation of earnings per share after dilution, the average number of outstanding shares is adjusted for the dilution effect of all potential shares. Munters has only stock options that entail a dilution effect. For such options, a calculation is made of the number of shares that could have been purchased at fair value (calculated as the average share price for the year) at an amount corresponding to the monetary value of the subscription rights associated with the outstanding stock options. The difference in value between the number of shares that would have been sold under the assumption that the stock options were utilized and the number of shares that would have been sold at the average share price during the period is treated as an issue of shares without payment. The weighted average number of shares is increased by the corresponding number of shares. The marginal dilution effect is a result of the stock option program from May 2004, which matured in 2007. Other option programs do not result in a dilution effect, since the issue price exceeds the average share price during the year. Amount on December 31 Closing carrying amount on December 31 1 0 1 17 Investments for the year primarily refer to Field.Link, a mobile IT system in the MCS division that will be launched in 2008. 59 Notes Note 13 goodwill Note 14 Carrying amount before impairments Direct shareholdings Amount on January 1 546 Acquisition of subsidiaries (note 3) Exchange-rate differences for the year 240 12 Amount on December 31 798 Accumulated impairments Amount on January 1 Impairments for the year 3 1 Amount on December 31 4 Closing carrying amount 794 Reported goodwill value per cash-generating unit Dehumidification, US MCS, Australia 2007 2006 161 4 – 4 MCS, Germany 96 92 MCS, Norway and Denmark 73 68 HumiCool Aerotech, US HumiCool, Italy HumiCool, Denmark Other PARTICIPATIONS IN SUBSIDIARIES 42 45 345 332 71 2 – 2 794 543 Impairment During 2007, an impairment was recognized of the entire goodwill value of SEK 1 M attributable to a Swedish operation in the MCS division due to the divestment of this operation. Impairment testing of goodwill values On September 31, 2007, carrying amounts of goodwill were subjected to routine impairment testing. The investigations were carried out for each individual cash-generating unit. The valuation was based on the discounted future cash flow. This encompasses forecasts, approved by Group management and the Board, for the next three years. The growth rate after the three years has been cautiously estimated at 2 percent. In the calculations, a discount rate that is a nominal rate for the Group (average weighted capital cost before tax) was used. It was determined as 12.4 percent (11.6). For each acquisition the discount rate was adapted to a long-term capital structure in the acquired company, whereby the discount interest rate varied within the interval of 7.6 to 11.8 percent. The most significant assumptions pertain to sales growth, the trend in the operating margin, utilization of operating capital employed and the discount rate. The recoverable value was found to exceed the carrying amounts. Consequently, no impairment was necessary. The total value in use for the cash-generating units exceeded the carrying amount by a factor of 3.2. A 0.6-percentage-point increase in the discount rate is required for it to be necessary to recognize an impairment loss in one unit. For the other units, a significantly larger increase in the discount rate is required before it is necessary to recognize an impairment loss. Up to December 31, 2007, there was no indication of any decline in value. AB Carl Munters (corp. reg. no. 556035-1198) Munters Betelligungs GmbH Munters BV Munters Corporation Munters France SAS Munters Group Ltd Munters Italy SpA Munters Korea Co Ltd Munters Ltd Munters (Thailand) Co Ltd Polygon AS Polygon A/S The cash-flow statement shows the impact on cash and cash equivalents with respect to acquired operations. During 2007, the cashflow impact pertained to the cash payments and direct expenses attributable to the acquisitions of Des Champs and Turbovent, and the payments of additional purchase prices for Sial that were previously reported as liabilities in conjunction with the acquisition. Percentage, % Carrying amount 100 100 100 100 100 100 100 100 100 100 100 19 169 4 0 2 45 0 62 0 157 1 249 1 Sweden Germany Netherlands USA France UK Italy South Korea UK Thailand Norway Denmark 690 Indirect shareholdings in subsidiaries with significant business operations Note 15 Aerotech Asia Inc Co Percentage, % Country Des Champs Technologies Munters AG Munters Air Treatment Equipment (Beijing) Co Ltd Munters A/S Munters Austria GmbH Munters Brasil Industria e Comércio Ltda Munters de Mexico S de RL de CV Munters Euroform GmbH Munters Europe AB (corp. reg. nr. 556380-3039) Munters GmbH Munters Inc Munters India Humidity Control Private Ltd Munters KK Munters Mist Eliminator (Beijing) Co Ltd Munters NV Munters Oy Munters Poland Sp zoo Munters Pte Ltd Munters (Pty) Ltd Munters Pty Ltd Munters Service GmbH Munters Services France SAS Munters Spain SAU Munters Torkteknik AB (corp. reg. nr. 556034-6164) Polygon A/S Sial SpA Turbovent Agro A/S USA Switzerland 100 100 China Denmark Austria Brazil Mexico Germany 100 100 100 100 100 100 Sweden Germany Canada India Japan China Belgium Finland Poland Singapore South Africa Australia Germany France Spain 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Sweden Denmark Italy Denmark 100 56 100 100 PARTICIPATIONS IN ASSOCIATED COMPANIES Country Acquisition of operations Country British Virgin Island Percentage, % Aquisition cost Carrying amount in Group Shares in earnings, 2007 50 4 2 – Impairment occurred in the amount of SEK 2 M (2). No business activities were conducted in the Company. Impairment was calculated at the estimated recoverable amount in conjunction with a possible future liquidation of the Company. Notes CREDIT AND LIQUIDITY RISK Note 17 PREPAID EXPENSES AND ACCRUED INCOME Group Credit risk Credit risk is the risk that the counterparty in a transaction is unable to fulfill its financial obligations and that any collateral provided is insufficient to cover the Company’s receivable. The predominant proportion of Munters’ credit risk pertains to receivables from customers. Provision for doubtful debts 2007 2006 Provision on January 1 Acquisitions of subsidiaries (Note 3) 67 3 71 2 Provision for expected losses 22 20 Established losses –7 –15 –12 2 –9 –2 75 67 Reversed, unutilized amount Exchange-rate differences Amount on December 31 Provisions for doubtful debts correspond to 5.5 percent (5.6) of total receivables. Time analysis of accounts receivable, fallen due for payment but not impaired 2007 2006 < 30 days 30–90 days 248 172 233 135 91–180 days > 180 days 83 59 64 53 562 485 Amount on December 31 Collateral in the amount of SEK 87 M has bee provided for total receivables, of which SEK 81 M comprises bank sureties. Liquidity risk is the risk of the Company not being able to fulfill its commitments associated with its financial liabilities. The table below shows the contract periods remaining until maturity. The amounts stated in the table are the contractual, undiscounted cash flows. Interest-bearing liabilities Other liabilities Accounts payable December 31, 2006 Interest-bearing liabilities Other liabilities Accounts payable Note 18 <1 year 1–5 year >5 year Total 1,200 489 496 32 403 496 31 86 1,137 931 117 1,137 2,185 <1 year 1–5 year >5 year Total 299 339 435 16 79 1,073 95 315 418 435 0 1,168 2006 2007 2006 6 8 51 6 9 41 1 – 5 1 – 2 65 56 6 3 FINANCIAL INSTRUMENTS A financial instrument is defined as a contract that results in a financial asset in a company and a financial liability or equity instrument in another company. Financial instruments include both primary instruments, such as accounts receivable, accounts payable and shares, as well as derivatives, such as options, forward contracts and interest and currency swaps. For a description of financial risk management, refer to the section “Risks and risk management” on pages 30–31. Financial instruments in addition to those that arise in operating activities are relatively limited within the Munters Group. In addition to the stock options presented in Note 29, they consist primarily of currency hedges and interest-bearing borrowing with banks (see Note 20). Derivative instruments At the end of the year, there were currency hedges within the Group according to the table below. They have been reported at fair value in the balance sheet. Net sales amount in local currency, 000s Carrying amount, SEK 000s EUR USD –4,709 3,497 –227 –759 GBP –200 20 DKK –497 –7 JPY 39,315 –76 PLN –550 –3 AUD SGD –20 –7 0 –41 Currency Liquidity risk December 31, 2007 Prepaid rent and leases Prepaid insurance premiums Other items Parent Company 2007 Total –1,093 Negative net selling amounts refer to purchasing and positive net selling amounts refer to selling. All forward contracts fall due for payment during 2008. Fair value of financial instruments The carrying amounts of interest-bearing assets and liabilities in the balance sheet may deviate from their fair value due to such reasons as changes in market interest rates. The fair value of such financial instruments as accounts receivable, accounts payable and other non-interest-bearing financial assets and liabilities, which are reported at accrued acquisition cost with deductions for any impairment, is deemed to correspond to the carrying amount due to the short terms of these instruments. Munters Annual Report 2007 Note 16 61 Notes Note 18 CoNt. Note 19 Share capital Categories of assets and liabilities Group NonLoan financial receivables assets Total Tangible assets – 600 600 Intangible assets – 904 904 2007 Currency derivatives to which hedge accounting of the cash flow is not applied Assets Other fixed assets – 19 64 83 Inventories, etc. – – 536 536 Accounts receivable Prepaid expenses and accrued income Derivative instruments – 1,292 – 0 – – 65 – 65 0 Other current receivables Cash and cash equivalents – – 58 276 48 – 106 276 0 1,645 2,217 3,862 – 1,292 2006 The share capital of SEK 131,250,000 comprises 75,000,000 fully paid shares, each with a par value of SEK 1.75. Each share entitles the holder to one vote at General Meetings. There is one class of share. All shares carry the same right to a share in the Company’s assets and profits. Each share entitles the holder to one vote at General Meetings with no limitations. There are no limitations to the transferability of the share under law or according to the Articles of Association. Reserves Reserve for Reserve for exchangeTotal unrealized gains rate differences reserves January 1, 2006 Cash-flow hedges Exchange-rate differences December 31, 2006 Cash-flow hedges Exchange-rate differences December 31, 2007 Assets Tangible assets – – 538 538 Intangible assets – – 586 586 Other fixed assets – 14 66 80 Inventories, etc. – – 458 458 Accounts receivable Prepaid expenses and accrued income Derivative instruments – 1,132 – 1,132 – 1 – – 56 – 56 1 Other current receivables Cash and cash equivalents – – 59 201 33 – 92 201 1 1,406 1,737 3,144 2007 EQUITY Financial liabilities reported Currency derivatives to at accrued Nonwhich hedge accounting of acquisition financial the cash flow is not applied cost assets Interest-bearing liabilities 1,200 Provisions Accounts payable Accrued expenses and deferred income Derivative instruments Other liabilities 496 24 136 219 1 1 2,185 2 –48 –46 –1 – – 10 –1 10 1 –38 –37 January 1, 2006 Sales in 2006 Number Par value, SEK 1,257,750 2,201,063 –42,000 –73,500 1,215,750 2,127,563 –148,800 –260,400 1,066,950 1,867,163 In total, treasury shares were acquired for a purchase price of SEK 56,983,367 corresponding to an average price including commission of SEK 53.41 per share. 231 496 353 3 –132 In order to cover its commitments for outstanding option programs, the Company has acquired treasury shares. December 31, 2007 1,200 231 83 – –132 Holding of treasury shares Sale in 2007 Liabilities 84 3 – The reserve for unrealized gains consists of the portion of gains and losses attributable to cash-flow hedges that are classified as effective. The reserve for exchange-rate differences consists of differences that arise when the income statements and balance sheets of foreign subsidiaries are translated into Swedish kronor. December 31, 2006 Total –1 377 1 355 474 2,660 2006 Number of outstanding shares Excluding treasury shares, the number of outstanding shares at year-end amounted to 73,933,050. Options program Outstanding options programs are described in Note 29. Changes during the year Liabilities Interest-bearing liabilities – 315 – Provisions Accounts payable Accrued expenses and deferred income Derivative instruments Other liabilities 315 – – 229 229 – 435 – 435 – 0 – 293 – 125 30 – 211 323 0 336 0 1,168 470 1,638 A financial asset (or liability) corresponds to a contractual right to receive (or a commitment to pay) cash or other financial assets from (to) a counterparty. In 2007, a 4:1 split, the automatic redemption of every fourth share and a bonus issue were undertaken. Transaction costs, which are reported against shareholders’ equity, amounted to SEK 660,000. Dividend during the year The Annual General Meeting on April 24, 2007 approved the proposal of the Board of Directors and the President of a dividend amounting to SEK 2.25 per share, or SEK 166,349,363 in total. Proposed dividend The Board of Directors and the President proposes that the Annual General Meeting approve a dividend of SEK 2.50 per share be paid to the shareholders, or SEK 184,832,625 in total. The proposed dividend has not been reported as a liability in these financial statements. Notes Changes in shareholders’ equity, Group Attributable to shareholders in the Parent Company Amounts in SEK M Share capital Reserves Profit brought forward Total Minority interest Total equity January 1, 2006 125 83 1,224 1,432 5 1,437 Cash-flow hedges, net Exchange-rate differences in translation of foreign subsidiaries Actuarial gains and losses, net, including special employers’ contribution – – – 3 –132 – – – 2 3 –132 2 – – – 3 –132 2 Total income and expenses reported directly against equity – –129 2 –127 – –127 Net earnings – – 325 325 3 328 Total income and expenses – –129 327 198 3 201 Sales of treasury shares – – 3 3 – 3 Payment received for options – – 2 2 – 2 Dividend to Parent Company shareholders Dividend from subsidiaries – – – – –135 – –135 – – –2 –135 –2 December 31, 2006 125 –46 1,421 1,500 6 1,506 January 1, 2007 125 –46 1,421 1,500 6 1,506 Cash-flow hedges, net Exchange-rate differences in translation of foreign subsidiaries Actuarial gains and losses, net, including special employers’ contribution – – – –1 10 – – – 3 –1 10 3 – – – –1 10 3 Total income and expenses reported directly against equity – 9 3 12 – 12 Net earnings – – 332 332 4 336 Total income and expenses – 9 335 344 4 348 Sales of treasury shares – – 11 11 – 11 Bonus issue 6 – –6 0 – 0 Redemption of treasury shares – – –494 –494 – –494 Dividend to Parent Company shareholders Dividend from subsidiaries – – – – –166 – –166 – – –3 –166 –3 131 –37 1,101 1,195 7 1,202 Statutory Share pre- Profit brought reserve mium reserve forward Total equity December 31, 2007 Amounts in SEK M Share­ capital December 31, 2005 125 65 11 227 428 Group contributions Net earnings – – – – – – 34 937 34 937 Total income and expenses – – – 971 971 Transfers between statutory reserve and other funds – 11 –11 – 0 Sales of treasury shares – – – 3 3 Payment received for options issued Dividend to Parent Company shareholders – – – – 2 – – –135 2 –135 December 31, 2006 125 76 2 1,066 1,269 Group contributions Net earnings – – – – – – 46 246 46 246 Total income and expenses – – – 292 292 Bonus issue 6 – – –6 0 Sales of treasury shares – – – 11 11 Redemption of treasury shares Dividend to Parent Company shareholders – – – – – – –494 –166 –494 –166 131 76 2 703 912 December 31, 2007 Munters Annual Report 2007 Changes in equity, Parent Company 63 Notes Note 20 interest-bearing liabilities Group Bank loan: approved general credit facility Bank loan: unutilized portion 2007 2006 2,177 –1,019 625 –522 32 10 199 13 1,200 315 Bank loans in addition to general credit facility Lease obligation Munters’ borrowing from banks comprises a syndicated credit facility and bank loans to subsidiaries granted on an individual basis. The syndicated credit facility amounts to SEK 2,000 M and extends for a period of five years, with the option of a two-year extension. This facility can be utilized in several currencies. The fixed-interest periods amounted to 3-12 months. The capital requirements in the credit facility are net liabilities through profit before interest rates, taxes, depreciation/amortization and impairments, and the interest-coverage ratio. Munters adhered to these capital requirements. Borrowing is distributed in local currencies and with average weighted interest rates as shown below: Currency Nominal amount, millions Average interest rate SEK EUR 891 3 4.7 4.3 USD 38 5.2 CNY 17 5.8 DKK 7 5.3 Munters applies the alternative that IAS 19 allows, namely that actu­ arial gains and losses are reported directly against share­holders’ equity in the period they occurred to the extent that they refer to remuneration after employment has been terminated. Actuarial gains amounted to SEK 2 M (3) for the period. The accumulated net loss amounted to SEK 33 M (35), which is included in the reported pension debt. The actuarial gains during 2006 pertain primarily to higher discount rates. Other long-term employee benefits include employees in Germany. Legislation was changed in Italy in 2007 such that all future provisions are to be classified as defined-contribution plans. This change entailed higher personnel costs in the income statement during the year for the two Italian Group companies. The defined-contribution plans include primarily retirement pensions, disability pensions and family pensions. The premiums are paid continually during the year by each Group company to separate legal entities, for example, insurance companies. The size of the premium is based on salary. The cost for definedcontribution plans for the year amounts to SEK 67 M (39). Group Reported provisions (changes for the year) Amount on January 1 Pension costs Actuarial gains Benefits paid by employer Premiums paid by employer 2006 156 15 142 17 –2 –3 –12 –5 –1 – Company acquisitions 0 7 Terminated and changed benefit plans Exchange-rate differences for the year 0 2 0 –2 158 156 Present value of wholly or partially funded obligations Present value of unfunded obligations Market value of plan assets (–) 71 155 –68 71 152 –67 Amount on December 31 158 156 223 5 212 6 Amount on December 31 The calculation of net debt is shown in the cash-flow statement. 2007 Reported provisions (on closing date) Note 21 PROVISIONS FOR PENSIONS AND SIMILAR COMMITMENTS Group 2007 2006 Long-term defined-benefit commitments to employees Other long-term employee benefits Other benefits to employees 134 14 14 139 12 11 Long-term 162 162 Short-term defined-benefit commitments to employees 10 5 Short-term 10 5 Total provisions for pensions and similar commitments 172 167 Present value of defined-benefit obligations Amount on January 1 Benefits earned during the year Interest expenses Paid benefits Reported provisions in accordance with IAS 19 134 14 139 12 10 5 158 156 The Munters Group finances pension plans for employees in several countries. These plans mainly follow practice in the country in question and may be defined-contribution or defined-benefit plans or a combination of both. The largest defined-benefit plans cover employees in Sweden, Norway, the UK and Germany. In France and Italy, the companies make provisions for mandatory remuneration when employment is terminated. 8 –7 Company acquisitions 0 7 Terminated and changed benefit plans 0 –3 –2 –5 3 4 10 –5 226 223 67 3 71 6 Actuarial gains – changes in assumptions Actuarial losses – experience-based adjustments Exchange-rate differences for the year Amount on December 31 Long-term defined-benefit commitments to employees Other long-term employee benefits Short-term defined-benefit commitments to employees 9 –16 Plan assets Amount on January 1 Expected return on plan assets Premiums paid by employer 1 – –4 –2 0 1 –5 –3 68 67 Expected return on plan assets Actuarial gains (+)/losses (–) 3 – 6 – Actual return 3 6 Benefits paid from plan assets Terminated and changed benefit plans Exchange-rate differences for the year Amount on December 31 Return on plan assets Notes Group Group 2007 2006 Benefits earned during the year Interest expenses 5 9 6 8 Expected return on plan assets –4 –4 1 2 5 –1 5 – Amortization of previously earned benefits Amortization of unrecognized actuarial gains and losses on other long-term employee benefits Terminated and changed benefit plans 2007 2006 2005 2004 2003 Present value of defined-benefit obligations Fair value of plan assets 226 –68 223 –67 212 –71 183 –65 163 –62 Net value funded and partly funded plans 158 156 141 118 101 Group Experience-based adjustments Costs for obligations during the year – defined-benefit plans 15 17 Plan liabilities Plan assets Pension costs for defined-contribution plans 67 39 Net experience-based adjustments Administrative costs Financial expenses 73 9 48 8 Total pension costs 82 56 Statement of income and expense reported in the Group Accumulated actuarial losses 2 0 2 1 –33 –35 Actuarial gains (+) and losses (–) reported directly against shareholders’ equity Amount on January 1 Amortization of actuarial gains during the year –35 4 –38 5 –1 –5 –1 0 0 2 0 1 –33 –35 55 33 60 28 Property, % 6 5 Other assets (cash and cash equivalents), % 6 7 Actuarial losses on obligations Actuarial losses/gains on plan assets Terminated and changed benefit plans Exchange-rate differences for the year Accumulated Plan assets Equity instruments, % Debt instruments, % No portion of plan assets in 2007 or 2006 was invested in the Company’s own equity instruments, debt instruments, properties or other assets utilized by the Company. Significant actuarial assumptions Group, weighted values 2006 3 –1 9 2 2 11 Munter’s budgeted fees for defined-benefit obligations amount to SEK 13 M for 2008. Distribution of pension costs in the income statement Actuarial gains during the year Effects of limitation on assets par. 58 (b) 2007 Group 2007 2006 Discount rate, % Return on plan assets, % 4.8 6.5 4.2 6.5 Future salary increases, % 3.2 3.0 Future inflation, % 1.8 2.1 The expected return for plan assets is based on the assumption that the return on bonds will be equal to the interest for a 10-year government bond and that the return on shares will amount to the same interest plus a risk premium. Parent Company Defined-benefit obligations to employees 2007 2006 37 35 The Parent Company’s pension plans in accordance with the FPG/ PRI system are an unfunded defined-benefit plan that, in accordance with Swedish law, is reported as a provision in the balance sheet. This reporting differs from the consolidated accounting principles. Parent Company 2007 2006 30 31 2 –1 1 –2 Capital value, calculated at present value, of the Company’s own pension obligations on December 31 31 30 Obligations that are wholly or partly offset by separated assets Obligations for which there are no separated assets 0 31 0 30 Total 31 30 The Company’s own pensions Costs excluding interest expenses 2 1 Costs for the Company’s own pensions, excluding taxes 2 1 Insured pensions Insurance premiums 4 3 Costs for insured pensions, excluding taxes 4 3 Reported net costs, excluding taxes, attributable to pensions 6 4 Capital value of the Company’s own pension obligations on January 1 Costs excluding interest expenses that were charged against earnings Payment of pensions Reported pension costs for the period Reported net costs are recognized as an operating expense in their entirety. The net discount rate applied was 3.64 percent and the commitments are calculated on salary levels on the closing date. Expected payments for defined-benefit pension plans for the next year amount to slightly less than SEK 2 M. Fees to the FPG/PRI system for 2008 are estimated to be approximately SEK 2 M. Munters Annual Report 2007 Costs for obligations during the year – defined-benefit plans 65 Notes Note 22 Provisions ProviWarranty for rental sions provicommit- for legal sions ments disputes On January 1, 2007 – Additional provisions – Reversed, unutilized amounts Exchange-rate differences Utilized during the year On December 31, 2007 Other provisions Total 5 – 1 – 53 32 3 1 62 33 –5 – – – – – –18 1 –13 – 0 –1 –23 1 –14 – 1 55 3 59 Provisions comprise: Long-term portion Short-term portion Note 23 Munters is also involved in a small number of commercial disputes. None of these disputes is deemed to have any major negative impact on the Company’s financial position or operating results. OTHER PROVISIONS 2007 2006 3 56 59 8 54 62 ACCRUED EXPENSES AND DEFERRED INCOME Note 25 There are no significant contractual relations or transaction between Munters AB and related parties. Remuneration and terms of employment for senior executives and individual members of the Board of Directors are presented in Notes 28 and 29. Munters AB has not provided guarantees or guarantee commitments to or on behalf of Board members or senior executives. During the current or the preceding fiscal years, no member of the Board of Directors or senior executive was directly or indirectly involved in business transaction with the Company that is or was unusual in nature or with respect to its terms or that in any respect remains unsettled or incomplete. The Parent Company’s sales to Group companies amounted to SEK 51 M (37). Purchases from Group companies amounted to SEK 15 M (13). Note 26 Group Vacation pay liabilities Social security expenses Other personnel-related expenses Received, non-invoiced goods, etc. Note 24 Parent Company 2007 2006 2007 2006 86 24 95 172 79 30 84 130 2 3 1 4 2 3 3 2 377 323 10 10 PLEDGED ASSETS AND CONTINGENT LIABILITIES Pledged assets for liabilities to credit institutes Corporate mortgages Other pledged assets Group Parent Company 2007 2006 2007 2006 4 1 4 1 – – – – 5 5 – – 2 – – 1 2 – – – 69 24 17 – 64 10 12 – 3 2 110 86 Contingent liabilities FPG guarantees Bank guarantees Parent Company guarantees Other FPG guarantees refer to pension liabilities in Sweden. Other guarantees are normal operational guarantees, for example, advances and completion guarantees. Legal proceedings Munters’ subsidiary in the US, Munters Corporation, was named co-respondent in 51 asbestos-related cases on December 31, 2007. To date, none of the plaintiffs have claimed to have been exposed to any specific Munters product. In the past few years, Munters Corporation has won four cases through summary judgments, meaning that these cases are now closed. Munters Corporation is of the firm opinion that the remaining claims are unfounded and that it will strongly dispute every claim. Munters Corporation has protection for the asbestos-related claims by having taken out several insurance policies. Under the condition of certain reservations, the insurance companies have confirmed that, until further notice, they will pay a significant portion of the defense expenses. Munters does not believe that the mentioned claims will have any significant negative impact on the Company’s financial position or operating results. TRANSACTIONS WITH RELATED PARTIES AVERAGE NUMBER OF EMPLOYEES, ABSENCE DUE TO ILLNESS, AND GENDER DISTRIBUTION Average no. of employees Group Australia Austria Belgium Brazil Canada China Denmark Finland France Germany India Indonesia Ireland Italy Japan Korea Mexico Netherlands New Zealand Norway Poland Russia Saudi Arabia Singapore South Africa Spain Sweden Switzerland Taiwan Thailand United Arab Emirates United Kingdom USA Vietnam 2007 Of which men, % Number 2006 Of which men, % Number 133 81 68 26 14 159 141 311 74 568 2 1 8 277 52 11 129 107 3 253 13 2 3 17 28 13 378 20 1 27 2 342 1,001 3 73 83 85 88 86 79 70 89 83 84 50 100 63 79 90 82 86 88 67 70 77 100 100 76 75 62 84 90 0 70 100 78 82 67 140 87 44 23 13 134 81 282 70 586 – 1 – 194 59 9 111 85 2 257 12 1 3 17 23 13 369 19 3 26 2 294 682 3 78 83 80 87 85 80 63 90 85 86 – 100 – 82 92 78 88 89 67 70 83 100 100 76 80 69 83 89 67 73 100 78 76 67 4,268 81 3,644 81 24 64 22 64 Of which Parent Company (Sweden) Notes Absence due to illness Gender distribution among Company Management Absence due to illness among employees of Munters AB during the year amounted to 4.17 percent (1.08) of the employees’ normal working time, of which absence due to illness for > 60 consecutive days accounted for 3.47 percent (0). Of total absence due to illness, 3.88 percent pertained to men and 0.29 percent to women. Information according to the Annual Accounts Act on absence due to illness for different groups of employees is not provided, since the number of employees per group was less than ten. At year-end, the Board of Directors consisted of eight men and two women. The Group management, including the President of the Parent Company, consisted entirely of men. Presidents of the subsidiaries included in the Group were also 100 percent men. SALARIES AND OTHER REMUNERATION AND SOCIAL SECURITY EXPENSES 2006 2007 Salaries and other remuneration Social security expenses Parent Company Salaries and other remuneration Social security expenses 23 15 24 of which, pension expenses – 6 – 4 Subsidiaries of which, pension expenses 1,502 – 332 76 1,342 – 303 52 Group 1,525 347 1,366 315 – 82 – 56 of which, pension expenses 12 2006 2007 President and Board of Directors Of which variable remuneration Other employees President and Board of Directors Of which variable remuneration Other employees Australia Austria 1 – 0 – 44 27 1 – 0 – 44 32 Belgium – – 30 – – 19 Brazil – – 13 – – 7 Canada 0 – 7 – – 7 China 1 0 11 1 0 6 Denmark 2 1 48 2 1 36 Finland 1 0 93 2 0 80 France 1 0 27 – – 27 Germany 2 0 235 2 0 255 India – – 0 – – – Indonesia – – 0 – – 0 Ireland – – 3 – – – Italy 6 2 82 4 1 55 Japan 2 1 19 1 0 21 Korea – – 3 – – 2 Mexico 1 0 13 – – 13 Netherlands 2 0 40 2 0 30 New Zealand – – 1 – – 0 Norway 1 0 103 1 – 93 Poland 0 0 2 0 0 2 Russia – – 1 – – 0 Saudi Arabia – – 1 – – 1 Singapore 1 0 3 1 0 3 South Africa 1 0 8 1 0 4 Spain 1 0 4 1 0 5 Sweden 8 1 140 6 1 140 Switzerland – – 11 – – 10 Taiwan – – 0 – – 1 Thailand 1 0 2 1 0 2 United Arab Emirates – – 1 – – 1 United Kingdom 3 1 131 2 1 110 USA Vietnam 6 – 1 – 381 1 6 – 2 – 326 1 42 9 1,483 35 8 1,331 7 1 16 6 1 18 Of which Parent Company (Sweden) Munters Annual Report 2007 Note 27 67 Notes Note 28 REMUNERATION TO THE BOARD AND SENIOR EXECUTIVES Remuneration and other benefits during the year to senior executives Amounts in SEK 000s Chairman of the Board, Berthold Lindqvist Board member, Anders Ilstam Board member, Bengt Kjell Board member, Eva-Lotta Kraft Board member, Sören Mellstig Board member, Sven Ohlsson Board member, Jan Svensson President Other senior executives (4.6 individuals) Total Board fees/ Basic salary Variable remuneration Other benefits Pension expense Other remuneration Total 500 200 200 250 225 300 250 3,750 8,034 – – – – – – – 390 1,528 – – – – – – – 168 1,087 – – – – – – – 1,380 2,294 – – – – – – – 271 348 500 200 200 250 225 300 250 5,959 13,291 13,709 1,918 1,255 3,674 619 21,175 Principles The Board Chairman and members of the Board of Directors receive fees according to the Annual General Meeting’s decision. No fees are paid for committee work. Employee representatives receive no Board fees. The Annual General Meeting, held in April 2007, decided on the following principles for remuneration to senior executives. Market-based and competitive salary levels and other employment conditions in relation to responsibilities, authorities, competencies and experience are applied to senior executives. In addition to a fixed annual salary, senior managers shall also be able to receive a variable salary, which for the President is based on the Group’s earnings per share and for other senior executives on improvements in each employee’s area of responsibility regarding earnings per share, sales, operating net earnings, capital turnover rate and outcome of individual activity plans. Variable salary is maximized to 50 percent of the fixed annual salary for the President and to between 30 and 70 percent of the fixed annual salary for other senior executives. Between the Company and other senior executives, the period of notice shall not be longer than six months and severance pay shall not correspond to more than 18 months’ salaries (basic salaries) for the President and 12 months’ salaries (basic salaries) for other senior executives. The right to receive a pension begins at the age of 62. The President is encompassed by a defined-contribution plan according to which contracted premium provision may amount to a maximum of 35 percent of the basic salary. Other senior executives residing in Sweden are encompassed by the ITP plan, in addition to which certain contribution-based supplements may be paid. Senior executives residing outside Sweden are offered pension solutions that are competitive in the country in which they reside. Every year the Board considers whether a share-price-related incentive program is to be proposed to the Annual General Meeting. A share-price-related incentive program that has not been decided on by an Annual General Meeting shall not exist in the Company. If a Board member is employed by the Company, remuneration shall be paid to such a member in accordance with these principles, with no separate remuneration paid to the Board member for the Board assignment. If a Board members performs assignments for the Company that are not Board assignments, the remuneration to be paid shall be market-based with respect to the nature of the assignment and the work required. These principles shall encompass individuals who, during the period in which the principles apply, are members of Group management, other managers in a senior position directly under the President or Board members. The principles apply to contracts signed after the decision by the Annual General Meeting and for cases in which changes are made to existing contracts after this time. The Board is entitled to deviate from the principle if there are special reasons in a specific case, provided that this deviation is reported and subsequently justified. In an effort to strengthen the continuity of the management of the MCS division, the Board exercised its right during the year to make exceptions from the principles. In addition to the standard program for variable salary, the President of the MCS division has the possibility of receiving a special bonus between 2008 and 2010 corresponding to 0–50 percent of the fixed annual salary. This bonus will be paid in 2011 and is conditional on the Division President remaining employed in the Company on January 1, 2011. The outcome is based on performance related to long-term targets for the division’s net sales, capital tied-up and operating margin. The Board fee refers to both the fee to elected Board members and to the fee to the members of the Audit Committee and Remuneration Committee. No fees are paid for the work of the Nomination Committee. Senior executives are the CEO (President), Chief Financial Officer, President of the Dehumidification division, President of the HumiCool division, President of the MCS division, and Group Vice President Human Resources and Corporate Communication. The group “Other senior executives” refers to four individuals and an additional individual during the seven months of the year, resulting in 4.6 individuals on an annual basis. Variable remuneration for the 2007 fiscal year refers to expensed variable remuneration that will be paid during 2008. The variable remuneration for the President corresponds to 2 percent of the expensed salary and 8 percent of the gratuity for the position of Acting President of the MCS division. For other senior executives, variable remuneration was between 13 and 42 percent. Other benefits refers to company cars and meal benefits. Pension expenses include costs for disability pension insurance and survivor annuity, etc. The amounts are stated excluding special employer’s contribution on pension expenses. Other remuneration refers to the payment of subsidies in 2007 for the option program whose redemption period began during that year and to interest compensation for the acquisition of Munters shares (see Note 29). Bonus For the President, the bonus is based on earnings per share. Pension The Swedish ITP plan is a multi-employer plan insured by Alecta. It is a defined-benefit plan, but since the plan assets and commitments cannot be allocated to each employer or individual person, the plan is reported as a defined-contribution plan. Accordingly, future commitments for the senior executives cannot be provided. One senior executive domiciled in the US is covered by the general 401k pension plan plus a special premium-based pension plan. Funds are allocated monthly to a fund and correspond on each occasion to the Company’s commitments. The Company’s commitment on December 31, 2007 amounted to SEK 1,020,000. All pension plans are vested – that is, not conditional on future employment. Notes Severance pay Between the Company and the President and other senior executives, the period of notice shall not be longer than six months. If employment is terminated by the Company, severance pay will be received amounting to 12 months’ salary (18 months for the President). Severance pay is not considered pensionable income, except for the President, and is reduced by income from other employment. If the President or other senior executive takes the initiative in terminating employment, there is no severance pay. Financial instruments and options program The President and other senior executives have participated in the options program, approved by the Annual General Meeting during the past year. No options were allotted since the improvement in earnings per share for 2007 in relation to 2006 was not acquired as stipulated in the requirements of the program. See also Note 29. Procedure and decision process The Board of Directors has appointed a Remuneration Committee among its members consisting of Berthold Lindqvist and Sören Mellstig. The work of the Committee is presented in the Corporate Governance Report on pages 34–37. Incentive program for senior executives The President holds 25,000 options in the program started in 2006. Other senior executives hold 5,000 options in the program started in 2004 and 15,000 options in the program started in 2006. Munters also subsidizes the acquisition of shares in Munters made by Group Management in October 2005. The subsidy means that during the period up to December 31, 2009 or at most to the termination of employment, Munters subsidizes the interest expenses for loan financing of current acquisitions for senior executives. In October 2005, within the framework of the offering, other senior executives jointly acquired 57,000 shares in an amount of SEK 3,705,000. The President, who joined the Company in 2006, acquired 36,000 shares in an amount of SEK 2,931,000 that are also included in this subsidy. Note 30 OUTSTANDING INCENTIVE PROGRAMS During the years 2004 and 2006, Munters implemented stock option programs directed to Group management and senior executives in the Group. The options for all outstanding stock option programs were purchased at a market premium, which is reported as an increase in the Company’s equity. To cover the Company’s commitments according to the stock option programs, treasury shares have been acquired, with the purchase price being reported as a reduction of the Group’s equity. In future, when options are redeemed, the subscription price received will be reported as an increase in the Group’s equity. During the year, the option premium was subsidized at 40 percent for the 2004 start year and will be subsidized at 60 percent for the 2006 start year of the option premium in the form of a cash bonus, on condition that the option holder is employed at the time of the options’ redemption period. The subsidy and associated social costs will be charged against consolidated earnings. Provisions for these subsidies amounted to SEK 2 M on the closing date. The change in the number of outstanding share options and their weighted average redemption price (SEK) are as follows: Group Amounts in SEK 000s 2006 2007 2006 Audit 7,500 6,564 429 429 Other assignments 1,193 1,311 – – 1,324 948 892 1,100 – – – – 10,965 9,867 429 429 Ernst & Young Other Audit Other assignments An audit entails an examination of the annual report and accounts, as well as the management by the Board of Directors and the President, other tasks for which the Company’s auditors are responsible for performing, and providing advice and other council occasioned by this examination or the performance of other tasks. Other assign­ ments relate mainly to consultation on taxation matters. Note 31 Average redemption price Options January 1 95.33 128,100 Issued Utilized Matured – 70.40 – – –10,600 – December 31 97.57 117,500 Average redemption price Options 87.00 220,100 106.40 75,000 70.40 –53,000 98.13 –114,000 95.33 128,100 The redemption price has been restated with respect to the share split and the bonus issue that were implemented in 2007. Each option entitles the holder to the purchase of 3.21 shares. Redemption period 2004 Sep 1, 2007– March 30, 2008 Sep 1, 2009– March 31, 2010 2006 Parent Company 2007 EVENTS AFTER CLOSING DATE 2006 2007 Start year FEES TO AUDITORS Number Number of outstandof issued ing options on options closing date 42,500 42,500 75,000 75,000 117,500 117,500 Option Redemppremium, tion price, SEK SEK 19.80 32.80/ 19.10 In February 2008, an efficiency and marginal improvement program was launched in Munters under the name Munters Efficiency Program Phase 2, abbreviated to MEP2. The program involves increased efforts in production efficiency in the HumiCool and Dehumidification divisions, and the implementation of a mobile IT platform (Field.Link) for service technicians in MCS, which will provide a platform for substantially improved productivity. A capitalefficiency project linked to Field.Link is also being introduced in the MCS division. The aim of MEP2 is a reduction in the annual cost level of SEK 75 M and decrease in capital tied-up of SEK 170 M. In 2008, a negative impact on earnings of SEK 50 M and additional investments of SEK 45 M are expected. The program is described in more detail on page 7 of the Annual Report. Munters Annual Report 2007 Note 29 Between September 2006 and March 2007, the redemption period for the option program started in 2003 commenced. All of the 63,600 options were redeemed by the option holders, since the exercise price was less than the current share price. During the year, the redemption period for the option program started in 2004 commenced. The average weighted share price during the redemption period was SEK 80.73. 82.00 106.40 69 Proposed distribution of earnings Proposed distribution of earnings Future outlook Munters commands a strong market position in its areas of operation and employs reorganization and efficiencyenhancement measures on an ongoing basis. Consequently, the outlook for a long-term favorable development is good. Proposed distribution of earnings The following earnings (SEK) are at the disposal of the Annual General Meeting: Share premium reserve 2,117,500 Profit brought forward Net earnings for the year 456,942,533 245,720,492 Total 704,780,525 The Company’s equity includes no unrealized profit or loss due to financial instruments having been reported at market value. It is the Board’s opinion that the proposed dividend would not prevent the Company or other companies in the Group from fulfilling their obligations in the short and the long term, nor from carrying out necessary investments. Consequently, the proposed dividend can be justified with reference to the provisions of Chapter 17, Section 3, Articles 2–3 of the Swedish Companies Act (rule of prudence). For information regarding the earnings and financial position of the Group and Parent Company, refer to the income statements and the balance sheets. Assurance The Board of Directors proposes that profit be distributed as follows: Distributed to shareholders SEK 2.50 per share To be carried forward 184,832,625 519,947,900 Total 704,780,525 Statement on proposed dividend, in accordance with Chapter 18, Section 4 of the Swedish Companies Act The proposed distribution will reduce the Company’s equity/ assets ratio from 40 percent to 32 percent and the consolidated equity/assets ratio from 31 to 26 percent. The equity/ assets level is satisfactory, given that the assessment that the operations of the Company and the Group operations can continue to be carried out while maintaining profitability. It is believed that the liquidity in the Company and the Group can also be maintained at a similarly satisfactory level. The undersigned assure that the Annual Report has been prepared in accordance with generally accepted accounting principles for listed companies, and that the consolidated accounts have been prepared in accordance with international accounting standards as referred to in Regulation (EC) No 1606/2002 of the European Parliament and of the Council of July 19, 2002 on the application of international accounting standards, provide a true and fair view of the Company’s and the Group’s financial position and earnings and that the Board of Directors’ Report and the Board of Directors’ Report for the Group provide a fair view of the development of the Company’s and the Group’s operations, financial position and earnings and describe material risk and uncertainty factors to which the Company and the companies included in the Group are exposed. Kista, March 11, 2008 Berthold Lindqvist Anders Ilstam Bengt Kjell Chairman Board member Board member Eva-Lotta Kraft Sören Mellstig Pia Nordqvist Board member Board member Board member Sven Ohlsson Jan Svensson Kjell Wiberg Board member Board member Board member Lars Engström President Board member Our auditor’s report was submitted on March 11, 2008 Ernst & Young AB Björn Fernström Authorized Public Accountant Auditor’s report Auditor’s report To the Annual General Meeting of Shareholders in Munters AB (publ) Corporate Registration Number 556041-0606 We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the Board of Directors and the President of Munters AB for the fiscal year 2007. The annual accounts of the Company are included on pages 4–33 and 39–70 of this document. The Board of Directors and the President are responsible for these accounts and the administration of the Company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of international financial reporting standards, IFRS, as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain high but not absolute assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the Board of Directors and the President and significant estimates made by the Board of Directors and the President when preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the Company in order to be able to determine the liability, if any, to the Company of any Board member or the President. We also examined whether any Board member or the President has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts have been prepared in accordance with the Annual Accounts Act and, thereby, give a true and fair view of the Company’s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with international financial reporting standards IFRS as adopted by the EU and the Annual Accounts Act and give a true and fair view of the Group’s financial position and results of operations. The statutory Board of Directors’ Report is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the general meeting of shareholders that the income statements and balance sheets of the Parent Company and the Group be adopted, that the profit of the Parent Company be dealt with in accordance with the proposal in the Board of Directors’ Report and that the members of the Board of Directors and the President be discharged from liability for the fiscal year. Stockholm, March 11, 2008 Ernst & Young AB Björn Fernström Munters Annual Report 2007 Authorized Public Accountant 71 Management 1 6 3 4 2 5 1. Lars Engström 3. Jonas Samuelson President and CEO. Acting President of the MCS division. Born 1963. Employed since 2006. Background: MSc Mech Eng, Institute of Technology Linköping University. Various positions within Atlas Copco in Sweden and Australia, most recently as President of Atlas Copco Underground Rock Excavation Division. Shares held: 36,000. Options: 25,000. Chief Financial Officer, Executive Vice President. Born 1968. Employed since 2005. Background: MSc Bus. Admin., Gothenburg School of Economics and Business Administration. General Motors and Saab Automobile in Sweden and the US. Most recently Executive Director Vehicle Sales, Service & Marketing Finance, General Motors North America. Shares held: 27,000. Options: 10,000. 2. Andreas Olofsson Group Vice President Human Resources and Corporate Communications. Born 1970. Employed since 2007. Background: MSc Econ., Uppsala University. Management consultant at Connecta, Foreign personnel manager at Sandvik and most recently Director of Human Resources and Organization at Bahco Group (Snap-on Inc.). Shares held: 15,000. 4. Per Segerström President HumiCool division, Group Vice President. Born 1956. Employed since 2003. Background: MSc Mech Eng., Royal Institute of Technology, Stockholm. Various positions within ABB in Sweden, Australia and Spain, most recently as Senior Vice President within the Substations business area. Shares held: 9,000. 5. Morten Andreasen 6. Mike McDonald President MCS division, Group Vice President. Born 1958. Background: B.S. Econ., Copenhagen University, Director of SAS Service Partner, President of Top Flight Catering AB, Senior Vice President LSG Sky Chefs. Shares held: 30,000. Employed on March 1, 2008. President Dehumidification division, Executive Vice President. Born 1947. Employed since 1995. Background: BS Business Administration and Economics, Drury College, Senior Executive Development Program, Northwestern University. President of Reda Pump Company. Shares held: 38,400. Options: 10,000. Information is as of March 11, 2008. This Annual Report is a translation of the Swedish Annual Report. In the event of any discrepancies, the Swedish version shall apply. Munters 2007 Definitions of financial key figures and glossary The year in brief Global Munters DEFINITIONS OF FINANCIAL KEY FIGURES Capital employed – Total assets minus Munters Order intake rose by 11 percent to SEK 6,407 M (5,761).  Net sales amounted to SEK 6,262 M (5,712), an increase of 10 percent. Division Dehumidification Net profit increased to SEK 336 M (328). Division HumiCool Division Moisture Control Services (MCS) Earnings per share amounted to SEK 4.49 (4.40). A dividend of SEK 2.50 per share (2.25) is proposed. Earnings Trend (rolling four-quarter figures) Two global product divisions focused on industrial-process air treatment, comfort-oriented climate control and climate control for the AgHort industry, and a global service organization within damage restoration and temporary climate control. Manufacturing, sales and service take place with more than 4,300 employees in companies in more than 30 countries. The Munters share has been listed since 1997 on the OMX Nordic Exchange Stockholm in the Mid Cap segment. SEK M 7,000 700 6,000 600 5,000 500 4,000 400 3,000 300 2,000 200 1,000 Q4 97 Q4 98 Q4 99 Order intake Keydata Q4 00 Q4 01 Q4 02 Q4 03 Net sales Q4 04 Q4 05 Q4 06 Q4 07 Produktionsanläggningar, sälj- och servicebolag Operating earnings 8000 Change, % Adjusted change, %1 800 2007 2006 Order intake, SEK M 6,407 5,761 11 6 Net sales, SEK M 6,262 5,712 10 6 566 529 7 600 500 7000 EBIT, SEK M EBIT margin, % 6000 9.0 9.3 Earnings after financial items, SEK M 526 514 2 Net earnings, SEK M 4000 336 328 2 5.4 5.7 Earnings per share, SEK 3000 4.49 4.40 Operating cash flow, SEK M 189 375 Net margin, % 5000 2000 Return on equity, % 25.7 22.5 Return on capital employed, % 24.8 28.0 Return on operating capital, % 31.8 32.7 2.7 3.0 1,068 257 1000 Capital turnover rate, times Net debt, SEK M Equity ratio, % Number of employees at year-end 1 31 48 4,043 3,552 Adjusted for currency and acquisitions and sale of operations. –50 700 400 300 Dehumidification och servicebolag for controlling humidity. Products and completeSälj-solutions (300 servicedepåer är ej markerade på kartan) Customer manufacturing and storage processes are made more efficient. Product quality and hygiene are improved. Dehumidification in combination with cooling creates an ideal indoor climate. Dehumidification division’s share of: 30% 38% Net sales MCS (Moisture Control Services) Services for water and fire damage restoration and temporary climate control. A complete service offering for the insurance industry that lowers costs through drying and renovating rather than rebuilding. Operating earnings MCS division’s share of: 42% 21% 200 100 14 P/E (price/earnings) ratio – Share price on closing date divided by earnings per share. Return on capital employed – Earnings after financial items plus financial expenses (excluding exchange-rate differences) divided by average capital employed calculated on the opening and closing balances in the past four quarters. Return on operating capital – Operating earnings divided by the average operating capital using the past 12 months’ opening and closing balances as a base. Return on equity – Net earnings divided by average equity calculated on the opening and closing balances of the last four quarters. Minority interest is excluded from earnings as well as shareholders’ equity. Evaporative cooling – Cooling that occurs PowerPurge™ – New, patented technology to recover energy from the dehumidification process. By returning surplus heat from the dehumidification rotor to the regenerated air and simultaneously reducing the need for after cooling of the process air, energy costs can be reduced by up to 40%. RH, Relative Humidity – Expresses the relationship between the water content of air at a given temperature and the maximum amount that the air can hold at the same temperature. Silica Gel – A moisture-absorbing substance (silicon dioxide) that is used in sorption rotors. Sorption rotor – A rotor for dehumidification through sorption. The Humidity Expert – A concept for positioning Munters. VOC – Volatile Organic Compounds. Zeol – An operation within Munters focused on adsorption of VOC from air with zeolites, a substance that adsorbs VOCs. GLOSSARY 100 Q4 96 Net debt – Interest-bearing liabilities plus defined-benefit commitments to employees minus interest-bearing assets minus cash and cash equivalents. Net debt/equity ratio – Net debt divided by equity (including minority interests). Operating assets – Intangible assets excluding goodwill plus tangible assets plus inventories etc. plus accounts receivable. Operating capital – Operating assets minus operating liabilities. Operating cash flow – Cash flow from current operations and investing activities excluding acquisitions of operations and the sale of operating segments. Operating earnings – Operating earnings corresponds to EBIT excluding goodwill impairments and surplus values depreciation. Operating liabilities – Advances from customers plus accounts payable. Operating margin – Operating earnings divided by net sales. Operating working capital – Inventories etc. plus accounts receivable minus advances from customers minus accounts payable. Net sales HumiCool Products and systems for evaporative cooling and humidification. Cooling systems for the poultry and horticulture industries. Technique and products for mist elimination, e.g. for treatment of flue gases. Operating earnings HumiCool division’s share of: 28% 41% Absolute humidity – The volume of water that air contains as generally measured in grams per kilogram of air. Absorption – Accumulation of moisture, for example, by a substance, which then changes chemically or physically. Adsorption – Accumulation of moisture, for example, by a substance, which does not change, either chemically or physically. AgHort – Agriculture and Horticulture. CELdek ® – A product of specially impregnated cellulose for evaporation and cooling of air. Cooling tower – A facility for evaporative cooling of water. Dehumidification – A division within Munters whose products are based on dehumidification. Dehumidifier – Equipment for dehumidification of air. DesiCool™ – A technology for cooling air through a combination of dehumidification and evaporative cooling. Dew point – The temperature to which air must be cooled for the water vapor in the air to condense. when a liquid, such as water, evaporates. FGD – Flue-gas desulfurization is a technology applied in coal-fired power plants to clean flue gases from sulfur emissions that cause so-called acid rain. GLASdek ® – A product of specially impregnated spun glass for humidification and cooling of air. HumiCool – A division within Munters whose products are based on evaporative cooling and humidification. Leak detection – A search method which exploits changes in moisture, temperature and sound waves that leaks cause. Lithium chloride – A moisture absorbing substance that is used in sorption rotors. MCS, Moisture Control Services – A division within Munters focused on moisture technology services with an emphasis on the restoration of water and fire damages. Mist eliminator – A component for removing drops of liquid from a flow of gas. Mollier diagram – A diagram that shows the correlation between absolute humidity, relative humidity, temperature and energy. Munters Annual Report 2007 SEK M non-interest-bearing provisions minus noninterest-bearing liabilities. Capital turnover rate – Net sales divided by average capital employed calculated on the opening and closing balances for the past four quarters. Cash and cash equivalents – Cash and bank balances plus current investments with maturity periods not exceeding three months. Earnings per share – Net earnings divided by the weighted average number of shares. EBIT margin – EBIT divided by net sales. Equity per share – Equity (excluding minority interest) divided by the number of shares outstanding on the closing date. Equity/assets ratio – Equity (including minority) interest divided by total assets. Interest coverage ratio – Earnings after financial items plus financial expenses (excluding exchange-rate differences) divided by financial expenses (excluding exchangerate differences). ProduCtion: CitigateStockholm.COM PRINT: Strokirk Landströms. PHOTO COVER: © Yann Arthus-BertranD/Altitude. PHOTO: Peter Knutsson (PORTRAIT), Net sales Operating earnings Jan Bengtsson/Etsabild, Per Magnus Persson/Johnér, Lars strandberg, Stefan Isaksson/briljans.se, Matton Bildbyrå AND Johnér bildbyrå. 73 Contents th. anagement o f in ym g r d ne t i s r e e e p can l l ex a v nic f human o t efi Munters AB (publ) g energy costs a r isin e inc dr an r nters’ ener g y g Mu -e ffi s. d indoor ng ove cli pr m mance for Globa lw ar m in e s s s a e n c db ro p u l a ild tri i ontribute to us c y l i t as mfort, per co 2 CEO’s statement 4 Strategic focus 6 Positioned for profitable growth for the b en ate m d heal an eed for su he n c c e gt ss si n fu roducts an ea d tp tec en h ci Annual Report 2007 10 Personnel 12 Dehumidification division 18 Moisture Control Services (MCS) division 24 HumiCool division 30 Risks and risk management 32 The share and shareholders 34 Corporate governance report 38 Board of Directors and Auditor 39 Guidelines for compensation to senior managers 40 10-year review 42 12-quarter review 44 Comments on the performance during the year 45 Income statement 46 Balance sheet 48 Cash-flow statement 49 Statement of the Group’s recognized income and expense 50 Accounting principles and notes 70 Proposed distribution of earnings 71 Auditor’s report 72 Group Management 73 Definitions of financial key figures and glossary The Board of Directors’ report compromises pages 4–33, 39–44 and 70. Financial information Interim Report January–March April 22 Annual General Meeting April 22 Interim Report January–June Interim Report January–September Year-End Report Annual Report 2008 August 12 October 23 February 2009 March 2009 The Annual Report is sent to all shareholders registered with VPC, the Swedish Securities Register Center. Munters AB (publ) Isafjordsgatan 1, Kista Entrance Box 1188, SE-164 26 Kista, Sweden Phone +46-8-626 63 00 Fax +46-8-754 68 96 [email protected] www.munters.com The Annual Report is a translation of the Swedish Annual Report. MUNTERS ANNUAL REPORT 2007 In event of any discrepancies, the Swedish version shall apply.