ANNUAL REPORT 2016 - HMS Networks · Earnings per share, basic, SEK 8.63 +62% 5.33 Earnings per share, diluted, SEK 8.59 +62% 5.31 Cash flow from operating activities 155 +72% 90

ANNUAL REPORT 2016

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INTRO | HMS STOCK | MARKET | OUR BUSINESS | PRODUCTS | SUSTAINABILITY | CORPORATE GOVERNANCE | GLOSSARY | FINANCIAL | NOTICE OF AGM CONTENTS | SEARCH INTRO | HMS STOCK | MARKET | OUR BUSINESS | PRODUCTS | SUSTAINABILITY | CORPORATE GOVERNANCE | GLOSSARY | FINANCIAL | NOTICE OF AGM CONTENTS | SEARCH

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Box 4126, 300 04 HalmstadPhone: +46 35 17 29 [email protected], www.hms.se

World-leading experts in industrial communicationWe provide reliable solutions for connecting equipment like robots, control systems, motors and sensors to all industrial networks.

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

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

Get connected!


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https://www.facebook.com/HMSIndustrialNetworks/ https://twitter.com/hmsnetworkshttps://www.youtube.com/user/HMSIndustrialNetwork

Follow HMS – www.hms-networks.com

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

FINANCIAL CALENDAR

April 25, 2017 Q1 Report 2017

April 26, 2017 Annual General Meeting

July 20, 2017 Q2 Report 2017

Oktober 27, 2017 Q3 Report 2017

February, 2018 Year-end report 2017

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

THE WORLD IS BECOMING INCREASINGLY CONNECTED

HMS IN BRIEF

ESTABLISHED SALES CHANNELS IN MORE THAN 50 COUNTRIES

PRODUCTSALES / REGION

EMEA, 62% NORTH AND SOUTH AMERICA, 22%

ASIA, 16%

WORLDWIDE PRESENCE

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

AT THE FOREFRONT OF TECHNOLOGY

All interim reports, annual reports and certain presentations are available on the HMS website: www.hms.se/investors. A printed version of the annual reported is only distributed to shareholders and investors who have requested one. The annual report can be ordered by mailing a complete address to [email protected].

THE CONNECTED MACHINE – HOW HMS MAKES THE INDUSTRIAL INTERNET OF THINGS POSSIBLEHMS products enable industrial machines to connect to different types of networks and control systems. We manufacture hardware and software that can be used for:

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

Connecting Devices™ – we make machines communicate

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

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

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

REMOTE SOLUTIONS: Remote monitoring and control via Internet using eWON solutions. Makes it possible for technicians to service the machine without being on site.

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

INFRASTRUCTURE INFRASTRUCTURE INSIDE MACHINES:INSIDE MACHINES:Communication solutions Communication solutions

WHY INVEST IN HMS• Internet of Things

increases the need forcommunication solutions.

• Established leader.

• Worldwide presence.

• New stars under development.

• At fore front of technology.SAFETY SOLUTIONS: Communication between machines and different types of safety systems.

�ÅTERWelcome to the AGM • Shareholders informationHMS in brief • Key figures • CEO’s comments

INTRO | HMS STOCK | MARKET | OUR BUSINESS | PRODUCTS | SUSTAINABILITY | CORPORATE GOVERNANCE | GLOSSARY | FINANCIAL | NOTICE OF AGM CONTENTS | SEARCH

HMS in brief • Key figures • CEO’s comments

FINANCIAL INFORMATION IN BRIEF, SEKm 2016 change % 2015

Net sales 952 +36% 702

Growth in net sales, % 36 - 19

Operating profit 149 +46% 102

Operating margin, % 16 - 14

Profit for the year 100 +67% 60

Order intake 966 +42% 682

Earnings per share, basic, SEK 8.63 +62% 5.33

Earnings per share, diluted, SEK 8.59 +62% 5.31

Cash flow from operating activities 155 +72% 90

Average number of employees 467 +30% 359

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

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

February: HMS acquires Belgian eWON SA – A leading IIoT company that delivers products for remote access of industrial equipment.

March: HMS receives Ruban d’Honneur at the 2016 European Business Awards in Milan. The award designates HMS as one of the 10 most successful companies in Europe, with annual sales in the range of EUR 26-150 million. In total, more than 32,000 companies competed in European Business Awards in 11 categories.

May: One of the leading US manufacturers of emergency power generators decides to use Netbiter as its hardware platform for remote monitoring and control. Estimated volume of USD 1.5 million.

June: US machine builders name HMS as the best choice for network connection and remote control, based on voting in the journal, Control Design.

June: HMS acquires the Spanish company, Intesis Software, SLU. – a leading manufacturer of communications solutions for building automation.

September: HMS launches Anybus Wireless Bolt, an entirely unique product for connecting industrial machines to wireless networks.

October: HMS offers the Netbiter Remote Management under its newly acquired brand, eWON.

December: New organization launched, with division into four Market Units (Americas, Continental Europe, Asia and North) along with three Business Units (Anybus, IXXAT and eWON).

CEO’S COMMENTS........................................................................ 2

HMS STOCK................................................................................. 4-5

MARKET TRENDS........................................................................ 6-7

BUSINESS MODEL...................................................................... 8-9

HMS mission............................................................................. 8

Business model......................................................................... 8

Value creation for our target groups.......................................... 9

STRATEGIES AND GOALS........................................................... 10

THE MARKET – SALES REGIONS............................................... 12

PRODUCT OFFERING.................................................................. 14

Anybus®.................................................................................... 16

IXXAT®..................................................................................... 18

eWON®.................................................................................... 20

Intesis ..................................................................................... 22

SUSTAINABILITY........................................................................... 24

Focus areas............................................................................. 24

Employees............................................................................... 26

Environmental impact.............................................................. 28

Sustainable business............................................................... 30

Social commitments................................................................. 31

CORPORATE GOVERNANCE................................................. 32-41

Chairman's comments.......................................................... ... 32

Corporate governance report................................................... 33

Board’s internal control report.................................................. 37

Board of Directors.................................................................... 40

Group management................................................................. 41

GLOSSARY.................................................................................... 42

FINANCIAL DEFINITIONS............................................................. 43

DIRECTORS’ REPORT............................................................. 46-50

FINANCIAL STATEMENTS....................................................... 51-57

NOTES...................................................................................... 58-81

BOARD’S AFFIRMATION............................................................ .. 82

AUDIT REPORT............................................................................. 83

MULTI-YEAR OVERVIEW.............................................................. 86

NOTICE OF AGM........................................................................... 87

CONTENTS

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OPERATING PROFIT AND MARGIN

OPERATING MARGIN OPERATING PROFIT

EMPLOYEES / COUNTRY

SWEDEN, 41% CENTRAL EUROPE GERMANY, FRANCE, ITALY, SWITZERLAND), 26%

BELGIUM, 12%

SPAIN, 7% USA, 6% JAPAN, 3% CHINA, 2% INDIA, 1% UK, 1% DENMARK, <1%

SALES NUMBER OF NEW DESIGN-WINS

HMS NETWORKS ANNUAL REPORT 2016 1



CEO’S COMMENTS

Trends like Industrial Internet of Things and Industrie 4.0 are fueling the use of industrial communication technology and it continues creating excellent growth opportunities for us in the area of our core expertise and motto, Connecting Devices.

“

2 HMS NETWORKS ANNUAL REPORT 2016

CONTENTS | SEARCH INTRO | HMS STOCK | MARKET | OUR BUSINESS | PRODUCTS | SUSTAINABILITY | CORPORATE GOVERNANCE | GLOSSARY | FINANCIAL | NOTICE OF AGM CONTENTS | SEARCH


CEO’S COMMENTS

Organic growth, successful acquisitionsand more focus on sustainabilityI look back on 2016 with a sense of satisfaction and pride. We've had a high level of activity in all areas of operation and we made great strides in growing the company.

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

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

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

NEW PRODUCTSIn 2016, we continued investing in innovation and product development, with the launch of many new exciting products in our traditional markets, along with new Industrial IoT applica-

tions. One example is our innovative Anybus Wireless Bolt, which combines industrial commu-nication technology with wireless communication for new and exciting application areas. This prod-uct has attracted much attention and it was also chosen as Best Network Technology by Automa-tion Inside.

SUPPLEMENTARY ACQUISITIONS The acquisition of the Belgian eWON SA was an important strategic step that now allows us to offer a complete portfolio in the growing field of remote control and remote monitoring. We call it Remote Solutions. eWON’s products are a great supplement to our existing Netbiter offering and during the year, we integrated Netbiter into the eWON brand.

Acquisition of the small, but quickly growing Spanish company, Intesis Software SLU, provides us with new opportunities in the interesting area of communications for intelligent buildings. Both

of these companies are strategic supplements for the HMS growth agenda in our market areas for industrial communication.

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

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

LOOKING TO THE FUTURE Our aim is to be a global growth company on the cutting edge regarding both customer focus and technology. The challenge in 2017 will be imple-menting the strategic initiatives adopted in 2016. We will, given the investments and innovation

achieved in 2016, continue to deliver profitable growth in the year ahead.

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

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

Staffan DahlströmPresident and CEO

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

“

Organic growth, successful acquisitions



HMS stock

HMS STOCK

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

SHAREHOLDERS, BASED ON HOLDINGS AS OF 31 DECEMBER 2016

ShareholdingNumber

shareholders %

1 – 500 2,345 83.2%

501 – 1,000 213 7.6%

1,001 – 5,000 188 6.7%

5 001 – 10,000 22 0.8%

10,001 – 15,000 7 0.2%

15,001 – 20,000 8 0.3%

20,001 – 35 1.2%

Total 2,818 100.0%

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

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2012 2013 2014 2015 2016

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

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JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC JAN FEB

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HMS share (SEK) OMX Stockholm Pi OMX Technology Pi Number of shares traded month, 000s

NumberNUMBER OF SHARES AND SHARE CAPITALHMS has a total of 11,704,717 shares. Share capital amounts to SEK 1,170,472 All shares have the same voting rights.

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

TRADING VOLUMEA total of 940,822 shares were traded during the year, valued at SEK 225 million, which corre-sponds to an annual turnover rate of 8 percent. On average, 3,719 (4,516) shares valued at SEK 889 (919) thousand were traded each trading day.

DIVIDEND POLICYHMS’s policy is to pay annual dividends of approximately 50 percent of the net profit for the year. The dividend amount is adapted to the com-pany’s earnings level, financial position and future growth opportunities. For 2017, the Board and propose dividends of SEK 4.00 (2.50), which cor-responds to approximately 47 percent of net profit for the year. Over the last five years,

average dividends have been approximately 46 percent. HMS stock has had an average yield of 1.76 percent per year over the last five years.

WARRANTS AND OPTIONSAll HMS employees were invited to participate in an incentive program, which will involve saving in HMS shares during 2017.

SHAREHOLDERS AND SHAREHOLDER STRUCTUREAs of 31 December 2016, HMS Networks AB (publ) had approximately 2,818 (2,678) share-holders. The ten largest shareholders represented 78.5 (79.0) percent of the voting rights and capital.

THE FOLLOWING ANALYSTS MONITOR HMS ON AN ONGOING BASIS:Johanna Ahlqvist, and Victor Höglund SEB Enskilda Equity Research.



HMS stock

HMS STOCK

OWNERSHIP STRUCTURE AS OF 31 DECEMBER 2016

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

MY PERSPECTIVE – WHY INVEST IN HMS:

“KEY FIGURES*

2016 2015 2014 2013 2012 2011

Share price (fi nal day of trading) 304.0 245,0 149.0 136.5 112.3 94.8

Volume-weighted average share price 239.0 203.5 144.6 112.8 102.7 99.8

Average sales per day, SEK m 0.9 0.9 0.5 1.2 0.5 0.7

Average number of shares traded per day 3,719 4,516 3,153 10,416 4,754 7,204

Number of shares 11,704 11,322 11,322 11,322 11,254 11,169

Earnings per share 8.59 5.33 5.59 5.54 4.64 4.83

Market capitalization, SEK m 3,558 2,774 1,687 1,546 1,271 1, 057

Enterprise value, EV (Market cap. + net debt), SEK m 3,979 2,951 1,915 1,789 1,240 1,056

P/E 35.4 46.0 26.7 24.6 24.2 19.6

Net debt /EBITDA 2.2 1.3 1.8 2.3 N/A N/A

EV/EBITDA 21.1 21.8 15.2 17.1 16.6 12.8

EV/Net sales 4.2 4.2 3.2 3.6 3.2 2.8

SHARE CAPITAL TREND

Year TransactionsChange in no.

of sharesTotal

no. of sharesChange in share

capital (SEK)Totalt share capital

(SEK)2004 Company formed 100,000 100,000 100,000 100,000

2004 New share issue 900,000 1,000,000 900,000 1,000,000

2005 New share issue 22,100 1,022,100 22,100 1,022,100

2006 New share issue 1,900 1,024,000 1,900 1,024,000

2007 Warrants 33,165 1,057,165 33,165 1,057,165

2007 Split 10:1 9,514,485 10 571,650 0 1,057,165

2009 Warrants 581,250 11,152,900 58,125 1,115,290

2012 Warrants 169,500 11,322,400 16,950 1,132,240

2016 Non-cash issue 382,317 11,704,717 38,232 1,170,472

HMS’S LARGEST SHAREHOLDERS ON 31 DECEMBER 2016No. of

sharesShare of votes and equity, %

Investment AB Latour 3 027,322 25.9%Staffan Dahlström 1,617,073 13.8%Lannebo fonder 1,104,349 9.4%Swedbank Robur fonder 1,089,194 9.3%SEB Fonder 902,706 7.7%Fjärde AP-Fonden 493,054 4.2%Serge Bassem, Pierre Crokaert 382,317 3.3%AMF 231,414 2.0%Eklund & Peterson AB 184,522 1.6%HMS Management * 151,234 1.3%Deka Bank 141,700 1.2%State Street Bank 140,000 1.2%Nordea småbolagsfond 138,954 1.2%DNB Norden Micro Cap 124,124 1.1%Avanza Pension 117,748 1.0%Greenspecialisten AB 105,303 0.9%Other 1,753,703 15.0%Total 11,704,717 100.0%

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

SWEDISH INSTITUTIONAL OWNERS, 75%

SWEDISH INDIVIDUALS, 11%

FOREIGN INSTITUTIONAL OWNERS, 14%



Everything is getting connected • Global mega trends driving HMS

MARKET TRENDS – DRIVING FORCE

Everything is getting connected!With the Industrial Internet of Things (IIoT), industrial products, machines and systems are becoming increasingly connected. The driving force is to increase flexibility, efficiency and productivity, which has always permeated industrial automation. However, IIoT is also a strong trend in building automation, power generation, medical systems and more. IIoT makes it possible to gather data from the connected, industrial devices and feed it into IT systems, where it can be analyzed and presented. It provides operators and decision-makers with immediate insight into the industrial processes, enabling them to ensure that factory systems are functioning as intended, are correctly adapted, and that there is optimal use of resources. Furthermore, with IIoT, subcontractors are able to monitor delivered products and provide maintenance during the product life cycle, thereby offering a higher level of service to industry.

Communication between machines and paper millsCommunication between

Remote programming of wind turbines

Remote programming

Getting robots to communicate with

safety systems

Remote monitoring of cooling systems in buildings

Remote monitoring of

Connecting control and navigation systems

Connecting control

Communication between test systems and trucks

Connecting welding machines to InternetConnecting welding

Remote start ofbackup generators

Online monitoring of pump systems



Everything is getting connected • Global mega trends driving HMS

MARKET TRENDS – DRIVING FORCEMARKET TRENDS – DRIVING FORCE

GLOBAL MEGA TRENDS DRIVING HMS

In modern factories, there is a high level of connectivity, which increases flexibility, effi-ciency and productivity. However, they often also rely on older system that they want to keep using, and which are still in good working order. It means that there is a need for solu-tions that integrate the old equipment with the new. HMS products are very good at connect-ing old systems with new ones. In this way, IIoT creates new application areas and busi-ness opportunities for HMS products and services.

IIoT helps provide operators and decision- makers with immediate access to information from industrial processes. It is insight that enables optimal performance of processes and use of resources. HMS’s business is highly aligned with IIoT – connecting industrial products to networks. HMS is gradually expanding its IIoT offering, based on its core expertise in industrial communication.

There are high demands on security with more connected devices. HMS is continually striving to develop and maintain secure solu-tions. Security is important to our customers, which is why they prioritize working with reli-able, knowledgeable communications part-ners when implementing IIoT solutions.

When industrial equipment is connected with communication and information systems, new opportunities arise for achieving optimal use of energy and equipment in the industrial systems. HMS's main contribution to sustain-able development is developing and manu-facturing products that make energy conservation and energy efficient production possible for its users, with the lowest possi-ble environmental impact during the product's useful life.

FOCUS ON SECURITYENVIRONMENTAL ANDENERGY EFFICIENCY

DEMANDS FOR ACCESS TO INFORMATION

CONNECTING EXISTING EQUIPMENT

Data from the industrial processes is made available no matter where you are, which facilitates global business and worldwide industry that is both sustainable and resource efficient. HMS is currently a global player, with a strong local presence. It’s a combination that provides definite advan-tages over competitors. More than 90 per-cent of HMS’s sales are exports, which means that the company is firmly established internationally and prepared for additional growth.

GLOBALIZATION & DIGITIZATION



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

BUSINESS MODEL AND THE VALUE WE CREATE

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

REVENUE DISTRIBUTION, 2016

DIRECT SALES, 70%

SALES VIA DISTRIBUTORS, 30%

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

DEVELOPMENT OF SEVERAL BUSINESS MODELS OVER TIMEIn prior years, HMS’s activities and business model were one dimensional, with the company focused on delivering communication solutions to manufacturers of automation products, in direct contact with the customer. Since then, HMS has evolved into a company that offers products and services to customers in many parts of the indus-trial value chain. In developing the offering, sup-plementary business models have been created for each market and product line.

Design-Wins still the foundationFor Anybus Embedded and certain IXXAT prod-ucts, the business is built upon framework agree-ments, or so-called Design Wins. A design-win typically involves a long-term collaboration with a manufacturer of automation equipment. It means that customers integrate HMS hardware and soft-ware into their product designs.

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

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

Major product offering for system integration.Anybus Gateways and most of the eWON andIXXAT products are offered via HMS’s network of qualified distributors. The business model is based on a network of around 300 independent, techni-cally competent distributors in around 50 coun-tries, who ensure that HMS products are used in local projects. The target groups are primarily

DESIGN WINS

SYSTEM INTEGRATION(HMS PRODUCTS ARE PURCHASED FOR THE PURPOSE OF SOLVING A COMMUNICATIONS

PROBLEM)

SERVICES AND SUBSCRIPTIONS

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

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

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




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

VALUE CREATION – FOR OUR TARGET GROUPS

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

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

For geographically dispersed installations, eWON Remote Solutions offer the potential of major savings in maintenance costs. Other bene-

fits are higher reliability and service life for the equipment.

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

Shareholders HMS’s goal is to create long-term value added for its shareholders. It is created via both share perfor-mance and dividends. HMS strives to achieve a long-term, increasing dividend for its sharehold-

ers. It also has an explicit dividend policy to dis-tribute up to 50 percent of the profit.

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

HMS offers its employees exciting personal and professional development in a modern, dynamic and growing organization that has a wide network of international contacts and excellent career opportunities. The company culture is modern and open, where shared values, learning and own responsibility are prioritized.

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

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




LONG-TERM GROWTH IN STRATEGIC MARKETS

HMS has steadily expanded, on the foundation of its technology and strong market position in the area of embedded network solutions for the man-ufacturing industry. Via a combination of new technologies, innovative products and market ini-tiatives, HMS has diversified into related indus-trial areas such as remote monitoring of industrial equipment, functional safety and communication for building automation and smart grids. HMS aims to, primarily, expand via organic growth by strengthening its position and developing its range of products and services. Selective acquisitions may also be made if they are a valuable addition to HMS's technology or product portfolio, thus strengthening the company's offering to the mar-ket. The acquisition of eWON and Intesis are just two examples of the latter scenario.

FOCUSED, SUSTAINABLE PRODUCT DEVELOPMENT Going forward, the product portfolio for HMS's three brands, Anybus, eWON and IXXAT will continue being developed in line with new cus-tomer requirements and technological develop-ments. Besides the pure sales goals, the aim is to strengthen HMS's market position as a leading supplier of user-friendly, safe solutions for indus-trial communication. The importance of solutions for information security in industry increases in conjunction with the growing need for new, inno-vative communication solutions. This is also an

STRATEGIES AND GOALS

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




STRATEGIES AND GOALS

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

The cornerstone of all development work is to create significant value using leading technology in order to meet market needs, while maintaining the focus on quality and environmental aspects. HMS products and solutions are based on the latest, proven, sustainable technology for industrial net-works, wireless communication and remote moni-toring.

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

SUSTAINABLE VALUE CHAIN Industry requires high quality products that are easy to install and use. Another basic requirement is the ability to use industrial products for a long period of time, over the entire product life cycle, which is standard for industrial systems. HMS is able to meet all of these requirements because it has full control over the entire value chain, from

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

OBJECTIVES

product development, component supply, manu-facturing, distribution, sales, training and after-sales service. The Business Management System (BMS) is used to specify and monitor all of the processes in order to ensure quality and continu-ous improvement in the value chain.

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

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

FINANCIAL OBJECTIVES

ACTUAL

-5

5

15

25

35

45

20132012

%

20162014 2015

Goal 20%

AVERAGE ANNUAL GROWTH, %

* after depreciation/amortization (EBIT)

0

10

20

30

20132012

%

20162014 2015

Goal 20%

OPERATING MARGIN*, %

0

100

200

300

20132012

PPM

20162014 2015

Goal < 200 ppm

The goal for returned defective products from the field was not achieved 2016. 285 PPM (Parts Per Million) is, however, still very low (0.0285 percent error rate). With such a low PPM, a

very small number of defective products can have a large impact on the error rate. HMS continues its careful monitoring of the

PPM rate, in accordance with existing quality routines, to ensure that failure to meet the target does not become a trend.

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

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

4

Operating margin

>20%

Long-term growth of

20%




THE MARKET – HMS SALES REGIONS

With offices in 12 countries and distributors in another 50 or so, HMS is represented in all major industrial markets.HMS products exist throughout the world, but primarily in countries with a strong manufacturing industry.

Established sales channels in more than 50 countries

HMS-offi ces External distributors

HALMSTAD, SWEDEN

CHICAGO, USA

SHIN-YOKOHAMA, JAPAN

BEIJING, CHINA

PUNE, INDIA

COVENTRY, UK

IGUALADA, SPAIN BASEL, SWITZERLAND MILANO, ITALY

KARLSRUHE, GERMANY

RAVENSBURG, GERMANY

GÖTEBORG, SWEDEN

BEDFORD, USAPITTSBURGH, USA

NIVELLES, BELGIUM

VANTAA, FINLAND

MULHOUSE, FRANCE





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

EUROPE Established manufacturing countries, like Germany, are in need of more flexibility at production facilities.

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

DRIVING FORCES FOR GROWTH IN INDUSTRIAL AUTOMATION BY GEOGRAPHIC REGION

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


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

GOTHENBURG, SVERIGEDevelopment offices for parts of Anybus.

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

RAVENSBURG, GERMANYDevelopment office for IXXAT products.

NIVELLES, BELGIUMDevelopment office for eWON products.

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

BEDFORD, USADevelopment office for customized solutions.

PITTSBURGH, USALocal office for sales and support of eWON products.

SHIN-YOKOHAMA, JAPANManages local sales (Japan and Korea), support and marketing.

MULHOUSE, FRANCEManages local sales, support and marketing.

MILAN, ITALYManages local sales, support and marketing.

COVENTRY, UKManages local sales, support and marketing.

BEIJING, CHINAManages local sales, support and marketing.

PUNE, INDIAManages local sales, support and marketing.

BASEL, SWITZERLANDManages local sales.

IGUALADA, SPAINDevelopment and sales of HMS Intesis products.

VANTAA, FINLANDDuring 2017 HMS established an office in Vantaa, Finland.



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

HMS PRODUCT OFFERINGHMS PRODUCT OFFERING

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




HMS PRODUCT OFFERING

industrial communication provides an excellent foundation for creating new, innovative products and services for the emerging IIoT global market.

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

WHO ARE HMS’S CUSTOMERS? HMS products are used by many different types of players in industry. Manufacturers of automation products, machine builders, system integrators and end users all regard HMS as a key supplier who helps ensure that their equipment is able to

communicate and be integrated with other equip-ment in industrial systems on the international market. It involves not only factory automation, but also process energy, buildings, life sciences, and transportation.

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

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

We have noticed a growing demand for sustain-able, intelligent industrial solutions, which are reliable, safe and robust, typically also relying on wireless technology. HMS’s strong position in

THREE STRONG PRODUCT BRANDS FOR CONNECTING DEVICESHMS started out focusing on manufacturers of automation products with our range of communi-cation cards. Our current offering, however, con-sists of three well-established and growing product lines: Anybus, IXXAT and eWON. They are pack-aged and designed for specific segments of the industrial value chain, which has gradually broad-ened HMS’s market presence. This development has been key to HMS’s growth process and it has established the company as a leading player in the market.

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

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


“




DID YOU KNOW THAT: Industrial net-works are often called buses or fieldbuses. It’s how the name Anybus came about.

INNOVATIVE PRODUCTS –

Anybus connects industrial devices to all types of networks

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

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

DID YOU KNOW THAT: Anybus products account for just over 55 percent of HMS’s total sales.

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

“MY PERSPECTIVE – WHY INVEST IN HMS:

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

BASED ON ANYBUS TECHNOLOGY 15%




INNOVATIVE PRODUCTS – INNOVATIVE PRODUCTS –

Globally, HMS has a special status among inde-pendent companies that focus on communication solutions. The competition is typically comprised of automation equipment manufacturers who design their own embedded network cards. Cur-rently, this type of in-house development and manufacturing represents most of the total global volume of embedded network cards. HMS feels that there is considerable potential in convincing more companies, which currently develop their own communication solutions, to instead pur-chase them from HMS.

ANYBUS GATEWAYSA gateway is an independent “translator” that enables automation devices and systems to com-municate with industrial networks. Gateways con-sist of one or more Anybus embedded cards and they typically function as problem-solvers on fac-tory floors all over the world. They are pre-pack-aged solutions that can immediately be used to connect machines and networks. Gateways are typically used to connect older automation equip-ment with newer systems.

Working from the basic idea, to merge two different Anybus network interfaces into pre-pack-aged gateways, HMS has created a very wide prod-uct range – now more than 300 products – that

make it possible to connect virtually any industrial network at all. Because of this, Gateways are in demand and used by automation engineers around the world, particularly for factory automation, but also in related areas such as building automation.

HMS markets gateways under the name, Any-bus X-gateways (communication between two networks) and Anybus Communicator (commu-nication between an automation device anda network).

ANYBUS WIRELESSHaving acquired technology for wireless commu-nication in 2014, HMS was able to, in 2016, launch its first proprietary solutions for wireless communications. Anybus Wireless Bolt and Wire-less Bridge are used to give machines on the fac-tory floor a solid wireless connection via Bluetooth or WLAN.

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

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

MARKETFactory automation remains the most important market for Anybus. Since com-munication is becoming increasingly important in other areas, like buildings, vehicles, process plants and infrastruc-ture, it means that new applications and markets are continually opening up for Anybus.

BUSINESS MODELAnybus embedded is sold through direct sales to manufacturers of automation products. A Design Win means that the customer has decided to use Anybus,

after which, an Anybus module is mounted to each new product that is manufactured. Anybus gateways and wireless are sold via direct sales as well as distributors.

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





IXXAT products enable Machine Automation

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

EXPERTS IN CAN AND REAL-TIME ETHERNET SYSTEMS

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

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

The main customers are OEM machine build-ers (OEM = Original Equipment Manufacturers) and large-scale equipment manufacturers and developers. Typical applications include machine control, Human Machine Interfaces (HMIs),

data-concentration, network extension and improving network robustness.

IXXAT AUTOMOTIVE – ENABLING NEXT GENERATION VEHICLES

As cars are turning into computers on wheels, the testing efforts for car manufacturers and their sup-

pliers are immense. IXXAT Automotive solutions combine elaborate test-functions in a small device combined with software for configuration and visualization. Applications include connection of vehicle components to test systems and simulating other vehicle parts.

The strength of the IXXAT Automotive offer-

DID YOU KNOW THAT: Each year, about 1 billion CAN nodes (a connec-tion point for a machine) are sold world-wide.

HMS’s core strength is the continuous transfer of our know-how in communication and embedded systems into products that enable our customers to realize their solutions. Evidence is the strong demand from new and long-term customers on products and consultancy.”Thomas Waggershauser, Product Marketing Director, IXXAT


“





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

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

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

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

IXXAT SAFETY – EXPERTISE AND PRODUCTS FOR A GROWING MARKET

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

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

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





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

How it worksA communication gateway (Cosy, Flexy, Netbiter or eFive) is attached to the remote equipment. It sends data via Ethernet or the cellular network to a cloud-based server (eWON Talk2M/Netbiter Argos) – Through this, you can access and control the device.

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





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

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

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

RAPIDLY GROWING MARKETThe market for remote access, control and moni-toring of industrial machines and systems is still young, fragmented and difficult to assess, but sev-eral driving forces indicate that it is growing at a rapid pace. We’ve noticed a clear trend with lead-ing automation companies that they see IIoT solu-tions as an important component for future growth.

FOUR REMOTE SOLUTIONS

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

Remote Access with eWON Cosy

With an eWON Cosy connected to a machine, it is possible to create a secure tunnel to the machine

and do programming and troubleshoot machines remotely without going on site, drastically reduc-ing support costs.

Remote Data with eWON Flexy

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

Remote Management with Netbiter

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

Remote Networks with eFive

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

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

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

We see a growing market for remote solutions. In today’s business, it is often the operational costs that put a burden on profitability and if you can invest in new tools and tech-nologies to make your business sharper and more efficient, you will get a quick return-on-investment and you will still be building your business. Not only does eWON remote solutions reduce operational cost, we also add value by gathering and displaying KPIs and key parameters from machines which improves service and performance. eWON has always been bringing new innovations to the market and has on many occasions been the trendsetter, picking the right technology at an early phase. At HMS, we will be able to keep eWON as the market-leading brand for remote solutions.Jon Jacobsen, Marketing Manager, eWON


“





Intesis – Connecting devices within building automation

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

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

IntesisHome: A complete IoT solution to con-nect air conditioners to the Internet enabling remote control and management through a smart-phone, tablet or PC to reduce energy consump-tion and increase comfort.

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

INTEGRATION WITH HMS AND FUTURE PLANS

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

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

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


“





Building automation is a growing sector, fueled by the ability to connect ventilation, heating, lighting and more.

Intesis management team during a visit to Halmstad.



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

SUSTAINABILITY

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

For us, sustainable growth has three interdepen-dent components: economic, environmental and social sustainability. We believe that sustainable growth is about taking responsibility for custom-ers, the environment and the people around us, in all areas of our operations. We do this by maximiz-ing value when we create profitable growth, mini-mize our footprint and realize our social responsibility. We call it our “Three Zings”.

FOCUS AREASThe HMS management team has established four particularly important focus areas of sustainable enterprising that provide the foundation for how HMS is able to contribute to a sustainable develop ment of society. • Innovative products and attractive solutions• Energy efficiency • Attractive employer • Responsible business dealings

During the year, HMS engaged with stakeholders

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

There is ongoing dialog on what is important in order to obtain valuable feedback on how to carry out effective sustainability efforts. Read more

about our materiality assessment and how HMS works with stakeholder engagement in our GRI supplement.

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

ECONOMYMAXIMIZING

VALUE

ENVIRONMENTMINIMIZING FOOTPRINT

SOCIAL REALIZING SOCIAL

COMMITMENTS

Our customers demand smart, sustainable products and ser-vices that help them address their economic and climate- related challenges. HMS engages in long-term sustain-ability efforts aimed at not only meeting our customers’ require-ments, but also promoting and making progress on sustain-ability issues in our niche.”Katarina Lekander, Quality Manager


“




SUSTAINABILITYSUSTAINABILITY

GOAL 3GOOD HEALTH AND WELL-BEING Investing in our employees’ health and well-beingRead more on page 26.

GOAL 4QUALITY EDUCATIONPrioritizing skilldevelopment and supporting training initiativesRead more on pages 27 and 31.

GOAL 5GENDER EQUALITYEnsuring equal rights, opportunities and conditionsRead more on pages 26-27.

GOAL 8DECENT WORK AND ECONOMIC GROWTH Promoting a long-term safe and secure working environment.Read more on page 30.

GOAL 9PROMOTING INNOVATION Investing in research and developmentRead more on pages 14-23, 28-29.

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

GOAL 12SUSTAINABLE CONSUMPTION AND PRODUCTION Developing and manufacturing products that enable significant energy savings for our customers.Read more on pages 28-29.

GOAL 10DIVERSITY Efforts to increase diversity. Read more on page 26.




SUSTAINABILITY

highly valued. This year, however, we introduced a new type of survey, which is carried out three times per year, where we “take the pulse” of the organiza-tion and thereby can get quicker feedback. It offers managers a way of obtaining quick feedback from employees via a portal that shows the departments results.

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

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

We have well-implemented procedures for risk assessment and we continually evaluate our work environment. Complaints may be submitted directly to a manager or the HR department. Anonymous complaints are also possible via

A world-class workplace

HMS HIGH FIVEHMS is a young, international, entrepreneurial company where there is high growth, exciting technological development and proximity to customers. This makes having shared values even more important, because it ensures that decisions and working methods are aligned with our long-term strategy. It also serves as our guiding star when performing daily tasks and interacting with customers, suppliers, colleagues and other stake-holders. HMS has formulated these shared values as five principles – HMS High Five. They are basi-cally self-explanatory: We will always prioritize our commitment to customers. We will grow and be innovative. We pursue our work with a long-term perspective. We believe in building relationships and we are efficient.

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

In our employee survey, areas dealing with gender and equality received very high ratings. We conduct employee surveys on a regular basis. The latest survey revealed that, among others, a pleasant work environment, gender and equality issues, as well as cooperation with colleagues are

HMS is a global company with operations in many countries. In order to achieve common goals and growth, without sacrificing quality, you need a strong company culture and shared values, which in turn makes it possible to have short decision paths and employees that can take their own initiative.




0

10

20

30

40

Number

20-29 50-5930-39 40-49 60-69 Age

EMPLOYEES / COUNTRY EMPLOYEES / FUNCTION


Management and administration, 18% Production and logistics, 18% Development, 30% Sales and marketing, 34%

22%

78%

ATTENDANCE 2016MANAGERS / AGE DISTRIBUTIONDISTRIBUTION WOMEN / MEN

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

employee surveys, by placing them in actual mail-boxes or via our whistleblower function.

THE RIGHT RECRUITMENT LEADS TO GROWTH AND QUALITYHMS's growth strategy depends on it having employees with the right expertise. We actively strive to profile HMS in the labor market, with a special focus on technicians and engineers. For example, HMS participates in job fairs at universi-ties and colleges, offers students opportunities for doing their thesis projects at HMS and promotes the company through various types of social media. This year, we added 17 (25) new employees to the Group, of which 5 (7) in Sweden and 12 (18) in other countries.

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

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

introduction programs. In addition, all new HMS employees throughout the world are invited to attend an introduction week in Halmstad. At HMS, there are many opportunities for shaping and developing one's own professional career. Career development discussions between an employee and his or her manager also take place each year. It creates a strong drive and commitment to continually improve, which is a critical success factor for long-term success. At the company, there is a special foreign exchange program that provides engineers from the development department with the opportunity of working in one of the compa-ny's other offices around the world.

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


“

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

Sweden, 41% Central Europe

(Germany, France, Italy,Switzerland), 26%

Belgium, 12% Spain, 7%

USA, 6% Japan, 3% China, 2% India, 1% UK, 1% Denmark, <1%

0

25

50

75

100

%

Total Men Women -29 years 30-49 years 50 years

97.02 97.67 95.04 96.04 97.01 97.66




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

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

• Products that are considered to be fundamental components in sustainable industrial systems

• Sustainable product development

• Sustainable manufacturing and logistics

SUSTAINABLE SOLUTIONSHMS products make it possible to create sustain-able industrial solutions, with a focus on such things as energy and resource efficiency, lower emissions, less pollution, higher quality and less waste. Another important aspect is being able to offer effective and flexible industrial solutions to

reduce overproduction. The goal is to be able to manufacture a small number of devices just as effi-ciently as with mass production.

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

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

TOTAL ENERGY CONSUMPTION ENERGY INTENSITY

0

500

1,000

1,500

2,000

2,500

201620150

1

2

3

4

5

MWh

kWh per skeppad enhet

TOTAL ENERGY CONSUMPTION Greenhouse gas emissions, tons CO2e 2016

Scope 1, direct greenhouse gas emissions 251

Scope 2, indirect greenhouse gas emissions from energy consumption 66

Scope 3, other indirect greenhouse gas emissions 148

Total greenhouse gas emissions 465

Greenhouse gas emissions for each unit (kg CO

2e) 0.65

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




SUSTAINABILITY

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

The basis for creating the smart industrial sys-tems of the future is the information and data obtained from industrial systems. HMS products provide that by offering intelligent control func-tions, along with capturing and presenting data to the main analysis and decision systems. As a result of the growing amount of data collection and remotely connected systems, new services and companies are arising, both centrally and region-ally. PRODUCT DEVELOPMENTHMS’s goal is to continually develop the capacity of products and solutions, in a way that is compat-ible with our sustainability goals, so that they can easily be integrated into industrial systems and provide valuable functionality and information. With this is mind, HMS participates in various technical network organizations, thereby ensuring that the company’s products and solutions remain on the cutting edge as regards such functions as energy management.

In the area of industrial communication solu-tions, technology is developing at a rapid pace, which puts high demands on the ability to offer more powerful, efficient products, without com-promising on the environmental aspects. Since time to market is important, methods and plat-forms also play a critical role because the quicker new solutions start getting used, the more there is to win, from a sustainability perspective. HMS puts a great deal of emphasis on energy-efficient technologies and solutions. Powerful, energy-effi-cient solutions, are created using processors and memories with contemporary silicon geometries. Products are designed to be used over a long period of time, in demanding environments. And, to achieve maximum lifespan, it must be possible to make repairs and perform upgrades in the field.

Low weight, small size and efficient packaging are also considered in the design, in order to conserve material resources and have a lower environmental impact in the logistics chain. Of course, only materials and manufacturing processes that meet the latest international legal requirements are used. To the greatest extent possible, hazardous sub-stances and chemicals are avoided.

FOCUS ON ENERGY EFFICIENCY HMS strives to develop products and solutions that contribute to efficient energy consumption and resource-efficient production. By using auto-mated processes and intelligent industrial commu-nication, it is possible to achieve more efficient energy consumption for industrial equipment, such as motor drives, pumps and fan systems. HMS products for remote control and remote monitoring, along with its cloud solutions, can be utilized to address global challenges in sustainable development. Intelligent remote control of equip-ment also results in energy savings, due to more efficient operations and fewer necessary site visits for the purpose of inspection and control. This is how HMS's products lead to higher energy effi-ciency and thus lower environmental impact.

RECYCLING AND E-WASTEThrough careful control of production processes, it is possible to achieve efficient manufacturing with minimal use of materials, waste and energy consumption.

HMS minimizes the use of hazardous sub-stances and facilitates recycling by complying with environmental laws like RoHS, REACH and WEEE. There are routines and work methods in

Savings potential through use of Talk2M 2016

Travel savings (km) 2,006,124,400

Lower carbon dioxide emissions (ton CO

2e) 255,981

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

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

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

Frank Weiß, CEO, Autech Tesla

place for selecting the right materials during the design phase.

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




SUSTAINABILITY

BUSINESS ETHICS AND ANTI-CORRUPTIONThe HMS Code of Conduct is a set of external and internal regulations that guide employees in everyday life. Compliance with the Code of Con-duct ensures that we run our business in a profes-sional, honest and ethical manner. The Code provides guidance on how HMS employees should

behave in a way that is ethical and in line with the company’s values. It is also used when monitoring suppliers. The Code of Conduct is available exter-nally on the company's website and has been approved by the group management team and the Board. The Code is available to all employees via the company intranet and it is covered during the introduction of new employees.

HMS operations involve the processing of cus-tomer data generated in our systems when custom-ers use our cloud services. We are committed to respecting and protecting the privacy of our cus-tomers. During the year, we developed our rou-tines for storing data and we implemented technical solutions aimed at protecting busi-ness-related data and confidentiality. We did not

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

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

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

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

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





Magnus Ovik from the HMS Supply Department inspects Chinese manufacturers of circuit boards, semi-finished products and contacts.

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

Each year, in collaboration with Halmstad University, HMS grants scholarships to the best thesis projects. The scholarships are awarded to outstanding students in computer science, electri-cal engineering and mechatronics. HMS is one of

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

Supplier auditsDuring the year, HMS implemented routines for evaluating materials suppliers. This is done via self-audits. The topics covered are risk manage-ment, labor law, health and safety, environment and business ethics. The results showed that a large

portion of our suppliers have inadequate proce-dures for being able to communicate to us how they work with sustainability issues. 32 percent of the material suppliers were deemed as having ade-quate processes for communicating sustainability. 3 percent were rejected because of poor communi-cation. They are being monitored and must imple-ment corrective measures in order to be allowed to keep doing business with us.

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

Realizing social commitments

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

Magnus Ovik from the HMS Supply Department inspects Chinese manufacturers of circuit boards, semi-finished products and contacts.

the sponsors of Årets Tekniker, an award that rec-ognizes the importance of technology to society, quality of life and entrepreneurship. The award helps us promote engineering as a career choice and create interest in technology.

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

Every quarter, a successful customer case is

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



Chairman’s comments • Corporate governance report • Board’s internal control report • Board of Directors • Group management

CORPORATE GOVERNANCE

Chairman’s comments

HMS is extremely well positioned and prepared to deliver future solutions in an increasingly con-nected world. HMS products contribute in vari-ous ways to a higher level of competitiveness and resource efficiency and thereby a sustainable soci-ety. The interest in, and demand for, HMS prod-ucts is increasing, and the company’s performance in 2016 demonstrates just how sound and pro-gressive HMS's business is.

To ensure future growth, HMS invests approx-imately one-third of its sales in product develop-ment and it focuses on new technology platforms in order to increase its competitiveness and lay the foundation for long-term growth. During the year, HMS also increased its global presence and breadth of the product portfolio through its acqui-sitions of eWON SA and Intesis Software SLU.

For a growth company in a rapidly growing sector, the Board of Directors plays an important role. It must actively support management by lis-tening and coaching on strategic issues, ensuring that strategies are correctly formulated and moni-tored. It must also keep track of the risks. The work performed by the Board follows a fixed

annual cycle, with scheduled meetings and an allo-cation of tasks and responsibilities in accordance with the company's rules of procedure. Already at the first Board meeting held in conjunction with the AGM, we set the structure for the upcoming Board year.

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

Each year, the work done by the Board is eval-uated by having every member of the Board answer some questions, which I then compile and discuss with the entire Board. The results of these evaluations, which are also made available to the nomination committee, help ensure that the work

done by the Board is efficient and they provide us with valuable feedback on whether the composi-tion and competence of the Board is adequate. The summary for the year once again showed that the Board has performed its tasks well. Besides the work done by the audit and remuneration com-mittees, the development committee also made important contributions. It is responsible for monitoring important issues concerning product development, technology development and ensur-ing that HMS has the right expertise.

Going forward, the Board's challenges are to support and debate with the management team on issues within a number of strategically important focus areas. We need to ensure that HMS, over the long term, remains competitive in a changing and growing market by keeping the right focus on product development, market expansion, cus-tomer needs and the skills of our employees.

Charlotte Brogren Chairman of the Board




Elects/appoints

Inform/report

NOMINATION COMMITTEE

BOARD OF DIRECTORS

PRESIDENT/CEO

EXTERNAL AUDITORS

SHAREHOLDERS AND AGM

REMUNERATION COMMITTEE

AUDITCOMMITTEE

DEVELOPMENT COMMITTEE

GROUP MANAGEMENT


Corporate governance report

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

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

SHAREHOLDERS AND AGMThe shareholders exercise their right to decide on the company’s affairs at the general meeting of shareholders, which is the company’s highest deci-sion-making body. The Annual General Meeting (AGM) decides, among other things, on the adop-tion of the income statements and balance sheets, appropriation of profits, discharge of responsibil-ity for the Board, election of Board members and auditors, as well as remuneration to the Chairman of the Board, other Board members and auditors. The AGM also decides on guidelines for remuner-ation to the management team.

In addition, the AGM decides on any changes to the company's Articles of Association, new share issues and the introduction of any share-based incentive schemes. The Articles of Associa-

tion is the fundamental governing document for the company. It stipulates the type of operations, the size of share capital, shareholders’ right to attend the AGM and the agenda of the AGM.

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

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

ANNUAL GENERAL MEETING 2016The AGM was held on 28 April 2016 at the com-pany's office in Halmstad. Present at the meeting were shareholders representing approximately 59 (66) percent of the number of shares and votes.

The following were present at the AGM: Chair-man Charlotte Brogren and Board members Hen-rik Johansson, Ray Mauritsson, Fredrik Hansson, Kerstin Lindell and Anders Mörck. Also at the meeting were Jan Svensson, Chairman of the nom-ination committee and Fredrik Göransson from the firm of auditors. Shareholders at the AGM decided:• to issue dividends of SEK 2.50 per share, total-

ing SEK 29,261,793 (28,306,000).

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

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

• to re-elect Ray Mauritsson, Henrik Johansson, Kerstin Lindell and Fredrik Hansson.

• to elect Anders Mörck as Board member.

• that remuneration to the Board would be SEK 1,275,000 for the next term, of which SEK 400,000 to the Chairman of the Board and SEK 175,000 to each of the other Board mem-bers.




DISTRIBUTION WOMEN/MEN ON THE BOARD

WOMEN, 29% MEN, 71%


AUDITOR

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

• the election of Öhrlings PricewaterhouseCoo-pers AB (PwC) as auditor, with Fredrik Görans-son, Authorized Public Accountant, in charge.

• on principles for appointing the nomination committee.

• on guidelines for salary and other remuneration for the CEO and other senior executives.

• on the authority of the Board to issue new shares.

• acquisition of shares in HMS Networks AB in connection with the established Share Savings Plan.

• to set up share savings plan open to all perma-nent employees of the Group.

NOMINATION COMMITTEEThe AGM decides on how the nomination com-mittee is appointed. It is the duty of the nomina-tion committee to, prior to the next AGM, prepare and submit proposals for a Chairman of the Board and other Board members, as well as remuneration to the Chairman and other Board members. The nomination committee is also responsible for eval-uating the work done by the Board of Directors based on the report it receives from the Chairman. The nomination committee also proposes the elec-tion of auditors and their remuneration.

At the 2016 AGM, there was a decision on the principles for establishing a nomination commit-tee at HMS Networks AB. In accordance with the nomination committee's proposal, the sharehold-ers at the AGM decided that the nomination com-mittee would consist of the Chairman of the Board, along with representatives from the four largest shareholders (as of 31 August) up until the next AGM is held or, when necessary, until such

time as a new nomination committee has been appointed.

Staffan Dahlström's knowledge and experience, in this context, is considered to be so important to the nomination committee's work and continuity of the top management of the company, that it justifies having him represented on the committee. The nomination committee appoints one of its members as chairman (however, neither the Chair-man of the Board nor any other member of the Board of Directors may be elected as chairman of the nomination committee). Should any of the three largest shareholders decline their right to appoint a representative, the right is transferred to the shareholder with the next largest shareholding on the specific date. If a member leaves the nomi-nation committee in advance then, if appropriate, a replacement will be appointed by the same share-holder that appointed the one departing, or if this

shareholder no longer ranks among the three larg-est shareholders, by the shareholder who in terms of shareholding is next in line.

The composition of the nomination committee will be published on the company’s website no later than six months before the next AGM. The nomi-nation committee strives to achieve gender balance on the Board of Directors. The Board of Directors currently has 29 (33) percent women serving on it.

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

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

NOMINATION COMMITTEE FOR THE AGM 2017

Name/representingShare of votes 2016-08-31

Jan Svensson, Investment AB Latour 26%

Staffan Dahlström, own holdings 14%

Göran Espelund, Lannebo Fonder 9%

Evert Carlsson, Swedbank Robur Fonder 9%

Charlotte Brogren, Chairman of the Board 0%

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

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

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

BASIS FOR BOARD WORKThe fundamental issues concerning the division of responsibility between the Board of Directors, Board committees, Chairman and CEO are expressed in the Board’s rules of procedure and instructions for the CEO. The rules of procedure regulate such things as how often the Board con-venes and the items that it should address at Board





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

Year-end closing andYear-end Report

Annual Report

Interim Reportfor January-March

Interim Reportfor January-June

Interim Reportfor January-September Budget meeting

Strategy meeting

First Board meeting

of the year

Financial monitoringFull-year forecast

JAN FEB MARCH APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC

Preparation ofAGM

meetings. The rules of procedure also explain the allocation of responsibility between the Board, its Chairman and the CEO.

The Board is responsible for adopting strate-gies, business plans, budgets, quarterly reports, financial statements and the annual report. The Board is also responsible for appointing and dis-missing the CEO and decisions involving signifi-cant changes to the HMS organization and operations. The rules of procedure state the thresholds that apply when the Board must decide on investments, company mergers and acquisi-tions, loans, etc.

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

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

The Swedish Code of Corporate Governance stip-ulates that the majority of elected Board members must be independent in relation to the company and Group management. Furthermore, at least two of the independent members must also be independent in relation to the shareholders that control ten percent or more of the shares or voting rights in the company. The nomination commit-tee has, during a joint assessment of each member’s relationship to the company, Group management and major shareholders, found that all members are independent in relation to the company and its management. Except for Anders Mörck, all the members have been assessed as being independent in relation to major shareholders. The unique expertise of each individual Board member and the resulting competence of the entire Board is presented on page 40.

The total amount of fees paid to the Board in 2016 was SEK 1,275 (1,275) thousand. For a more detailed description of Board members' attendance at meetings, please see Note 26.

CHAIRMAN OF THE BOARDThe Board’s rules of procedure stipulate that the Chairman must ensure that the Board’s work is run effectively and that the Board meets its obliga-tions. This includes organizing and leading the Board's efforts and creating the best possible con-ditions for meeting its responsibilities. It is also the duty of the Chairman to ensure that Board mem-bers regularly update and hone their know-how about the company and that new members receive the requisite introduction and training. Further-more, the Chairman must meet with the CEO to provide advice and discuss important issues. He

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

At the AGM on 28 April 2016 Charlotte Bro-gren was elected as Chairman of the Board. The Chairman of the Board in not involved in the operational management of the company.

WORK OF THE BOARD IN 2016Since the AGM of 28 April 2016 the Board has held ten minuted meetings up to the adoption of this annual report. Both the CEO and CFO of HMS Networks AB participate in Board meetings, with the CEO serving as rapporteur and the CFO serving as secretary. At each of its meetings, the





Board has dealt with the mandatory standing items, as stipulated in the Board’s rules of proce-dure. This includes discussion of the company’s business situation, budgets, quarterly reports and annual financial statements. The work of the Board otherwise focused on the further development of previously established market and acquisition strat-egies. Besides its scheduled meetings, the Board's work consists of regular follow-up on financial matters, strategic product development, providing recommendations on remuneration levels, dealing with company acquisition issues and matters hav-ing to do with accounting and auditing.

REMUNERATION COMMITTEEThe Board appoints some of its members to serve on the remuneration committee, which is responsi-ble for regularly reviewing the employment terms of senior executives by making comparisons with individuals holding similar positions in other com-panies. The Board decides on the principles for remuneration to senior executives and the CEO.

The remuneration committee consists of the Chairman of the Board (Charlotte Brogren) and one other Board member (Fredrik Hansson) who was appointed by the Board. Fredrik Hansson was elected as Chairman of the remuneration commit-tee. Attendance was 100 percent at all the meetings.

AUDIT COMMITTEEThe Board nominates an audit committee, which monitors the financial reporting by examining all critical audit issues and other conditions that might affect the content and quality of the finan-

cial statements. The committee also monitors the effectiveness of the company’s and Group’s inter-nal controls, risk management systems and the external auditors’ impartiality and independence. The audit committee evaluates the audit work and assists the nomination committee in the selection of auditor. The committee also makes decisions regarding all purchases of consulting services (not related to the audit) from the company’s auditor.

The audit committee consists of two Board members appointed by the Board (Kerstin Lindell and Anders Mörck). Kerstin Lindell was elected as Chairman of the audit committee. Attendance was 100 percent at all the meetings.

The committee has regular contact with exter-nal auditors, who report to the committee con-cerning important details that arose during the statutory audit, specifically concerning possible inconsistencies in the internal controls for finan-cial reporting.

DEVELOPMENT COMMITTEEThe Board appoints some of its members to serve on the development committee. This committee is meant to serve as a sounding board for the HMS management team on issues having to do with research and development, specific projects and the company's portfolio of development projects, the organizational structure of the R&D department and how it is managed, as well as the training and development of employees. Furthermore, the com-mittee should serve as a resource when it comes to preparing and obtaining support for R&D initia-tives that require a decision by the Board due to the

strategic importance, investment decisions or col-laboration with others. The committee should ensure that the HMS Board stays up to date on R&D issues relevant to the company and its future.

The development committee consists of three appointed Board members (Charlotte Brogren, Henrik Johansson and Ray Mauritsson). Henrik Johansson was elected as Chairman of the develop-ment committee. Attendance was 100 percent at all the meetings.

CEO AND GROUP MANAGEMENTThe CEO is responsible for developing the compa-ny's business, as well as leading and coordinating daily operations in accordance with the instruc-tions and directions adopted by the Board. This means, among other things, responsibility for the financial reporting, compiling the supporting information for decisions and ensuring that obliga-tions, contracts and other legal documents do not contravene Swedish or international laws and regu-lations. The CEO must also ensure that the compa-ny's goals, policies and strategic plans are being followed and that they are updated whenever nec-essary. The CEO appoints the other members of the Group management team.

Furthermore, the CEO is responsible for pro-viding the Board with required information and supporting documentation for decisions. Such

information must be sent to each Board member at least seven days prior to scheduled Board meetings, where the CEO serves as rapporteur. The CEO keeps the Board and its Chairman constantly updated about the company’s and Group’s financial position and growth.

Group management is headed by the CEO along with the following eight members: Chief Financial Officer, Chief Technical Officer, HR Manager, Marketing Director, General Manager Americas, General Manager Central Europe, Gen-eral Manager eWON and General Manager for IXXAT. For additional information about the Group management team, please see page 41.

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

In 2016, the total remuneration (including pension provisions) to the CEO amounted to SEK 3,733 (3,516) thousand. For more information about remuneration to the CEO and Group man-agement team, see Note 26.

REMUNERATION TO GROUP MANAGEMENT 2016, SEKm

Basic salary*Variable remu-

neration Pension costs Total 2016

CEO 2,467 574 692 3,733

Group management, other (8 individuals) 10,900 1,937 2,939 15,777

Total 13,367 2,511 3,631 19,510

*Including other remuneration





Board’s internal control report

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

OVERALL CONTROL ENVIRONMENTDecision paths • Responsibilities/Authority • Values • Individual/Organization

INFORMATION AND COMMUNICATION INFORMATION AND COMMUNICATION INFORMATION AND COMMUNICATION

FINANCIAL OBJECTIVES CONTROL

INFORMATION AND COMMUNICATION

FOLLOW UP

HMS's work with internal controls has been designed to ensure that the company's financial reporting is correct and reliable1) and that its finan-cial statements have been prepared in accordance with applicable laws and regulations, accounting standards and other requirements for listed com-panies. The work with internal controls provides value by clarifying roles and responsibilities, improving the efficiency of processes, increasing risk awareness and improving the reliability and quality of financial reporting and follow up.

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

CONTROL ENVIRONMENTThe foundation for internal controls consists of the overall control environment that has been estab-lished by the Board and management team. This is built on an organization with clear decision-mak-ing paths where authority and responsibility are defined with clear instructions. It is also built on a corporate culture with common values and indi-vidual awareness of each person's role in maintain-ing good internal control.

The Group strives to ensure that the entire organization lives by these values. There is much

emphasis on making sure that these core values guide all behavior, both internally and externally. HMS has established a Code of Conduct. It explains the desired behavior in different situations.

The Board has overall responsibility for the internal controls concerning financial reporting. The Board has established written rules of proce-dure that clarify the Board’s responsibilities and how work should be allocated within the commit-tees. The Board has also appointed an audit com-mittee, which is primarily responsible for ensuring the reliability of financial reporting and adequacy of internal controls. It also interacts with the com-pany’s auditors for that same purpose. Further-more, the Board has drawn up instructions pertaining to financial reporting for both the CEO and the Board of HMS. Responsibility for main-taining an effective control environment and the ongoing work concerning internal controls is dele-gated to the CEO who in turn delegates func-tion-specific responsibility to managers at different levels throughout the Group.

The purpose of HMS’s internal control efforts is to ensure that the Group achieves it goals for finan-cial reporting. A minimum requirement is for the control activities to address the key identified risks within the Group.

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

During 2016, in accordance with established guidelines, HMS continued its review of the exist-ing internal controls so that the Board has adequate supporting documentation for establishing the appropriate level of stringency. The result of this effort will be an evaluation and verification of the

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

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

The focus is on risks in the financial reporting

RISK ASSESSMENT





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

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

The central finance and accounting depart-ment is responsible for the consolidated financial statements, as well as the financial and administra-tive control systems. The department’s responsibil-ities also include ensuring that relevant instructions for the financial reporting are made known and available to the employees concerned.

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

The financial managers of the subsidiaries are responsible for ensuring that the control activities for the financial reporting of their respective units

are adequate, which means that they have been designed to prevent, discover and correct errors and deviations, and that they comply with internal guidelines and instructions.

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

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

INFORMATION AND COMMUNICATIONInformation and communication about risks, con-trols and control results throughout the HMS group help ensure that the right business decisions are made. The Group strives to make certain that the information and communication routes for the internal controls pertaining to financial report-ing work as intended and are known throughout the Group.

The guidelines for financial reporting are com-municated to all employees concerned within the Group via policies, manuals and work instruc-tions. The information includes methods, instruc-tions and practical checklists, descriptions of roles and responsibilities and a comprehensive schedule.

The HMS Group's published financial statements for external reporting purposes are derived from all of its legal entities and they are prepared in accor-dance with standardized reporting routines.

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

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

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

Financial information is regularly published in the form of:Quarterly and year-end reports, which are pub-

lished as press releases.

• Annual Report

• Press releases about important news and events that could have a significant impact on the share price.

• Presentations and teleconferences for financial analysts, investors and the media on the same day as the financial statements and quarterly reports are published and in conjunction with the publication of other important information.





Auditor’s statement on the corporate governance reportTo the Annual General Meeting of HMS Networks AB, CIN: 556661-8954

• Meetings with financial analysts and investors. All reports, presentations and press releases are

published simultaneously on the Group’s web-site at: http://investors.hms.se.

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

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

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

Forecasts are another important component of Group-wide internal control. Sales are forecast at the product level by managers from the sales orga-nization. Sales forecasts are consolidated and vali-dated in connection with compiling the forecasts for the entire business. The comprehensive fore-cast is compiled once per year. In addition to the comprehensive forecast, a budget is also drawn up, which is presented to the Board for its approval in Q4. Besides the forecast and budget, Group man-agement also works with overall strategic plans.

The audit committee follows up the financial

reports and receives information from the compa-ny’s auditor about their findings and recommen-dations. Checks on how well internal control activities are working are regularly performed at various levels within the Group and reported back to the Group by the audit committee. In view of the scope of the business and the existing control activities, the Board has decided that there is no need to introduce a special internal audit function.

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

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

• Number of members in the audit committee.

• Composition of members in the nomination committee.

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

Halmstad, 21 March 2017

Charlotte Brogren Fredrik Hansson

Henrik Johansson Kerstin Lindell

Ray Mauritsson Anders Mörck

Tobias Persson

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

FOCUS AND SCOPE OF THE REVIEWOut review has been conducted in accordance with RevU 16, Auditor's Review of the Corporate Governance Report. This means that our review of the Corporate Governance Report has a different focus and significantly smaller scope that the focus and scope required for per-forming an audit in accordance with International Standards on Auditing and generally accepted auditing practices in Sweden. We believe that this review provides a reasonable basis for our opinion set out below.

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

Halmstad, 24 March 2017Öhrlings PricewaterhouseCoopers AB

Fredrik GöranssonAuthorized Public Accountant





Board of Directors

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

Board position Chairman of the Board Board member Board member Board member Board member Board member Board member(employee representative)

Current employment

General Director of Vinnova and Chairman of the Board of Industrifonden.

Active in own company. CEO of Arctos Equity Partner. CEO of Bona AB. CEO of Axis AB (publ). CFO at Investment AB Latour. (publ.).

Development Engineer at HMS

Education PhD in Chemical Engineering from Lund University

Bachelor of Science, Econom-ics and Finance from UNA (University of North Alabama).

Master of Science in Industrial Economics from Chalmers University

Master of Science inChemical Engineering and Tech. Fil.lic. in Polymer chem-istry from Lund Instituteof Technology.

M.Sc.in Technical Physics and Executive MBA from Lund University.

M.Sc. in Business and Economics, Växjö University 1987.

M. Sc. Tech. in Computer Technology.B. Sc. Tech. in Information and Communications Technology.B. Sc. Tech. in Electrical Engineering.

Year elected 2010 2015 2009 2014 2007 2016 2016

Born 1963 1971 1966 1967 1962 1963 1978

Resident of Stockholm Karlskrona Gothenburg Malmö Malmö Gothenburg Halmstad

Other assignments Chairman of the Board of Q-Free AS and Boardmember of Gunnebo AB.

Board member of Roxtec AB, Nord Lock AB, Cale AB, Hedson AB and Wapro AB.

Chairman of the Board of Rapid Images AB and PDS Vision Group AB and Board member of Tele-Radio Interna-tional Holding AB and Elektron Music Machines MAV AB.

Board member of Peab AB, Hexpol AB and Vice Chairman of the South Sweden Cham-ber of Commerce.

None Board member of Diamorph AB, Swegon AB, Hultafors Group AB, Latour Industries AB and Nord-Lock AB.

Chairman of the Board at MedicWave AB (publ.)Partner of Lypson Intelligenta System HB.

Dependence Independent from the com-pany and its main owners.

Independent from the com-pany and its main owners.




Independent from the com-pany. Not independent of the major shareholders.

Employee of HMS

Previous experience

Development Manager for ABB Robotics and executive positions within ABB’s research organization.

CEO at Roxtec Group AB. Senior positions in Invest-ment AB Latour, Brady Corporation and Tradex Converting with extensive experience in internationalexpansion activities.

Research and Development Manager at Akzo Nobel.

Manager at Akzo Nobel. Senior positions in tac (now Scneider Electrics) from 1987 to 1995. Division Manager and other senior positions inAxis Communications from 1995 to 2003.

CFO at Bure Equity AB,Nilörngruppen AB and Previously Authorized Public Accountant at Ernst & Young.

Shareholding (own and related party) 1,000 600 6,400 0 5,000 1,000

Via Share Savings Plan for employees: 280

Audit committee X (Chair) X

Remuneration committee X X (Chair)

Development committee X X (Chair) X

Attendance at Board meetings 100% 100% 100% 100% 92% 100% 100%

Remuneration 2016* 400,000 175,000 175,000 175,000 175,000 175,000 0

*Pertains to the period between AGM 2016 and AGM 2017





Group management

Name Staffan Dahlström Anders Hansson Gunnar Högberg Kevin Knake Sabina Lindén Jörgen Palmhager Christian Schlegel Michael Volz Serge Bassem

Current position Chief Executive Officer Marketing Director Chief Financial Officer General Manager Market Unit Americas

Human Resources Manager

Chief Operating Officer and Chief Technology Officer

General Manager IXXAT Business Unit

General Manager Market Unit Continental Europe

General Manager, eWON Business Unit

Education Degree in Computer Systems Engineering from Halmstad University and an Executive MBA from Lund School of Economics and Management.

Master’s Degree in In-dustrial Management and Economics from Halmstad University.

M.Sc. in Business and Economics from UppsalaUniversity.

Bachelor’s degree in Industrial Engineering andComputer Science from Central Michigan University

Bachelor’s degree in voca-tional sociology from the University of Gothenburg.

B.Sc. in Computer Sys-tems Engineering from Halmstad University.

Bachelor’s degree in mechanical engineeringfrom Ravensburg-Weingarten University of Applied Sciences, Germany

Bachelor’s degree in communications from the University of Dieburg, Germany

Master’s degree in Electrical and Mechanical Engineering from Brussels University, Belgium.

Born 1967 1968 1956 1961 1979 1968 1965 1957 1965

Nationality Sweden Sweden Sweden USA Sweden Sweden Germany Germany Belgium

Other assignments None None Board member of På i Stockholm AB. Member of Meritmind AB’s advisory committee.

Chairman of ODVA Roundtable of EtherNet/IP Implementors

None None None None Board member of Modbususer organization.

Previous experience

Sales and Marketing Manager at HMS.

Previous positions at HMS: Global Key Account Manager, Sales and Marketing Manager for France, Benelux, Spain and Portugal, and Product Manager.

Auditor at Ernst & Young. Controlling Manager at Althin Medical AB. COO at Kipling AB COO at Roxtec AB.

Engineering Manager at Rockwell Automation, Micro Processor Systems Inc. and Pyramid Solutions Inc.

Developer, Project Man-ager and Chief Operating Offi cer at HMS.

Development Manager Team Leader at Bosch. CEO at PROFIBUS in Germany. Founder of Vcom GmbH

VD HMS Industrial Networks SA

Shareholding (own and related party) 1,618,581 7,613 46,775 6,557 7,097 59,750 3,970 7,260 191,158

Employed since 1989 2000 2006 2003 2006 1992 1991 2000 2016

Member of Group management team since: 2009 2010 2006 2009 2007 2007 1998 2000 2016



Glossary • Financial definitions

GLOSSARY

Glossary

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

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

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

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

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

ESD protection – Protection against electrostatic discharge.

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

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

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

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

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

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

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

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

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

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

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

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

PPM – Return of products

Process manufacturing – a branch of manufacturing that is asso-ciated with formulas and manufacturing recipes, such as quantities

of liquid, gas or powder. Once an output is produced by this process, in cannot be distilled back to its basic components.

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

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

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

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

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

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

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

FINANCIAL DEFINITIONS



Glossary • Financial definitions

GLOSSARY FINANCIAL DEFINITIONS

Financial definitions

No. of outstanding sharesThe number of registered shares, less repurchased shares that are held as treasury shares.

Return on shareholders’ equityShare of the profit after tax attributable to the parent company’s shareholders in relation to the average equity.

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

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

EBIT Operating income according to income statement excluding items affecting comparability.

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

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

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

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

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

Cash flow from operating activities per share, SEKCash flow from operating activities in relation to the average number of outstanding shares.

Net debt Long-term and current interest-bearing financial liabilities less financial assets.

Net debt/equity ratio Net debt divided by equity.

P/E ratio Market price in relation to earnings per share.

Earnings per share Share of the profit after tax attributable to the parent company’s shareholders in relation to the average number of outstanding shares.

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

Working capital Current assets less cash and cash equivalents and current liabilities

Operating margin Operating profit (loss) in relation to net sales.

Equity/assets ratio Shareholders’ equity in relation to total assets.

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


CONTENTS | SEARCHINTRO | HMS STOCK | MARKET | OUR BUSINESS | PRODUCTS | SUSTAINABILITY | CORPORATE GOVERNANCE | GLOSSARY | FINANCIAL | NOTICE OF AGM CONTENTS | SEARCH

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


FINANCIAL STATEMENTSFINANCIAL STATEMENTS

HMS NETWORKS ÅRSREDOVISNING 2015 45

CONTENTS | SEARCH INTRO | HMS STOCK | MARKET | OUR BUSINESS | PRODUCTS | SUSTAINABILITY | CORPORATE GOVERNANCE | GLOSSARY | FINANCIAL | NOTICE OF AGM CONTENTS | SEARCHCONTENTS | SEARCH


CONTENTS

DIRECTORS’ REPORT ......................................... 46-50

Significant events ........................................................ 46

Sustainability ............................................................... 47

Risks and uncertainty factors ...................................... 48

Employees .................................................................. 49

Future outlook ............................................................. 50

THE GROUP ......................................................... 51-54

Consolidated income statement.................................. 51

Consolidated statement of comprehensive income..... 51

Consolidated balance sheet........................................ .52

Consolidated cash flow statement............................... 53

Consolidated statement of change in equity................. 54

PARENT COMPANY............................................... 55-57

Parent company’s income statement........................... 55

Parent company’s balance sheet................................. 56

Parent company’s cash flow statement........................ 57

Parent company’s statement of changes in equity......................................................... 57

NOTES .................................................................. 58-80

Note 1 General information......................................... 58

Note 2 Accounting policies.......................................... 58

Note 3 Financial risk management.............................. 65

Note 4 Important estimates and assessments for accounting purposes .................................. 67

Note 5 Segment information....................................... 68

Note 6 Categorization by type of cost.......................... 68

Note 7 Remuneration to auditors................................ 68

Note 8 Remuneration to employees............................ 68

Note 9 Income tax....................................................... 70

Note 10 Exchange rate differences – net.................... 70

Note 11 Earnings per share......................................... 70

Note 12 Dividend per share......................................... 70

Note 13 Intangible assets ............................................71

Note 14 Property, plant and equipment .......................72

Note 15 Derivatives.................. ..................................73

Note 16 Accounts receivable and other receivables.... 73

Note 17 Inventories .....................................................74

Note 18 Cash and cash equivalents ...........................74

Note 19 Share capital and other contributed capital ....74

Note 20 Provisions ......................................................74

Note 21 Interest-bearing liabilities............................... 75

Note 22 Deferred tax................................................... 75

Note 23 Pension obligations........................................ 76

Note 24 Pledged assets and contingent liabilities....... 76

Note 25 Finance leases ..............................................76

Note 26 Remuneration to the Board and senior executives, etc. ............................ 77

Note 27 Shares in subsidiaries.................................... 78

Note 28 Earnings from participations

in Group companies ...................................... 79

Note 29 Financial income............................................ 79

Note 30 Financial expenses........................................ 79

Note 31 Prepaid expenses and accrued income.........79

Note 32 Accrued expenses and deferred income....... 79

Note 33 Related parties............................................... 79

Note 34 Business combinations ................................. 79

Note 35 Financial assets and financial liabilities......... 81

Note 36 Subsequent events....................................... 81

Note 37 Proposed distribution of profit in the Parent Company.................................. 81

BOARD’S AFFIRMATION........................................... 82

AUDIT REPORT ......................................................... 83

Multi-year overview..................................................... 86

46 HMS NETWORKS ÅRSREDOVISNING 2015



DIRECTORS’ REPORT

OperationsHMS is the leading independent supplier of products for industrial communication. The products enable various types of machines to connect to industrial networks and systems. Millions of robots, motors, generators and other business-critical equipment around the world rely on HMS technology for industrial communication.

Product development and some manufacturing takes place at the company’s head office in Halmstad (Sweden) as well as in Ravens-burg (Germany), Igualada (Spain) and Nivelles (Belgium). Sales offices are located in Japan, China, Germany, USA, Italy, France, Belgium, India, England, Spain and Denmark. There are also distrib-utors in more than 50 countries. HMS has approximately 500 employees and it produces network interface cards and gateways for linking different networks under the Anybus and IXXAT brands, along with products for remote monitoring/controlling under the eWON brand. HMS is listed on the NASDAQ-OMX Nordic Exchange in the Mid Cap, Information Technology category.

SeasonalityHMS does not have any significant seasonal variations in its opera-tions, except for higher costs in the fourth quarter, primarily associ-ated with the number of large marketing events that occur in that period.

Significant events HMS ended the year with growth at 36 (19)% and annual sales at a new record level, SEK 952 (702) million. Order intake for the year was SEK 966 (682) million, which corresponds to a growth rate of 42 (12)%.

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

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

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

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

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

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

At the first Board meeting following election, Staffan Dahlström was appointed President and CEO of HMS Networks AB.At the end of June 2016, the Group acquired 100% of the share capital in Spanish company, Intesis Software SLU. The company offers advanced gateway solutions and products for communication in the building automation segment. The majority of sales are derived from the company’s industrial building automation solution, Intesis-Box. Intesis closely collaborates globally with many leading manu-facturers of air conditioning and building automation systems. The company currently has 33 employees. Sales for 2016 were approx-imately SEK 57 million and it has had annual growth of over 20% over the last few years.

Significant events in brief:• HMS receives a USD 1.5 million order for delivery of remote mon-

itoring of backup power generators.

• HMS Anybus Wireless Bolt, a product group in the IIoT segment was launched during the third quarter of 2016 and it received the 2016 Automation Inside Reader´s Choice Award for Best Network Technology

HMS Group's revenue distribution by market in 2016

EMEA 62%

NORTH- AND SOUTH AMERICA 22%

ASIA 16%

Japan 9%

Germany 26%

USA 19%

Summary of performance

2016 2015

Net sales, SEK m 952.3 701.7

Operating income before depreciation (EBITDA), SEK m 188.5 135.5

Operating margin before depreciation(EBITDA), % 19.8 19.3

Operating income after depreciation (EBIT), SEK m 149.3 101.6

Operating margin after depreciation (EBIT), % 15.7 14.5

Profit after financial items, SEK m 139.7 87.6

Profit for the year, SEK m 100.5 60.2

Earnings per share, basic, SEK 8.63 5.33

Earnings per share, diluted, SEK 8.59 5.31

Directors’ report




DIRECTORS’ REPORT

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

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

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

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

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

Cash flow from operating activities amounted to SEK 155 (90) million. After net investments of SEK -308 (-25) million and new

borrowings, amortization and dividends paid, totaling SEK 231 (-63) million, the cash flow for the year amounted to SEK 78 (2) million.

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

Foreign branch offices The Group has a branch office in Beijing, which is responsible for sales, marketing and support to the Chinese market.

SustainabilityHMS’s vision is to enable industrial devices and systems to commu-nicate so that the world becomes more productive and sustainable. It is a vision that also underlies the strategy of creating value and sustainable development stakeholders.

For us, sustainability has 3 components; maximizing value, min-imizing carbon footprint and realizing social commitments• We deliver sustainable growth and smart products that provide

value to customers, partners and employees

• We work with action plans for environmental issues to reduce our environmental impact

• We respect human rights, employee working conditions and actively participate in the communities where we operate.

Compliance with laws and codes HMS is aware of its social respon-sibility as a company in the global market. The Company undertakes to comply with the rules on ethics, the environment, human rights

and health and safety at our companies worldwide.

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

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

Working conditions and rights of workersProviding a good, safe work environment is an important strategic issue for HMS.

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

EnvironmentHMS products can help to significantly reduce travel. By being able to monitor and control industrial equipment via the Internet, custom-ers are able to cut down on the number of expensive and environ-mentally detrimental service calls.

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

Sustainable productsHMS's main contribution to sustainable development is developing and manufacturing products that enable significant energy savings for its users, with the lowest possible environmental impact during the product's useful life. The Eco Strategy Wheel is HMS's model for considering the environmental aspects associated with developing, manufacturing, shipping and using HMS products. In other words, it considers the entire product life cycle.

Focus on energy efficiencyHMS strives to develop products and solutions that contribute to efficient energy consumption and resource-efficient production.




DIRECTORS’ REPORT

Sustainability in product developmentHMS’s goal is to continually develop the capacity of products and solutions so that they can easily be integrated into industrial systems and provide valuable functionality and information.

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

Manufacturing – control and routinesAs regards manufacturing, there are additional important environ-mental aspects that must be considered. For example, higher effi-ciency can be achieved by controlling manufacturing processes, resulting in less waste and lower energy consumption.

Safe and efficient use of resourcesHMS conducts systematic work to promote employee health and well-being.

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

Less travelHMS has local presence in the major markets.

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

Research and developmentThe Group expensed SEK 119 (103) million for research and devel-opment during the year. In addition, capitalized development costs were SEK 24 (20) million. Total costs for research and development

expenses make up 15 (18)% of sales. The Group’s policy is to only capitalize major projects for developing its own integrated circuits and new platforms for products intended for use in embedded sys-tems. Development of additional products or applications based on these are not capitalized. Customer-specific projects are capitalized when it has been determined as likely that the development costs will be covered by future volume commitments.

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

Principles for remuneration to senior executivesAt the first Board meeting of 2016, a remuneration committee was appointed by the Board. In 2016, the following principles were applied, which were proposed to the company's remuneration com-mittee to be brought forth for approval at the 2017 AGM. Remunera-tion to the CEO and other members of the HMS Group management team consists of basic salary, short-term and long-term incentive schemes and pension. Other benefits and remuneration are awarded on the same terms that apply to other employees.

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

Short-term incentive schemes to the CEO and senior executives are based on the financial targets for the Group. Incentive schemes must be primarily based on growth and profitability. In addition to that, other personal goals may be established. For the CEO and other senior executives, the highest possible amount is 50% of basic salary in 2016.

The retirement age for the CEO is 65 years. The pension pre-mium must amount to 35% of fixed monthly salary up to 28.5 times the price base amount. For salary above that level, the pension

premium is 25%. For other senior executives, the retirement age is 65-66 years.

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

For information on the composition of the remuneration commit-tee, see page 36.

Risks and uncertainty factors

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

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

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




DIRECTORS’ REPORT

failure to do so could affect the Group's profit and overall financial position.

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

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

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

EmployeesThe Group’s future growth is partly dependent on retaining key employees. There are no guarantees that HMS can succeed in retaining such individuals. The loss of one or more key employees could have a negative impact on the business. Thus far, HMS has not had difficulty recruiting qualified employees. However, the Group cannot guarantee that it will be able to recruit equally skilled individ-

uals in the future. Going forward, if HMS is less successful in recruit-ing and retaining highly qualified managers and other skilled employ-ees, it could find it difficult to maintain and further develop the busi-ness.

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

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

Product safetyWhen manufacturing and selling industrial products, there is an associated risk of warranty claims and product liability. Therefore, HMS typically designs its products according to detailed technical specifications in order to meet the requirements of industry. Even though the company tests its products thoroughly to ensure that they meet the relevant specifications, the activities in this area could nev-ertheless be associated with an increased risk of warranty claims and product liability. When HMS carries out detailed studies on product safety, it relies on both internal and external analyses to ensure that its products correspond to the agreed product specifica-tions. Even though the Group considers that these measures are

sufficient in each individual case, it cannot guarantee that warranty claims or product liability suits will not occur, despite its efforts to prevent this from happening.

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

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

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

Intellectual property rightsHMS’s intellectual property rights are essential to its business. HMS has registered patents and brands in a number of countries. HMS has strived to protect its brand by registering it in each country where it currently has operations, or expects to soon become established. HMS has also sought patent protection where the company consid-ers it to be commercially justified. Nevertheless, there is no guaran-tee that these measures are, or will be, sufficient to protect the company's intellectual property rights. HMS cannot prevent its competitors from using the HMS brand and logotype to market their own products in a way that infringes or in any other way poses a threat to the company’s intellectual property rights. If the intellectual




DIRECTORS’ REPORT

property rights cannot be protected, regardless of the reason, the Group’s business could be affected in a negative way.

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

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

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

The currency composition of operating income is approximately 60% in EUR, 24% in USD, 7% in JPY and 9% in SEK and other currencies. The currency composition of cost of goods sold is: 63% in EUR, 21% in USD, 1% in JPY and 15% in other currencies. The currency composition of operating expenses is: 46% in EUR, 15% in USD, 4% in JPY and 36% in SEK and other currencies.

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

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

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

HMS stockHMS Networks AB (publ) is listed on the NASDAQ OMX Stockholm Mid Cap list, in the Information Technology sector. On average, 3,719 (4,516) shares were traded each day. The shares’ vol-ume-weighted average price in 2016 was SEK 239.0 (203.5). The total number of shares at the end of the period were 11,704,717, of which 31,000 are held in treasury. All shares have the same voting rights.

PARENT COMPANY

Information about the businessThe parent company’s activities focus on Group-wide administration and financing. Apart from the CEO, the Parent Company has no employees.

Proposed distribution of profit in the Parent CompanyThe following profits are at the disposal of the AGM:

Profit brought forward and other non-restricted reserves 133,358,069

Profit (loss) for the year 49,931,489

SEK 183,289,558

The Board of Directors and CEO propose the follow-ing appropriation of profits:

Distributing dividends to shareholders of SEK 4.00/share* 46,694,868

Carried forward 136,594,690

SEK 183,289,558

* The dividend is calculated on the total number of outstanding shares as of

2016-12-31

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




FINANCIAL STATEMENTS

SEK thousands Note 2016 2015

Net sales 5 952,282 701,676

Cost of goods and services sold -370,964 -271,918

GROSS PROFIT 581,318 429,757

Selling expenses -226,029 -164,932

Administrative expenses -78,987 -61,354

Research and development expenses -119,079 -103,116

Other operating income 10 0 1,230

Other operating expenses 10 -7,911 0

OPERATING PROFIT 6, 7, 8, 26 149,313 101,584

Financial income 10, 29 419 2

Financial expenses 10, 30 -9,999 -14,025

Total income from financial investments -9,579 -14,023

PROFIT BEFORE TAX 139,734 87,561

Income tax 9 -39,269 -27,356

PROFIT FOR THE YEAR 100,466 60,205

Profit attributable to:

HMS Network AB’s shareholders 100,466 60,205

Total 100,466 60,205

Earnings per share, basic, SEK 11 8.63 5.33

Earnings per share, diluted, SEK 11 8.58 5.31

Average number of outstanding shares, in thousands 11,642 11,291

Dividends per share, SEK 12 2.50 2.50

Consolidated income statement Consolidated statement of comprehensive income


Profit (loss) for the year 100,466 60,205

Other comprehensive income:

Items that can later be reclassified to profit and loss

Cash flow hedges 483 1,787

Hedging of net investments -9,620 11,565

Exchange differences arising from translation of foreign operations 21,662 -11,244

Income tax attributable to the items above 22 2,010 -2,937

Other comprehensive income for the year, after tax 14,535 -830

Total comprehensive income for the year 115,001 59,376

Total comprehensive income for the year attributable to:

HMS Network AB’s shareholders 115,001 59,376

Total 115,001 59,376





Consolidated balance sheet

SEK thousands Note 2016-12-31 2015-12-31

ASSETS

Non-current assets

Intangible assets 13

Capitalized development work 117,721 111,143

Goodwill 744,433 394,167

Customer relations and technology platforms 72,031 53,993

Brands 96,099 80,699

Total intangible assets 1,030,285 640,002

Property, plant and equipment 14, 25

Buildings and land 3,291 0

Plant and machinery 25,621 7,764

Equipment, installations and facilities 9,568 7,536

Construction-in-progress 496 0

Total property, plant and equipment 38,977 15,300

Financial assets

Deferred tax asset 22 1,440 3,239

Other long-term receivables 2,174 1,723

Total financial assets 3,614 4,962

Total non-current assets 1,072,874 660,264

Current assets

Inventories 17 86,095 55,810

Accounts receivable - trade 16 123,170 81,973

Current tax assets 1,248 198

Derivative instruments 15 2,106 0

Other receivables 16 15,884 7,234

Prepaid expenses and accrued income 16, 31 5,738 5,881

Cash and cash equivalents 18 99,036 19,503

Total current assets 333,278 170,599

TOTAL ASSETS 1,406,152 830,863


EQUITY AND LIABILITIES

Equity

Share capital 19 1,170 1,132

Other contributed capital 19 218,318 125,641

Reserves 23,461 8,926

Retained earnings including profit for the year 393,495 319,783

Total equity 636,444 455,482

Non-current liabilities

Non-current interest-bearing liabilities 21 433,603 158,142

Deferred tax liability 22 88,121 72,242

Total non-current liabilities 521,724 230,384

Current liabilities

Current interest-bearing liabilities 21 86,095 38,759

Accounts payable - trade 64,275 44,704

Current tax liability 16,441 7,760

Derivative instruments 15 2,097 473

Other liabilities 25,254 10,712

Accrued expenses and deferred income 32 50,772 40,177

Other provisions 20 3,051 2,412

Total current liabilities 247,984 144,997

TOTAL EQUITY AND LIABILITIES 1,406,152 830,863




FINANCIAL STATEMENTS FINANCIAL STATEMENTS

Consolidated cash flow statement


Cash flow from operating activities

Operating profit 149,313 101,584

Adjustment for items not included in cash flow:

Depreciation/amortization 36,583 33,170

Impairment of intangible assets 3,413 202

Disposal of property, plant and equipment 536 202

Share Savings Plan 8 2,430 1,737

Exchange rate differences -3,427 -14,026

Interest paid -9,849 -4,936

Interest received 419 0

Income tax paid -29,887 -21,125

Cash flow from operating activities before changes in working capital 149,530 96,808

Change in working capital

Change in inventories -877 -2,353

Change in accounts receivables – trade -6,631 -12,100

Change in other current receivables -1,249 -1,091

Change in accounts payable – trade 3,291 4,087

Change in other current liabilities 11,258 4,661

Cash flow from operating activities 155,322 90,012


Investing activities

Investments in intangible assets 13 -27,778 -20,404

Investments in PPE 14 -8,504 -5,042

Investments in subsidiaries 34 -271,475 0

Change in non-current financial assets -479 -160

Changes in current financial investments 0 208

Cash flow from investing activities -308,236 -25,398

Financing activities

Borrowings 512,220 0

Loan amortization -251,723 -34,644

Dividends paid to the parent company's shareholders 12 -29,184 -28,229

Cash flow from financing activities 231,313 -62,873

CHANGE IN CASH AND CASH EQUIVALENTS 78,399 1,742

Cash and cash equivalents at beginning of year 18 19,503 17,629

Exchange rate differences in cash and cash equivalents 1,135 132

Cash and cash equivalents at year-end 18 99,036 19,503





Consolidated statement of change in equity

SEK thousands NoteShare

capital

Other con-tributed capital Reserves

Retained earnings including profit for the year

Total equity

Opening balance on 1 January 2016 as per the adopted balance sheet 1,132 125,641 8,926 319,783 455,482

Comprehensive income



Cash flow hedges 15 483 483

Hedging of net investments 15 -9,620 -9,620

Exchange rate differences 21,662 21,662

Income tax attributableto components of othercomprehensive income 9 2,010 2,010

Total comprehensive income

0 0 14,535 100,466 115,001

Transactions with shareholders in their capacity as owner:

Costs for share-basedremuneration 2,430 2,430

New share issue 19, 34 38 92,677 92,715

Dividend (SEK 2.50 per share) 12 -29,184 -29,184

Total transactions with shareholders, reported directly to equity 38 92,677 0 -26,754 65,961

Closing balance as of 31 December 2016 1,170 218,318 23,461 393,495 636,444


capital

Other con-tributed capital Reserves

Retained earnings including profit for the year

Total equity

Opening balance on 1 January 2015 as per the adopted balance sheet 1,132 125,641 9,755 286,070 422,599

Comprehensive income



Cash flow hedges 15 1,787 1,787

Hedging of net investments 15 11,565 11,565

Exchange rate differences -11,244 -11,244

Income tax attributableto components of other comprehensive income 9 -2,937 -2,937

Total comprehensive income

0 0 -829 60,205 59,376

Transactions with shareholders in their capacity as owner:

Costs for share-basedremuneration 1,737 1,737

Dividend (SEK 2.25 per share) 12 -28,229 -28,229

Total transactions with shareholders, reported directly to equity 0 0 0 -26,492 -26,492

Closing balance as of 31 December 2015 1,132 125,641 8,926 319,783 455,482





Parent company’s income statement


Net sales 5 14,168 11,933

GROSS PROFIT 14,168 11,933

Administrative expenses 7, 8, 26 -14,187 -11,606

OPERATING PROFIT -19 327

Profit from financial investmentsProfit from participation in subsidiaries 28 50,000 0

Interest expenses and similar items 29, 30 0 0

Total income from financial investments 50,000 0

PROFIT AFTER FINANCIAL ITEMS 49,981 327

Appropriations 0 8

Tax on profit for the year -49 -141

PROFIT FOR THE YEAR 49,931 194





Parent company’s balance sheet


EQUITY AND LIABILITIES

Equity

Restricted equityShare capital 19 1,170 1,132Statutory reserve 19,446 19,446Total restricted equity 20,616 20,578

Non-restricted equityRetained earnings 22,083 51,073Share premium reserve 111,275 18,598Profit (loss) for the year 49,931 194Total non-restricted equity 183,289 69,865

Total equity 203,905 90,443

Current liabilitiesAccounts payable - trade 50 667

Liabilities to Group companies 131,198 149,890Income tax liabilities 104 30Other liabilities 965 1,068Accrued expenses and deferred income 32 1,764 2,817Total current liabilities 134,081 154,472

TOTAL EQUITY AND LIABILITIES 337,986 244,915


ASSETS

Non-current assets

Financial assetsParticipations in Group companies 24, 27 337,324 244,039Total financial assets 337,324 244,039

Total non-current assets 337,324 244,039

Current assets

Current receivablesOther receivables 203 4Prepaid expenses and accrued income 31 52 596Total current receivables 255 600

Cash and bank balances 406 276

Total current assets 662 876

TOTAL ASSETS 337,986 244,915





Parent company’s cash flow statement Parent company’s statement of changes in equity


Operating activitiesOperating profit -19 327

Interest paid 30 0 0

Income tax paid 25 -10

Cash flow from operating activities before change in working capital 6 317

Change in working capitalChange in other current receivables 345 -247

Change in accounts payable - trade -617 240

Change in other current liabilities 30,151 28,002

Cash flow from operating activities 29,886 28,313

Investing activitiesCosts associated with non-cash issue -570 0

Cash flow from investing activities 570 0

Financing activitiesDividend paid -29,184 -28,229

Cash flow from financing activities -29,184 -28,229

CHANGE IN CASH AND CASH EQUIVALENTS 131 84

Cash and cash equivalents at beginning of year 276 192

Cash and cash equivalents at year-end 406 276

Restricted equity Non-restricted equity


capitalStatutory

reserveRetained earnings

Share premium

reserve

Profit (loss) for the year Total

Opening balance on 1 January 2015 1,132 19,446 79,350 18,598 -48 118,477

Transfer of profit (loss) from 2014 -48 48 0

Dividend SEK 2.25 per share 12 -28,229 -28,229

Profit (loss) for the year 194 194

Closing balance as of 31 December 2015 1,132 19,446 51,073 18,598 194 90,443

Restricted equity Non-restricted equity


capitalStatutory

reserveRetained earnings

Share premium

reserve

Profit (loss) for the year Total

Opening balance on 1 January 2016 1,132 19,446 51,073 18,598 194 90,443

Transfer of profit (loss) from 2015 194 -194 0

New share issue 19, 34 38 92,677 92,715

Dividend SEK 2.50 per share 12 -29,184 -29,184


Closing balance as of 31 December 2016 1,170 19,446 22,083 111,275 49,931 203,905




NOTES

Standard Significant requirements Impact Enters into force as of

IFRS 9 Financial instruments

IFRS 9 covers the classification, measurement and recognition of financial assets and liabilities and intro-duces new rules for hedge accounting. The full version of IFRS 9 was issued in July 2014. It replaces the parts of IAS 39, which deals with the classification and measurement of financial instruments and introduces a new impairment model.

The new hedge accounting rules in IFRS 9 are more compat-ible with the company's risk management in practice. Gener-ally speaking, it will be easier to apply hedge accounting because the standard introduces a more principles-based approach to hedge accounting. The new standard also intro-duces expanded disclosure requirements and changes in presentation.The Group has not yet evaluated how the Group's hedge accounting will be affected by the new rules.The new model for calculating credit loss reserve is based on expected credit losses, rather than incurred credit losses in accordance with IAS 39, which may result in earlier recogni-tion of credit losses. The model must be applied to financial assets carried at amortized cost, debt instruments measured at fair value through other comprehensive income, contract assets in accordance with IFRS 15 Revenue from Contracts with Customers, lease receivables, loans and certain finan-cial guarantees. The Group has not yet evaluated how the Group's provision for credit losses will be affected by the new rules.

1 January 2018.In accordance with the transi-tion rules in the full version of IFRS 9, early adoption was allowed in stages for financial years beginning before Febru-ary 1, 2015. After that date, the rules must be applied in full.It is expected to be applied by the Group as of 1 January 2018.

IFRS 15 Revenue from contracts with customers

IFRS 15 is the new standard for revenue recognition. IFRS 15 replaces IAS 18 Revenue and IAS 11 Con-struction Contracts.IFRS 15 is based on the principle that revenue is rec-ognized when the customer obtains control of the goods or services sold - a principle which replaces the previous principle that revenue is recognized when the risks and benefits have been transferred to the buyer.A company may choose between the full restrospec-tive approach or a prospective approach with addi-tional disclosures.

Management is currently assessing the effect of the new standard. At present, the Group is unable to assess the impact of these new rules on the financial statements. The Group will be making a detailed assessment during the coming year.

1 January 2018It is expected to be applied by the Group as of 1 January 2018.

IFRS 16Leasing

IFRS 16 Leases was published in January 2016 and it replaces the previous IAS 17 Leases and the related interpretations IFRIC 4, SIC-15 and SIC-27. For the lessor, presentation is essentially unchanged. But pre-sentation does change for the lessee. There will no longer be a distinction between operating and finance leases. Instead, all leases will be reported in the bal-ance sheet, except for short-term agreements and leases of lesser value. Reporting is based on the view that the lessee has a right to use an asset for a spe-cific period of time with a simultaneous obligation to pay for that right.

The Group has started its effort of assessing the effects of introducing the standard. The standard will primarily affect the presentation of the Group’s operating leases. As of the closing date, the Group had non-cancellable leases amount-ing to SEK 152 million, see Note 25. The Group has not yet evaluated the extent to which these obligations will be reported as assets and liabilities, along with how this will affect the Group's earnings and its classification of cash flows. Certain obligations could be covered by the exemption for short-term contracts and leases of lesser value. Further-more, some obligations could relate to arrangements that are not to be reported as leases in accordance with IFRS 16.

1 January 2019 or later. Early adoption is allowed.

NotesAll amounts in SEK thousands unless otherwise stated

Note 1 General informationThe HMS Group is one of the world’s leading suppliers of communi-cation technology for industrial automation. The Group develops and manufactures flexible, innovative and reliable solutions to connect industrial products to networks and gateways, thus enabling inter-connection between various networks under the Anybus, IXXAT and Intesis brands, as well as products for remote monitoring under the eWON brand. Most product development and some manufacturing takes place at the company’s head office in Halmstad (Sweden) as well as in Ravensburg (Germany), Igualada (Spain) and Nivelles (Belgium). Sales are conducted from the head office in Sweden and from the sales offices in Japan, China, Germany, USA, Italy, France, India, England, Belgium, Spain and Denmark.

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

This annual report and consolidated financial statements were approved for publication by the Board of Directors on 21 March 2017.

Note 2 Accounting policiesThe most important accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis for preparation of financial statementsThe consolidated financial statements of the HMS Group have been prepared in accordance with the Swedish Annual Accounts Act and RFR 1 Additional Accounting Regulations for Groups and the Inter-national Financial Reporting Standards (IFRS) and interpretations from the IFRS Interpretations Committee (IFRS CC) that have been adopted by the EU.

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

The parent company's financial statements have been prepared in accordance with the Annual Accounts Act and RFR 2 Accounting

for Legal Entities. In cases where the parent company has applied different accounting policies than the Group, this is specifically stated in the respective sections below.

Preparing financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires the

management team to make certain judgments in the process of applying the accounting policies. Note disclosures are provided for areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, which is detailed in Note 4.




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2.1.1 Changes in accounting policies and disclosures

a) New and amended standards adopted by the GroupDuring the financial year, the Group did not apply any new or revised standard that has a significant impact on the Group's financial state-ments.

b) New standards, amendments and interpretations of existing standards that have not yet come into force and have not been early adopted by the GroupAt the time when the consolidated financial statements for 31 December 2016 were prepared, several standards and interpreta-tions applicable to the Group had been published, but had not yet come into force. None of these are expected to have a significant impact on the consolidated financial statements except for the ones detailed in the table (page 58) on IFRS:

2.2 Consolidated financial statements

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

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

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

Non-controlling interest in subsidiaries' earnings and equity are presented separately in the consolidated income statement, state-ment of comprehensive income, statement of changes in equity and the balance sheet.

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

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

2.4 Translation of foreign currency

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

b) Transactions and balance sheet itemsForeign currency transactions are translated into the functional cur-

rency using the exchange rates prevailing on the transaction dates or the date when items were remeasured. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of closing day rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. However, this does not apply to transactions that fulfill the requirements for hedge accounting of cash flows or net investments. Such gains or losses are recognized in other comprehensive income.

Foreign exchange gains and losses attributable to loans and cash equivalents are reported in the income statement as financial revenue or financial expenses. Exchange profits and losses attrib-utable to the purchasing of raw materials and products are reported in the income statement as cost of goods sold. Other foreign exchange gains and losses are reported in the income statement as ‘Other operating income’ and ‘Other operating expenses’ respec-tively.

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

a) assets and liabilities for each balance sheet are translated at the closing rate;

b) income and expenses for each income statement are translated at the average exchange rate, and

c) all resulting exchange differences are recognized in other com-prehensive income.

Recognized in the consolidated financial statement (in other com-prehensive income), are exchange rate differences attributable to the translation of a net investment in a foreign operation, along with exchange rate differences attributable to loans or other financial instruments designated as hedges for such investments. Accumu-lated gains and losses in equity are recognized in profit or loss when foreign operations are sold, either entirely or in part.

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




NOTES

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

The Group recognizes revenue when the amount can be mea-sured reliably, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group's areas of operation, as described below. The Group bases its esti-mates on historical outcomes, the type of customer, the type of transaction and the particular circumstances of each case.

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

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

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

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

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

Interest income is recognized using the effective interest method. When the value of a receivable becomes impaired, the carrying amount is lowered to the recoverable amount, which is equal to the estimated future cash flows discounted at the original effective inter-

est rate for the instrument. The discounting effect then continues to be dissolved as interest income. Interest income on impaired loan receivables is recognized using the original effective interest rate.

2.6 Current and deferred income taxTax expense for the period is comprised of current tax calculated

on net taxable income for the period using the current tax rates. Current tax expense is then adjusted by changes in deferred tax assets and tax liabilities attributable to temporary differences and unutilized loss carry-forwards.

Current tax expense is calculated using the tax regulations that have been decided or announced at year-end in the countries where the parent company and its subsidiaries have operations and gen-erate taxable income.

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

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

Deferred tax assets are recognized to the extent that it is proba-ble that future taxable profit will be available against which the tem-porary differences can be utilized.

Deferred taxes attributable to temporary differences associated with investments in subsidiaries and associates, are recognized only to the extent that the Parent Company is able to control the reversal of the temporary differences and it is probable that the difference will not reverse in the foreseeable future.

Deferred tax assets and deferred tax liabilities are offset when there is a legal right to settle the current tax assets and tax liabilities on a net basis and the tax liabilities relate to taxes levied by the same taxation authority and relate to either the same taxable entity or

different taxable entities that intend to realize the asset and settle the liability at the same time.

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

2.7 LeasingLeasing of items of property, plant and equipment in which the Group as lessee essentially holds the financial risks and rewards associ-ated with ownership, are classified as finance leases (Note 25). At the start of the lease term, finance leases are capitalized at the lower of the leased asset's fair value and the present value of the minimum lease payments. Corresponding payment obligations, after deduc-tions for financial expenses, are included in the balance sheet items, long-term borrowings and short-term borrowings. Each lease pay-ment is allocated between interest and reduction of the principal. Interest is recognized in the income statement over the leasing period so that the amount of the expense in each reporting period corresponds to a constant periodic rate of interest on the remaining balance of the liability. Items of property, plant and equipment that are obtained through a finance lease agreement are depreciated over asset’s useful life or the term of the lease (whichever is shorter), provided that it cannot, with reasonable certainty be established that there is transfer of ownership to the lessee at the end of the lease period.

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

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

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

CONT. NOTE 2 Accounting policies




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• shares issued by the Group• assets or liabilities that result from an agreement on contingent

payment• previously held equity interest in the acquired company

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

The costs associated with acquisitions are expensed as incurred.

Goodwill is the amount that the

• purchase sum,• any non-controlling interest in the acquired company and• the fair value as of the acquisition date of any previously held

equity interest in the acquired company (if the business combina-tion was done in stages) exceeds the fair value of the identifiable net assets that were acquired. If the amount is lower than the fair value of the acquired net assets, e.g. acquisition at a low price, the difference is reported directly to profit or loss.

In cases where all or part of the purchase sum is deferred, future payments are discounted to their present value at the acquisition date whenever the discounting effect is significant. The discount rate is the company’s marginal lending rate, which is the interest rate the entity would have paid for financing through loans during the same period and with similar terms and conditions.

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

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

2.9 Impairment of non-financial assetsGoodwill and intangible assets with an indefinite useful life or intan-gible assets not ready for use, are not amortized. They are however, tested annually for impairment, or more often whenever there is an indication of impairment. Assets subject to amortization are tested for impairment whenever events or changes in circumstances indi-cate that the carrying amount may not be recoverable. An impair-ment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the asset’s fair value less selling expenses or its value-in-use, whichever is higher.

For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are essentially independent cash flows (cash generating units). At each reporting date, an assessment is made regarding possible reversal of impairment loss on assets (other than goodwill) that have previously become impaired.

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

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

Utilized overdraft facility is recognized as borrowings in current liabilities.

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

Accounts receivable are initially measured at fair value and sub-sequently measured at amortized cost using the effective interest

method, less any provision for impairment. A provision for impair-ment of accounts receivable is set up when there is objective evi-dence that the Group will not be able to collect all amounts that have fallen due according to the original terms that applied.

2.12 InventoriesInventories are recognized at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) principle. Raw materials are measured at cost. Finished goods are measured at standard cost. The cost of finished goods and work-in-progress consists of raw materials/components, direct labor, and other direct and indirect directly attributable manufacturing costs (based on nor-mal manufacturing capacity). Borrowing costs are not included. The net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Inter-company profit from sales between Group companies is elimi-nated.

2.13 Financial instruments

2.13.1 ClassificationThe Group classifies its financial assets in the following categories: financial assets measured at fair value through profit or loss, loan receivables, accounts receivable and derivatives used as a hedge.

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

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




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

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

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

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

• hedge of the fair value of a recognized asset or liability or a firm commitment (fair value hedge),

• hedging of a risk linked to the cash flows of a recognized asset or liability or a highly probable forecast transaction (cash flow hedge), or

• hedge of a net investment in a foreign operation (net investment hedges).

When the transaction is entered into, the relationship between the hedging instrument and the hedged item is documented, as well as the Group's objectives for risk management and its risk strategy for the hedge. The Group also documents its assessment, both at the start of the hedging period and on an ongoing basis, of how the derivative instruments used in the hedging transaction have been

and will continue to be effective in terms of counterbalancing changes in fair value or cash flows attributable to the hedged items.

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

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

Hedges are designed with the expectation that they will be effec-tive. The effective portion of changes in fair value of a derivative, which is designated as a cash flow hedge and qualifies for hedge accounting is recognized in other comprehensive income and the accumulated amount in equity. The gain or loss attributable to any ineffective part is immediately recognized as other income or other expenses in the income statement.

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

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

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

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

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

2.13.2 Reporting and valuationPurchases and sales of financial assets and liabilities are recog-nized on the trade date, which is the date on which the Group com-mits to purchase or sell the asset. Financial instruments, except for financial assets and liabilities reported at fair value via the income statement, are initially recognized at fair value plus transaction costs. Financial assets and liabilities measured at fair value through profit or loss are initially recognized at fair value, with the associated transaction costs reported in the income statement.

Financial assets and liabilities are removed from the balance sheet when the rights to receive cash flows from the instruments have expired or have been transferred and the Group has substan-tially transferred all risks and rewards of ownership. Financial assets that can be sold and financial assets valued at fair value via the income statement are reported at fair value after the acquisition date. Loan receivables and accounts receivable are measured at amortized cost using the effective interest method.

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

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


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

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

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

Machinery and equipment 3–7 yearsEquipment, installations and facilities 3–7 years

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

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

2.15 Intangible assets

a) GoodwillGoodwill is calculated in accordance with the principles explained in Note 2.8. Goodwill resulting from business combinations is included in intangible assets. Goodwill is not amortized, but i is tested for impairment on an annual basis, or more often if events or changed conditions indicate possible impairment. Goodwill is recognized at cost less accumulated impairment losses. When a unit is sold, the carrying amount of goodwill is included in the resulting gain/loss.For the purpose of impairment testing, goodwill that was acquired in a business combination is allocated to cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the acquisition. Each unit or group of units to which

goodwill has been allocated correspond to the lowest level in the Group at which the goodwill is monitored as part of internal gover-nance.

Impairment losses are immediately expensed and they are never reversed.

b) BrandsBrands have been acquired via business combination and they are measured at fair value on the acquisition date. Brands with an indef-inite useful life are tested each year for impairment. Brands with a finite useful life are amortized over the estimated useful life of 10 years.

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

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

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

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

• it is technically possible to complete the above development proj-ect so that the development results can be used,

• the company’s intention is to complete the development project and to either use it or sell it,

• it is likely that the development results can be used or sold,

• it can be shown how the development results generate probable future economic benefits,

• there is access to adequate technical, financial and other resources to complete development and to either use or sell the development results, and

• the expenditure attributable to the project during its development can be estimated in a reliable way.

Customer-specific projects are capitalized when it has been deter-mined as likely that the development costs will be covered by future volume commitments.

Costs include the employee costs for internal work with develop-ment, external expenses and a reasonable share of the indirect costs.

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

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

Development costs that were previously expensed are not capi-talized as assets in later periods.

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

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

Capitalized development work 5-7 years

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

Accounts payables and other liabilities are classified as current liabilities if they fall due for payment within 1 year or sooner (or over

NOTES




a normal business cycle if this is longer). Otherwise, they are reported as non-current liabilities.

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

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

Borrowings are removed from the balance sheet when the obli-gations have been settled, canceled or in some other manner extin-guished. The difference between the carrying amount of a financial liability (or part of financial liability) that has been extinguished or transferred to another party and the consideration paid, including transferred assets which are not cash or liabilities assumed, is rec-ognized in earnings.

Bank overdrafts are reported as borrowings among current liabil-ities in the balance sheet.

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

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

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

The returns and warranty provision is based on a routine devel-oped specifically for the company.

2.19 Remuneration to employeesLiabilities for wages and salaries, including non-monetary benefits and compensated absences that are expected to be settled within 12 months after the fiscal year-end, are recognized as current liabil-ities at the undiscounted amount that is expected to be paid when the liabilities are settled. The expense is recognized at the rate that employees perform the services.

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

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

The pension obligations for salaried employees in Sweden are secured through insurance with Alecta, which is a defined benefit plan covering a number of employers. For the 2016 financial year, the company has not had access to sufficient information to enable it to report this plan as a defined benefit plan. The pension commit-ments are thus reported as a defined contribution plan.

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

b) Share-based remunerationThe Group's incentive program aims to facilitate recruitment and stimulate long-term commitment from employees regarding the Group’s profit and business development.

During 2016, all permanent employees of the HMS Group were offered the opportunity to participate in a share savings plan, where payment is made in shares and where the Group receives services

from employees as consideration for the Group's own equity instru-ments.

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

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

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

2.20 Share capitalOrdinary shares are classified as equity.

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

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

2.21 ProvisionsOther provisions in equity are comprised of hedging and translation reserves. The hedging reserve is comprised of unrealized gains and losses on futures, along with hedging of net investments, which are recognized in profit or loss in the periods that the hedged transac-


NOTES




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Risk Exposure arises from Measurement Management

Market risk – currency risk

Future business transactions.Recognized financial assets and financial assets that are not denominated in SEK.

Cash flow forecastsSensitivity analysis

Currency forward contracts

Market risk – interest rate risk

Long-term borrowings with a variable interest rate

Sensitivity analysis Interest rate derivatives, when they are expected to lower the Group’s interest expense

Credit risk Cash and cash equivalents, accounts receivable and derivatives

Aging analysisCredit rating

Credit limits

Liquidity risk Borrowings and other liabilities Rolling cash flow forecast Access to binding credit facilities and credit

tions impact profit or loss. The translation reserve is comprised of exchange differences arising when the income statements and bal-ance sheets of all the Group companies are translated to the Group's reporting currency.

2.22 DividendsDividends are recognized as revenue when the right to receive pay-ment has been established. This applies even if the dividends are paid out of profits arising before the date of acquisition. However, it may be necessary to test the investment for impairment.

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

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

NOTE 3 Financial risk management

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

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

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

a) Derivative instrumentsThe Group has financial derivatives in the form of currency forward contracts that hedge purchases and sales in foreign currency. Deriv-atives are only used for commercial hedging purposes and not as speculative investments.

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

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

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

Translation risk arises because the Group’s equity amount is affected by currency rate fluctuations on its investments in subsid-iaries in foreign currency. Currency exposure that has arisen from the net assets obtained from the businesses acquired by the Group are primarily dealt with by borrowing in the currency concerned.

Through its operating activities, the Group is primarily exposed to changes in the exchange rate between EUR and SEK. If the SEK

had weakened/strengthened by 10% against the EUR with all other variables held constant, the Group’s equity as of 31 December 2016 would have been SEK 14.3 million higher/lower. If the SEK had weakened/strengthened by 10% against all other currencies, the Group’s equity as of 31 December 2016 would have been SEK 28.0 million higher/lower.

If the SEK had weakened/strengthened by 5% against the EUR with all other variables held constant, the operating profit/loss as of 31 December 2016 would have been SEK 7.1 (4.8) million higher/lower, mainly as a result of purchases and sales in foreign currency, and from the gains/losses that would arise upon translation of accounts receivable, financial assets and liabilities measured at fair value through profit or loss.

If the SEK had weakened/strengthened by 5% against the USD with all other variables held constant, the operating profit/loss as of 31 December 2016 would have been SEK 4.6 (3.9) million higher/lower, mainly as a result of purchases and sales in foreign currency, and from the gains/losses that would arise upon translation of accounts receivable, financial assets and liabilities measured at fair value through profit or loss.

If the SEK had weakened/strengthened by 5% against the JPY with all other variables held constant, the operating profit/loss as of 31 December 2016 would have been SEK 2.3 (1.8) million higher/lower, mainly as a result of purchases and sales in foreign currency, and from the gains/losses that would arise upon translation of accounts receivable, financial assets and liabilities measured at fair value through profit or loss.

NOTES




c) Interest rate riskThe Group's primary interest rate risk arises from long-term borrow-ings with variable interest rates, which expose the Group to interest rate risk on the cash flow. The Group’s financial policy states that interest expenses should be as low as possible. In order to minimize the Group’s interest expenses, interest rate derivatives may be uti-lized. For 2016 and 2015, it was assessed that the use of interest rate derivatives would not decrease the Group’s interest expenses.

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

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

d) Credit riskCredit risk arises from holdings in cash and cash equivalents, deriv-ative instruments, deposits with banks and credit institutions and other credit exposures, including outstanding receivables. See Note 16 for more information about the Group's outstanding receivables.

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

e) Financing and liquidity riskFinancing risk is the risk that maturing loans cannot be refinanced without difficulty or added expense and that this situation would make it difficult for the Group to fulfill its payment obligations. Liquid-ity risk is the risk of difficulties in fulfilling obligations that are associ-ated with financial liabilities. See Note 21 for an analysis of the

Group's interest-bearing liabilities, classified according to the time remaining until maturity as of the closing date.

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

Financing risk arises when, at a given point in time, it becomes difficult obtaining financing. To minimize the costs of the Group’s borrowings and financing, the finance function must provide credit facilities that adequately meet the Group's need for working capital

credit. HMS's goal is to always have access to approximately 10% of sales in cash, excess liquidity and unutilized credit facilities, which at year-end corresponded to approximately 10 (7)%.

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

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

Analysis of maturity

As of 31 December 2016Less than 3 months

Between 3 months and

1 yearBetween 1

and 2 yearsBetween 2

and 5 yearsMore than

5 years Total

Finance leases -674 -1,708 -2,994 -5,627 -9,570 -20,573

Derivative instruments -1,028 -1,069 -2,097

Bank loans -18,197 -72,644 -68,527 -358,545 -169 -518,082

Accounts payable – trade -64,275 -64,275

Total -84,174 -75,421 -71,521 -364,172 -9,739 -605,028

As of 31 December 2015Less than 3 months

Between 3 months and

1 yearBetween 1

and 2 yearsBetween 2

and 5 yearsMore than

5 years Total

Finance leases -135 -406 -451 -541 -1,533

Derivative instruments -236 -237 -473

Bank loans -10,046 -29,813 -39,143 -113,265 -9,222 -201,490

Accounts payable – trade -44,704 -44,704

Total -55,121 -30,456 -39,594 -113,806 -9,222 -248,200* Amortization and interest in foreign currency have been calculated based on the closing exchange rates in effect and interest rates

in effect at the time.

CONT. NOTE 3 Financial risk management

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3.2 Managing capital risksThe Group’s objective with regard to capital structure is to • safeguard the Group’s ability to continue operations, so that it can

continue to generate returns for shareholders and value to other stakeholders, and

• maintain an optimal capital structure in order to keep the cost of capital down.

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

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

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

2016 2015

Interest-bearing liabilities (Note 21) 519,697 196,901

Less cash and cash equivalents (Note 18) -99,036 -19,503

Net debt 420,661 177,398Total equity 636,444 455,482

Total capital 1,057,105 632,880

Net debt/equity ratio 66% 39 %

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

• Quoted prices (not adjusted) on active markets for identical assets or liabilities (Level 1).

• Other observable data for the asset or liability than the quoted prices included in Level 1, either directly (i.e. as a price quotation) or indirectly (i.e. derived from price quotations) (Level 2).

• Data for assets or liabilities not based on observable market data (i.e. non-observable data) (Level 3).

The following table shows the Group’s assets and liabilities valued at a fair value as of 31 December 2016:

Level 1 Level 2 Level 3 Total

Derivative instruments used for hedging 0 2,106 0 2,106

Total assets 0 2,106 0 2,106Derivative instruments used for hedging -2,097 -2,097

Total liabilities 0 -2,097 0 -2,097

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

Level 1 Level 2 Level 3 Total

Total assets 0 0 0 0Liabilities

Derivative instruments used for hedging -473 -473

Total liabilities 0 -473 0 -473

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

NOTE 4 Important estimates and assessments for accounting purposesThe Group makes estimates and assumptions about the future. The estimates for accounting purposes that result from these, by defini-tion, will rarely equate to the actual result. Management also makes estimates when applying the Group's accounting policies.

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

The estimates and assumptions that involve a considerable risk of needing to make significant adjustments to the carrying amounts

of assets and liabilities during the next financial year are shown below.

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

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

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

b) Revenue recognitionThe Group uses successive revenue recognition when reporting fixed-price agreements for sales of development services. Succes-sive revenue recognition means that the Group must assess ser-vices already performed by the closing date as a proportion of the total services to be performed.

c) Capitalized development costsThe company capitalizes costs associated with the development of identifiable and unique integrated circuits when the criteria described in Section 2.15 d have been fulfilled and when the costs are expected to be covered and exceeded by future volume commitments from customers. Four times per year, the Group determines whether its products, for which a carrying amount has been recorded, are in the process of being sold, or are expected to be sold. The Group records impairment loss on products for which the future revenue is expected to be less than the carrying amount. In 2016, this impairment testing resulted in a write-down of SEK 3 (0) million.

NOTES




NOTE 5 Segment information

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

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

Net sales per country

The Group Parent company

2016 2015 2016 2015

Germany 248,078 199,260

USA 179,458 135,502

Japan 85,578 68,472

Sweden 60,642 56,591 14,168 11,933

France 45,609 30,827

China 41,456 33,452

Italy 40,243 19,613

Other countries 251,217 157,958

952,282 701,674 14,168 11,933

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

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

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

NOTE 6 Categorization by type of cost

2016 2015

Cost of purchasing and handling materials 280,080 197,478

Costs for remuneration to employees (Note 8) 345,139 279,317

Depreciation, amortization and impairment (Note 13, 14) 42,598 34,088

Marketing costs 20,368 14,033

Freight costs 6,393 4,561

Other external costs 128,259 92,247

Capitalized development costs (Note 13) -27,778 -20,404

Total costs for goods sold, sales administration, research and development 795,059 601,320

NOTE 7 Remuneration to auditors

Remuneration to auditors


2016 2015 2016 2015

PwC

Audit assignment* 1,389 1,038 872 720

Audit activities other than the audit assignment 143 0 143 0

Tax advice 1,417 824 8 0

Other services 50 0 50 0

Total 2,999 1,862 1,074 720

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

NOTE 8 Remuneration to employees


2016 2015 2016 2015

Salaries and other remuneration * 257,817 209,539 4,316 4,642

Social security contributions 70,249 55,812 1,524 1,410

Pension costs 17,073 13,966 692 638

Total 345,139 279,317 6,532 6,691

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

NOTES

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

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

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

CONT. NOTE 4 Important estimates and assessments for accounting purposes




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2016 2015

Average no. of employeesAverage no. employees

Of which men

Average no. of employees

Of which men

Sweden 191 141 186 139

Germany 113 91 112 96

Belgium 58 47 0 0

Spain 33 27 0 0

USA 28 20 24 16

France 3 3 2 2

Italy 6 5 5 5

Japan 13 10 12 9

China 10 9 9 8

Great Britain 5 4 5 4

Denmark 1 0 2 1

Switzerland 1 1 0 0

India 5 5 4 5

The Group, total 467 363 359 285

Gender distribution of the Group (incl. subsidiaries) for Board members and other senior executives

2016 2015

No. on closing date

Of which men

No. on closing date

Of which men

Board members 7 5 6 4

CEO and other senior executives 10 9 8 7

The Group, total 17 14 14 11

2016 2015

Salaries, other remuneration and social security expenses

Salaries and other

remuneration

Social security expenses

(of which pension expenses)

Salaries and other

remuneration

Social security expenses

(of which pension expenses)

Board members and CEO 12,993 3,152 (1,163) 9,271 2,771 (1,021)

Senior executives 4,984 4,632 (2,468) 4,931 3,953 (1,934)

Other employees 239,840 62,465 (13,442) 195,336 63,054 (11,011)

The Group, total 257,817 70,249 (17,073) 209,539 69,778 (13,966)

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

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

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

In order to ensure delivery of shares in accordance with the share savings plans, the AGM decided to acquire own shares for all plans.

Program 1In accordance with a decision at the 2012 AGM, all permanent employees of the HMS Group were invited to participate in a share savings plan in 2013. 60% chose to participate. The number of shares acquired as part of the plan was 24,939. In conjunction with this, the company acquired 31,000 own shares in 2013 in order to fulfill obligations pertaining to future matching and performance

NOTES

CONT. NOTE 8 Remuneration to employees




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

Program 2In accordance with a decision at the 2013 AGM, all permanent employees of the HMS Group were invited to participate in a share savings plan in 2014. 51% chose to participate. The number of shares acquired as part of the plan was 20,049.



Program 5In accordance with a decision at the 2016 AGM, all permanent employees of the HMS Group were invited to participate in a share savings plan in 2017. The registration period for participation was the month of December 2016 and approximately 43% chose to par-ticipate. With this share savings plan, savings in HMS shares will be implemented during 2017.

The fair value of the services rendered is based on the share price for the matching shares and performance shares that are expected to be allocated. The share price is established on the date when the shares are allocated. The Group's costs for the share savings plan are reported in accordance with IFRS 2 Share-based payment (see also the description under accounting policies). In 2016, the Group's total employee benefit expenses for the share savings plan amounted to SEK 3,963 (3,278) thousand, of which SEK 2,430 (1,737) thousand was reported under equity and SEK 1,533 (1,541) thousand was reported as a provision for future social security expenses.

NOTE 9 Income tax

2016 2015

Current tax -37,152 -31,314

Deferred tax (Note 22) -2,117 3,958

Tax -39,269 -27,356

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

2016 2015

Profit before tax 139,736 87,561

Tax calculated using the Swedish tax rate (22%) -30,742 -19,263

Tax effect of items which are non-deductible/non-taxable -281 -2,514

Difference in foreign tax rates -9,061 -4,234

Adjustment relating to prior years 814 -2,282

Previously unrecognized loss carry forwards for subsidiaries that have not been utilized 0 938

Tax expense -39,269 -27,356

Weighted average tax rate 28.1% 31.2%

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

NOTE 10 Exchange rate differences – netExchange differences were reported in the income statement as follows:

2016 2015

Other operating income/expenses -7,911 1,230

Net financial items -414 -9,289

Total -8,325 -8,059

CONT. NOTE 8 Remuneration to employees

NOTES

NOTE 11 Earnings per shareEarnings per share is calculated by dividing the amount of profit reported in the income statement that is attributable to the parent company's shareholders by the weighted average number of out-standing ordinary shares during the period.

2016 2015

Profit attributable to parent company shareholders 100,466 60,205

Weighted average number of outstanding ordinary shares (000s) 11,642 11,291

Earnings per share, basic (SEK per share) 8.63 5.33

Earnings per share, diluted (SEK per share) 8.59 5.31

Average number of shares basic and diluted 2016 2015

Average number of shares used to calculate earnings per share, basic 11,641,857 11,291,400 Adjustment for calculation of Earnings per share, diluted:Shares in Share Savings Plans 57,017 43,220 Average number of shares, diluted 11,698,874 11,334,620

NOTE 12 Dividend per share

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

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

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




NOTES1

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NOTE 13 Intangible assets

Patents

Capitalized development

work Goodwill

Customers, technology

platforms Brands Total

As of 1 January 2015Cost 448 167,311 385,289 72,302 76,167 701,516

Accumulated amortization and impairment/ rate effects -211 -58,937 15,463 -7,894 7,893 -43,686

Carrying amount 237 108,374 400,752 64,408 84,060 657,831

Financial year 2015Opening carrying amount 237 108,374 400,752 64,408 84,060 657,830

Purchases 20,404 20,404

Exchange rate differences -6,585 -2,251 -3,361 -12,198

Impairment -237 -237

Depreciation 0 -17,635 -8,163 -25,798

Closing carrying amount 0 111,143 394,167 53,993 80,699 640,002

As of 31 December 2015Cost 448 187,715 385,289 72,302 76,167 721,472

Accumulated amortization and impairment/ rate effects -448 -76,572 8,878 -18,308 4,532 -81,470

Carrying amount 0 111,143 394,167 53,993 80,699 640,002

Financial year 2016Opening carrying amount 0 111,143 394,167 53,993 80,699 640,002

Purchases 27,778 27,778

Acquisition of subsidiaries 336,969 25,372 12,329 374,670

Exchange rate differences 18 13,297 2,745 4,017 20,076

Impairment -3,313 -3,313

Depreciation -17,904 -10,079 -946 -28,929

Closing carrying amount 0 117,721 744,433 72,031 96,099 1,030,284

As of 31 December 2016Cost 0 215,493 722,258 97,674 88,496 1,123,920

Accumulated amortization and impairment/ rate effects -97,772 22,175 -25,642 7,603 -93,636

Carrying amount 0 117,721 744,433 72,031 96,099 1,030,285

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

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

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

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

In 2016, the Spanish company, Intesis Software SLU was acquired, which resulted in consolidated goodwill in the form of cus-tomer relations, technology platforms and brands. Acquisition of the new company gave rise to goodwill attributable to employee know-how and Intensis’ market position in the building automation seg-ment amounting to SEK 117,328 thousand.

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

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

NOTES




NOTE 14 Property, plant and equipment

Buildings and Land

Machinery and

equipment

Equipment, installations and

facilitiesConstruction-in-

progress Total

As of 1 January 2015Cost 31,361 34,704 66,065

Accumulated depreciation -21,423 -26,122 -47,546

Carrying amount 9,938 8,582 18,520

Financial year 2015Opening carrying amount 9,938 8,582 18,520

Exchange rate differences -7 -7

Investments 1,742 3,300 5,042

Sales and disposals -202 -202

Depreciation -3,916 -4,137 -8,053

Closing carrying amount 7,764 7,536 15,300

As of 31 December 2015

Cost 33,103 35,897 70,898

Accumulated depreciation, exchange rate effects -25,340 -28,361 -55,599

Carrying amount 7,764 7,536 15,300

Financial year 2016Opening carrying amount 7,764 7,536 15,300

Exchange rate differences 558 558

Investments 3,601 7,480 11,081

Net investments via company acquisitions 3,340 15,708 3,386 496 22,930

Sales and disposals -536 -536

Depreciation -49 -3,296 -7,011 -10,356

Closing carrying amount 3,291 23,777 11,413 496 38,977

As of 31 December 2016Accumulated cost 3,340 52,413 39,068 496 104,932

Accumulated depreciation -49 -28,636 -27,655 -65,955

Carrying amount 3,291 23,777 11,413 496 38,977

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

The recoverable amount for the cash generating units has been based on their value-in-use. This has included estimates for growth, profit margin, tied-up capital, investment requirement and risk pre-mium. The principles behind these assumptions were unchanged compared with the previous year.

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

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

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

Investments during the period are based on the company's inter-nal investment plan and are expected to meet replacement demand, except for Intesis, where the future margins have been adjusted downwards to reflect the expected costs for the future expansion of the business.

These estimates form the basis for calculating value-in-use and the cash flow forecast for a period covering the fixed budget and the company’s five-year financial plan. Cash flow was then extrapolated using an assumed annual growth rate of 2.0 (2.0)%, which is lower than the actual annual growth rate. The need for working capital (excluding cash) is, over the long term, estimated at 8 (8)% for the Group excluding Intesis and 15% for Intesis separate to the compa-ny's net sales. The weighted average cost of capital (WACC) before tax is 12.3 (12.8)% for the Group excl. Intesis and 12.1% for Intesis separately.

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

CONT. NOTE 13 Intangible assets

NOTES




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(b) Hedging of net investments in foreign operations

The Group's borrowings in EUR amounting to SEK 300,438 (191,835) thousand are identified as a

hedging of net investments pertaining to the acquisition of subsidiaries. The Group's assessment is that

the fair value corresponds to the carrying amount as of 31 December 2016. The exchange loss on

translation of the borrowings into SEK amounts to -9,620 (11,565) thousand for the reporting period and

it has been recognized in other comprehensive income.

NOTE 16 Accounts receivable and other receivables

2016 2015

Accounts receivable - trade 123,758 83,246

Provision for doubtful debts -588 -1,273

Accounts receivable – net 123,170 81,973

The fair value of accounts receivables and other receivables is as follows: 2016 2015

Accounts receivable - trade 123,170 81,973

Other receivables 12,549 7,234

Prepaid costs and accrued income, see Note 30 5,739 5,881

141,457 95,088

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

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

2016 2015

1-15 days 16,902 8,237

15 days to 3 months 8,000 10,570

3 to 6 months 446 669

More than 6 months 1,141 921

26,489 20,397

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

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

NOTE 15 Derivatives

2016 2015

Currency forward contracts – asset 2,106 0

Currency forward contracts – liability -2,097 -473

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

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

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

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

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

Assets held through a finance lease agreement 2016 2015

Opening carrying amount 1,533 2,164

Investments for the year 2,577 0

Added via company acquisition 15,289 0

Depreciation for the year -958 -631

Closing carrying amount 18,442 1,533

CONT. NOTE 14 Property, plant and equipment

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

NOTES




Number of shares (000s)

Share capital (SEK t)

Other contributed capital (SEK t) Total (000s)

As of 1 January 2015 11,322 1,132 125,641 126,773

As of 31 December 2015 11,322 1,132 125,641 126,773

As of 31 December 2016 11,673 1,170 218,318 219,488

The total number of shares is 11,704,717 (11,322,400) with a quotient value of SEK 0.1 (0.1) per share. During 2013, the company repurchased 31,000 own shares on NASDAQ OMX Stockholm. The total amount paid for the shares was SEK 3,895 thousand. The shares are held as treasury shares.

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

NOTE 20 Provisions

2016 2015

Complaints provision 1,301 2,412

Warranty provision 1,750 0

Total 3,051 2,412

NOTE 19 Share capital and other contributed capital

CONT. NOTE 16 Accounts receivable and other receivables

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

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

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

2016 2015

EUR 71,196 44,305

USD 36,333 22,641

SEK 5,536 5,647

JPY 5,138 7,050

CNY 2,781 2,061

GBP 2,381 1,242

DKK 199 292

INR 195 7

Total 123,758 83,246

NOTE 17 Inventories

The Group 2016 2015

Raw materials and consumables 63,870 21,352

Work-in-progress 1,866 2,546

Finished goods 20,359 31,912

Total 86,095 55,810

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

NOTES

NOTE 18 Cash and cash equivalents

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

The Group 2016 2015

Cash and bank balances 99,036 19,503

Total 99,036 19,503

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




NOTES

NOTE 21 Interest-bearing liabilities

THE GROUP PARENT COMPANY

The Group 2016 2015 2016 2015

Non-current interest-bearing liabilitiesBank loans 394,030 157,150 0 0

Liability for contingent consideration 19,134 0Liability pertaining to finance leases (Note 25) 18,191 992 0 0Defined benefit pension plan 2,248 0

Total 433,603 158,142 0 0

Current interest-bearing liabilitiesBank loans 64,578 38,218 0 0

Other current financial liability 19,134 0Liability pertaining to finance leases (Note 25) 2,382 541 0 0Total 86,095 38,759 0 0

Total interest-bearing liabilities 519,697 196,901 0 0

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

THE GROUP PARENT COMPANY

The Group 2016 2015 2016 2015

3 months or less 16,937 9,690 0 0Between 3 months and 1 year 69,157 29,069 0 0Between 1 and 2 years 65,602 38,668 0 0

Between 2 and 5 years 356,018 110,339 0 0More than 5 years 11,983 9,135 0 0

519,697 196,901 0 0

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

Loan terms for the bank loan are based on the development of net debt and EBITDA. The carrying amount of the Group's interest-bearing liabilities corresponds to their fair value either

because the interest rate on these liabilities is in line with current market rates or because the liabilities are short-term.

The liability for contingent consideration is related to the acquisition of Intesis in 2016. See Note 34

for more information. The additional consideration is contingent on sales and earnings growth during the

period 2016-2018. Management continually revalues liabilities pertaining to additional consideration to

their estimated fair value based on the acquired company's performance, established budgets, business

plans and projections. This means that the fair value is substantially based on unobservable inputs (Level

3 as defined in IFRS 13).

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NOTE 22 Deferred tax

Deferred tax assetsTax

deficit Pensions Other Total

As of 1 January 2015 869 459 1,328Exchange rate differences 69 21 90

Reclassified to deferredtax liabilities 775 775

Reported in income statement -938 1,983 1,045

As of 31 December 2015 0 3,238 3,238Exchange rate differences 58 58

Reclassified to deferred tax liabilities-2,412 -2,412

Added via acquisition 719 -341 378

Reported in income statement 178 178

As of 31 December 2016 0 719 721 1,440

Deferred tax liabilities

Taxallocationreserves

Property, plant and equipment and intangible

assetsCurrencyhedging Other Total

As of 1 January 2015 20,567 50,797 -5,411 -838 65,115Reported in income statement -1,916 6,846 73 5,003

Reported in other comprehensive income 2,937 2,937

Reclassified to deferred tax assets 775 775

Exchange rate differences -1,670 82 -1,588

As of 31 December 2015 18,651 55,973 -2,474 92 72,242Reported in income statement -1,469 1,116 2 2,646 2,295

Reported in other comprehensive income 0

Added via acquisition 10,827 1,428 12,255

Reclassified to current tax 2,474 2,474

Reclassified from deferred tax assets -2,412 -2,412

Exchange rate differences 1,267 1,267

As of 31 December 2016 17,182 69,183 2 1,754 88,121

NOTES




NOTE 25 Finance leases

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

Plant and machinery2016 2015

Cost - capitalized finance leases 37,689 13,501

Accumulated depreciation -19,247 -11,968

Carrying amount 18,442 1,533

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

2016 2015

Within 1 year 2,382 541

Between 1 and 5 years 8,621 992

More than 5 years 9,570

Total future leasing payments 20,573 1,533

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

2016 2015

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

Total minimumleasing fees 28,659 20,867

Future contractual leasing payments2016 2015

Within 1 year 29,722 25,379

Between 1 and 5 years 121,892 104,078

Total future leasing payments 151,614 129,457

NOTE 24 Pledged assets and contingent liabilities

The GroupPledged assets 2016 2015

Shares in subsidiaries 638,666 459,188

Contingent liabilitiesContingent liabilities none none

Parent companyPledged assets 2016 2015

Shares in subsidiaries 337,324 244,039

Contingent liabilitiesSecurity for subsidiaries 486,437 226,630

NOTE 23 Pension obligations

Pension benefitsFor salaried employees in Sweden, the ITP 2 plan's defined benefit pension obligations for retirement pension and family pension have been secured through insurance with Alecta covering several employers. For some of the company's first employees, retirement pension obligations have been secured via insurance with Skandia. For a few people in the Group, fee-based solutions are in place. For the 2016 financial year, the company did not have access to informa-tion in order to report its proportionate share of the ITP plan's obliga-tions, plan assets and costs, which meant that it was not possible to report this as a defined benefit plan. Pension plan ITP 2, which is secured through insurance with Alecta, is therefore reported as a defined contribution plan.

The premium for the defined benefit retirement and family pen-sion is individually calculated. It is based on such things as salary, previously earned pension and expected remaining period of ser-vice. The fees for pension insurance with Alecta during the year amounted to SEK 7,157 (6,362) thousand. The year’s fees for pen-sion insurance with Skandia amounted to SEK 4,214 (3,470) thou-sand. The Group accounts for an insignificant portion of the plan.

The collective consolidation level is comprised of the market value of Alecta's assets as a percentage of the pension obligations calculated in accordance with Alecta's actuarial methods and assumptions, which are not in accordance with IAS 19. The collective consolidation level should typically be allowed to fluctuate between 125 and 155 percent. If Alecta's collective consolidation level falls below 125 percent or exceeds 155 percent, measures must be taken to bring the consolidation level back to the normal interval. If the consolidation level is low, one measure might be to raise the set price for new subscription or expand existing benefits. If the consolidation level is high, one measure might be to introduce premium reductions. At year-end 2016, Alecta’s surplus at the collective consolidation level was 149 (148) percent.

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

NOTES




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

Remuneration to the Board and senior executivesRemuneration to the Chairman and Board members is in accor-dance with the general meeting of shareholders’ decision. There is no separate remuneration for committee work. Board fees do not pertain to employee representatives.

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

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

Variable remuneration for the financial year consists of expensed bonus, which is paid out in the coming year.

For details of how the bonus is calculated, see below.At the AGM on 28 April 2016 Charlotte Brogren was re-elected

as Chairman of the Board. The following individuals were also relected at the AGM to serve on the Board of Directors: Ray Mauritsson, Henrik Johansson, Kerstin Lindell and Fredrik Hansson. Karl Thedéen chose to resign from the Board, and Anders Mörck was elected as a new member of the Board.

Since the AGM of 28 April 2016 the Board has held 10 minuted meetings up to the adoption of this annual report.

Variable remunerationVariable remuneration for the CEO and other senior executives is based primarily on growth along with profitability goals set by the Board. In addition to that, other personal goals may be established. For 2016, variable remuneration for the CEO corresponded to 23 (40) percent of basic salary and for other senior executives it was 18 (18) percent.

Remuneration and other benefits 2016Basic salary*/

Board fees

Variable remunera-

tionPension

expensesTotal2016

Options held

Board attendance

Chairman of the Board, Charlotte Brogren 400 400 100%

Board member, Ray Mauritsson 175 175 90%

Board member, Henrik Johansson 175 175 100%

Board member, Fredrik Hansson 175 175 100%

Board member, Anders Mörck 175 175 100%

Board member, Kerstin Lindell 175 175 100%

Total, Board 1,275 0 0 1,275 0

CEO Staffan Dahlström 2,467 574 692 3,733

Other senior executives (8) 10,900 1,937 2,939 15,777

Total 14,642 2,511 3,631 20,785 0

Remuneration and other benefits 2015Basic salary*/

Board fees

Variable remunera-

tionPension

expensesTotal2015

Options held

Board attendance

Chairman of the Board, Charlotte Brogren 400 400 100%

Board member, Ray Mauritsson 175 175 92%

Board member, Henrik Johansson 175 175 100%

Board member, Fredrik Hansson 175 175 100%

Board member Karl Thedéen 175 175 85%

Board member Kerstin Lindell 175 175 100%

Total, Board 1,275 0 0 1,275 0CEO Staffan Dahlström 2,088 790 638 3,516

Other senior executives (7) 8,521 1,532 2,316 11,585

Total 11,884 2,322 2,954 16,376 0

NOTES

Defined benefit/Defined contribution pension plansThe Group has both defined benefit and defined contribution pen-sion plans. See section 2.19 and Note 23. Pension costs are costs that affect profit (loss) for the year.

PensionsThe retirement age for the CEO is 65 years.

For other senior executive, the retirement age is 65-66 years.

Severance payThe notification period for termination of employment of the CEO is 6 months for both sides. If the company initiates dismissal, sever-ance pay amounting to 12 months’ salary in addition to regulary salary will be paid. In the case of notice of termination from the CEO’s side, no severance payment is made.

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

*Including other remuneration




NOTE 27 Shares in subsidiaries

Shares owned by parent company Registered office CIN ShareNo. of

sharesWith quotient

value 161231 151231

HMS Industrial Networks AB Halmstad, Sweden 556529-9251 100% 6,540 100 244,039 244,039

HMS Industrial Networks SA Nivelles, Belgium 450350907 33% 431 100 93,285 0

Shares owned by subsidiary Registered office CIN. Share Equity Profit (loss)

HMS Electronics AB Halmstad, Sweden 556463-9374 100% 247 0

HMS Industrial Networks ApS Copenhagen, Denmark 33363842 100% 404 -6

HMS Industrial Networks GmbH Karlsruhe, Germany 35006/39876 100% 18,800 5,085

HMS Industrial Networks Inc Chicago, USA 5983-659-5 100% 71,943 -672

HMS Industrial Networks India Pvt. Ltd. Pune, India 138298 100% 493 113

HMS Industrial Networks K.K Tokyo, Japan 0200-01-060118 100% 3,974 1,473

HMS Industrial Networks Ltd. Coventry, England 7521411 100% 641 127

HMS Industrial Networks S.r.l. Milan, Italy 5260930960 100% 644 184

HMS Technology Center Ravensburg GmbH Ravensburg, Germany 29724241 100% 73,108 49,960

HMS Industrial Networks SA* ** Nivelles, Belgium 450350907 67% 142,467 78,710

eWON Inc Pittsburgh, USA 27-3369241 100% 4,337 1,691

eWON KK Tokyo, Japan 3-0100-0115-6936 100% -2,492 -964

Intesis Software SLU Igualada, Spain B62202460 100% 45,569 8,990

Intellicom Innovation AB Halmstad, Sweden 556537-7826 100% 8,360 0

FAR Sprl Nivelles, Belgium 0462.305.661 100% 5,774 -68

HMS Industrial Networks Limited (UK Company Number 07521411)We hereby confirm that the consolidated accounts for the ultimate parent company HMS Networks AB (publ) for the year ended 31st December 2016 include the figures of the UK subsidiary, HMS Industrial Networks

Limited (UK Company Number 07521411) for the year ended 31 December 2016. We confirm that the UK subsidiary is claiming exemption from UK audit under section 479A of the Companies Act 2006.

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

NOTES

Decisions on remunerationDuring the year, the remuneration committee submitted a proposal to the Board on principles for remuneration to senior executives. The proposal specifies proportions between fixed and variable remuner-ation and the size of possible salary increases. Furthermore, the remuneration committee has proposed criteria for assessing the outcome of variable remuneration, allocation and size in the form of

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

financial instruments, etc., as well as pension conditions and sever-ance pay. The committee also assessed the feasibility of giving remuneration to other Board members who provide consulting ser-vices to the Group.

The Board discussed the remuneration committee’s proposal and reached a decision based on the recommendations. Remuner-ation to the CEO for the 2016 financial year was decided by the

Board based on the recommendations of the remuneration commit-tee. Remuneration for other senior executives was decided by the CEO after consultation with the remuneration committee.

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




NOTES

NOTE 29 Financial income


2016 2015 2016 2015

Interest income 419 2 0 0Total 419 2 0 0

NOTE 28 Earnings from participations in Group companies

Parent company

2016 2015

Anticipated dividends 50,000 0Total 50,000 0

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NOTES

NOTE 30 Financial expenses


2016 2015 2016 2015

Interest expenses and other banking costs -9,585 -4,736 0 0

Exchange rate differences -414 -9,289 0 0Total -9,999 -14,025 0 0

NOTE 32 Accrued expenses and deferred income


2016 2015 2016 2015

Accrued salaries 14,213 11,586 506 790

Vacation pay 12,794 8,308 390 418

Social security contributions 10,999 10,246 674 976

Deferred income 544 0 0 0

Other items 12,222 10,037 194 633

Total 50,772 40,177 1,764 2,817

NOTE 31 Prepaid expenses and accrued income


2016 2015 2016 2015

Rents 2,556 2,507 0 0

Accrued income 0 241 0 0

Other items 3,183 3,133 52 596

Total 5,738 5,881 52 596

NOTE 33 Related parties

There have not been any related party transactions except for the ones specified in Note 26 Remunera-tion to the Board and senior executives.

NOTE 34 Business combinations

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

The acquisition price amounted to EUR 29 million on a debt-free basis, of which approximately EUR 10 million was paid by issuing 382,317 shares in the company and the remainder in cash. The acquisi-tion has been financed through a bank loan of EUR 19 million. The acquisition generates a consolidated goodwill of approximately SEK 233 million. The new issue of shares, was in accordance with authoriza-tion to the Board of Directors that was granted at the 2015 Annual General Meeting, resulted in share dilution of 3.27%. Acquisition-related costs, excluding issue costs amounted to SEK 2.8 million.

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

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

Purchase sum:

Cash and cash equivalents 178,981

Shares issued 93,285

Total purchase sum 272,266

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




NOTES

The assets and liabilities recognized in conjunction with the acquisition are as follows: Fair value

Intangible assets

- Customer relations 12,355

- Brands 7,663

- Deferred tax liabilities -6,406

Property, plant and equipment 21,551

Inventories 19,253

Accounts receivable and other receivables 32,455

Deferred tax assets 378


Non-current interest-bearing liabilities -31,179

Accounts payable and other liabilities -30,228

Total identifiable net assets 52,625

Goodwill* 219,641

Acquired net assets 272,266

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

Purchase sum – outflow of cash: 2016

Cash consideration 178,981

Acquired cash and cash equivalents -26,783

Net outflow of cash 152,198

CONT. NOTE 34 Business combinations

The assets and liabilities recognized in conjunction with the acquisition are as follows: Fair value

Intangible assets

- Customer relations 13,017

- Brands 4,666

- Deferred tax liabilities -4,421

Other non-current assets 1,588

Current assets 16,215


Deferred tax liabilities -1,428

Current liabilities -9,123

Total identifiable net assets 49,200

Goodwill* 117,328

Acquired net assets 166,528

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

Purchase sum – outflow of cash: 2016

Cash consideration 147,682

Acquired cash and cash equivalents - 28,686

Net outflow of cash 118,996

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

The acquisition price amounted to EUR 13 million on a debt free basis and a performance-based additional consideration of EUR 2 million. The maximum contingent consideration of EUR 2 million is based on sales growth and earnings for the period 2016-2018. The acquisition has been financed through a bank loan of EUR 16 million. The acquisition generates a consolidated goodwill of approxi-mately SEK 131 million. Acquisition-related costs amounted to SEK 2.4 million. The acquired company is included in the HMS Group's income statement and balance sheet as of 30 June 2016. During the six

months since acquisition, Intesis has contributed SEK 29 million to the Group’s sales. The acquisition's contribution to operating profit, including amortization of acquired goodwill and acquisition costs, amounted to SEK 9 million. If the acquisition had occurred at the beginning of the financial year, the contribution to sales would have been SEK 57 million and the contribution to operating profit, including acquisition costs and amortization of acquired goodwill, would have amounted to SEK 21 million.

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

Purchase sum:


Contingent additional consideration 18,846

Total purchase sum 166,528

NOTES




NOTES

Note 36 Subsequent events

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

NOTE 35 Financial assets and financial liabilities

Financial assets

Derivative instruments used

for hedging

Financial assets measured at

amortized cost Total

2016Accounts receivable and other receivables 130,305 130,305

Cash and cash equivalents 99,036 99,036

Derivatives 2,106 2,106

Total 2,106 229,341 231,447

2015Accounts receivable and other receivables 85,609 85,609

Cash and cash equivalents 19,503 19,503

Total 105,112 105,112

Financial liabilities

Derivative instruments used

for hedging

Liabilities measured at

amortized cost Total

2016Interest-bearing liabilities 519,697 519,697

Derivative instruments 2,097 2,097

Accounts payable and other liabilities 70,182 70,182

Total 2,097 589,879 591,976

2015Interest-bearing liabilities 196,901 196,901

Derivative instruments 473 473

Accounts payable and other liabilities 46,083 46,083

Total 473 242,984 243,457

NOTES1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

NOTE 37 Proposed distribution of profit in the Parent Company

The following profits are at the disposal of the AGM

Profit brought forward and other non-restricted reserves 133,358,069

Profit (loss) for the year 49,931,489

SEK 183,289,558

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

Distributing dividends to shareholders of SEK 4.00/share* 46,694,868

Carried forward 136,594,690

SEK 183,289,558

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



BOARD’S AFFIRMATION AND SIGNATURES

The income statement and balance sheets will be brought forth at the Annual General Meeting on 26 April 2017 for adoption.

Halmstad, 21 March 2017

Charlotte BrogrenChairman of the Board

Kerstin Lindell Board member

Staffan Dahlström CEO

Our audit report was submitted on 24 March 2017

Öhrlings PricewaterhouseCoopers AB

Fredrik GöranssonAuthorized Public Accountant

Fredrik Hansson Board member

Henrik Johansson Board member

Tobias Persson Employee representative

Anders Mörck Board member

The Board of Directors and CEO affirm that the consolidated accounts have been prepared in accor-dance with the International Financial Reporting Standards (IFRS) as adopted by the EU and that they provide a true and fair view of the Group’s financial position and results. The Annual Report has been prepared in accordance with generally accepted accounting principles, provides a true and fair view of the and Parent Company’s financial position and results.

The Board of Directors’ report for the Group and parent company provides a true and fair overview of the Group’s and parent company’s operations, financial position and results and also describes material risks and uncertainties faced by the parent company and the companies that comprise the Group.

Ray Mauritsson Board member




BOARD’S AFFIRMATION AND SIGNATURES

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

In our opinion, the financial statements have been prepared in accordance with the Annual Accounts Act and in all material respects, they give a true and fair view of the parent company's financial posi-tion as at 31 December 2016 and of its financial performance and cash flow for the year in accordance with the Annual Accounts Act. The consolidated financial statements have been prepared in accor-dance with the Annual Accounts Act and in all material respects, they give a true and fair view of the Group's financial position as at 31 December 2016 and of its financial performance and cash flow for the year in accordance with the International Financial Reporting Standards (IFRS) that have been adopted by the EU. The Board of Directors' report is consistent with the other parts of the annual report and the consolidated financial statements.

We therefore recommend that the general meeting of sharehold-ers should adopt the income statements and balance sheets for the parent company and the Group.

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

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

Our audit work

Focus and scope of the auditWe designed our audit by establishing the level of materiality and

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

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

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

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

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

In cases where the entity's auditors carry out work that is essen-tial to our audit of the Group, we evaluate, in our capacity as Group auditors, the need and degree of involvement in the work of the entity auditors in order to determine whether sufficient audit evidence has

been obtained as the basis for our opinion on the consolidated audit report. With that in mind, the Group audit team regularly meets with the entity auditors and significant subsidiaries.

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

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

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

AUDIT REPORT

Report on the Annual Report and Consolidated Financial Statements




Particularly important area How our audit took into consideration this particularly important area

Test of impairment on goodwill

As of 31 December 2016, goodwill amounted to SEK 744.4 million, which corresponds to 53 percent

of the Group's total assets. As described in Note 13, the Group's goodwill is associated with two sepa-

rate cash generating units, HMS Networks Group excluding Intesis and Intesis separately.

In accordance with IAS 36, the Group tests annually whether there is an impairment of goodwill.

Impairment is determined by considering each cash-generating unit's recoverable amount compared

to its carrying amount. The recoverable amount was determined by management, by calculating the

operations' ability to generate cash flow in the future.

Impairment testing is essential for our audit because goodwill represents significant amounts in the

balance sheet. Furthermore with a test of impairment, management must make significant estimates

and assumptions about the future.

Based on management's impairment test, the Board has concluded that no impairment of goodwill

exists as of 31 December 2016. The most significant assumptions used in the impairment test are

described in Note 13.

Our audit procedures included an assessment of the mathematical accuracy of the cash flow calcula-

tion, along with a reconciliation of cash flow forecasts against the adopted budget for 2017 and the

business plan for 2018-2019.

We have evaluated and assessed that the company's valuation is consistent with accepted valua-

tion techniques.

We have tested the reasonableness of the assumptions that have the greatest impact on the impair-

ment test, which include sustainable growth, sustainable operating margin and discount rate.

By making our own sensitivity analyses, we have challenged management's assumptions and tested

the existing safety margins to assess the risk that impairment could occur.

We have also evaluated whether the Company has provided enough information in the annual

report about the assumptions which, should they change, could lead to impairment of goodwill in the

future.

Particularly important area How our audit took into consideration this particularly important area

Acquisition of eWON and Intesis – preparation of acquisition analysis

As detailed in Note 34 of the annual report, the Group made two acquisitions in 2016. In February 2016,

acquisition of eWON was completed and in June 2016, the acquisition of Intesis was made. For eWON,

the total purchase sum, which consisted of own shares and cash, totaled SEK 272.3 million. Relatively

speaking, Intesis is a minor acquisition, with a total purchase sum of SEK 166.5 million.

The acquisitions that were made, were important to our audit because the amounts were significant.

Furthermore, preparation of acquisition analyses is a complex process requiring management to make

significant estimates and assessments.

When preparing acquisition analyses, management allocates the purchase sum to different cate-

gories of assets based on an assessment of fair value as of the acquisition date. In conjunction with

that, management determines the amounts for such things as the identifiable intangible assets like

customer relations and brands. During this process, management makes estimates and assumptions

about such things as the acquired businesses' future cash generation ability, useful lives of identified

intangible assets and discount rates.

Our audit procedures to assess the accounting of the acquisitions have included the following.

• We have read the sales and purchase agreements in order to understand the important terms and conditions, along with their impact on the acquisition analyses.

• As regards the portion of the purchase sum for eWON settled through own shares, we have reviewed whether the established fair value of the Parent Company’s shares correspond to the actual share price on the date of transaction.

• We have enlisted the services of PwC's own valuation experts to, independently evaluate the models and assumptions used by management to identify and value intangible assets.

• We have assessed the applied useful lives of identified, separable intangible assets to determine whether they are consistent with our understanding of the assets’ useful lives and the Group's accounting policies.

• We have assessed whether there are any differences between the Group’s accounting policies and the accounting policies used by the acquired companies, along with the impact this has had on the acquisition analyses.

Finally, we have assessed the accuracy of disclosures that the Group has provided in Note 34 about

the acquisitions it has made.

Particularly important areasAreas that are particularly important to the audit are those which, according to our professional assessment, are the most significant for the audit of the financial statements for the current period. These

AUDIT REPORT

areas were dealt with as part of both the audit, and our overall assessment of the financial statements. However, we do not provide separate opinions on these areas.




AUDIT REPORT AUDIT REPORT

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

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

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

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

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

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

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

Auditor's responsibilityOur goal is to achieve a reasonable degree of assurance about

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

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

Report on other requirements in accordance with legislation and other regulations

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

We recommend to the general meeting of shareholders that the appropriation of profit should be in accordance with the proposal in the Board of Directors’ report and that the members of the Board of Directors and the CEO should be discharged from liability for the fiscal year.

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

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

The Board of Directors' and CEO's responsibilitiesThe Board of Directors is responsible for the proposed appropriation of the company’s profit or loss. With proposal of a dividend, this includes an assessment of whether the dividend is justifiable consid-

ering the demands that the nature of operations, scope and risks place on the size of the Parent Company’s and Group’s equity, con-solidation requirements, liquidity and position in general.

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

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

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

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

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

Halmstad, 24 March 2017Öhrlings PricewaterhouseCoopers AB

Fredrik Göransson

Authorized Public Accountant




Financial data in summary (SEK m) 2016 2015 2014 2013 2012

Net sales 952 702 589 501 382

Growth in net sales, % 36 19 18 31 -0.5

Gross profit 581 430 367 314 229

Gross margin, % 61 61 62 63 60

Operating income before depreciation (EBITDA) 188 136 126 105 75

Operating margin before depreciation (EBITDA), % 20 19 21 21 20

Operating income after depreciation/amortization (EBIT) 149 102 98 87 64

Operating margin after depreciation/amortization (EBIT), % 16 15 17 17 17

Profit for the period 100 60 63 63 52

Order intake 966 682 611 516 424

Earnings per share, basic, SEK 8.63 5.33 5.59 5.56 4.64

Earnings per share, diluted, SEK 8.59 5.31 5.58 5.55 4.64

Dividend per share, SEK* 4.00 2.50 2.50 2.25 2.25

Total assets 1,406 830 832 771 418

Equity 636 455 423 378 342

Equity per share, SEK 55 40 37 33 30

Equity/assets ratio, % 45 55 51 49 82

Net debt/equity ratio % 66 39 54 65 -9

Return on shareholders’ equity, % 18 14 16 17 16

Return on capital employed, % 17 15 15 18 20

Investments in non-current assets 36 25 38 57 42

Cash flow from operating activities 155 90 93 89 83

Cash flow from operating activities per share, SEK 13.32 7.97 8.26 7.93 7.38

Average number of employees 467 362 352 338 241

Sales per employee 2.0 1.9 1.7 1.5 1.6

* Board’s proposal

MULTI-YEAR OVERVIEW


INTRO | HMS STOCK | MARKET | OUR BUSINESS | PRODUCTS | SUSTAINABILITY | CORPORATE GOVERNANCE | GLOSSARY | FINANCIAL | NOTICE OF AGM CONTENTS | SEARCHCONTENTS | SEARCH

MULTI-YEAR OVERVIEW

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

Right of participation in the Annual General MeetingShareholders who wish to participate in the Annual General Meeting must be registered in the share register kept by Euroclear Sweden on Thursday 20 April 2017 and give notice of their intention to participate at the Meeting to the Company no later than Thursday 20 April 2017.

Registration must be communicated in one of the following ways: by phone: +46 (0)35-17 29 00, in writing: HMS Industrial Networks AB, c/o Computer-share AB, Box 610, 182 16 Danderyd, or via the website: www.hms.se/inves-tors. The registration must include the following information: name, personal ID number/CIN, shareholding, address, daytime telephone number and, when applicable, information on assistants or deputies who will be attending. The notification must include, where applicable, complete authorization documents such as registration certificate, power of attorney, or equivalent.

ProxiesIf a shareholder is represented by a proxy, the proxy must be issued with a power of attorney dated for this day. If the power of attorney is issued by a legal entity, a certified copy of the registration certificate, or other document demonstrating the signatory’s authority to sign for the legal entity, must be included. The power of attorney and any registration certificate may not be more than one year old. The power of attorney (original), and registration cer-tificate should be sent to HMS Industrial Network AB, c/o Computershare AB, Box 610, 182 16 Danderyd, well in advance of the AGM. The power of attorney form is available on the Company’s website: www.hms.se/investors and at the Company’s head office.

Nominee registered sharesShareholders whose shares are registered in the name of a nominee through a bank or Securities Register Centre must temporarily re-register the shares in their own name to be able to participate at the Meeting. Such registration must be done at Euroclear Sweden no later than Thursday 20 April 2017, which means that shareholders must notify their intentions on this matter to the nominee well in advance of the stated date.

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

Welcome to the AGM • Shareholders information



Welcome to the AGM • Shareholders information



-

https://www.facebook.com/HMSIndustrialNetworks/ https://twitter.com/hmsnetworkshttps://www.youtube.com/user/HMSIndustrialNetwork

Follow HMS – www.hms-networks.com

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

FINANCIAL CALENDAR

April 25, 2017 Q1 Report 2017

April 26, 2017 Annual General Meeting

July 20, 2017 Q2 Report 2017

Oktober 27, 2017 Q3 Report 2017

February, 2018 Year-end report 2017

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

THE WORLD IS BECOMING INCREASINGLY CONNECTED

ESTABLISHED SALES CHANNELS IN MORE THAN 50 COUNTRIES

PRODUCTSALES / REGION

EMEA, 62%NORTH AND SOUTH AMERICA, 22%ASIA, 16%

WORLDWIDE PRESENCE

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

AT THE FOREFRONT OF TECHNOLOGY

All interim reports, annual reports and certain presentations are available on the HMS website: www.hms.se/investors. A printed version of the annual reported is only distributed to shareholders and investors who have requested one. The annual report can be ordered by mailing a complete address to [email protected].

THE CONNECTED MACHINE – HOW HMS MAKES THE INDUSTRIAL INTERNET OF THINGS POSSIBLEHMS products enable industrial machines to connect to different types of networks and control systems. We manufacture hardware and software that can be used for:

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

Connecting Devices™ – we make machines communicate

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

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

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

REMOTE SOLUTIONS: Remote monitoring and control via Internet using eWON solutions. Makes it possible for technicians to service the machine without being on site.

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

INFRASTRUCTURE INFRASTRUCTURE INSIDE MACHINES:INSIDE MACHINES:Communication solutions Communication solutions

WHY INVEST IN HMS• Internet of Things

increases the need forcommunication solutions.

• Established leader.

• Worldwide presence.

• New stars under development.

• At fore front of technology.SAFETY SOLUTIONS: Communication between machines and different types of safety systems.

Welcome to the AGM • Shareholders informationHMS in brief • Key figures • CEO’s comments A LOOK BACK

ANNUAL REPORT 2016

CONNECTED

CONNECTED

CONNECTED

CONNECTED

CONNECTED

CONNECTED

CONNECTED

CONNECTED

CONNECTED


HM

S A

NN

UA

L R

EP

OR

T 2016

Box 4126, 300 04 HalmstadPhone: +46 35 17 29 [email protected], www.hms.se

World-leading experts in industrial communicationWe provide reliable solutions for connecting equipment like robots, control systems, motors and sensors to all industrial networks.

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

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

Get connected!

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

hms networks GRI APPENDIX 2016

SUSTAINABILITY

2 HMS NETWORKS GRI APPENDIX 2016

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

GRI INDEXThe following list references the GRI disclosures that HMS report on. AR = Annual report; GRI = GRI Appendix

G4-1 CEO’s statement on the organisation’s sustainability strategy

G4-3 Name of the organisation

G4-4 Primary products and services

G4-5 Location of organisation’s headquarters

G4-6 Countries where operations are conducted

G4-7 Nature of ownership and legal form

G4-8 Markets served, where the organisation is active

G4-9 Size of the organisation

G4-10 Total number of employees

G4-11 Employees covered by collective bargaining agreements

G4-12 Describe the organisation’s supply chain

G4-13 Significantchangesduringthereportingperiod

G4-14 Organisation’s compliance with the precautionary principle

G4-15 External initiatives that the organisation subscribes or endorses

G4-16 Memberships of associations

G4-17 Entities included in the scope of the report

G4-18 Processfordefiningreportcontent

GENERAL STANDARD DISCLOSURES REFERENCE GENERAL STANDARD DISCLOSURES REFERENCE

G4-19 Materialaspectsofsustainabilityidentified

G4-20 Aspect boundaries within the organisation

G4-21 Aspect boundaries outside the organisation

G4-22 Restatements of information

G4-23 Significantchangesfrompreviousreports

G4-24 Stakeholder groups with whom the organisation is engaged

G4-25 Basisforidentificationandselectionofstakeholders

G4-26 Approaches to stakeholder engagement

G4-27 Topics and concerns raised through stakeholder engagement

G4-28 Reporting period

G4-29 Date of publication of most recent report

G4-30 Reporting cycle

G4-31 Contact person for questions regarding the report

G4-32 Reporting level and GRI Index

G4-33 External audit

G4-34 Governance structure for the company

G4-56 The organisation’s values, codes of conduct etc.

AR, p. 2-3

AR, p. 4

AR, p. 14-23

AR, p. 13

AR, p. 12-13

AR, p. 4-5

AR, p. 8-15

AR, p. 1, 5, 12

GRI, p. 5

GRI, p. 5

AR, p. 11, 30-31, 49

AR, p. 1

GRI, p. 4

None

GRI, p. 5

GRI, p. 3

GRI, p. 3-4

GRI, p. 4

GRI, p. 3-4

GRI, p. 3-4

GRI, p. 2

GRI, p. 2

GRI, p. 3

GRI, p. 3

GRI, p. 3

GRI, p. 3

GRI, p. 2

GRI, p. 2

GRI, p. 2

GRI, p. 5

GRI, p. 2

GRI, p. 2

AR, p. 33-41

AR, p. 26-27

SUSTAINABILITY

HMS NETWORKS GRI APPENDIX 2016 3

SPECIFIC STANDARD DISCLOSURES REFERENCE

DMA Indirect economic impacts

G4-EC8 Significantindirecteconomicimpacts

DMA Energy

G4-EN3 Organisation’s energy consumption

G4-EN5 Energy intensity

DMA Emissions

G4-EN15 Direct greenhouse gas emissions

G4-EN16 Energy indirect greenhouse gas emissions

G4-EN17 Other indirect greenhouse gas emissions

G4-EN18 Greenhouse gas emissions intensity

DMA Effluentsandwaste

G4-EN23 Total weight of waste by type and disposal method

DMA Productsandservices

G4-EN27 Extent of mitigation environmental

impacts of products and services

DMA Customerprivacy

G4-PR8 Complaints regarding customer privacy

and customer data

DMA Trainingandeducation

G4-LA9 Average hours of training

G4-LA11 Performance reviews

DMA Anti-corruption

G4-SO4 Communication and training on anti-corruption

DMA Supplierhumanrightsassessment

G4-HR10 New suppliers that were screened using

human rights criteria

BOUNDARIES AND OMISSIONSAll our material sustainability aspects impact our business operations. Some of the aspects have an impact beyond HMS organisational boundaries, such as supplier assessment. In the sustainability report, the impact of each sustain-ability aspect, both within and outside the company are described. This is the firstyearofreportinginaccordancewithGRIandthesystemsformeasuringall indicators are not completely developed. Our aim is to include the data for G4-LA9 and G4-HR10 within the next three years.

STAKEHOLDER DIALOGUEIn 2016, HMS conducted a number of interviews and surveys with stakeholders. The aim was to identify the sustainability aspects that our customers, employees, investors and owners consider most important. The process started withafirstprioritizationofsustainabilityaspectsbyHMSCorporateManagementTeam.Theimportanceofthetopicswasthenconfirmedthroughdialogueswithstakeholders. HMS conducted an employee survey and in-depth interviews with owner representatives. We have continuous contact with all our stakeholders during the year and their inputs are valuable for HMS future development.

Regular contact and meetings.

Continuing dialogue, surveys

and performance reviews.

Continuing dialogue

and questionnaires.

Regular contact and

procurement requirements.

On site audits.

KEY STAKEHOLDERS FORUM FOR DIALOGUE KEY ISSUES AND CONCERNS

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

AR, p. 28-29

AR, p. 28-29

AR, p. 28-29

AR, p. 28 and GRI, p. 4

AR, p. 28

AR, p. 28-29 and GRI, p. 4




AR, p. 28


GRI, p. 4

AR, p. 28-29

AR, p. 28-29

AR, p. 30

AR, p. 30

AR, p. 26-27

GRI, p. 3

GRI, p. 5

AR, p. 30-31

AR, p. 30-31



Owners/investors

Employees

Customers

Suppliers

Risk management Transparency.

Environmental impact from prod-

ucts and services. Professional

development. Transports of

goodsandEnergyefficiency.

Supplier Human Rights follow-up.

Product compliance with

environmentalEUlaws.Conflict

Minerals Reporting. Transparency.

Clear expectations.

SUSTAINABILITY

4 HMS NETWORKS GRI APPENDIX 2016

MATERIALITY ANALYSISThe materiality analysis is based on HMS strategy and the stakeholder dialogue. Thematerialsustainabilityaspectsidentifiedareenvironmentalimpactsofprod-ucts and services, energy consumption, emissions, electronic waste, anti-cor-ruption, customer privacy, indirect economic impact, employee education and supplier assessment of human rights.

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

Recyclingofelectronicwaste 2016 2015 Electronic waste (ton) 2,14 1,82

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

Economic The increased productivity and indirect economic impacts from

the use of HMS products

Environmental Energy consumption, emissions, electronic waste and reduced

environmental impact

Social Employee education, supplier assessments, anti-corruption and

customer privacy

HMS MATERIAL SUSTAINABILITY ASPECTS

Scope 1 Fuel from travel in company vehicles

Scope 2 Electricity

District heating

District cooling

Scope 3 Transportation of materials or products

SCOPE ACTIVITY

The table present activities included in the calculation of HMS greenhouse gas emissions.

SUSTAINABILITY

HMS NETWORKS GRI APPENDIX 2016 5

MEMBERSHIPS IN ORGANIZATIONSHMS are members of a number of associations to create understanding and todriveinnovationandbusinessdevelopment.Themembershipsdefinedasstrategic are listed here.

• Association for High Technology Distribution

• CLPA - CC-Link Partner Association

• Control System Integrators Association

• ETG – EtherCAT Technology group

•ODVA(EmployeefromHMSholdsthepositionasChairmanandhasanofficerposition)

•PI-ProfibusInternational

• Rockwell Automation Global Encompass Partner

• Schneider Electric CAPP - Collaborative Automation Partner Program

• VDMA (organization of machine manufacturers and plant builders)

MEMBERSHIPS

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

Percentageemployeesreceivingperformancereviews 2016 Share of all employees 96%

CONTACTFor questions regarding our sustainability report, contact Katarina Lekander, Quality and Sustainability Manager, [email protected].

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

Number of permanent employees 495

- Full time 454

- Part time 41

Number of temporary employees 8

Totalnumberofemployees 503

TOTAL NUMBER OF EMPLOYEES 2016

Documents

ANNUAL REPORT 2016 - HMS Networks · Earnings per share, basic, SEK 8.63 +62% 5.33 Earnings per share, diluted, SEK 8.59 +62% 5.31 Cash flow from operating activities 155 +72% 90