2017 Contents Page REPORT OF THE BOARD OF DIRECTORS FINANCIAL STATEMENTS Consolidated financial statements General information and management of insider issues Consolidated statement of income Consolidated balance sheet Consolidated statement of cash flows Consolidated statement of changes in shareholders’ equity Accounting principles of the consolidated financial statements New and revised standards Financing risks – Critical accounting judgments of the management Notes to the consolidated financial statements Net sales Long-term projects Account receivables and receivables according to the percentage of completion Materials and services – Provisions Employee benefits Management’s employee benefits Other operating income and expenses Income taxes Deferred tax assets and liabilities Group goodwill Other intangible assets Research and development costs Property, plant and equipment Depreciation and amortization Inventories Current receivables and payables Exchange rate differences – Derivatives – Hedge accounting Risk management – Currency risks Equity Shares and share capital Earnings per share Financial liabilities Financial assets Liquidity risk – Covenants Financial income and expenses Pledged assets and contingent liabilities Segment information 2 3 9 10 11 12 13 14 15 16 17 18 19 21 22 23 24 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 45 46 47 48 Page Parent company’s financial statements, FAS Parent company’s income statement, FAS Parent company’s balance sheet, FAS Parent company’s cash flow statement, FAS Notes to the Parent company’s financial statements List of the Parent company’s common accounting document types, voucher groups and means of storaging 49 50 51 52 53 The Board of Directors’ proposal and the Auditor’s note 62 Auditor’s Report (Translation of the Finnish Original) 63 DEVELOPMENT OF GROUP RESULT AND KEY RATIOS Development of quarterly results Key ratios describing the Group’s financial development Calculcation of key ratios Share-related data 67 68 69 70 71 SHARES AND SHAREHOLDERS 72 Market capitalization and shareholders Distribution of ownership Largest shareholders 73 74 75 (English translation of Financial statements 2017) 61 Report of the Board of Directors The Group’s net sales for 2017 totaled EUR 148.6 million (MEUR 113.1), up by 31 percent from the previous year. The Group’s operating profit grew 35 percent from the previous year and stood at EUR 11.6 million positive (MEUR 8.6). The Group’s financial income and expenses totaled EUR 0.1 million negative (MEUR -0.3). The result before taxes was EUR 11.5 million positive (MEUR 8.2). Profit for the financial year was EUR 9.3 million (MEUR 6.7). Comprehensive income was EUR 9.2 million positive (MEUR 7.5). Undiluted earnings per share were EUR 2.20 (EUR 1.60) and diluted earnings per share were EUR 2.18 (EUR 1.59). Return on equity was 25.2 percent (20.9%). In this report, figures in parentheses refer to corresponding figures for the previous years 2016 and 2015. The calculation formulas for the key ratios and alternative performance measures (APM’s) in this report are presented on page 70 and the calculation formulas for the share-related key ratios on page 71. BUSINESS ENVIRONMENT Raute’s customers in the plywood and LVL (Laminated Veneer Lumber) industries are engaged in the manufacture of wood products used in investment projects and are thus highly affected by fluctuations in construction, housing-related consumption, international trade, and transportation. The situation in the global economy and the financial markets during 2017 did not change considerably with respect to Raute or Raute’s customer base. Positive development continued, however, in Raute’s key market areas. Although construction activity increased in many market areas, it remained at a fairly low level in all major market areas. Thanks to the continued brighter economic and market situation, investment activity among Raute’s customers improved and the unravelling of the built-up investment backlog began. Quotation activity for new-capacity projects and larger, project-type undertakings remained brisk throughout the year, and trade negotiations took place actively. Demand shifted from smaller projects and modernizations to projects encompassing individual machine lines. ORDER INTAKE AND ORDER BOOK Raute serves the wood products industry with a full-service concept based on service that encompasses the entire life cycle of the delivered equipment. Raute’s business consists of project deliveries and technology services. Project deliveries encompass projects from individual machine or production line deliveries to deliveries of all the machines and equipment belonging to a mill’s production process. Additionally, Raute’s full-service concept includes comprehensive technology services ranging from spare parts deliveries to regular maintenance and equipment modernizations, as well as consulting, training and reconditioned machinery. The order intake in 2017 was at a very strong level, amounting to EUR 155 million (MEUR 162). Of the new orders, 39 percent came from Europe (57%), 32 percent from Russia (27%), 23 percent from North America (11%), 5 percent from South America (2%), and 1 percent from Asia–Pacific (3%). Sometimes even strong fluctuations in the distribution of new orders between the various market areas are typical for project-focused business. The order intake for project deliveries stood at EUR 96 million (MEUR 118), which is 19 percent less than the previous year’s record level. The largest individual orders were for an LVL lay-up line in the USA valued at EUR 11 million that took effect at the end of July, and an order for main machinery for a plywood mill expansion in Russia that took effect in October and was valued at EUR 21 million. Order intake in technology services amounted to EUR 58 million (MEUR 4 4), 33 percent more than in the comparison year. Growth in modernizations stood at 51 percent and in other technology services 6 percent. At the end of 2017, the order book, EUR 110 million (MEUR 106), stood at a record-high level. Part of the order book is scheduled for 2019. COMPETITIVE POSITION Raute’s competitive position has remained unchanged and is strong. Raute’s solutions help customers in securing their delivery and service capabilities throughout the life cycle of the production process or a part thereof. In such investments, the supplier’s overall expertise and extensive and diverse technology and service offering play a key role. The competitive edge provided by Raute plays a major role when customers select their cooperation partners. Raute’s strong financial position and long-term dedication to serving selected customer industries also enhance its credibility and improve its competitive position as a company that carries out long-term investment projects. The Metriguard products acquired in April complement Raute’s product range. Metriguard’s equipment has been integrated into dozens of Raute’s deliveries over the years. The active installed equipment base extends from North and South America to Europe, Asia, Africa, Australia and New Zealand. NET SALES The Group’s net sales (IFRS) totaled EUR 148.6 million (2016: MEUR 113.1; 2015: MEUR 127.3). Net sales grew 31 percent on 2016. Growth in net sales is attributed to the good existing order book, the large number of orders received during the year, and the acquisition of the Metriguard business at the start of April. Net sales were generated by project deliveries related to the wood products technology business and by technology services. Net sales for project deliveries totaled EUR 99 million (MEUR 70), up 42 percent from the previous year. Project deliveries accounted for 67 percent (62%) of total net sales. The plywood industry’s share of the net sales of project deliveries was 83 percent (66%), while the LVL industry’s share was 17 percent (34%). At the end of 2017, the order book contained a total of six large millscale projects aimed at generating new capacity, in which Raute is the full-scope supplier. Of these projects, two are in the final approval stage, two are in the installation stage and two are in the production stage. Net sales for technology services totaled EUR 49 million (MEUR 43). Net sales grew 14 percent from the previous year, but its share of total net sales fell to 33 percent (38%), due to the strong growth in project deliveries. Growth was evenly distributed across the different product areas. Europe’s 2017 share of total net sales was 56 percent (60%), Russia’s 24 percent (17%), North America’s 14 percent (15%), South America’s 4 percent (3%), and Asia–Pacific’s 2 percent (5%). 17 percent (22%) of the Group’s net sales came from Finland. In 2017, net sales (FAS) of the parent company Raute Corporation totaled EUR 130.0 million (2016: MEUR 97.7; 2015: MEUR 112.4). RESULT AND PROFITABILITY In 2017, the Group’s operating profit (IFRS) totaled EUR 11.6 million positive (2016: MEUR 8.6; 2015: MEUR 8.1) and 7.8 percent of net sales (2016: 7.6%; 2015: 6.4%). Operating profit grew 35 percent due to net sales growth. 3 Report of the Board of Directors The Group’s financial income and expenses totaled EUR -0.1 million (MEUR -0.3). The Group’s profit before taxes was EUR 11.5 million positive (MEUR 8.2) and profit for the financial year was EUR 9.3 million positive (MEUR 6.7). The Group’s comprehensive income was EUR 9.2 million positive (MEUR 7.5). Undiluted earnings per share were EUR 2.20 (EUR 1.60) and diluted earnings per share were EUR 2.18 (EUR 1.59). Return on investment was 30.4 percent (25.3%) and return on equity 25.2 percent (20.9%). The operating profit (FAS) of the parent company Raute Corporation was EUR 11.7 million positive (2016: MEUR 8.8; 2015: MEUR 8.3). The operating profit amounted to 9.0 percent of net sales (2016: 9.1%; 2015: 7.3%). The profit for the financial year (FAS) was EUR 9.2 million positive (MEUR 8.7 positive). The profit for the financial year includes a return of EUR 4.4 million (MEUR 2.8) of impairment on loan receivables from subsidiaries, as well as impairments on investments in foreign subsidiaries of EUR 5.2 million (MEUR 1.4). CASH FLOW AND BALANCE SHEET The Group’s financial position remained strong throughout the year. At the end of the financial year, the Group’s cash and cash equivalents exceeded interest-bearing liabilities by EUR 29.3 million (MEUR 20.6). At the end of the financial year, gearing was -74 percent (2016: -60%; 2015: -17%) and the equity ratio was 64 percent (2016: 60%; 2015: 59%). The Group’s cash and cash equivalents amounted to EUR 30.7 million (MEUR 23.8) at the end of 2017. The change in cash and cash equivalents in the financial year was EUR 6.9 million positive (MEUR 17.2 positive). Operating cash flow was EUR 18.4 million positive (MEUR 21.2 positive). Cash flow from investment activities was EUR 5.8 million negative (MEUR 2.9 negative), including the cash consideration of EUR 2.9 million on the purchase price and costs of EUR 0.5 million related to the acquisition of the Metriguard business. Cash flow from financing activities was EUR 5.7 million negative (MEUR 1.2 negative), including dividend payments of EUR 4.2 million and EUR 0.2 million in rights issues. The Group’s balance sheet total at the end of 2017 stood at EUR 86.9 million (2016: MEUR 69.8; 2015: MEUR 61.8). 4 Interest-bearing liabilities amounted to EUR 1.4 million (MEUR 3.1) at the end of 2017. The parent company Raute Corporation has a EUR 10 million commercial paper program, which allows the company to issue commercial papers maturing in less than one year. The parent company Raute Corporation is prepared for future working capital needs and has long-term credit facility agreements with three Nordic banks totaling EUR 23.0 million. The main covenants of the credit facilities are an equity ratio of >30% and gearing of <100%. Of the credit facilities, EUR 32.7 million remained unused at the end of the financial year. At the end of the financial year, the equity ratio (FAS) of the parent company Raute Corporation was 64 percent (2016: 59%; 2015: 52%). LOANS TO RELATED PARTIES AND OTHER LIABILITIES Other liabilities are presented in the notes to the financial statements. RESEARCH AND DEVELOPMENT Raute is a leading technology supplier for the plywood and LVL industries and focuses strongly on the development of increasingly efficient, productive, safe and environmentally friendly manufacturing technology and supporting measurement and machine vision applications. Opportunities provided by digitalization are also an essential part of R&D activities. In 2017, the Group’s research and development costs totaled EUR 3.2 million (2016: MEUR 2.9; 2015: MEUR 3.1) and 2.2 percent of net sales (2016: 2.5%;2015: 2.4%). The most significant product development project in machine technology in 2017 was the renewal of a veneer dryer. The application area of the green veneer composing line that was launched in 2016 was expanded to include 8’-wide softwood. Suitable pilot customers are currently being sought for both above-mentioned projects. In order to expand the solutions of the SmartMill concept, which optimizes the customer’s production process, development work on machine vision and grading solutions, as well as on new digital products, was continued. During the financial year, the research and development costs (FAS) of the parent company Raute Corporation were EUR 3.2 million, representing 2.4 percent of net sales (2016: MEUR 2.9/3.0% of net sales; 2015: MEUR 3.1/2.8% of net sales). INVESTMENTS The Group’s investments in 2017 totaled EUR 7.0 million (2016: MEUR 3.2; 2015: MEUR 2.5). The acquisition of the Metriguard business accounted for EUR 3.4 million of the Group’s capital expenditure, including an estimate of the earn-out share to be paid in 2018. The investments include EUR 0.1 million in capitalized development costs (2016: MEUR 0.0; 2015: MEUR 0.2). Other investments were related to various replacement and improvement projects targeted at production, premises and IT systems, and to testing equipment manufactured for the needs of product development. The investments of the parent company Raute Corporation totaled EUR 4.4 million (2016: MEUR 2.9; 2015: MEUR 2.2). DEVELOPMENT OF OPERATIONS In 2017, strategic development projects focused on improving competitiveness, delivery capabilities, and the service business. The Group’s main unit in Nastola introduced the LEAN method in production. Use of the LEAN method as a development tool will be expanded to other main processes in 2018. HUMAN RESOURCES The Group’s headcount at the end of 2017 was 704 (643). Finnish Group companies accounted for 68 percent (72%) of employees, North American companies for 17 percent (13%), Chinese companies for 11 percent (12%), and other sales and maintenance companies for 4 percent (4%). Converted to full-time employees (“effective headcount”), the average number of employees during the financial year was 660 (2016: 631; 2015: 614). Salaries and remunerations paid by the Group totaled EUR 33.6 million (2016: MEUR 30.1; 2015: MEUR 28.1). This figure does not include expenses resulting from the stock option and share incentive plans. The Group continued to develop the competence of its personnel and increase their commitment to the company. 3 percent (3%) of the pay- Report of the Board of Directors roll was invested in personnel training. Personnel development in 2017 focused on selected training programs, including Raute Leader, Service Excellence and Site Operations programs. Targeted competence-development activities were implemented through, among other things, a systematic mentor program. Additionally, a business sustainability development program was initiated. The Raute Academy and Mill Academy online learning systems were introduced as a means of promoting both personnel’s training and training directed at customers. Converted to full-time employees, the average number of personnel employed by the parent company Raute Corporation in 2017 was 461 (2016: 441; 2015: 417). Salaries and remunerations paid by the parent company totaled EUR 24.8 million (2016: MEUR 22.9; 2015: MEUR 20.8). REMUNERATION The Group has remuneration systems in place that cover the entire personnel. SHARE-BASED INCENTIVE PLANS A total of EUR 595 thousand (EUR 46 thousand) has been recognized as an expense for the share-based incentive plans. At the end of the financial year, EUR 240 thousand (EUR 129 thousand) from the share plans was allocated to the invested non-restricted equity reserve. Share-based incentive plan 2014–2018 The Group has a long-term share-based incentive plan for the Group’s senior management for the years 2014 to 2018 based on performance. The plan has two valid share plans, which began in 2015 and 2016. In both plans, a year-long earnings period is followed by a two-year vesting period. The earnings criteria were the financial year’s earnings per share and growth in net sales. The plan beginning in 2015 covers altogether 11 persons belonging to the Group’s senior management. The Board of Directors confirmed the amounts of the personal bonuses to be paid for the 2015 earnings period on March 2, 2016. The bonus of altogether EUR 614 thousand was paid out on March 6, 2017. The proportion paid in shares consisted of a total of 14,523 of the company’s A shares. The vesting period will end at the beginning of 2018. The plan beginning in 2016 covers altogether 12 persons belonging to the Group’s senior management. The Board of Directors confirmed the amounts of the personal bonuses to be paid for the 2016 earnings period on March 2, 2017; the proportion to be paid in shares is altogether 8,913 series A shares. No shares or cash were issued under the plan. The vesting period will end at the beginning of 2019. Share-based incentive plan 2017–2022 In February 2017, the Board of Directors of Raute Corporation resolved to implement a new performance-based, share-value-based, longterm incentive plan for the Group’s senior management. The purpose of the plan is to align the objectives of the owners and management in order to develop the company’s value, and to commit management to achieving the company’s strategic goals by offering a competitive long-term incentive plan. The Performance Share Plan is made up of three three-year plans that begin every year. A single plan may consist of either a three-year earnings period or a one-year earnings period and the subsequent twoyear vesting period. The possible bonus earned by virtue of a single plan shall be paid at the end of the three-year plan in question. Any potential bonus will be paid either in Raute’s listed A shares or in cash. The company’s Board of Directors decides separately on when each plan commences, the length of its earnings period, the performance targets, the persons entitled to participate in the plan and the earnings potential. LTI Plan 2017–2019 commenced at the start of 2017. The plan consists of a one-year earnings period and the subsequent two-year vesting period. The bonuses will be paid in spring 2020. The plan covers 12 persons belonging to the Group’s senior management. The performance targets are earnings per share (EPS) and growth in net sales. The earnings opportunity is limited such that the value of the bonus, at the time of payment, to be paid to a participant based on a single three-year plan can be no more than double the value of the maximum earnings opportunity allocated to him/her when the plan commenced. SOCIETY AND THE ENVIRONMENT Responsibility is one of the values that guide Raute’s operations. Raute aims to systematically develop its products and services to be environ- mentally sound while also reducing the environmental impacts of its own operations. The Group abides by the principles of good corporate citizenship, taking into consideration nature and its protection, and how society as a whole operates, while respecting local cultures and valuing diversity. Raute’s Board of Directors has presented to the company the Code of Conduct which guides the personnel to act responsibly in accordance with Raute’s values. Raute delivers technology for the wood products industry, which uses renewable raw materials. Most of the products manufactured using Raute’s machinery have a long life, and the carbon stored in wood products has a positive impact on the achievement of climate targets. An increase in the use of sustainably produced wood, for example, in construction is among the most important means of achieving climate targets. Raute’s product development focuses on improving the resource efficiency of the machinery in order to reduce the overall environmental impacts of the production chain. Raute’s machinery typically has a very long life, and the majority of emissions arise during the operational phase of the machines. Raute focuses particularly on developing the occupational safety of its products. In Raute’s own operations, environmental matters and occupational safety are managed according to the principles of continuous improvement. The main production unit in Nastola is certified according to the ISO 14001 (environmental management system) and ISO 9001 (quality management system) standards. The operations and ethical principles of the partner and subcontractor network are also subjected to systematic inspection. Raute aims to continuously improve occupational safety, reduce energy consumption, decrease the volume of waste, and develop the working environment. RISKS AND RISK MANAGEMENT The Group’s identified key risk areas relate to the nature of the business, the business environment, financing, damage or loss and information security. The fluctuations in demand resulting from economic cycles and delivery and technology risks have been identified as the Group’s most significant business risks. 5 Report of the Board of Directors Risks in the near term continue to be driven by the uncertainty relating to the global economic situation and the development of the financial markets, as well as by international political instability. The most significant risks for Raute in the near term are related to the very high order book, and especially to the major mill-scale projects that are in the implementation phase, in accordance with the schedule determined in the contract terms, and the sufficiency and availability of skilled resources. company’s ISO-certified quality system. Technology risks are reduced by the conditions of delivery contracts and by restricting the number of simultaneous first deliveries. The Group has no ongoing legal proceedings or other disputes in progress that might materially affect the continuity of business operations, nor is the Board of Directors aware of any other legal risks related to the Group’s operations that might have such an effect. The company’s reputation Raute is at risk of being part of a business chain that involves corruption, bribery or money laundering without its knowledge. The realization of these risks may result in legal consequences, and the company’s reputation and financial position may suffer. Business risks Impact of economic cycles on business operations Raute’s business operations are characterized by the sensitivity of investment demand to fluctuations in the global economy and the financing markets, and the cyclical nature of project business. The impact of changes in demand on the Group’s result is reduced by increasing the share of technology services, increasing operations in market areas with a small current market share, developing products for customer segments in which the Group has a weaker market position, and developing the partner network. Deliveries and technology The bulk of Raute’s business operations consists of project deliveries, which expose the company to risks caused by customer-specific solutions related to each customer’s end product, production methods or raw materials. At the quotation and negotiation phase, the company has to take risks relating to the promised performance figures and make estimates of implementation costs. Raute invests heavily in product development. The developmental phase for new technologies involves the risk that the project will not lead to a technologically or commercially acceptable solution. The functionality and capacity of new solutions produced as a result of development work cannot be fully verified until the solutions can be tested under production conditions in conjunction with the first customer deliveries. Contract, product liability, implementation, cost and capacity risks are managed using project management procedures that comply with the 6 Emerging markets Raute’s objective is to increase its local business, for example, in China and Russia, where, besides opportunities, companies face risks typical to emerging markets. It is possible that players who do not respect Raute’s principles related to human rights or the basic rights of employees operate in the international supply chain. Such cases may damage the company’s reputation and interrupt the supply chain if the infraction is severe enough to warrant an end to the co-operation. Payment fraud Raute is repeatedly exposed to the risk of payment fraud. The company faces the risk of a fraud attempt bypassing the payment transaction control points and damaging the company financially. Data security Information security risks are managed according to a defined information security policy. Human resources Competence retention and development and good management of the sufficiency of human resources are particularly important in cyclical business. Continuity is ensured by monitoring the development of the age structure, implementing systematic human resources management and investing in well-being at work. Financing risks The most significant financing risks in the Group’s international business operations are default risks and currency risks related to counterparties. The Group is also exposed to liquidity, refinancing, interest rate and price risks. The default risk relating to customers’ solvency is managed through payment terms and by covering the unpaid sum with bank guarantees, letters of credit or other suitable securities. The Group’s liquid assets are mainly held in banks in the Nordic countries. The credit losses recognized during the 2017 financial year amounted to EUR 3 thousand (EUR 168 thousand). The Group’s main currency is the euro. The most significant currency risks result from the following currencies: Chinese yuan (CNY), Russian ruble (RUB), Canadian dollar (CAD) and US dollar (USD). The main hedging instruments used are foreign currency forward contracts. Currency clauses are included in quotations to hedge against currency risks during the quotation period. Depending on the case, currency risks related to preliminary sales contracts are hedged with currency option contracts. The Group has prepared for fluctuating working capital requirements and possible disturbances in the availability of money through longterm credit facility agreements with three Nordic banks. The financing risks, as well as the risk management objectives and procedures, are described in more detail on page 17 of the notes to the financial statements. Risks of damage or loss Raute’s most significant single risks concerning material damage and business interruption loss are a fire, a serious machine breakdown and an IT system breakdown or malfunction at the Nastola main production unit, where the production, planning, financial, and ERP systems serving the Group’s key technologies are centrally located. Precautions against such risks have been taken by means of back-up systems and insurance policies, but the serious realization of such a risk would cause significant damage to Raute’s operations. Other risks of damage or loss include occupational safety risks, which are managed by means of active risk-prevention measures, such as continuous personnel training and investigation of all near-miss situations. Occupational safety and ergonomics are under continuous development. Raute’s production operations do not have significant direct environmental impacts. The main production unit in Nastola is situated in a Report of the Board of Directors groundwater zone. A chemical or fuel leak in a groundwater zone could cause environmental damage, financial costs and disturbances in production. The Nastola main unit has an ISO-certified environmental system in place, and special attention has been paid to chemical safety. Other units also aim to adhere to the principles of the environmental system. The Group hedges against risks of damage or loss by assessing its facilities and processes in terms of risk management and by maintaining emergency plans. Global and local insurance programs are checked regularly as part of overall risk management. The objective is to use insurance policies to sufficiently hedge against all risks that are reasonable to handle through insurance due to economical or other reasons. Organization of risk management Raute’s risk management policy is approved by the Board of Directors. The Board is responsible for organizing internal control and risk management, and for monitoring their efficiency. The Executive Team defines the Group’s general risk management principles and operating policies and defines the boundaries of the organization’s powers. The President and CEO and the CFO regularly report significant risks to the Board. The Group’s President and CEO controls the implementation of the risk management principles in the entire Group, while the Presidents of the Group companies are responsible for risk management in their respective companies. The members of the Group’s Executive Board are responsible for their own areas of responsibility across company boundaries. Raute has no separate internal auditing organization. The Controller function oversees the annual internal control plan, develops internal control and risk management procedures together with the operative leadership, and monitors compliance with risk management principles, operational policies and powers. SHAREHOLDERS The number of shareholders totaled 3,625 at the beginning of the year and 4,797 at the end of the financial year. Series K shares were held by 55 private individuals (50) at the end of the financial year. Nominee-registered shares accounted for 4.0 percent (2.1%) of shares. The company did not receive any flagging notifications in 2017. The Board of Directors, the President and CEO as well as the Executive Board held altogether 253,893 company shares, equaling 6.0 percent (5.9%) of the company shares and 11.6 percent (11.2%) of the votes on December 31, 2017. The distribution of ownership by sector and by size as well as the largest shareholders are presented in the financial statements under “Shares and shareholders”. AUDITORS At Raute Corporation’s Annual General Meeting on March 28, 2017, the authorized public accounting company PricewaterhouseCoopers was chosen as auditor with Authorized Public Accountant Markku Launis as the principal auditor. CORPORATE GOVERNANCE Raute Corporation complies with the Finnish Corporate Governance Code 2015 for listed companies issued by the Securities Market Association on October 1, 2015. CORPORATE GOVERNANCE STATEMENT Raute Corporation’s Board of Directors has reviewed Raute Corporation’s Corporate Governance Statement for 2017 according to chapter 7, section 7 of the Finnish Securities Markets Act and the Finnish Corporate Governance Code 2015 for listed companies issued by the Securities Market Association on October 1, 2015. The statement has been drawn up separately from the Report of the Board of Directors. NON-FINANCIAL STATEMENT Raute Corporation’s Board of Directors has addressed Raute Corporation’s non-financial statement for 2017 (in accordance with Directive 2014/95/EU of the European Parliament and Council) as a statement separate from the Report of the Board of Directors. BOARD OF DIRECTORS AND PRESIDENT AND CEO The Annual General Meeting elects the Chairman and Vice-Chairman for the Board of Directors, and 3–5 Board members. At the Annual General Meeting held on March 28, 2017, Mr. Erkki Pehu–Lehtonen was elected Chairman of the Board of Raute Corporation, Mr. Mika Mustakallio Vice-Chair, and Mr. Joni Bask, Ms. Laura Raitio, Mr. Pekka Suominen, and Mr. Patrick von Essen were elected as Board members. The Board of Directors appoints the President and CEO and confirms the terms of his or her employment, including fringe benefits. Mr. Tapani Kiiski, Licentiate in Technology, continued as Raute Corporation’s President and CEO. He was appointed as Raute Corporation’s President and CEO on March 16, 2004. As agreed in the executive contract, the term of notice is six months, and the severance pay equals twelve months’ salary. Raute Corporation’s Articles of Association do not grant any unusual authorizations to the Board of Directors, or to the President and CEO. Any decisions on changes to the Articles of Association or an increase in share capital are made in compliance with the regulations of the effective Companies Act. EXECUTIVE BOARD Raute Group’s Executive Board and the members’ areas of responsibility are: Tapani Kiiski, President and CEO, Chairman – Sales Arja Hakala, Group Vice President, Finance, CFO – Finance and administration Marko Hjelt, Group Vice President, Human Resources – Human resources and competence development Mika Hyysti, Group Vice President, Technology – Technology, products and R&D Timo Kangas, Group Vice President, EMEA – Market area EMEA Antti Laulainen, Group Vice President, Technology Services and Sales Management – Technology services and sales management Petri Strengell, Group Vice President, Supply Chain – Sourcing and production. SHARES During 2017, a total of 33,873 new series A shares (80,231 shares) were subscribed for under the 2010 series B and 2010 series C stock option rights. 7 Report of the Board of Directors The number of Raute Corporation’s shares at the end of 2017 to taled 4,249,248 (4,206,462), of which 991,161 (991,161) were series K shares (ordinary share, 20 votes/share) and 3,258,087 (3,215,301) series A shares (1 vote/share). Series K and A shares confer equal rights to dividends and company assets. RAUTE CORPORATION’S 2010 A, 2010 B AND 2010 C STOCK OPTIONS In 2017, altogether 16,449 series A shares were subscribed for with Raute’s series B 2010 stock options and 17,424 with series C stock options. BOARD OF DIRECTORS’ PROPOSAL CONCERNING THE USE OF PROFIT AND PAYMENT OF DIVIDEND On December 31, 2017, the parent company’s distributable assets totaled EUR 29,525 thousand, of which EUR 9,162 thousand represents the profit for the financial year 2017. Series K shares can be converted to series A shares under the terms set out in section 3 of the Articles of Association. If an ordinary share is transferred to a new owner who has not previously held series K shares, the new owner must notify the Board of Directors of this in writing and without delay. In this kind of situation other holders of series K shares have the right to redeem the series K share under the terms specified in Article 4 of the Articles of Association. Raute Corporation’s series C 2010 stock options are listed on Nasdaq Helsinki Ltd under the trading code RAUTEEW310. The subscription period for series C stock options ends on March 31, 2018. The subscription period for series A stock options ended on March 31, 2016 and for series B stock options on March 31, 2017. The Board of Directors will propose to Raute Corporation’s Annual General Meeting, to be held on March 22, 2018, that a dividend of EUR 1.25 per share be paid to holders of series A and K shares for the financial year 2017, and that the remainder of distributable assets be transferred to equity. At the end of 2017, altogether 13,446 series C stock options had not been exercised. The subscription price for series C stock options was EUR 5.00 at the end of the year, and the closing price was EUR 20.50. On the date of the profit distribution proposal, the number of shares entitling to a dividend is 4,249,248 shares, which would amount to total dividends of EUR 5,312 thousand. Shareholders who are registered in the shareholders’ register maintained by Euroclear Finland Ltd on the record date for dividend payment, March 26, 2018, are entitled to dividends. The dividend payment date would be April 4, 2018. Raute Corporation’s series A shares are listed on Nasdaq Helsinki Ltd. The trading code is RAUTE. In 2017, 845,672 shares were traded (987,608) worth altogether EUR 19.2 million (MEUR 14.3). The number of shares traded represents 26 percent (31%) of all listed series A shares. The average price of a series A share was EUR 22.70 (EUR 14.50). The highest closing price of the year was EUR 30.52 and the lowest EUR 16.84. The company’s market capitalization at the end of 2017 totaled EUR 123.2 million (MEUR 70.2), with series K shares valued at the closing price of series A shares, EUR 29.00 (EUR 16.70), on the last listing day December 29, 2017. Raute Corporation has signed a market making agreement with Nordea Bank Ab (publ) in compliance with the Liquidity Providing (LP) requirements issued by Nasdaq Helsinki Ltd. On September 25, 2017, the company resolved on the issuance of new shares to the company itself without consideration so that, in spring 2018, it will have own shares held by the company available for the payment of the share rewards payable based on the company’s share incentive plan 2016–2018. The 8,913 new series A shares were entered in the Trade Register on October 17, 2017 and admitted to public trading on October 18, 2017. 8 DISTRIBUTION OF PROFIT FOR THE 2016 FINANCIAL YEAR The Annual General Meeting held on March 28, 2017 decided to pay a dividend of EUR 1.00 per share for the financial year 2016. The total amount of dividends is EUR 4.2 million, with series A shares accounting for EUR 3,228,550.00 and series K shares for EUR 991,161.00. The dividend payment date was April 6, 2017. AUTHORIZATION OF REPURCHASE AND DISPOSAL OF OWN SHARES The Annual General Meeting held on March 28, 2017 authorized the company’s Board of Directors to decide on the repurchase of Raute Corporation series A shares with assets from the company’s non-restricted equity and to decide on a directed issue of a maximum of 400,000 shares. On September 25, 2017, Raute Corporation’s Board of Directors resolved on the issuance of 8,913 new series A shares to the company itself without consideration, in accordance with Chapter 9, section 20 of the Companies Act. At the end of the financial year, the company controlled 8,913 of its own shares. ANNUAL GENERAL MEETING 2018 Raute Corporation’s Annual General Meeting will be held in Lahti on Thursday, March 22, 2018. No essential changes have taken place in the company’s financial position since the end of the financial year. The company has good liquidity, and in the Board of Directors’ view, the proposed dividend does not pose a risk to solvency. OUTLOOK FOR 2018 For 2018, due to the record-high order book and sustained brisk demand, we estimate that both Raute’s net sales and operating profit will remain at the record high level of the preceding year. Consolidated Financial Statements 2017 RAUTE CORPORATION Consolidated Financial Statements January 1 – December 31, 2017 Raute Corporation’s consolidated financial statements for January 1–December 31, 2017 have been prepared in accordance with the Internatio nal Financial Reporting Standards (IFRS) and the interpretations released accepted for application in the EU. Preparations have complied with the IAS and IFRS standards, as well as SIC and IFRIC interpretations, effective on December 31, 2017. The notes to the consolidated financial statements also comply with Finnish accounting legislation. Raute’s virtual character Patchman represents the world’s most advanced plywood manufacturing technology with an intelligent combination of the latest machine vision and mechanical tools. Patchman is named after Raute’s first automatic veneer patching line. 9 General information and Management of insider issues General information Adoption of the Consolidated Financial Statements These consolidated financial statements for the period between January 1 and December 31, 2017 were authorized for issue by Raute Corporation’s Board of Directors at its meeting on February 15, 2018. According to the Finnish Companies Act, shareholders may approve or reject the financial statements at the Annual General Meeting arranged after the statements have been issued. The Annual General Meeting also has the opportunity to make changes to the financial statements. Business and operational segments Raute Group (“the Group”) is a globally operating technology and service company serving the wood products industry, with the core competence in selected wood products manufacturing processes. Raute’s customers are companies operating in the wood products industry that manufacture veneer, plywood, LVL and sawn timber. Raute’s full-service concept is based on product life-cycle manage ment and include project deliveries and technology services. Raute’s technology offering covers machinery and equipment for the customer’s entire production process. In addition to a broad range of machines and equipment, Raute’s solutions cover technology services ranging from spare parts deliveries to regular maintenance and equipment modernizations. The operations of Raute Group belong to the wood products tech nology segment. Raute Corporation’s Board of Directors is the chief operating decision maker that is responsible for assigning resources to the operating segment and assessing its result. The Board monitors profitability through the key figure Operating profit. Raute’s head office is located in Lahti (previously the municipality of Nastola), Finland. Its other production plants are in Kajaani, in the Vancouver area in Canada, in the Shanghai area in China, and in Pullman, Washington, USA. The company’s sales network has a global reach. Parent company Raute Group’s Parent company, Raute Corporation, is a Finnish pub lic limited liability company established in accordance with Finnish law (Business ID FI01490726). Its series A shares are quoted on Nasdaq Helsinki Ltd, under Industrials. Raute Corporation is domiciled in Lahti. The address of its registered office is Rautetie 2, FI–15550 Nastola, and its postal address is P.O. Box 69, FI–15551 Nastola. 10 Insider management Raute Corporation follows the Guidelines for Insiders issued by Nasdaq Helsinki Ltd, the Central Chamber of Commerce, and the Confederation of Finnish Industries EK. In addition, the company applies separate insider instructions approved by the Board of Directors. The Chief Financial Officer is in charge of insider issues in the company. Raute maintains a list of persons working in the management functions and the persons in their immediate circles (so-called management un der notification obligation). These persons are obliged to notify Raute and the Financial Supervisory Authority about all transactions made on their account using financial instruments of Raute Corporation. Raute’s management under notification obligation includes the Board of Directors, President and CEO and Chief Financial Officer. Raute maintains a Confidential Information Recipient (CIR) list of employees and other persons who have continuous access to the company’s undisclosed financial information. The individuals in the CIR group are committed to abiding by the company’s closed period. The CIR list is not public. In addition to what is mentioned above, the company maintains a list of projects. A project means an identifiable set of measures or an arrange ment that is to be confidentially prepared by Raute, which is, according to Raute, insider information and whose publication Raute has decided to delay. The insider trading prohibition of persons under notification obligation and in the CIR group begins at the end of the reporting period, however at least 30 days before the publication of an interim report or financial statements and ends two hours after the publication of a corresponding stock exchange release. The company avoids investor communication meetings during the closed period. Raute has an internal procedure through which persons employed by the company may report within the company a suspected abuse of regulations and provisions concerning the financial market (whistle blowing). Preparation of consolidated financial statements Raute Corporation’s consolidated financial statements for January 1 – December 31, 2017 have been prepared in accordance with the International Financial Reporting Standards, IFRS, accepted for application in the European Union. Preparations have complied with the IAS and IFRS standards, as well as SIC and IFRIC interpretations, effective on December 31, 2017. All figures are presented in thousand euro, unless otherwise stated. Due to the rounding of the figures in the financial statements tables, the sums of figures may deviate from the sum total presented in the table. Figures in parentheses refer to the corresponding figures in the comparison period. Raute Corporation’s consolidated financial statement information is available online at www.raute.com or at the head office of the Parent company, Rautetie 2, FI–15550 Nastola, Finland. Consolidated statement of income Financial Statements 2017 / Group CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF INCOME 1.1.–31.12.2017 1.1.–31.12.2016 148 615 113 130 1 905 150 96 Materials and services -80 721 -54 849 Employee benefits expense -41 036 -36 606 -2 633 -2 340 1.1.–31.12.2017 1.1.–31.12.2016 9 300 6 684 - - Changes in the fair value of available-for-sale investments 193 259 Hedge accounting -31 66 -183 534 1 103 EUR 1,000 NET SALES Change in inventories of finished goods and work in progress EUR 1,000 PROFIT FOR THE FINANCIAL YEAR Other comprehensive income items: Items that will not be reclassified to profit or loss Other operating income Items that may be subsequently reclassified to profit or loss Depreciation Other operating expenses Total operating expenses OPERATING PROFIT -14 653 -12 030 -139 042 -105 825 11 573 8 558 359 123 -411 -461 -51 -338 PROFIT BEFORE TAX 11 522 8 220 Income taxes -2 222 -1 536 9 300 6 684 9 300 6 684 Undiluted earnings per share 2,20 1,60 Diluted earnings per share 2,18 Exchange differences on translating foreign operations Income taxes related to these items -32 -60 Comprehensive income items for the period, net of tax -52 799 9 250 7 483 9 250 7 483 COMPREHENSIVE PROFIT FOR THE FINANCIAL YEAR 1,59 Financial income Financial expenses Financial expenses, net PROFIT FOR THE FINANCIAL YEAR Profit for the financial year attributable to Equity holders of the Parent company Comprehensive profit for the financial year attributable to Equity holders of the Parent company Basis of preparation The Board of Directors monitors profitability through the key figure Operating profit. The Group has defined operating profit as follows: Operating profit is the net sum calculated by adding other operating income to net sales; deducting purchase expenses that have been adjusted by changes in inventories of finished goods and work in progress and by expenses from production for own use; and by deducting expenses from employee benefits, depreciation, amortization and possible impairment losses, as well as other operating expenses. All other income statement items are presented under operating profit before the profit for the financial year. Earnings per share for profit attributable to Equity holders of the Parent company, EUR MEUR 160 Net sales development Operating profit development MEUR 12 140 10 120 Shares, 1 000 pcs Adjusted average number of shares 4 225 Adjusted average number of shares diluted 4 259 100 4 210 8 80 4 167 6 60 4 40 2 20 0 2013 2014 2015 2016 2017 0 2013 2014 2015 2016 2017 11 Consolidated balance sheet CONSOLIDATED BALANCE SHEET CONSOLIDATED BALANCE SHEET 31.12.2017 EUR 1,000 31.12.2016 31.12.2017 EUR 1,000 ASSETS EQUITY AND LIABILITIES Non-current assets 31.12.2016 Equity attributable to Equity holders of the Parent company Goodwill 1 035 - Share capital 8 256 8 256 Other intangible assets 2 548 1 353 Fair value reserve and other reserves 7 156 6 577 Property, plant and equipment 9 948 9 580 Exchange differences 923 748 Retained earnings Profit for the financial year Other financial assets 659 842 14 321 11 859 167 11 848 Inventories 10 861 9 674 Accounts receivables and other receivables 30 363 24 435 45 40 Cash and cash equivalents 30 724 71 992 57 918 TOTAL ASSETS 86 857 69 767 6 684 34 217 Provisions 707 462 Deferred tax liability 166 192 Total non-current liabilities 874 653 1 378 1 156 Current interest-bearing liabilities 1 413 3 136 25 188 13 069 23 769 Total current assets 9 300 39 694 Provisions 410 14 865 Deferred tax assets Total non-current assets Total equity Non-current liabilities Current assets Income tax receivable Current liabilities Current advance payments received 829 1 131 Trade payables and other liabilities 17 481 16 404 Total current liabilities 46 290 34 896 Total liabilities 47 163 35 549 TOTAL EQUITY AND LIABILITIES 86 857 69 767 Income tax liability Return on investment, ROI Return on equity, ROE Gearing Equity ratio 35% -20% 20% 50% -30% 15% 40% -40% 30% -50% 10% 20% -60% 5% 5% 10% -70% 0% 12 60% 10% 2017 -10% 25% 15% 2016 70% 20% 2015 0% 30% 25% 2014 80% 30% 2013 35% 0% 0% 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 -80% 2013 2014 2015 2016 2017 Consolidated statement of cash flows Financial Statements 2017 / Group CONSOLIDATED STATEMENT OF CASH FLOWS EUR 1,000 1.1.–31.12.2017 1.1.–31.12.2016 Non-cash transactions in operating activities CASH FLOW FROM OPERATING ACTIVITIES Proceeds from customers Other operating income Payments to suppliers and employees Cash flow before financial items and taxes Interest paid from operating activities Dividends received from operating activities Interest received from operating activities Other financing items from operating activities 167 370 123 974 50 1 103 -145 131 -103 221 22 289 21 856 -277 -111 120 114 7 3 -298 2017 Exchange rate differences Derivatives -227 -8 Employee benefits -2 340 -280 Depreciation and amortization 2016 -2 633 EUR 1,000 162 -36 TOTAL -66 68 259 -2 890 Profit or loss from change in fair value of financial assets through profit or loss -2 212 -251 Income taxes paid from operating activities -3 408 -374 Net cash flow from operating activities (A) 18 432 21 237 CASH FLOW FROM INVESTING ACTIVITIES Purchase of property, plant and equipment and intangible assets -2 874 -3 019 Business transaction -3 193 - Proceeds from sale of property, plant and equipment and intangible assets 117 Proceeds from sale of investments 182 - -5 768 -2 925 207 528 Net cash flow from investing activities (B) 94 CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issue of share capital Proceeds from current borrowings 4 413 6 410 Repayments of current borrowings -6 136 -4 794 Dividends paid -4 220 -3 303 Net cash flow from financing activities (C) -5 736 -1 158 6 928 17 154 Net change in cash and cash equivalents (A+B+C) increase (+)/decrease (-) Basis of preparation The cash flow statement has been generated using the direct method. The cash flow from operating activities includes proceeds from customers, other operating income as well as payments of supplies and services acquired. Cash flow from operating activities also includes payments to employees as well as interest paid and interest received from financial assets held for cash management. The cash flow from operating activities does not include accounts payable related to the investments. Cash flow from financing activities includes the share capital changes in cash, dividends paid to shareholders during the period as well as pro ceeds and repayments of loans. Cash and cash equivalents comprises cash and cash equivalents which will be due within the following three months’ period. Foreign Group companies’ cash flow state ments have been converted into euros according to the weighted average exchange rate of the financial year. Cash flow from investing activities includes the purchase of intangible and tangible assets and expenses of other activated assets. The item also includes proceeds from sale of these assets on accrual basis. MEUR Cash flow fom operating activities 25 Cash and cash equivalents at the beginning of the period Net change in cash and cash equivalents Effects of exchange rate changes on cash Cash and cash equivalents at the end of the period 23 769 6 538 6 928 17 154 20 27 77 15 30 724 23 769 10 5 0 -5 2013 2014 2015 2016 2017 13 Consolidated statement of changes in shareholders’ equity CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY To the equity holders of Retained the Parent earnings company Share capital Invested non-restricted equity reserve 8 256 5 445 1 132 842 18 543 34 217 34 217 - - - - 9 300 9 300 9 300 - - 193 - - 193 193 - - -31 - - -31 -31 - - - -183 - -183 -183 - - -32 - - -32 -32 - - 131 -183 9 300 9 250 9 250 Share-options exercised - 207 - - - 207 207 Equity-settled share-based transactions Dividends Total transactions with owners EQUITY at Dec. 31, 2017 - - 240 - - 240 240 - - - - -4 220 -4 220 -4 220 EUR 1,000 EQUITY at Jan. 1, 2017 Comprehensive profit for the financial year Profit for the financial year Other comprehensive income items: Changes in the fair value of available-for-sale investments Hedging reserve Exchange differences on translating foreign operations Income taxes related to these items Total comprehensive profit for the financial year Transactions with owners Other Exchange reserves differences TOTAL EQUITY 0 207 240 0 -4 220 -3 773 -3 773 8 256 5 652 1 504 659 23 623 39 694 39 694 Share capital Invested non-restricted equity reserve To the equity holders of Retained the Parent earnings company TOTAL EQUITY 8 223 4 950 1 058 308 15 161 29 700 29 700 - - - - 6 684 6 684 6 684 - - 259 - - 259 259 - - 66 - - 66 66 - - - 534 - 534 534 - - -60 - - -60 -60 - - 265 534 6 684 7 483 7 483 33 495 - - - 528 528 - - -191 - - -191 -191 -3 303 COMPARISON YEAR EUR 1,000 EQUITY at Jan. 1, 2016 Comprehensive profit for the financial year Profit for the financial year Other comprehensive income items: Changes in the fair value of available-for-sale investments Hedging reserve Exchange differences on translating foreign operations Income taxes related to these items Total comprehensive profit for the financial year Transactions with owners Share-options exercised Equity-settled share-based transactions Dividends Total transactions with owners EQUITY at Dec. 31, 2016 14 Other Exchange reserves differences - - - - -3 303 -3 303 33 495 -191 0 -3 303 -2 966 -2 966 8 256 5 445 1 132 842 18 543 34 217 34 217 Accounting principles of the consolidated financial statements Amendments to accounting principles of con solidated financial statements and informa tion to be presented The consolidated financial statements are drawn up according to the same accounting principles as in 2016. Raute Corporation’s consolidated financial state ments have been prepared under the historical cost convention, except for the items measured at fair value, which are: - available-for-sale financial assets - financial assets and liabilities recognized at fair value through profit or loss - cash-settled share-based transactions - derivative financial instruments Preparation of consolidated financial state ments The consolidated financial statements include the financial statements of the Parent company Raute Corporation and the financial statements of those subsidiaries in which the Group has control. The Group controls an entity when the group is exposed to or has rights to variable returns from its involvement with the entity. Furthermore, the Group has the ability to affect the variable return through its power over entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group has control in the other company. In Raute Group, control is usually based on share ownership that represents more than 50 percent of the voting rights. Subsidiaries are fully consolidated in the consolidated financial statements from the date on which control is transferred to the Group and de-consolidated from the date that control ceases. Business combinations have been entered using the acquisition method. The consideration paid for the acquisition of a subsidiary is determined as the fair value of the transferred assets, liabil- ities incurred and equity interests issued by the Group. The consideration transferred contains the fair value of the asset or liability that results from the contingent consideration arrangement. Expenditure related to the acquisition is recognized as an expense when it is incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed by the business combination, have been measured at the acquisition-date fair value. Non-controlling interests have not been recognized in business combinations. Business transactions, receivables and liabilities, and unrealized gains between Group companies have been eliminated. Unrealized losses has also been eliminated. Where necessary, the accounting principles of the subsidiaries have been changed to comply with the Group’s accounting principles. The allocation of the profit or loss for the financial year to the equity holders of the Parent company has been presented in connection with the state ment of comprehensive income. The consolidated financial statements have been presented in euro, which is the Parent company’s functional and presentation currency. The figures concerning the profit or loss and financial position of the companies combined under the consolidated financial statements have been measured in the currency of the country in which that company op erates (functional currency). Financial statements in foreign currency The income statements of foreign subsidiaries have been translated into euro using the weighted average exchange rates during the financial year and balance sheets have been translated at the average rate on the balance sheet date. Translation of income and comprehensive income at different exchange rates in the income statement and in the balance sheet results in translation differences which have been recognized in the balance sheet Group companies Financial Statements 2017 / Group Group’s ownership interest and voting power, % Parent company’s ownership interest and voting Raute Canada Ltd., Delta, B.C., Canada 100 100 Raute Inc., Delaware, USA 100 100 Raute US, Inc., Monroe, Louisiana, USA 100 - RWS-Engineering Oy, Lahti, Finland 100 100 Raute Group Asia Pte Ltd., Singapore 100 100 Raute WPM Oy, Lahti, Finland 100 100 Raute Chile Ltda., Santiago, Chile 100 50 Raute Service LLC, St. Petersburg, Russia Raute (Shanghai) Machinery Co., Ltd, Shanghai, China Metriguard Technologies, Inc., Pullman, Washington, USA 100 - 100 100 100 - Raute Corporation, Lahti, Finland (Parent company) under equity, the difference of which has been recognized in the other comprehensive income items. The translation differences arising from the elimination of the acquisition cost of foreign sub sidiaries and from the translation of equity items accumulated after the acquisition have been recognized in the other items of the comprehensive income. On partial or full disposal of a subsidiary, the accumulated translation differences have been recognized through profit or loss as part of the gains or losses from disposal. The exchange rates used for the consolidation of subsidiaries has been presented in the table Exchange rates used in consolidation of subsidiaries. EXCHANGE RATES USED IN CONSOLIDATION OF SUBBSIDIRIES Income statement EUR 2017 2016 CNY 7,6266 7,3594 RUB 65,8806 74,2224 CAD 1,4644 1,4664 USD 1,1292 1,1066 SGD 1,5583 1,5278 CLP 732,3058 748,7723 Balance sheet at Dec. 31 2017 2016 CNY Related party transactions Group’s related party consist of Raute Group’s subsidiaries and management. Raute Group’s management consists of the Board of Directors, President and CEO and Executive Board. In addition, Raute Group’s related party consist of Raute Corporation’s Sickness Fund. EUR 7,8073 7,2983 RUB 69,3920 64,3000 CAD 1,5039 1,4188 USD 1,1993 1,0541 SGD 1,6024 1,5234 CLP 751,8129 702,2261 15 New and revised standards IFRS-standards that have been published and will be valid in future financial periods International Accounting Standard Board (IASB) has published new or revised standards and interpretations or amendments, which the Group will apply at the beginning on the date that each standard and interpretation comes into effect. If the effective date is a date other than the first day of the financial year, the Group applies the standard at the start of the financial year following the effective date. The effects of the standard have been presented in more detail in the note it concerns: - IFRS 9: Financial instruments, page 37 - IFRS 15: Net sales, page 20 - IFRS 16: Lease contract, page 27. Other standards published have not been estimated to have an essential impact on Raute Corporation’s future financial statements. 16 Financing risks – Critical accounting judgments of the management Management of financing risks The aim of the Group’s financing risk management is to minimize the negative effects of the changes in the financial markets on the Group’s financial performance and ensure sufficient liquidity in all market conditions. The Group implements a financing policy, which is approved by the Parent company’s Board of Directors and defines the limiting values that guide operations, the adopted financial and hedging instruments, and the acceptable counterparties. The Parent company’s financing unit is responsible for the management of financing risks, with a duty to identify, assess, and hedge financing risks in co operation with operative units. The Board regularly monitors the extent of the financing risks based on, among others, the net currency position, the age distribution and the hedging of receivables as well as cash flow estimates and financial stress tests. The Group, in its operations, is exposed to financing risks which have been classified into market, counterparty and liquidity risks. Market risks include currency, interest and price risks. Currency risks are further divided into transaction and translation risks. The Group’s most significant counterparty risks are customer credit risks related to contractual counterparties in the project business and counterparty risks related to the Group’s investment activities. The key risk areas of the Group’s international business operations have been recognized as default risks of the counterparty risks and currency risks of the market risks. The Group is also exposed to liquidity and refinancing risks. Critical accounting judgments of the company management and key sources of estimation uncertainty When preparing the consolidated financial statements in compliance with International Financial Reporting Standards, the company management has made certain estimates and assumptions. In addition, the management has exercised its judgment in selecting and applying the accounting policies. These estimates and assumptions have affected the assets and liabilities in the Group’s balance sheet, the disclosure of commitments and possible assets in the consolidated financial statements, and income and expenses for the financial year. Because the estimates have been based on manage ment’s best knowledge at the reporting date, and they comprise risks and uncertainties, therefore actual results may differ from these estimates. Possible changes in estimates and assumptions have been recognized in the financial year in which the estimate or assumptions has been changed. Financial Statements 2017 / Group The judgments the management has been used, when applying the accounting policies and which has the most significant impact on the financial statements, has been presented in the note it concerns. The management estimations have been presented in: - Note Group goodwill, page 30 - Note Other intangible assets, page 31 - Note Long-term projects, page 21 - Note Accounts receivables and receivables according to the percentage of completion, page 22 - Note Provisions, page 23 - Note Employee benefits, page 24 - Note Income taxes, page 28 - Note Research and development costs, page 32 - Note Current receivables and liabilities, page 36 - Note Financial assets, page 43. The management is not, by the time the financial state ments were to be published, aware of any major uncertainties concerning the estimates on the reporting date or any key assumptions concerning the future, on the basis of which there would be a considerable risk of a substantial change in the carrying values of assets and liabilities during the next financial year. The additional information related to the financing risks has been presented in the additional information items as follows: - Currency risks, note Managament of risks – Currency risks, page 38 - Interest risks, note Financial liabilities, page 42 - Price risks, note Materials and services, page 23 - Customer credit risks, note Accounts receivables and receivables according to the percentage of completion, page 22 - Counterparty risks, note Accounts receivables and re ceivables according to the percentage of completion, page 22. 17 Notes to the consolidated financial statements Project business A major share of the Group’s business is project-type business in which the delivery package contains products and services and the price, payment terms, delivery times and delivery terms are determined based on contract negotiations and the competitive situation. Projects are investments from the customer’s viewpoint. With regard to the investment decision, the decision-making process and arranging financing may take a long time and their duration may be difficult to predict. For project business, significant demand fluctuation is t ypical. The percentage of completion procedure reduces variation in net sales between reporting periods but does not eliminate it. The contents and timing of the in-progress project portfolio impact Raute’s working capital items. 18 Net sales 2017 % 2016 % EMEA (Europe and Africa) 81 952 56 67 186 60 CIS (Russia) 35 917 24 19 928 17 NAM (North America) 21 115 14 16 829 15 LAM (South America) 6 202 4 3 826 3 APAC (Asia–Pacific) 3 429 2 5 361 5 148 615 100 113 130 100 EUR 1,000 NET SALES Net sales by market area YHTEENSÄ Raute serves the wood products industry with a full-service concept based on service that encompasses the entire life cycle of the delivered equipment. Raute’s business consists of project deliveries and technology services. Project deliveries encompass projects from individual machine or production line deliveries to deliveries of all the machines and equipment belonging to a mill’s production process. Additionally, Raute’s full-service concept includes comprehensive technology services ranging from spare parts deliveries to regular maintenance and equipment modernizations, as well as consulting, training and reconditioned machinery. Large mill or production line scale delivery projects can temporarily increase the share of an individual customer of the Group’s net sales to more than 10 percent. At the end of the financial year 2017, the Group had two customers (2), whose customized share of the Group’s net sales temporarily exceeded ten percent. The sales share of the customers was 36 percent. The share of one customer was 20 percent and the share of the other customer 16 percent. Finland accounted for 17 percent (22 %) of net sales. Net sales Technology services vs. Project deliveries Technology services 33 % Basis of preparation Net sales include revenue from the sale of project deliveries and technology services, as well as raw materials and equipment, adjusted net of indirect taxes, discounts, and exchange differences from foreign currency sales. All components pertaining to each contractual entity have been treated as a whole and the same revenue recognition method is applied to them. The main part of the net sales is comprised of pro ject deliveries and modernization projects, which have been treated as long-term projects. They are carried out customized projects and include both product and service sales. The breakdown of the Group’s net sales into purely product and service sales cannot be presented reliably. Revenues from the sale of spare parts and oth er goods, as well as small and short-term projects, have been recognized in full when the significant risks and rewards have been transferred to the buyer and the Group no longer has right of possession of and control over the product. This generally means the moment at which the goods have been delivered to the customer in accordance with the agreed delivery clause. The delivery conditions used in the Group are based on Incoterms 2010 delivery clauses which have been presented in the official rules pub lished by the International Chamber of Commerce for the interpretation of trade terms. Net sales by market area Project deliveries, LVL 11 % South Asia-Pacific America 2% 4% North America 14 % Europe 56 % Project deliveries, Plywood 56 % Financial Statements 2017 / Group Russia 24 % Revenues from service and other expert services have been recognized in net sales for the period in which the service has been provided. Revenues from time-based maintenance contracts have been recognized as income for the maintenance contract period and the costs incurred have been recognized as expenses on performance basis. Revenues from other services have been recognized in net sales for the period in which the service has been provided. 19 Net sales IFRS standards that have been published and will be valid for future financial years IFRS 15 standard Revenue from contracts with customers will be effective on January 1, 2018. The standard replaces IAS 18 and IAS 11 standards and related interpretations. According to IFRS 15 standard the revenue is recognized when or as soon as the customer receives the control of the transferred goods or services. When determining the time when control is passed it is estimated whether the control over the performance ob ligation of goods or services is transferred either over time or at a point in time. This criterion applies by following the five steps guidance: (1) identification of the contract, 2) identification of the performance ob ligation, 3) determining the transaction price, 4) allocation of the transaction price to the performance obligations and (5) recognition of revenue. The Group started its IFRS 15 project during spring 2016. The Group reviewed customer contract types and identified the performance obligations related to the contracts and determined the revenue recognition method according to the IFRS 15 standard to evaluate the adoption of the IFRS 15 standard to company’s result and the balance sheet position. During the year 2017 Group has analyzed work-inprogress projects at the time of January 1, 2017, and new customer contracts during the year 2017 and identified individual delivery contracts which deviate from the type of revenue recognition adopted in the revenue recognition model for either performance obligations recognition or recognition criteria concerned. According to the management assessment the adoption of the standard is likely to change the recognition in certain long-term projects. Project deliveries and modernization projects of Raute’s product and services which shall be treated as long-term projects, recognized according to the 20 percentage of completion and are customized and tailored to customer’s needs, shall be determined as a performance obligation over time in accordance with IFRS 15. These performance obligations do not have the alternative use in IFRS 15 and those constitute still one performance obligation. The company applies the same revenue recognition principle in performance obligations over time and percentage of completion (relation of actual project costs to the estimated total project costs). Management has estimated that the adoption of the new standard does not have an impact on the revenue recognition of these projects. Exceptions to the above mentioned rule are longterm projects in which the customer has not been committed to the reimbursement of accumulated costs and a sufficient margin in situations where the client unilaterally suspends the agreement or when the client is unable to fulfill its contractual obligations. These individual projects will in the future be treated as performance obligations satisfied at a point in time. In these exceptional cases, the adop tion of the IFRS 15 standard will change the date of revenue recognition to a later date at a point in time. The management has estimated that the amount of these projects has been and shall be minor. Exceptional long-term projects mentioned above but also individual standard equipment deliveries and other technology services like services, spare parts, training and digital services shall be categorized as performance obligations satisfied at a point in time acording to the IFRS 15 standard. According to the IFRS standard performance obligations related to the products will continue to be recognized based on the delivery terms and performance obligations related to services when the service has been provided to the customer. The management has estimated that the adoption of the new standard has no impact on allocation of these performance obligations and revenue recognition date. According to the management’s estimation the adoption of the new standard does not have a significant impact on the Group’s result and the balance sheet position. The possible changes in applying the standard do not significantly reduce the amount of the work-in-progress and the advance payments received under percentage of completion. The impact of the new standard on revenue recognition may however be significant compared to the current procedure if any future large contract combination does not fulfill the performance ob ligation criteria over time or the contract combination creates separate performance obligations based on specifications evaluated in the contract. Raute Group will adopt the IFRS 15 standard on the first required effective period starting January 1, 2018. The Group presents adjusted comparative figures of the financial year 2017 and adjusted opening balance of January 1, 2018 according to the IFRS 15 standard methodology. The Group does not apply the reliefs allowed in the retrospective method. The Group presents the numerical data of the impact during the first quarter of the financial year 2018. Long-term projects EUR 1,000 2017 2016 LONG-TERM PROJECTS Specification of net sales Net sales by percentage of completion Other net sales TOTAL 118 666 89 231 29 949 23 899 148 615 113 130 Project revenues entered as income from currently undelivered long-term projects recognized by percentage of completion 135 874 114 461 Amount of long-term project revenues not yet entered as income (order book) 104 916 105 684 The balance sheet items of the undelivered projects Basis of preparation Project deliveries and modernizations classified as a project delivery have been treated and recognized based on the percentage of completion except the projects which do not obtain the classification requirements of long term projects. If a contractual entity (e.g. mill-scale delivery) includes sub-entities (e.g. production lines) with determined contract terms and conditions and with risks, rewards and control of ownership transferred to the buyer se parately from the rest of the contractual entity, they have been treated as separate long-term projects. During the financial year 2017 and the comparison period, the Group has had no financial costs allocated to the long-term projects entered in the balance sheet. Projects in which the value by percentage of completion exceeds advance payments invoiced - aggregate amount of costs incurred and recognized profits less recognized losses 88 318 90 806 - advance payments received 67 913 74 065 Gross amount due from customers 20 405 16 741 Projects in which advance payments invoiced exceed the value by percentage of completion - aggregate amount of costs incurred and recognized profits less recognized losses 46 940 - advance payments received 69 533 35 980 Gross amount due to customers 22 593 12 339 22 593 12 339 23 641 Advance payments included in the current liabilities in the balance sheet Gross amount due to customers Other advance payments received, not under percentage of completion 2 595 730 25 188 13 069 Advance payments paid for long-term projects 659 847 Total 659 847 Total Financial Statements 2017 / Group Advance payments of the long-term projects included in inventories in the balance sheet Basis of preparation of percentage of comple tion Revenue and cost from long-term projects has been recognized as an income and expense according to the percentage of completion (POC) as soon as the outcome has been reliably estimated. The estimates have been based on the previous experience of the corresponding business transactions and the special feature of each project has been estimated. Changes to the project, requirements concerning additional charges and incentives have been taken into account in the project income and expenses to the extent that can be reliably determined and which has been agreed upon with the customer. Percentage of completion has been measured on a cost basis as the relation of actual project costs to the estimated total project costs. When it is probable that the total costs needed to complete the contract will exceed total contract re venue, the expected loss has been recognized as an expense immediately. If the result of a long-term project cannot be reliably estimated, • the project costs have been recognized as an expenditure in the same financial year in which they have been incurred and • project revenue has been recognized only to the extent of project costs incurred that are likely to be recovered. Costs related to projects that have not yet been re cognized in revenue have been recognized as longterm projects in progress under inventories. If the net sales by percentage of completion (incurred costs and recognized profits) are larger than the amount of advance payment received for the project, the difference has been recognized as a gross amount due from customers in the balance sheet item Accounts receivables and other receivables. If the net sales by percentage of completion (incurred costs and recognized profits) are smaller than the amount of advance payment received for the project, the diffe rence has been recognized as a gross amount due to customers in the balance sheet item Trade and other payables. When the risks and responsibilities of the project have been essentially transferred to the counterparty on the contract, the long-term project has been recognized entirely as an income, unpaid contract price has been presented in accounts receivables and the estimated project warranty costs as a warranty reserve. Management’s critical accounting judgments and key sources of estimation uncertainty The percentage of completion method is based on estimates of expected project revenue and expenses, as well as on reliable measurement of project progress. Should the estimates of the project outcome change, the recognized revenue and profit is adjusted in the period in which the change first becomes known or can be estimated. 21 Account receivables and receivables according to the percentage of completion EUR 1,000 2017 2016 ACCOUNTS RECEIVABLES AND RECEIVABLES ACCORDING TO THE PERCENTAGE OF COMPLETION IN THE BALANCE SHEET 8 399 5 612 Receivables according to the percentage of completion 20 405 16 741 TOTAL 28 804 22 353 Accounts receivables Customer receivables Accounts receivables in the balance sheet Invoiced outstanding advance payments Total Age distribution of customer receivables Undue Overdue 0–29 days 2017 2016 8 399 5 612 6 129 4 870 14 528 10 482 2017 2016 11 915 8 103 1 750 762 Overdue 30–60 days 153 248 Overdue over 60 days 709 1 369 14 528 10 482 Total The outstanding advance payments presented in the table ”Customer receivables” are invoiced payments connected to binding contracts which are not included in the assets of the balance sheet at the balance sheet date. The combined age analysis of accounts receivables and advance payments of binding sales contracts invoiced according to payment terms has been presented in the table ”Age distribution of customer receivables”. 22 Basis of preparation Sales and other revenue have been recognized in accounts receivables at the original receivable amount. Current accounts receivables have been measured at the original receivable amount and their book value is equal with their fair value. Accounts receivables of EUR 8,399 thousand (EUR 5,612 thousand) are non-interest bearing with average terms of payment of 30 days. Accounts receivables do not include any items which will fall due within 12 months from the balance sheet date, classified as non-current. Project receivables are a balance sheet item comparable to accounts receivables. An amount with which individual long-term projects’ net sales recognized on the basis of percentage of completion exceed the amount of advance receivables. The fair values of receivables are presented in the notes to the financial statements “Financial assets”, on page 43. Project receivables are presented in these notes as a financial asset. Management’s critical accounting judgments and key sources of estimation uncertainty The management has estimated customer’s ability to remit the payment of such trade receivables, for which the company has not received any guarantee for the payment or any other securities. The Group companies’ ability to settle the trade receivables and payments has been estimated by the mangement.Estimated impairment on accounts receivables Estimated impairment of accounts receivable Estimates have been made whether there are indications of impairment for accounts receivables. The recognition of accounts receivable impairment has been made when there has been reason to assume that the Group will not receive overdue receivables. During the financial year, the Group recognized accounts receivable impairments in the amount of EUR 3 thousand (EUR 168 thousand). Impairments have been recognized in the item “Other operating expenses”. Risk management The total value of accounts receivables and project receivables in the balance sheet corresponds to the amount of money that is the maximum amount of credit risk at the balance sheet date without taking into account the fair value of collateral or later contractual obligations in the case that the contractual parties are unable to fulfill their obligations to pay in accordance with the sales contract. The Group’s credit risks or counterparty risks are realized when the customer or other counterparty is unable to fulfill its commitments to the Group. Credit risks related to contractual counterparties in project deliveries are managed with established suppliers and customers by advance payment terms and by expecting bank guarantees or confirmed letters of credit for customer payments. Credit risks related to technology services are managed by regularly monitoring the customer-specific amounts of receivables and customers’ payment behavior. As a result of the general uncertainty related to the development of the global economy, financial markets and the customers’ market situation the risk level for unhedged receivables is expected to be at a higher level than before the recession. The maximum credit risk relating to customers’ solvency is the amount of receivables relating to binding sales contracts that are not covered by bank guarantees, letters of credit or other securities. Received bank guarantees and letters of credit covered 6 percent (14%) of the accounts receivables and the percentage of completion receivables recorded in the balance sheet and 16 percent (29%) of the order book at the end of the financial year. The credit risk was exceptionally high due to the change in trade practices and the share of estblished suppliers and customers at the end of the financial year. During the financial year, a credit amounting to EUR 3 thousand million (EUR 168 thousand) from a single customer has been recognized as an expense. No significant credit risk clusters were recognized in the accounts receivables at the balance sheet date. Materials and services – Provisions EUR 1,000 2017 2016 MATERIALS AND SERVICES Purchases during the financial year -69 698 -45 889 -203 254 External services -10 820 -9 213 TOTAL -80 721 -54 849 Change in inventories, materials and supplies Financial Statements 2017 / Group Basis of preparation Purchases include materials and raw materials, as well as variable costs related to acquisition and manufacturing the products. External services include variable costs of production and subcontracting costs as well as service payments to sup pliers. Change in inventories includes material and raw material inventory change. 2017 2016 Book value at Jan. 1 1 543 1 747 Additions 1 808 1 225 Decrease -1 449 -1 429 Risk management The raw materials used by the Group are repro cessed steel products, other raw materials, components, and commodities. It is not possible to actively hedge against their market price risk with derivatives, and their price risk is a part of the business risk. The price risk of steel is managed by regularly analyzing and following the price fluctuation. The price risk of components is reduced by making blanket agreements with suppliers. The price risk of the electric power used in the Group’s production processes is followed and managed through fixed-price contracts. EUR 1,000 At the balance sheet date, there were no derivatives hedging price risk that would affect the profit or loss in the consolidated financial state ments. PROVISIONS Warranty provisions Exchange differences Book value at Dec. 31 -2 - 1 900 1 543 75 116 Other provisions Book value at Jan. 1 Additions 186 27 Decrease -75 -68 Book value at Dec. 31 186 75 2 086 1 618 Basis of preparation A provision has been recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. TOTAL from which - non-current - current 707 462 1 378 1 156 A provision related to warranty obligations has been recognized through profit or loss when reve nue from a long-term project, service or spare part including a warranty clause has been recognized. The amount of the warranty provision is estimated at the beginning of the project based on past experience from warranty costs. The unused pro vision has been recognized as income at the end of the warranty period and expiry of the warranty obligations. In long-term projects recognized on the basis of percentage of completion, the warranty provisions are included in the estimated to tal costs of the project. Provision for unprofitable contract has been recognized when the unavoidable direct costs and estimated indirect production costs and depreciation under the contract have exceeded the benefits from the contract. Management’s critical accounting judgments and key sources of estimation uncertainty The amount of warranty provisions has been estimated on the basis of the management’s expe rience from product costs in the warranty period, taking into consideration special product risks. 23 Employee benefits 2017 2016 Workers 217 201 Office staff 487 442 TOTAL 704 643 Personnel working abroad 222 183 Workers 204 197 Office staff 456 434 TOTAL 660 631 Personnel working abroad, effective, on average 204 193 Workers 209 201 Office staff 473 441 TOTAL 682 642 Personnel working abroad, on average 206 193 2017 2016 -33 589 -29 907 -648 -46 Pension contributions -4 721 -4 706 Other personnel costs -2 078 -1 947 -41 036 -36 606 Wages and salaries Wages and salaries include the basic salaries with fringe benefits, a profit and performance benefits (performance-based bonuses) and long-term incentive schemes. NUMBER OF PERSONNEL Employed at Dec. 31, persons Performance-based bonus systems based on annual targets Performance-based bonus system includes the bonus systems for the President and CEO and for the Group’s Executive Board, key personnel and the rest of the personnel. A person can receive the bonus from one performance bonus system at a time. The Board of Directors annually confirms the general principles, maximum amounts and calculation methods for the remuneration systems. The system is in force for a year at a time. The payment of the bonus is dependent of the positive Group’s profit. The maximum amount of the bonus systems has been limited to 20 percent. The majority of the performance-based bonuses are paid once a year after the Annual General Meeting has confirmed the consolidated financial statements. Effective, on average, persons On average, persons EUR 1,000 EMPLOYEE BENEFITS EXPENSE Wages and salaries Share-based payments TOTAL Personnel, effective, on average Personnel at Dec. 31 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0 2013 24 2014 2015 2016 2017 The payment of bonuses within the performance-based bonus systems for the President and CEO, the Group’s Executive Board and key personnel is dependent on the profit and task-related personal targets determined for the entire year. The maximum amount of the bonus from the performance-based bonus system is 6 months for the President and CEO and 3 months for the Group’s Executive Board. 0 2013 2014 2015 2016 2017 The payment of bonuses within the plans for the rest of the personnel is dependent on the Group’s profit and the shared targets set for the unit’s performance, quality and operations. Part of the performance-based bonuses for entire personnel are determined and paid quarterly. Basis of preparation Performance-based bonus systems based on annual targets has been recognized as a provision when the Group has a contractual obligation or when a constructive payment obligation has arisen from an earlier practice. Critical accounting judgments The expenses and liabilities recognized on the performance-based bonuses on annual target are based on calculations of the bonuses that are based on valid contracts. The management has used estimates to assess the amount of the performance-based bonus plan’s when the target’s linked to the persons or personnel group’s profit, quality and operations have been met. Employee benefits Senior management’s share-based payment plan Raute Group’s performance-based bonus system includes two long-term performance share-based incentive plan for the Group’s senior management. The purpose of the plan is to align the objectives of the owners and management, for example, in terms of developing the company’s value and to engage management by offering a competitive incentive plan based on ownership of the company’s shares. An expense of EUR 595 thousand (46 thousand) has been recognized for the share-based payments to during the financial year. Amount of EUR 240 thousand (129 thousand) has been allocated to the non-restricted equity reserve at the end of the financial year. Share-based payment plan 2014–2018 (LTI2014, LTI2015, LTI2016) On 12 February 2014, Raute Corporation’s Board of Directors decided on a new long-term Performance Share Plan for the Group’s senior management. The share plan includes three three-year share plans, which each include a year-long earnings period and a two-year vesting period following the earnings period, during which the bonus’s value development is based on the development of the value of the share. Any payment of share rewards is carried out in the company’s series A shares and the portion intended for paying tax on the bonus is paid in cash. Participants in the share plan cannot sell or otherwise transfer any shares received as a bonus during the vesting period. The share plans commenced in 2014 (LTI2014), 2015 (LTI2015) and 2016 (LTI2016). The company’s Board of Directors separately decided on the participants in the share plans and on the earnings criteria applied during each earnings period, the targets set for them and the target and maximum levels of the bonus to be paid. The earnings criteria of the share plan are earnings per share and growth in net sales. The 2015 share plan covers altogether 11 persons and the 2016 share plan covers altogether 12 people belonging to the Group’s senior management. LTI2014 The bonus earned during the 2014 earnings period, altogether EUR 49 thousand, was paid out entirely in cash in 2015, as decided by the Board of Directors, and the share plan has ended. LTI2015 The bonus earned during the 2015 earnings period, altogether EUR 614 thousand, was paid out on 6 March 2017. The vesting period ended at the start of 2018. LTI2016 The total amount of bonuses earned during the 2016 earnings period and the personal proportions were confirmed in February 2017. The bonus will be paid in spring 2018. The vesting period ends at the start of 2019. Performance Share Plan 2017–2022 (LTI Plan 2017–2019, LTI Plan 2018–2020, LTI Plan 2020) On February 15, 2017, the Board of Directors of Raute Corporation resolved to implement a new performance-based, share-value-based, long-term incentive plan for the Group’s senior management. The Performance Share Plan is made up of three three-year plans that begin every year. A single plan may consist of either a three-year earnings period or a one-year earnings period and the subsequent two-year vesting period. The possible bonus earned by virtue of a single plan shall be paid at the end of the three-year plan in question. The earnings opportunity has been limited such that the value of the bonus, at the time of payment, to be paid to a participant based on a single threeyear plan can be no more than double the value of the maximum earnings opportunity allocated to the employee when the plan commenced. The company’s Board of Directors decides separately on when each plan commences, the length of its earnings period, the performance targets, the persons entitled to participate in the plan and the earnings opportunity. LTI Plan 2017–2019 LTI Plan 2017–2019 commenced at the start of 2017. The plan consists of a one-year earnings period and the subsequent two-year vesting period. The bonuses shall be paid in spring 2020. Any payment of share rewards shall be carried out in Raute Corporation’s series A shares and its tax portion in cash or total amount in cash. The plan covers altogether 12 persons belonging to the Group’s senior management, including the Group’s President and CEO and the members of the Executive Board. The performance targets are earnings per share (EPS) and growth in net sales. Basis of preparation Share price at the balance sheet date has been used in determining the payment of bonuses within the open performance-based bonus. The contra account for the performance-based share incentive plan issued in shares is the invested non-restricted equity reserve. The portion paid in cash has been included in the accrued liabilities. Financial Statements 2017 / Group Pension plans Pension plans have been classified into defined be nefit and defined contribution plans. Under a de fined contribution plan the Group pays fixed contributions to a separate insurance company, after which the Group has no other obligations to pay. In addition, the Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay retirement benefits. Contributions to defined contribution pension plans have been recognized in the income statement as an expense in the period in which they were due. The Finnish statutory employment pension scheme and the pension plans of foreign subsidiaries have been classified as defined contribution plans. The parent company Raute Corporation has a defined-contribution pension arrangement and the related obligations are determined in accordance with the pension act that applies to the employees. The pension arrangements of foreign subsidiaries are managed in accordance with lo cal legislation and they are defined-contribution arrangements. Raute Corporation’s voluntary supplementary pension insurance has been treated in accounting as a defined-benefit plan. The current Finnish employees’ voluntary supplementary pension insurance has been arranged through Mandatum Life Insurance Company. At the end of the financial year, the balance sheet did not contain any obligations resulting from benefit-based obligations. Raute’s Sickness Fund is an insurance fund, which pays its members additional benefits on top of compensations paid according to the Sickness Insurance Act. Raute’s Sickness Fund covers personnel in Raute Corporation and Lahti Precision Oy. . 25 Management’s employee benefits EUR 1,000 2017 2016 Salaries and remunerations of the President and CEO and Board of Directors of the Parent company Tapani Kiiski, President and CEO Salaries and other short-term employee benefits Post-employment benefits 453 374 79 65 Share-based payments 233 765 532 Pehu–Lehtonen Erkki, Chairman of the Board 40 40 Mustakallio Mika, Vice-Chairman of the Board 20 20 Suominen Pekka, Member of the Board 20 20 Bask Joni, Member of the Board 20 20 von Essen Patrick, Member of the Board as of March 31, 2016 20 13 Raitio Laura, Member of the Board as of March 28, 2017 13 - Leiwo Päivi, Member of the Board until March 28, 2017 7 20 Hautamäki Risto, Member of the Board until March 31, 2016 - 7 140 140 Raute’s Remuneration statement contains information on the remuneration of the Board of Directors and the President and CEO. Up-to-date information is available on the company’s website at www.raute.com. 93 TOTAL The President and CEO has a possibility to have a profit-related bonus amounting to a maximum of six months’ salary which depends on the annual targets. The President and CEO’s term of notice is six months, and the severance pay equals twelve months’ salary. Remuneration of the Parent company’s Board of Directors Members of the Board of Directors TOTAL Group Executive Board’s employee benefits on an accrual basis 1 099 933 Post-employment benefits 224 183 Share-based payments 331 127 1 654 1 243 Salaries and other short-term employee benefits TOTAL 26 An expense of EUR 462 thousand has been recognized for the share based payment during the financial year based on the long-term share-based incentive program directed to the top manage ment. During the financial year, the management and the Board of Directors has not granted share op tions. Pension obligations of the President and CEO and the Board Members are determined according to the Employees Pensions Act. Other special conditions concerning retirement or the amount of retirement allowance have not been agreed on. The statutory pension cost in the financial year 2017 was EUR 79 thousand (EUR 65 thousand). Remunerations paid to the Board of Directors do not include the statutory retirement obligation. On December 31, 2017, the Board of Directors and the Group’s President and CEO and the Group’s Executive Board held altogether 126,003 series A shares and 127,890 series K shares. The management’s holding represents 6.0 percent of the company shares and 11.6 percent of the votes. The figures include the holdings of their own, minor children and control entities. During the financial year no loans have been granted to the company’s management. No pledges have been given or other commitments made on behalf of the company’s management and shareholders. Other operating income and expenses EUR 1,000 2017 2016 OTHER OPERATING INCOME 11 918 4 84 Capital gain on sale of fixed assets 24 28 Other 57 74 TOTAL 96 1 103 2017 2016 Indirect production expenses -3 264 -2 982 Renting expenses -1 416 -1 215 Sales and marketing expenses -2 604 -2 128 Insurance compensations Allowances received EUR 1,000 OTHER OPERATING EXPENSES Credit losses Administration expenses Changes in the fair value of currency forward contracts Other expenses TOTAL -3 -168 -2 298 -2 334 -58 179 -5 010 -3 380 -14 653 -12 030 -40 -41 -2 -1 -93 -19 -5 Audit expenses, other services Audit expenses, tax services Total Authorized Public Accountants PricewaterhouseCoopers (Global) -12 -12 Audit expenses, other assignments according to the Audit Act - - Audit expenses, other services - - Audit expenses, tax services - - -12 -12 - Within one year 1 297 926 - After a period of more than one year and less than five years 2 773 756 Audit expenses, statutory Total Basis of preparation Other operating expenses have been re cognized as income-impact items by nature included in business operations. Other individual items such as direct purchases, changes in inventories and employee benefits expenses included in the income statement have been presented in connection of the corresponding income statement item. -71 Authorized Public Accountants PricewaterhouseCoopers Oy (Finland) Audit expenses, other assignments according to the Audit Act Basis of preparation Revenue not included in net sales, such as lease income, insurance compensations and gains on the disposal of fixed assets, has been recognized in the other operating income, Lease income has been recognized as income on a straight-line basis for the lease term. -10 -140 Auditors’ remunerations Audit expenses, statutory Financial Statements 2017 / Group Other lease agreement Group as a lessee The Parent company’s auditor during the financial year was the Authorized Public Accountants PricewaterhouseCoopers Oy. Statutory audit fee includes audit fees for current financial year auditing. Other services and tax services include audit fees for other services recognized on accrual basis during the financial year. Fees do not include travel costs and fees payable to the authorities arising from auditing or other assignments. Basis of preparation Leases in which a significant portion of the risks and rewards incident to ownership are retained by the lessor have been treated as operating leases. Payments made under other leases have been re cognized as an expense based on the lease period. IFRS standards that have been published and will be valid in future financial periods IFRS 16 standard Leases shall be effective on January 1, 2019. According to the standard, lease agreements shall be recognized in the balance sheet item Property, plant and equipment in the lessee’s balance sheet. A lessee shall recognize an asset based on the right-of-use of the asset and a lease liability based on the obligation to pay lease rent. The standard includes two exemptions for the lessee. The leases of low-value items and short-term leases, maturing under 12 months, can be excluded according to IFRS 16. Raute Corporation has estimated that the adop tion of the standard will have an impact on the recognition of certain lease agreements in the consolidated financial statements. The lease expense of lease contracts will be replaced by the depreciation calculated on the asset and the inte rest expense on the lease liability. A lessee shall recognize an asset based on the right-of-use of the asset and a lease liability based on the obligation to pay lease rent. Furthermore, the standard will have an impact on the additional information in the consolidated financial statements and the Group’s key ratios. Raute Corporation will publish a more detailed evaluation of the impact of the standard during the financial year 2018. Minimum rents paid on the basis of other non-cancellable leases: - Maturing later Total - 1 4 070 1 684 In the 2017 financial statements, lease obligations have been presented in the off-balance sheet item in the Other own obligations in the note Pledged assets and contingent liabilities, on page 47. 27 Income taxes EUR 1,000 2017 2016 INCOME TAXES Consolidated income statement Current tax based on the taxable profit of the financial year -3 108 -2 003 9 61 878 407 TOTAL -2 222 -1 536 Reconciliation of the relationship between realized tax expense and theoretical accounting result using the Finnish tax rate of 20.0 percent Profit before taxes 11 522 8 220 -2 304 -1 644 57 -27 120 48 Basis of preparation The taxes in the consolidated income statement include the current tax based on the Group companies’ taxable income, as well as tax adjustments for previous years and the change in deferred taxes. Current tax based on the taxable income has been calculated on taxable income using the tax rate in force in each country. Taxes have been recognized in the income statement, except when they are re lated to other comprehensive income items or recognized directly in equity. In such a case, the tax has also correspondingly been recognized in other comprehensive income items or directly in equity. Current tax of previous financial years Deferred taxes Tax effect of the following items: Taxes calculated using the Finnish tax rate, 20.0% Effect of differences in tax rates of foreign subsidiaries Non-taxable income -123 -247 Taxes from the previous financial years 5 51 Utilization of previously unrecognized tax losses - 8 -494 -24 Non-deductible costs in taxation Unrecognized tax assets from the losses of foreign subsidiaries 519 300 Consolidated tax expense -2 221 -1 536 Effective tax rate, % 19,3 % 18,7 % Other items 28 The Group companies can use special tax deductions related to certain new investments of assets or expenses under certain conditions. These tax credits are treated as a deductible from taxes at the moment when it is highly probable that the tax deduction will be received. The tax credit reduces the tax liability and the tax expense based on the taxable income for the period. Deferred taxes have been recognized for all temporary differences between the accounting and taxation value. Deferred tax has been determined using tax rates that have been enacted or substantively enacted by the balance sheet date and have been expected to apply when the related deferred tax asset shall be realized or the deferred tax liability shall be settled. The most significant tempo rary differences have arisen from the amortization of tangible fixed assets, fair value adjustments of available-for-sale financial assets, fair value adjustments of derivatives and tax losses carried forward unused. The undistributed profits of foreign subsidiaries are not recognized as deferred tax liabilities. The assets are invested permanently in the countries in question. The translation differences generated by the consolidation of foreign subsidiaries are not recognized as deferred tax liabilities. Deferred tax assets have been recognized to the extent that it is probable that taxable profits will be available against which temporary differences can be utilized. The recognition of deferred tax assets has been estimated at each reporting date. The undistributed profits of foreign subsidiaries are not recognized as deferred tax liabilities. The assets are invested permanently in the countries in question. The translation differences generated by the consolidation of foreign subsidiaries are not recognized as deferred tax liabilities. Management’s critical accounting judgments and key sources of estimation uncertainty The Group is subject to income taxes in Finland and several other countries. Management’s judgment has been required in determining the amount based on the taxable income for the financial year, tax of uncertain tax positions, as well as deferred tax assets and liabilities. The recognition and basis of preparation of the deferred tax assets has been estimated at the end of the financial year and the extent to which deferred tax assets can be recognized to the balance sheet. The management estimates how likely it is for the Group’s companies to have future recoverable taxable income against which unused tax losses can be utilized. The pre paratory estimates used for the estimates at the balance sheet date can differ from the actual figures, in which case changes in tax assets have been recognized as expenses in the income statement. Deferred tax assets and liabilities DEFERRED TAX ASSETS EUR 1,000 Intercompany inventory profit Provisions Employee benefits Tax losses and credits unused Other temporary differences Deferred tax assets, total Offset from deferred tax liabilities Deferred tax assets, net DEFERRED TAX LIABILITIES Entered through profit or loss Entered in comprehensive income statement Recognized in shareholders’ equity 34 -7 - - 28 52 - 39 - 90 210 28 - - 238 Effect of Group consolidation 114 -10 - - 103 287 1.1.2017 31.12.2017 Financial assets at fair value 1.1.2017 Recognized in shareholders’ equity 31.12.2017 9 9 - -1 17 Other temporary differences 333 -54 8 - 227 -4 - - 410 35 Deferred tax liabilities, total 499 -64 47 - 481 Offset to deferred tax assets -306 -9 - - -315 Deferred tax liabilities, net 192 -73 47 - 166 Entered in Entered comprethrough hensive profit or income loss statement Recognized in shareholders’ equity 31.12.2016 476 253 - -1 728 -306 -9 - - -315 167 244 0 -1 410 Entered in comprehensive income statement Recognized in shareholders’ equity 31.12.2016 COMPARISON YEAR EUR 1,000 Intercompany inventory profit Provisions Employee benefits 1.1.2016 Entered through profit or loss 25 224 8 9 -14 1 - - 34 210 9 Tax losses and credits unused Other temporary differences 172 49 11 -9 - - Deferred tax assets, total 478 -2 - -303 -3 172 -5 Deferred tax assets, net EUR 1,000 Entered in Entered comprethrough hensive profit or income loss statement 183 40 COMPARISON YEAR Offset from deferred tax liabilities Financial Statements 2017 / Group EUR 1,000 Financial assets at fair value 1.1.2016 - - 52 - 52 Effect of Group consolidation 126 -12 - - 114 183 40 Other temporary differences 418 -85 - - 333 Deferred tax liabilities, total 544 -98 52 - 499 - 476 Offset to deferred tax assets -303 -3 - - -306 - - -306 Deferred tax liabilities, net 241 -101 52 - 192 0 0 167 A deferred tax asset of EUR 434 thousand (EUR 10 thousand) has been recognized from losses of foreign subsidiaries from the financial year 2017. A deferred tax asset of EUR 634 thousand (EUR 1 125 thousand) has been unrecognized from loss carryfor-wards of foreign subsidiaries. It is probable that no taxable income, against which the losses can be utilized, shall be available to the Group before the expiry date of the losses. 29 Group goodwill BUSINESS COMBINATION On April 3, 2017, Raute Corporation acquired the business of Metriguard, Inc. in the USA. Metriguard sells and maintains measuring equipment for the veneer and plywood industry and for sawmills on a global scale. The production of the company has been centralized in Pullman, Washington. Metriguard’s business will be continued under Raute’s new US subsidiary, Metriguard Technologies, Inc., whose financial information will be reported as part of Raute’s wood products technology segment. The acquisition has been implemented as an asset purchase, including Metriguard’s intangible assets, working capital and fixed assets, except real estate. Metriguard, Inc.’s personnel transferred in the business transaction. The purchase price is paid in two installments. A base purchase price of USD 3.1 million has been paid at closing. The additional earn-out payment based on net sales for a 12-month period following closing of the transaction will be paid in the summer 2018. The fair values of the balance sheet items recognized from the acquisition are preliminary. Fair values of the acquisition, thousand euros Intangible assets Tangible assets Inventory Sales receivables and other receivables Trade payables and other payables Net identifiable assets acquired Goodwill Net assets acquired 3.4.2017 1 407 94 1 368 310 -178 3 002 1 035 4 037 Purchase consideration, thousand euros Cash paid Contingent consideration Total purchase consideration 3.4.2017 2 911 1 126 4 037 The cash flow effect of the business transaction at the acquisition date was EUR 3,371 thousand. The Group has recognized acquisition related expenses in the amount of EUR 0.5 million. The expenses are included in Other operating expenses of the consolidated statement of income. 30 Basis of preparation The goodwill recognized in the consolidated balance sheet has been generated in the business acquisition from Metriguard, Inc. The goodwill represents acquired market share, business knowledge and the synergies obtained in connection with the acquisition. The goodwill is the amount over which the acquisition cost has exceeded the fair values of identified acquired assets and liabilities. Net identifiable other intangible assets acquired has been presented in the balance sheet item Other intangible assets. These items shall be depreciated over their useful life. Group goodwill has been recognized in the balance sheet at original acquisition cost less amortization and possible impairments. No amortization according to a plan is booked from group goodwill. The group goodwill is tested annually for impairment and always if any indication of impairment exists. Impairment testing For the impairment test the goodwill is allocated to the cash generating units (CGUs) of the Group, which are identified to the business unit. The re coverable amount of a CGU is determined by value-in-use calculations which require the usage of assumptions. Cash flow estimates used in the calculations are based on management’s best judgment and budget accepted by the management. The discount rate used in the calculations is based on the weighted average cost of capital (WACC) at the business area. The possible impairment loss is recognized imme diately in the income statement. Previously recognized goodwill impairment losses will not be revised. The management has estimated the assumptions for the impairment testing at the balance sheet date. The recoverable amount of the cash generating unit is based on the budget accepted by the management and for forecasts for five years. The discount rate used in calculations is 9.1% (before taxes). The assumptions used in the cash flow estimates for future operations are based on management estimates at the balance sheet date. During the financial year impairment has not been recognized to the consolidated income statement. Other intangible assets Financial Statements 2017 / Group OTHER INTANGIBLE ASSETS EUR 1,000 Acquisition cost at Jan. 1, 2017 Exchange rate differences Additions Reclassification between items Acquisition cost at Dec. 31, 2017 Accumulated depreciation and amortization at Jan. 1, 2017 Exchange rate differences Accumulated depreciation and amortization of disposals and reclassification Depreciation and amortization for the financial year Accumulated depreciation and amortization at Dec. 31, 2017 Book value at Dec. 31, 2017 Development costs Other intangible assets Development costs in progress TOTAL 4 640 8 751 0 13 391 - -48 1 627 123 -48 1 750 - -295 - -295 4 640 10 036 123 14 799 -4 291 -7 746 0 -12 038 - 42 - 42 - 565 - 565 -223 -597 - -820 -4 515 -7 736 0 -12 250 125 2 300 123 2 548 Develoment costs Other intangible assets Development costs in progress TOTAL 4 640 8 375 1 020 14 035 - -28 108 - -28 108 COMPARISON YEAR EUR 1,000 Acquisition cost at Jan. 1, 2016 Exchange rate differences Additions Reclassification between items Acquisition cost at Dec. 31, 2016 Accumulated depreciation and amortization at Jan. 1, 2016 Exchange rate differences Accumulated depreciation and amortization of disposals and reclassification Depreciation and amortization for the financial year Accumulated depreciation and amortization at Dec. 31, 2016 Book value at Dec. 31, 2016 Basis of preparation An intangible asset has been recognized in the balance sheet when it is probable that the expected future financial benefit attributable to the asset will flow to the entity over a period of several years (amortization period) and the cost of the asset can be measured reliably. In other cases the expenditure from intangible assets has been recognized as an expense when incurred. Intangible assets in the Group do not include assets, which has unlimited economical period. - 296 -1 020 -724 4 640 8 751 0 13 391 -4 065 -7 341 -1 020 -12 426 - 18 - 18 - - 1 020 1 020 -227 -423 - -650 -4 291 -7 746 0 -12 038 348 1 005 0 1 353 The intangible assets include capitalized development costs and other intangible assets. Intangible assets with a finite useful life have been recorded in the balance sheet and recognized in the income statement as an expense based on the straight-line depreciation method over their useful life as follows: Patents 10 years Computer software 3–5 years Other intangible assets 3–10 years Capitalized development costs 3–10 years. Development costs incurred in planning new or more advanced products and in manufacturing test machinery for testing them has been recognized as intangible assets in the balance sheet from the mo ment the product can be produced technologically, utilized commercially, and future financial benefit is expected from it. Capitalized product development costs include the material, work and testing expenditure incurred directly from completing the product for the intended purpose. After they have originally recognized in the balance sheet capitalized product development costs have been measured at acquisition cost less accumulated amortization and impairment. Development costs recognized as an expense during previous financial year is not capitalized at a later date Other intangible asset has been recognized in the balance sheet at original cost when it is probable that the expected future financial benefit attributable to the assets will flow to the entity over a period of several years (amortization period) and the cost of the assets can be measured reliably. The expected useful lives of the items in the intangible assets in the balance sheet have been reviewed at each reporting date. If they differ considerably from previous estimates, the amortization plan is updated in accordance with the new expected useful lives. The carrying values of intangible assets with limited useful lives have been reviewed at each reporting date. If the value of an asset has decreased significantly the impairment is transferred to the income statement. A previously made impairment can be reversed if the circumstances can be shown to have improved considerably. Impairment of intangible assets Group’s intangible assets have been tested annually for impairment. Assets that are subject to the amortization have been reviewed for impairment always when events or changes in circumstances have pro vided indications that it may be impossible to recover the carrying amount of the assets. The recoverable amount is the higher of an asset’s fair value less costs to sell or value in use. The value in use is the present value of the expected recoverable cash flows from the asset. For the assessment of impairment, the assets are classified at the lowest levels at which the cash flows can be separately identified. The amount by which the carrying amount of the asset exceeds the recoverable amount has been recognized in the income statement as an impairment loss. An impairment loss recognized in previous periods for non-financial assets other than goodwill has been reassessed at each balance sheet date. The recognition of an impairment loss has been reversed when a change has taken place in the circumstances or in the estimates used to determine the recoverable amount of the asset. However, reversal of impairment has not exceeded the asset’s carrying amount less impairment loss. 31 Research and development costs EUR 1,000 2017 2016 RESEARCH AND DEVELOPMENT COSTS Research and development costs for the financial year Amortization of previously capitalized development costs Development costs recognized as an asset in the balance sheet Research and development costs recognized as an expense for the financial year -3 237 -2 863 -223 -227 123 - -3 338 -3 090 Basis of preparation Research cost and those development costs which have not been capitalized to the balance sheet, has been recognized as an expense to the operating expenses before operating profit. Amortization of capitalized product develop ment costs has been started when the product is ready for use and released for sale. The useful life of development costs is three to ten years de pending on the estimated lifetime of the product, during which time capitalized assets have been recognized as an expense on a straight-line basis. Capitalized costs for product development in pro gress have been tested annually for impairment with the value calculation, if the changes in the circumstances have provided indications of impairment. Management’s accounting judgments The expected useful lives of the items in the intangible assets in the balance sheet have been reviewed at each reporting date. If they differ considerably from previous estimates, the amortization plan is updated in accordance with the new expected useful lives. Each asset has been assessed for indications of impairment as explained in the accounting principles above. Where the carrying amount of the asset exceeds the assets’ estimated recoverable fair value, impairment has been recognized in the income statement. The valuations are sensitive to the assumptions involving future expected returns and discount rates. The discount rate describes the estimated interest rate expected on the markets, taking into account the time value of money and the special risks pertaining to the asset in question, the re lated adjustments for which have not been made to the estimated cash flows. The discount rate is defined using the average weighted capital cost, which describes the total equity and borrowing costs, taking into account the special risks linked to the assets. The discount rate used in calculations is 9.1%. During the 2017 financial year and the comparison year, no impairment loss was recognized on capitalized product development costs in progress. 32 Property, plant and equipment Financial Statements 2017 / Group PROPERTY, PLANT AND EQUIPMENT EUR 1,000 Acquisition cost at Jan. 1, 2017 Land and water Buildings and structures Machinery and equipment Advance Other payments and tangible assets assets in progress Total 386 10 887 36 571 553 260 Exchange rate differences - - -585 -11 - -596 Additions - 4 1 217 - 1 403 2 623 Disposals - - -97 - - -97 Reclassification between items - 209 -84 12 -589 -452 386 11 100 37 021 594 1 073 50 134 Accumulated depreciation and amortization at Jan. 1, 2017 - -7 390 -31 234 -453 - -39 077 Exchange rate differences - - 513 7 - 520 Accumulated depreciation and amortization of disposals and reclassification - - 183 - - 183 Depreciation and amortization for the financial year - -364 -1 426 -23 - -1 813 Accumulated depreciation and amortization at Dec. 31, 2017 - -7 754 -31 964 -469 - -40 186 386 3 346 5 058 85 1 073 9 948 Land and water Buildings and structures Machinery and equipment Advance Other payments and tangible assets assets in progress Total Acquisition cost at Dec. 31, 2017 Book value at Dec. 31, 2017 48 657 COMPARISON YEAR EUR 1,000 Acquisition cost at Jan. 1, 2016 386 10 218 33 244 561 1 054 Exchange rate differences - - 432 14 - 445 Additions - - 936 - 2 179 3 116 Disposals - - -66 - - -66 Reclassification between items - 669 2 025 -22 -2 973 -301 386 10 887 36 571 553 260 48 657 Accumulated depreciation and amortization at Jan. 1, 2016 - -7 047 -29 463 -423 - -36 934 Exchange rate differences - - -452 -7 - -458 Accumulated depreciation and amortization of disposals and reclassification - - 5 - - 5 Depreciation and amortization for the financial year - -342 -1 324 -23 - -1 690 Accumulated depreciation and amortization at Dec. 31, 2016 - -7 390 -31 234 -453 - -39 077 386 3 497 5 337 100 260 9 580 Acquisition cost at Dec. 31, 2016 Book value at Dec. 31, 2016 45 463 33 Depreciation and amortization EUR 1,000 2017 2016 DEPRECIATION AND AMORTIZATION Depreciation and amortization by class of assets Intangible assets - Capitalized development costs -223 -227 - Other intangible assets -597 -423 Property, plant and equipment - Buildings and structures - Machinery and equipment - Other tangible assets TOTAL -364 -342 -1 426 -1 324 -23 -23 -2 633 -2 340 Basis of preparation Property, plant and equipment have been measured at acquisition cost less accumulated depreciation and impairment. The acquisition cost includes the purchase price, cash and other discounts, import duties and fixed taxes. When a property, plant or equipment is manufactured in-house, it also includes, in addition to the above-mentioned items, a share of the Group’s fixed costs. Ordinary property, plant and equip ment repair and maintenance costs have been recognized through profit or loss as incurred. Possible costs incurred in restoring to original state have been taken into account in IFRS accounting as part of the acquisition cost. Raute Corporation’s consolidated financial state ments of December 31, 2017, including the comparison data, do not include property, plant or equipment for which costs capitalized in the future should be taken into account. 34 Depreciation of tangible assets is calculated using the straight-line method over their estimated use ful lives as follows: Buildings 25–40 years Machinery and equipment 4–12 years Other fixed assets 3–10 years Land no depreciations are made. The residual value and useful lives of assets are reviewed at the last day of each reporting period and are changed if necessary. If the carrying amount of an asset exceeds the estimated recoverable amount, it is immediately reduced to correspond to the recoverable amount. Gains and losses on decommissioning and disposal of prop erty, plant and equipment have been recognized through profit or loss. Inventories EUR 1,000 2017 2016 INVENTORIES Materials and supplies 6 723 5 929 Work in progress 2 514 1 952 Other inventories 965 945 Advance payments for long-term projects 659 847 10 861 9 674 TOTAL Financial Statements 2017 / Group During the financial year, EUR 447 thousand (EUR 357 thousand) were recognized in expenses, reducing the carrying amount of inventories to correspond to the disposal price. Basis of preparation Inventories have been measured at the lower of cost and net realizable value. Raw materials and supplies have been measured using the weighted average cost method. The cost of finished goods and work in progress comprises direct material and production costs and the portion of indire ct production costs and depreciation allocated to products at a normal capacity excluding financial expenses. Net realizable value is the estimated selling price in the ordinary course of business, less costs of completion and sale. The value of invento ries includes impairment due to obsolescence. Risk management Advance payments made to suppliers and subcontractors at the reporting date involve a risk of the counterparty not being able to fulfil their contractual obligations and return the advance payment. The risk is managed by examining the size of the subcontractors’ risk position and the physical progress of the task and by demanding collateral for the advance payments from specific suppliers. At the reporting date, there was EUR 0.6 million in unsecured paid advance payments (EUR 0.8 million). 35 Current receivables and payables EUR 1,000 2017 2016 ACCOUNTS RECEIVABLES AND OTHER RECEIVABLES Accounts receivables Receivables according to percentage of completion from customers’ long-term projects Accrued income and prepaid expenses Derivative contract receivables 8 399 5 612 20 405 899 16 741 691 131 90 574 1 341 30 408 24 476 Accrued employee related expenses 23 21 Income tax receivable 45 831 630 TOTAL 899 691 2017 Information of credit losses related to the accounts receivables and percentage of completion receivables as well as exposal to credit risk and counterparty risk has been presented in the note Account receivables and Project receivables on page 22. Fair values of the receivables have been presented in the note Financial assets, page 43. 40 Other accrued income and prepaid expenses Basis of preparation The Group’s assets include accounts receivables, percentage of completion receivables, accrued income and prepaid expenses, derivative contract receivables and other receivables. 2016 Other receivables TOTAL Substantial items included in accrued income and prepaid expenses EUR 1,000 TRADE PAYABLES AND OTHER PAYABLES Current interest-free liabilities in the balance sheet 25 188 13 069 Trade payables 7 115 7 596 Accrued expenses and prepaid income 9 603 8 097 Advance payments received Derivatives Income tax liability Other liabilities TOTAL 80 7 829 1 131 683 704 43 498 30 604 Substantial items included in accrued expenses and prepaid income Accrued project expenses related to long-term projects Accrued employee related expenses Financial expenses Contingent consideration of the business acquisition Other accrued expenses and prepaid income TOTAL 845 1 435 7 184 6 146 27 176 1 001 - 546 340 9 603 8 097 Advance payments received, EUR 25 188 thousand (EUR 13 069 thousand), include advance payments received from the long-term projects in the amount of EUR 22 593 thousand (EUR 12 339 thousand). 36 Basis of preparation The Group’s trade payables and other payables include liabilities arising from goods and services delivered prior to the financial year-end. Liabilities are unsecured and are due to be paid within 12 months after the reporting period. The book value of the items correspond to the fair value at the closing date. . Management’s accounting judgments and key sources of estimation uncertainty Management has monitored the customers’ and other counterparties’ ability to settle the commercial receivables and payment obligations related to loans. No significant credit risk clusters were re cognized in the receivables at the balance sheet date. . Exchange rate differences – Derivatives – Hedge accounting EUR 1,000 2017 2016 EXCHANGE RATE GAINS AND LOSSES (NET) 33 -82 -82 -178 Included in other comprehensive income items -183 534 TOTAL -232 274 Included in net sales Included in financial income and expenses EUR 1,000 2017 2016 DERIVATIVES Nominal values of forward contracts in foreign currency Economic hedging - Related to financing - Related to the hedging of net sales 492 - 3 228 6 084 12 716 2 556 Hedge accounting - Related to the hedging of net sales Fair values of forward contracts in foreign currency Economic hedging - Related to financing 52 - - Related to the hedging of net sales 27 -41 -18 -75 Hedge accounting - Related to the hedging of net sales Basis of preparation Foreign currency transactions of foreign subsidiaries’ financial statements have been translated into the functional currency using the exchange rates prevailing at the dates of the transactions. In practice the translation is often carried out using rates that approximately correspond to those prevailing at the dates of transactions. Monetary items in foreign currency have been translated into the functional currency using the rates prevailing on the last day of the reporting period. Foreign currency non-monetary items measured at fair value have been translated into the functional currency using the rates prevailing at the date of fair value measurement. Otherwise non-monetary items have been measured using the rate prevailing at the date of transaction. IFRS standards that have been published and will be valid in future financial periods IFRS 9 standard is effective on January 1, 2018. Raute Group shall adopt the standard from the date of application. The change includes revised guidance on the hedge accounting. The standard also provides the guidance on the classification and measurement of the financial assets, and expanded presentation requirements. It has been estimated that the changes in the standard will not have a significant impact on financial statement transactions and items. Basis of preparation The Group has used currency derivative contracts to hedge against currency risks related to future transactions of commercial transactions and financial items. At the time of the adoption of each derivative contract have been determined in which asset or liability recognized in the balance sheet, or a highly probable forecast transaction (cash flow hedge) the risk it protects and has the hedge accounting applied. Derivative financial instruments have been recognized in the balance sheet at their fair value at the contract date and are later remeasured at fair value. The fair values of derivative contracts have been determined using the market values at the balance sheet date. Gains and losses from fair value measurement are treated as determined by the purpose of the derivatives. The changes in the value of derivatives, to which hedge accounting has not been applied, have been presented in the income statement in other operating income or expenses. Derivatives recognized in the Group’s balance sheet have been presented as accrued expenses or receivables under current assets or liabilities in the balance sheet. The derivatives mature within the due dates of the contracts. Financial Statements 2017 / Group Gains and losses from foreign currency transactions and translation of monetary items have been recognized in the income statement. Exchange rate gains and losses from transactions have been presented in the corresponding items in a net basis above the operating profit or loss. Exchange rate gains and losses related to cash and cash equivalents, loans and other financial assets and liabilities have been presented in the income statement under the item Financial income and expenses. The exchange gains and losses included in the comprehensive income items include exchange rate differences linked to monetary items which fulfill the terms defined for the hedging of cash flows. In addition, the items include the translation difference profits generated by the net investments linked to a foreign subsidiary. Hedge accounting has been applied when essential exchange risk exists on the derivative contract which is determined as a hedging of the cash flow of the long-term project. The decision to apply hedge accounting is made separately for each contract at the contract date. Each hedging derivative is set to hedge certain assets and liabilities, binding contracts or future transactions. The hedging relationship between the hedged item and the hedging instrument and risk management objectives and strategies for hedging transactions has been documented when hedging relationship has been created. When starting the hedging, the Group documents an estimate of whether the change in the fair value of the hedging instrument effectively corresponds to the changes in the fair values of the hedged cash flows or other hedged items. The changes in the fair value in derivative contracts which meet the conditions of hedging has been recognized in the items of comprehensive income and presented in the equity hedge reserves. The gains or losses in equity have been recognized in profit or loss when the predicted sale has been recognized in the comprehensive income statement. 37 Risk management – Currency risks Risk management The Group operates in international markets and is thus exposed to currency risks resulting from changes in currency exchange rates. The Group’s currency risks consist of foreign currency de nominated sales and purchases as well as assets and liabilities recognized in the balance sheet (transaction risks) and investments in foreign sub sidiaries (translation risks). The Group’s main currency is the euro. The most significant currency risks result from the following currencies: - Canadian dollar (CAD) - US dollar (USD) - Chinese yuan (CNY) - Russian rouble (RUB). The distribution of the Group’s sales varies annually according to market area. In 2017 amount of 63 percent (50%) of net sales were generated outside the euro zone. The Group primarily uses Group company’s functional currency as the primary trading currency, of which the most important is the euro. The proportion of the net sales sold in another currency than the Group’s home currency was 7 percent (11 %) during the year 2017. The Group’s operative units hedge foreign currency denominated payments based on binding sales contracts through the Parent company’s financing unit when the contracts take effect. Currency forward contracts are used to hedge sales payments operatively. The Group hedges the internal trading with forward contracts. The most significant individual currency risk related to purchasing in the Group arises from the Parent company’s internal purchases from China. The trading currency of these purchase agreements is the euro but the Group ’s costs are determined by the Chinese juan. Primarily, cash flows accumulating from un-hedged sales payments in the same currency are used in 38 the hedging of currency risks related to binding procurement contracts. Future cash flows, which are not based on contracts binding both parties, are usually not hedged. Currency clauses are used to hedge against currency risks during the quotation period. Depending on the case, currency risks related to preliminary sales contracts are hedged with currency option contracts. The nominal value of forward contracts used to hedge business operations was EUR 16.4 million (MEUR 8.6) and the fair value EUR 60,8 thousand (EUR -116 thousand) at the balance sheet date. The internal loans taken out by the Group companies and their deposits are mainly in the functional currency of the subsidiary in question. The currency exchange risks of the Group’s internal loans have been hedged with forward contracts, with the exception of equity loans or loans in fact classified as such, and such working capital loans, the repayments of which are paid from the fore casted unhedged currency flows of sales in the same currency. At the end of the financial year 2017, no forward contracts were related to the hedging of the Group’s financing. The subsidiaries’ loans from external financial institutions were in each company’s functional currency. The forward contract receivables and liabilities re lated to an economic hedging of a sales currency payments, to which hedge accounting is not ap plied, increase the currency risk to the Group at the balance sheet date. This currency risk is recognized to the extent that the value of forward contracts exceeds the respective binding sales contracts recorded sales. The measurement of the forward contracts and the percentage of comple tion receivables had a EUR 78 thousand positive effect on the Group’s operating profit (EUR -41 thousand) at the reporting date. The nominal values of derivatives related to financing are presented in the note Derivatives, page 37. The Group applies the hedge accounting to the currency derivative contracts when the change in the fair value of a contract may have a significant temporary effect on the Group’s operating profit due to the change in exchange rates. The Group’s Parent company concludes, with an external counterparty, a derivative contract which is defined as a hedging instrument in hedge accounting. Sub sidiaries use internal derivatives to hedge transactions defined as hedged items. The total amounts of the valuation gains and losses for derivatives have been presented in the note Derivatives, page 37. The Group regularly monitors transaction risks in the main currency pairs. Currency flows related to binding contracts, and derivative contracts used for their hedging, are taken into account in the net currency position from the reporting date onwards regardless of which year’s profit or loss the currency risk will affect. The aim of managing currency risks is to keep the open net currency positions of each Group currency pair at less than EUR 500 thousand for each currency pair other than for the Russian ruble, for which the aim is to keep the net currency position at less than EUR 1 million. The Group’s net currency position and its portion included in the balance sheet at the reporting date (Net balance sheet risk) is presented in currency pairs in the following table: EUR 1,000 Net currency position 2017 2016 Net balance sheet risk 2017 2016 CNY/EUR 216 82 8 286 RUB/EUR -650 -539 -650 -539 CAD/EUR 650 185 4 986 185 USD/EUR 177 30 677 -379 The Group is exposed to translation risks. The Group has foreign subsidiaries which have equities in currencies other than the Parent company’s functional currency. The currency risks related to the conversion of the foreign subsidiaries’ net investments to the Group’s home currency, the euro, have not been hedged. The Group’s subsidiaries’ non-euro-denominated equities equalled altogether EUR -3 280 thousand on December 31, 2017 (EUR -3,680 thousand). Net investments are detailed according to currency in the following table: Net investments 2017 2016 - EUR 1,000 - CNY RUB - - CAD 84 84 USD 1 058 17 15 15 Other A sensitivity analysis in the main currency pairs on the transaction risk, i.e. the effect of reasonable potential changes in the exchange rates on the Group’s profit or loss after tax on December 31, 2017 is presented in the following table: Effect on profit after tax 2017 EUR 1,000 CNY +/- 30% -/+ RUB +/- 30% CAD +/- 30% USD +/- 30% 2016 184 -/+ 436 +/- 25 -/+ 152 -/+ 1 077 -/+ 566 -/+ 99 +/- 5 All foreign currency receivables and liabilities as well as the currency derivative contracts, recognized in the balance sheet on the reporting date, have been taken into account in the sensitivity analysis. In the analysis, the change in exchange rate has been estimated to be +/-30 percent from the reporting date based on the prevailing uncertainty in the financial market development. Other factors are estimated to remain unchanged. Equity EUR 1,000 2017 2016 SHARE CAPITAL Share capital at Jan. 1 8 256 8 223 - 33 8 256 8 256 5 445 4 950 207 495 Invested non-restricted equity reserve at Dec. 31 5 652 5 445 Other reserves at Jan. 1 Exercised stock options Share capital at Dec. 31 FAIR VALUE RESERVE AND OTHER RESERVES Invested non-restricted equity reserve at Jan. 1 Exercised stock options Financial Statements 2017 / Group 1 132 1 058 Fair value reserve 193 -31 66 Equity settled share-based payments 240 -191 Invested non-restricted equity reserve includes other equity investments and the share subscription price unless not recognized to the equity based on an explicit resolution. 259 Hedging reserve, hedge accounting Basis of preparation Series K and series A shares held by third parties have been presented in share capital. Expenditure related to issues or acquisitions of own equity instruments has been presented as allowance for equity. Deferred taxes related to these items Other reserves at Dec. 31 -32 -60 1 504 1 132 EXCHANGE RATE DIFFEFRENCES Exchange rate differences at Jan. 1 842 308 -183 534 659 842 Retained earnings at Jan. 1 18 543 15 161 Dividends -4 220 -3 303 9 300 6 684 23 623 18 543 Changes in the fair value of available-for-sale investments 193 259 Cash flow hedges -31 66 -183 534 Income taxes related to these items -32 -60 TOTAL -52 799 Other reserves include the fair value reserve arising from the valuation of revaluation reserve, granted share-based remuneration settled in shares and the changes in fair value in derivative contracts which meet the conditions of hedging. Exchange rate differences on translating foreign operations Exchange rate differences at Dec. 31 RETAINED EARNINGS Profit for the financial year Retained earnings at Dec. 31 OTHER COMPREHENSIVE INCOME ITEMS Exchange differences on translating foreign operations Exchange rate differences include exchange differences arising from translation of foreign sub sidiaries financial statements as well as gains and losses arising from hedging of net investments in subsidiaries. The dividend proposed by the Board of Dire ctors to the Annual General Meeting has been recognized as a liability and a deduction from distributable equity for the period in which the dividend has been approved for distribution by the shareholders. The Annual General Meeting held on March 28, 2017 decided to pay a dividend of EUR 1.00 per share for the financial year 2016. The total amount of dividends was EUR 4 219 711.00, with series A shares accounting for EUR 3 228 550.00 and series K shares for EUR 991 161.00. The dividend payment date was April 6, 2017. 39 Shares and share capital Shares, 1,000 pcs Series K shares (ordinary shares) Series A shares 2017 2016 20 votes/share 991 991 1 vote/share 3 258 3 215 4 249 4 206 Total shares at Dec. 31 Own shares at Jan. 1 15 9 Own shares at Dec. 31 15 - 9 Disposal of own shares In 2017, altogether 16,449 series A shares have been subscribed for with Raute’s series B 2010 stock options and 17,424 with series C stock op tions. The subscription period for series B stock options ended on March 31, 2017. - -15 Acquisition of own shares Raute Corporation has t wo series of shares, se ries K and series A. Share-related data is presented on page 70 of the financial statements. 15 Raute Corporation’s series C 2010 stock options are listed on Nasdaq Helsinki Ltd under the trading code RAUTEEW310. The subscription period for series C stock options is March 1, 2015 to March 31, 2018. The respective subscription price was EUR 5.00 and the closing price at the end of the reporting period 2017 was 20.50. Reconciliation of the number of shares, 1,000 pcs Number of shares at Jan. 1 4 206 80 9 Number of shares at Dec. 31 Share capital EUR 15 4 249 Directed issue of shares to the company itself Changes in share capital from Jan. 1, 1994 to Dec. 31, 2017 4 112 34 Exercised stock options 4 206 Number of series K shares Number of series A shares 1 054 600 2 124 240 Share capital at Jan. 1, 1994 5 359 073 Issue of share capital Sep. 21, 1994 1 069 285 - 635 768 - -14 000 14 000 -12 648 - - 1 213 506 - - Conversion of series K shares into series A shares 2003 - -44 539 44 539 Conversion of series K shares into series A shares 2004 - -4 900 4 900 380 300 - 190 150 Share subscriptions with series 2010 stock options 2014 20 940 - 10 470 Share subscriptions with series 2010 stock options 2015 192 960 - 96 480 - - 14 523 32 900 - 80 231 - - 8 913 Conversion of series K shares into series A shares 1998 Decrease of share capital (premium fund) June 30, 2000 Increase of share capital, capitalization issue June 30, 2000 Registration of shares with options 2006 Directed issue of shares to the company itself 2016 Share subscriptions with series 2010 stock options 2016 Directed issue of shares to the company itself 2017 Share subscriptions with series 2010 stock options 2017 Share capital at Dec. 31, 2017 Other tradable securities - - 33 873 8 256 316 991 161 3 258 087 2017 2016 Series 2010 B stock options, unsubscribed at Dec. 31 - 16 449 Series 2010 C stock options, unsubscribed at Dec. 31 13 446 31 370 Total unsubscribed at Dec. 31 13 446 47 819 40 The company has acquired through a direct issue to the company itself a total of 8,913 pieces of its own shares based on the authorization granted by the Annual General Meeting. The new shares were registered with the Trade Register on Octo ber 17, 2017 and they were held by the company at the balance sheet date December 31, 2017. Capital structure management The objective of the Group’s capital structure management is an effective capital structure that secures the Group’s operational preconditions on the capital market. The Group’s Parent company’s credit ranking throughout 2017, as well as in the comparison year 2016, was good. The Group’s capital structure is followed using the equity ratio, which has been set a strategic target value. During the financial year 2017 the target value of the equity ratio was over 40 percent. At the end of the financial year, the equity ratio was 64 percent (60%) and gearing -74 percent (-60%). Earnings per share 2017 2016 Undiluted earnings per share Share of profit that belongs to the owners of the Parent company, EUR 9 300 6 684 Weighted average number of shares, 1,000 pcs 4 225 4 167 2,20 1,60 Share of profit that belongs to the owners of the Parent company, EUR 9 300 6 684 Diluted weighted average number of shares, 1,000 pcs 4 259 4 210 2,18 1,59 4 225 4 167 34 43 4 259 4 210 Earnings per share, EUR Diluted earnings per share Diluted earnigs per share, EUR The weighted average number of shares used as divider when calculating the diluted earnings per share The weighted average number of shares used as divider when calculating the diluted earnings per share Share-based payments The weighted average number of shares used when calculating the diluted earnings per share Financial Statements 2017 / Group Basis of preparation Undiluted earnings per share have been calculated by dividing the period’s profit attributable to equity holders of the Parent company by the weighted average of outstanding shares in the period. Diluted earnings per share have been calculated by dividing the period’s profit attributable to equity holders of the Parent company by the weighted average of shares in the period, which have been adjusted by dilutive effect of the share-based payments. Share-based payments have dilutive effect if the exercise price of the share benefit is lower than the fair value of the share. For the calculation of diluted earnings per share, share-based payments calculation is done to determine the number of shares that could have been acquired at fair value (the average annual market share price of the company’s share) based on the monetary value of the subscription rights attached to outstanding share benefits. This number of shares is compared with the number of shares that would have been issued assuming the exercise of the share benefits. The share-based payments had a diluted effect of 33 834 pieces (43 049 pieces) on calculating the diluted number of shares. 41 Financial liabilities 2017 2016 Partial payments of financial loans 1 413 3 136 TOTAL 1 413 3 136 100 % 100 % EUR 1,000 CURRENT INTEREST-BEARING LIABILITIES Financial liabilities recognized at amortized cost Distribution of the Group’s current loans by currencies - Chinese yuan (CNY) The weighted averages of effective interest rates of current interest-bearing loans 5,28 % Partial payments of financial loans 5,37 % The following table shows the fair values and carrying amounts of financial item which corresponds their fair value carried in the consolidated balance sheet. The Group’s principles of fair value determination related to the financial instruments have been described in the note Basis of preparation. EUR 1,000 Carrying Fair Carrying Fair amount value amount value Dec. 31, 2017 Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2016 Financial liabilities at fair value through profit or loss - Trade payables and other liabilities - Accrued expenses and prepaid income Total The Group’s financial liabilities include a financial loan of a foreign subsidiary totaling EUR 1.4 million (MEUR 3.1) from a financial institution approved EUR 1,000 80 80 7 7 1 413 1 413 3 136 3 136 32 986 32 986 21 369 21 369 Financial liabilities recognized at amortized cost - Financial loans Partial payments of the financial loan in the following financial year have been presented in the current liabilities. The Group has no non-current financial liabilities at the reporting date. 9 603 9 603 8 097 8 097 44 082 44 082 32 609 32 609 Financial instruments by category Financial liabilities at fair value through profit or loss Financial liabilities recognized at amortized cost 80 80 7 7 44 002 44 002 32 602 32 602 EUR 1,000 Level 1 Level 2 Level 3 Total Financial expenses Total Repayments Total Financial expenses Total Financial liabilities at fair value through profit or loss 1 413 109 1 522 - Derivative contracts - 80 - 80 7 115 - 80 - 80 Cash outflow Cash inflow The fair value of the instruments included in the hierarchy level 2 is based on the price available from the market data but instruments are not traded in an active market. 42 Total EUR 1,000 2017 Repayments Financial expenses Total 3 136 85 3 221 Repayments Financial expenses Total 7 596 7 596 Accrued expenses and prepaid income 9 603 9 603 Derivatives Total In the Group, the fluctuating interest level mainly influences the future return level of liquid assets and the use of current credit agreements intended for working capital financing. Trade payables 7 115 Accrued expenses and prepaid income Repayments Risk management The Group’s interest risk results from financial liabilities. The Group’s objective is to hedge against interest risks related to liabilities through fixed-interest rate loans, interest rate derivative instruments and sufficient liquid assets. The Group takes out loans with either fixed interest rates or floating interest rates. The floating interest rate loans expose the Group’s cash flow to interest risk. Financial loans Trade payables Financial expenses Hierarchy levels 2018 Financial loans Repayments by the Parent company. The Group’s pledges and contingent liabilities have been presented in note Pledged assets and contingent liabilities, page 47. Maturities of the financial liabilities, comparison year Maturities of the financial liabilities at Dec. 31, 2017 Fair value of financial liabilities - Derivative contracts Basis of preparation Financial liabilities are initially recognized at fair value. Transaction costs have been included in the initial carrying amount of the financial assets at amortized cost. Later, financial liabilities, excluding de rivative liabilities, have been measured at amortized cost using the effective interest method. Current financial liabilities are debts where the Group has no unconditional right to defer the payment of the debt to at least 12 months from the reporting date. Repayments Financial expenses Total 7 987 7 987 Derivatives -16 093 15 944 -150 Cash outflow Cash inflow Total -6 775 4 235 -2 540 Financial assets EUR 1,000 Carrying Fair Carrying Fair amount value amount value Dec. 31, 2017 Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2016 Fair values of financial assets Financial assets at fair value through profit or loss - Derivative contracts 131 131 90 90 Unquoted share investments 923 923 748 748 - Account receivables and other receivables 30 277 30 277 24 385 24 385 Cash and cash equivalents 30 724 30 724 23 769 23 769 Total 62 055 62 055 48 992 48 992 61 000 61 000 48 154 48 154 1 054 1 054 838 838 Loans and receivables Financial instruments by category Loans and receivables Available-for-sale financial assets The balance sheet item Accounts receivables and other receivables includes percentage of completion receivables from customers’ long-term projects totaling EUR 20,405 thousand (EUR 16,741 thousand). EUR 1,000 Level 1 Level 2 Level 3 Total Hierarchy levels Financil assets at fair value through profit or loss - Unquoted share investments - - - Derivative contracts - 131 923 - 923 131 Total - 131 923 1 054 Financial instruments at fair value are categorized according to standard IFRS 7. Instruments included in level 1 are traded in active markets. The fair values of these instruments are based on the quoted market prices at the balance sheet date. The fair value of the instruments included in level 2 is based on the price available from the market data but instruments are not traded in an active market. The fair value of the instruments included in level 3 is not based on the observable market data but is based on the estimates from the management Basis of preparation Financial assets have been classified as financial assets at fair value through profit and loss, loans and other receivables and available-for-sale financial assets. Classification has been made based on the purpose of acquisition in conjunction with the original acquisition. Financial assets are derecognized from the balance sheet when the contractual right to receive cash flows has expired or the Group has substantially transferred risks and income outside the Group.The balance sheet values of the Group’s financial items correspond with the carrying amount of the Group balance sheet due to the nature of balance sheet items. Financial assets maturing within 12 months are included in current assets. Financial assets at fair value through profit or loss have been acquired for trading. All purchases and sales of financial assets have been recognized on the transaction date. Financial assets held for trading have mainly been acquired to generate profit from short-term changes in market price. Derivatives which are used for hedging purposes, but hedge accounting is not applied, are classified as held for trading. The fair values of derivatives have been determined using the market values of the contract determined to the similar period at the balance sheet date. Derivatives held for trading are included in current assets. The changes in the fair value of derivatives, have been presented in income statement in the financial year in which they have been incurred. The nominal values of currency derivative contracts have been disclosed in the note Derivatives, page 37. Available-for-sale financial assets consist of unquoted share investments. Unquoted share investments have been recognized at cost deducted with Financial Statements 2017 / Group possible impairments, so far as their fair value has not been possible to determine reliably. The original carrying amount of sales receivables and other receivables corresponds to their fair value. The discounting effect is not significant when taking into account the maturity of the receivables. The balance sheet sales receivables at the reporting date do not include significant risk concentrations. Impairment of financial assets At the reporting date the Group assesses whether there is objective evidence of impairment of a financial asset or a group of financial assets. If the fair value of the Group’s equity investment is significantly less than the acquisition cost and the time period defined by the Group, this is a sign of impairment of the available-for-sale share. If impairment has occurred, the losses accumulated in the fair value reserve are transferred to the income statement. Impairment losses of equity investments classified as available-for-sale assets have not been reversed through profit or loss. The default risk related to accounts receivables has been estimated on the basis of a comprehensive survey of accounts receivables carried out at the balance sheet date. Factors indicating impairment of accounts receivables include repeated failures or delays to pay, imminent bankruptcy or debt restructuring as a result of major financial difficulties of the debtor. Estimated impairment losses have been recognized in the income statement as the difference between the carrying amount and the present value of estimated future cash flows discounted at the effective interest rate. If an impairment loss decreases in a subsequent period, and the decrease can be objectively related to an event occurring after the impairment was recognized, the impairment loss is reversed through profit or loss. 43 Financial assets 2017 2016 Cash and bank accounts 30 724 23 769 TOTAL 30 724 23 769 Cash and cash equivalents 30 724 23 769 TOTAL 30 724 23 769 2017 Basis of preparation Cash and cash equivalents comprise cash in hand, current bank deposits and other highly liquid short-term investments with original maturities of three months or less. Bank overdrafts are included in current interest-bearing liabilities. Credit accounts related to Group accounts are included in current interest-bearing liabilities and presented net if the Group has a contractual legal right of set-off concerning full or partial payment or elimination of an amount to the lender. Financial assets are derecognized when the contractual right to cash flows expires or the Group has sub stantially transferred risks and income outside the Group. Risk management Counterparty risk for investment activities The financing instrument contracts that the Group has concluded with banks and financial institutions involve the risk that the counterparty is not able to fulfill its obligations according to the contract. In investment activities and when concluding derivative contracts, only those parties which have a good credit rating and which meet the other terms and conditions defined by the financing policy are accepted as counterparties. When making investments, or derivative and loan agreements, the Group applies counterparty-specific upper limits to avoid risk concentrations. On the balance sheet date, the investments assets related to the Group’s cash management were in bank accounts. The liquid assets in financial institutions outside the euro zone were EUR 4.9 million (MEUR 5.8) at the balance sheet date. Basis of preparation Available-for-sale financial assets consist of investments in unquoted shares. They have been included in non-current assets unless the intention is to hold them less than 12 months from the balance sheet date. The Group has so far no intention to dispose these investments in which case they have been included in non-current assets. Unquoted shares have been valued at cost less po tential impairment, extent the fair value cannot be determined reliably. Management’s accounting judgments In determination of the fair value of available-for-sale financial assets the management has used management’s judgment and assumptions which have been based on the available information on market conditions. 2016 EUR 1,000 CASH AND CASH EQUIVALENTS Cash and cash equivalents in cash flow statement EUR 1,000 OTHER FINANCIAL ASSETS Available-for-sale financial assets Unquoted share investments 471 490 Revaluation: PHP-Holding Oy - 186 Revaluation: Other shares 452 73 TOTAL 923 748 Changes in the fair value of available-for-sale financial assets have been recognized in other items of the comprehensive income and they have been presented in the fair value reserve, including the tax effects. Permanent impairment of assets has always been recognized directly in the income statement. The fair value of the available-for-sale financial assets has been categorized in level 3 in the financial asset hierarchy. The fair value hierarchy information has been presented in the notes to the consolidated financial statements on page 43. 44 Liquidity risk - Covenants Risk management Due to the nature of the Group’s project business, required financing and the amount of liquid assets also fluctuate in the short term. Predicting working capital requirements is made especially challenging by new orders which have individual payment terms and involve uncertainties related to delivery schedules. The minimum amounts of cash and cash equivalents, current investments, and available credit liabilities have been defined in the Group’s financing policy to ensure the Group’s liquidity. Good liquidity is maintained primarily through efficient working capital and cash management. In the long term, risks related to the availability and pricing of funding are managed by using a variety of sources for financing. Investments are required to exhibit sufficient liquidity. The Group did not have interest-bearing net liabilities in the consolidated financial statements of December 31, 2017 or in the comparison year. The cash and cash equivalents available to the Group are sufficient to cover the Group’s short-term financing needs. The Group’s cash and cash equivalents totaled EUR 30.7 million (MEUR 23.8) at the end of the financial year. The Group has made preparations for fluctuating working capital requirements and possible disturbances in the availability of money with non-current credit limit agreements worth EUR 23.0 million with three Nordic banks. At the end of the financial year, EUR 32.7 million was unused of the limit. The current credit limit agreements terminate in the year 2019. The credit facility agreements covenants The Group has set in its loan and credit contracts, as well as in the security agreements related to them, the following specific conditions of key ratios, so called covenants: - equity ratio at least 30 percent and - gearing under +100 percent. Investments are made mainly in current deposits or in secondary marketable euro-based investments with a good credit rating. Financial Statements 2017 / Group The loan covenants are reported to the creditor on a quarterly basis. If the Group breaks the loan covenant conditions, the creditor may require expedited repayment of the loans. The Group’s financial liabilities include trade payables, derivative liabilities and interest-bearing liabilities. Trade payables are due within less than a month on average. Repayment of interest-bearing loans based on the Group’s loan contracts and cash flows from financial expenses related to them and cash flows from other financial liabilities are presented in note Financial liabilities on page 42. In addition, bank credit limits and Raute Corporation’s EUR 10 million (MEUR 10) domestic commercial paper program, which allows the Group to issue commercial papers maturing in less than one year, secure the Group’s liquidity. Nordea Bank AB (publ) is the arranger of the program. During the financial year 2017 and the comparison year, the Group met the conditions of the cove nants and reached the set target value of equity ratio. Fluctuations in working capital Fluctuations in balance sheet working capital items and the key figures based on them are due to differences in the timing of customer payments and the cost accumulation from project deliveries, which is typical of the project business. Major individual projects in particular typically employ working capital just before the delivery of machines and equipment to customers. 45 Financial income and expenses EUR 1,000 2017 2016 FINANCIAL EXPENSES, NET Financial income Interest income from receivables Dividend income from available-for-sale investments 5 3 120 114 68 - Capital gains from available-for-sale investments 164 - Exchange rate gains from financial liabilities, net 1 6 Other financial income 2 - 359 123 -191 -173 Basis of preparation Interest income has been recognized as income in the financial year in which it has arisen. Dividend income has been recognized as income in the financial year when the right to receive the dividend payment has been established. Revaluation of assets at fair value through profit or loss Total financial income Financial expenses Interest expenses on financial loans recognized at amortized cost -83 -184 Other financial expenses -137 -104 Total financial expenses -411 -461 Financial expenses, net -51 -338 Exchange rate losses on other financial items Foreign exchange gains arise from the valuation of the Group’s foreign currency cash and cash equivalents and financial liabilities. Interest expenses from financial liabilities have been recognized as expense in the financial year in which they belong to based on the interest liability determined in the financial loan contract. Other interest expenses have been recognized as expense in the financial year in which they have arisen. Foreign exchange losses arise from the valuation of the Group’s foreign currency cash and cash equivalents and financial liabilities. 46 Pledged assets and contingent liabilities EUR 1,000 2017 2016 8 274 6 623 1 413 Financial Statements 2017 / Group 3 136 On behalf of the Parent company Business mortgages Mortgage agreements on behalf of subsidiaries Financial loans 313 189 1 726 3 377 25 728 17 793 Rental liabilities maturing within one year 1 297 926 Rental liabilities maturing in one to five years 2 773 756 Other obligations Business mortgages Commercial bank guarantees on behalf of the Parent company and subsidiaries Other own obligations Rental liabilities maturing later Total - 1 4 070 1 684 Loans and guarantees on behalf of the related party The Parent company Raute Corporation had loan receivables from it subsidiary Raute Canada Ltd. a total of EUR 997 thousand (2 114 thousand) and from Metriguard Technologies, Inc. a total of EUR 1 032 thousand. Raute Corporation has given a counter guarantee of EUR 1 413 thousand (EUR 3 136 thousand) for the loan of a foreign subsidiary. Raute Corporation has given a commercial counter guarantee of EUR 99 thousand (EUR 20 thousand) on behalf of a foreign subsidiary. 47 Segment information EUR 1,000 2017 % 2016 % Basis of preparation Operations of Raute Group belong to the wood products technology segment. Raute Corporation’s Board of Directors is the chief operating decision maker that is responsible for assigning resources to the operating segment and assessing its result. The Board monitors profitability through the operating profit key figures. SEGMENT INFORMATION Wood products technology Net sales 148 615 113 130 Operating profit 11 573 8 558 Assets 86 857 69 767 Liabilities 47 163 35 549 6 962 3 224 Capital expenditure Assets of the wood products technology segment by geographical location 77 392 89 58 993 85 North America 5 693 7 4 077 6 China 2 511 3 5 357 8 Russia 1 007 1 990 1 South America 128 0 189 0 Other 127 0 161 0 Total 86 857 100 69 767 100 Finland 4 283 62 2 925 91 North America 2 663 38 181 6 China - - 104 3 Russia 13 0 9 0 South America 1 0 1 0 Other 1 0 4 0 Total 6 962 100 3 224 100 Finland Capital expenditure of the wood products technology segment by geographical location 48 Due to Raute’s business model, operational nature and administrative structure, the operational segment to be reported as wood products technology segment is comprised of the whole Group and the information on the segment is consistent with that of the Group. The division into operating segments is based on the Group’s internal decision-making order and is consistent with the financial reports submitted to the chief operating decision maker. Segment reporting follows the principles of presentation of the consolidated financial statements. Parent company’s financial statements, FAS RAUTE CORPORATION Financial statements January 1 – December 31, 2017 The accounting principles of the Parent company’s financial statements have been presented only for those parts that differ from the IFRS accounting principles of the consolidated financial statements. Basis of preparation The Parent company’s financial statements have been prepared in accordance with the Finnish Accountancy Act (FAS). Other than euro-denominated transactions have been recognized at the exchange rate effective on the transaction date. Receivables and liabilities denominated in other than euro-based currencies have been translated into euro at the average rate of the balance sheet date, except for business operations where the associated currency risk has been hedged by a currency derivative contract. These items have been measured at the value hedged through the derivative contract. Advances paid and received have been recognized in the balance sheet at the exchange rate effective on the payment date. Exchange gains and losses related to changes in the exchange rates have been recognized through profit or loss. 49 Parent company’s income statement, FAS PARENT COMPANY’S INCOME STATEMENT euros 1.1.–31.12.2017 1.1.–31.12.2016 NET SALES 129 993 776,94 97 713 817,06 Change in inventories of finished goods and work in progress 636 019,00 464 092,84 Other operating income 336 743,05 1 393 187,11 Materials and supplies -75 246 701,21 -51 416 095,39 Personnel expenses -30 576 856,82 -28 470 135,58 -1 900 894,13 -1 585 142,82 Depreciation and amortization -11 541 364,39 -9 253 428,76 -119 265 816,55 -90 724 802,55 11 700 722,44 8 846 294,46 -27 259,73 1 355 066,93 PROFIT BEFORE APPROPRIATIONS AND TAXES 11 673 462,71 10 201 361,39 Income taxes -2 511 000,30 -1 499 622,35 9 162 462,41 8 701 739,04 Other operating expenses Total operating expenses OPERATING PROFIT Financial income and expenses PROFIT FOR THE FINANCIAL YEAR 50 Parent company’s balance sheet, FAS PARENT COMPANY’S BALANCE SHEET euros PARENT COMPANY’S BALANCE SHEET 31.12.2017 31.12.2016 31.12.2017 31.12.2016 Share capital 8 256 316,00 8 256 316,00 Fair value reserve and other reserves 5 652 408,93 5 445 207,56 14 710 592,47 10 228 564,43 euros SHAREHOLDERS’ EQUITY AND LIABILITIES ASSETS Shareholders’ equity Non-current assets Intangible assets 2 889 716,81 880 017,78 Tangible assets 7 845 393,77 7 460 355,91 Investments 1 839 802,15 817 208,03 12 574 912,73 9 157 581,72 Total non-current assets Financial Statements 2017 / Parent company Retained earnings Profit for the financial year Total shareholders’ equity 9 162 462,41 8 701 739,04 37 781 779,81 32 631 827,03 1 979 039,84 1 558 684,00 Current assets Obligatory provisions 7 558 857,86 7 375 584,14 Deferred tax assets 37 220,39 9 339,04 Current receivables 30 624 745,52 24 529 168,95 Liabilities Cash and cash equivalents 30 331 321,27 22 144 932,16 Current liabilities 41 366 238,12 29 026 094,98 Total current assets 68 552 145,04 54 059 024,29 Total liabilities 41 366 238,12 29 026 094,98 TOTAL ASSETS 81 127 057,77 63 216 606,01 TOTAL LIABILITIES 81 127 057,77 63 216 606,01 Inventories 51 Parent company’s cash flow statement, FAS PARENT COMPANY’S CASH FLOW STATEMENT euros 1.1.–31.12.2017 1.1.–31.12.2016 135 947 843,21 107 452 953,82 CASH FLOW FROM OPERATING ACTIVITIES Proceeds from sales Proceeds from other operating income Payments of operating expenses Cash flow before financial items and taxes 283 168,30 1 299 996,68 -115 720 492,50 -88 619 212,43 20 510 519,01 20 133 738,07 Interest paid from operating activities -25 815,72 -41 270,07 Dividends received from operating activities 119 954,00 114 160,00 Interests received from operating activities 502 322,27 32 686,73 Other financing items from operating activities -50 837,52 -203 341,96 Income tax paid -2 887 940,02 -258 262,67 Net cash flow from operating activies (A) 18 168 202,02 19 777 710,10 Capital expenditure in tangible and intangible assets -2 349 969,91 -2 850 197,21 Business transaction -1 546 555,22 - 108 977,63 93 237,21 -6 285 787,97 - 182 400,00 - CASH FLOW FROM INVESTING ACTIVITIES Proceeds from sale of tangible and intangible assets Payment for acquisition of subsidiary Proceeds from sale of investments Loans granted to Group companies Repayments of loan receivables from Group companies Net cash flow from investing activities (B) -1 031 798,14 - 5 248 711,11 3 006 763,80 -5 674 022,50 249 803,80 CASH FLOW FROM FINANCING ACTIVITIES 207 201,37 527 691,83 Proceeds from current borrowings 3 000 000,00 3 000 000,00 Repayments of current borrowings -3 000 000,00 -4 250 000,00 Dividends paid -4 219 711,00 -3 302 526,40 Net cash flow from financing activities (C) -4 012 509,63 -4 024 834,57 8 481 669,89 16 002 679,33 Proceeds from issue of share capital Net change in cash and cash equivalents (A+B+C) increase (+)/decrease (-) Cash and cash equivalents at the beginning of the year Net change in cash and cash equivalents Effect of exchange rate changes on cash Cash and cash equivalents at the end of the year 52 22 144 932,16 5 987 976,60 8 481 669,89 16 002 679,33 -295 280,78 154 276,23 30 331 321,27 22 144 932,16 Notes to the Parent company’s financial statements Financial Statements 2017 / Parent company NOTES TO THE PARENT COMPANY’S FINANCIAL STATEMENTS EUR 1,000 2017 % 2016 % 2017 2016 110 896 83 005 19 098 14 709 TOTAL 129 994 97 714 Project revenues entered as income from currently undelivered long-term projects recognized by percentage of completion 129 804 109 828 88 168 100 173 - aggregate amount of costs incurred and recognized profits less recognized losses 84 998 88 283 - advance payments received 64 882 72 037 Gross amount due from customers 20 117 16 246 - aggregate amount of costs incurred and recognized profits less recognized losses 44 805 21 545 - advance payments received 63 973 31 555 Gross amount due to customers 19 168 10 010 19 168 10 010 EUR 1,000 LONG-TERM PROJECTS NET SALES Specification of net sales Net sales by market area EMEA (Europe and Africa) 82 296 63 67 882 70 Net sales by percentage of completion CIS (Russia) 34 827 27 18 800 19 Other net sales LAM (South America) 5 986 5 3 048 3 NAM (North America) 4 062 3 3 180 3 APAC (Asia–Pacific) TOTAL 2 822 2 4 804 5 129 994 100 97 714 100 Finland accounted for 20 percent (25%) of the Parent company’s net sales. Basis of preparation The revenue recognition related to net sales correspond the accounting principles of the Group consolicated financial statements. Amount of long-term project revenues not yet entered as income (order book) The balace sheet items of the undelivered projects Projects in which the value by percentage of completion exceeds advance payments invoiced Projects in which advance payments invoiced exceed the value by percentage of completion Advance payments included in the current liabilities in the balance sheet Gross amount due to customers Other advance payments received, not under percentage of completion 2 534 181 21 702 10 191 Advance payments paid for long-term projects 965 1 213 TOTAL 965 1 213 TOTAL Advance payments of the long-term projects included in inventories in the balance sheet 53 Notes to the Parent company’s financial statements CURRENT RECEIVABLES EUR 1,000 INVENTORIES 2017 2016 Accounts receivables Other receivables Total from Group companies 2017 2016 Materials and supplies 4 357 4 562 2 029 2 114 Work in progress 1 639 1 065 985 915 Other inventories 598 536 Advance payments for long-term projects 965 1 213 7 559 7 376 Current receivables from Group companies Loan receivables EUR 1,000 - 350 3 014 3 379 Current receivables from others TOTAL During the financial year, EUR 98 thousand (EUR 101 thousand) were recognized in expenses, reducing the carrying amount of inventories to correspond to the disposal price. 6 530 3 521 Accrued income and prepaid expenses 20 724 16 678 Other receivables, non-interest-bearing 356 951 Total from others 27 610 21 150 TOTAL 30 625 24 529 Book value at Jan. 1 1 511 20 117 16 247 Additions 1 693 1 158 607 431 Decrease -1 411 -1 319 20 724 16 678 1 793 1 511 48 116 Accounts receivables Substantial items included in accrued income Project receivables entered according to percentage of completion Other accrued income TOTAL Basis of preparation Receivables in the balance sheet include accounts receivables and other receivables. Receivables have been valued at original carrying amount or at the lower disposal price. Accounts receivables in the balance sheet do not include significant concentration. OBLIGATORY PROVISIONS EUR 1,000 2017 2016 Warranty provisions Book value at Dec. 31 1 672 Other obligatory provisions Book value at Jan. 1 Change in inventories, materials and supplies 2017 2016 -63 929 -42 553 -204 438 External services -11 114 -9 301 TOTAL -75 247 -51 416 54 1 Decrease -48 -69 186 48 1 979 1 559 TOTAL MATERIALS AND SERVICES Purchases during the financial year 186 Book value at Dec. 31 EUR 1,000 Additions Notes to the Parent company’s financial statements PERSONNEL EXPENSES EUR 1,000 Wages and salaries Pension costs Fixed share-based employee payments Other personnel expenses TOTAL Financial Statements 2017 / Parent company OTHER OPERATING INCOME 2017 2016 -24 801 -22 674 -4 164 -4 158 -286 -227 -1 129 -1 411 -30 577 -28 470 EUR 1,000 2017 2016 Other operating income from Group companies 280 311 Other operating income 26 53 Capital gain on non-current assets 16 28 Insurance compensations 11 918 Allowances received TOTAL 4 84 337 1 393 PERSONNEL Employed at Dec. 31, persons Workers 164 163 Office staff 323 301 TOTAL 487 464 5 4 Personnel working abroad Basis of preparation Revenue not included in net sales has been recognized in the other operating income. Lease income included in the other operating income has been recognized as income on a straight-line basis for the lease term. OTHER OPERATING EXPENSES EUR 1,000 2017 2016 Effective, on average, persons Workers 157 157 Indirect production costs -3 089 -2 744 Office staff 304 284 Sales and marketing costs -2 819 -2 317 TOTAL 461 441 Administration costs -2 304 -1 992 5 4 Personnel working abroad, effective, on average Credit losses from others On average, persons Workers 162 162 Office staff 319 291 TOTAL 481 453 5 4 Personnel working abroad, on average Credit losses from Group companies Basis of preparation Statutory pension coverage of Raute Corporation has been arranged through an external pension insurance company. Pension expenses have been recognized as expenses according to accrual over time. Other costs TOTAL - 900 -3 -159 -3 326 -2 942 -11 541 -9 253 Basis of preparation Research and development costs have been recognized as expenses in the income statement in the year they incurred. During the financial year research and development costs have been recognized in the income statement in the amount of EUR 3 169 thousand (EUR 2 898 thousand). 55 Notes to the Parent company’s financial statements OTHER OPERATING EXPENSES EUR 1,000 Auditor’s remunerations Authorized Public Accountants PricewaterhouseCoopers Oy (Finland) Audit expenses, statutory Audit expenses, other assignments according to the Audit Act Audit expenses, other services Audit expenses, tax services TOTAL OTHER LEASES 2017 2016 EUR 1,000 2017 2016 149 149 29 26 - 1 178 176 2017 2016 Raute Corporation as a lessee Minimum rents paid on the basis of other non-cancellable leases: -40 -41 -2 -1 -93 -19 -5 -10 -140 -71 The Parent company’s auditor during the financial year was Authorized Public Accountants PricewaterhouseCoopers Oy. Statutory audit fee includes audit fees for current financial year auditing. Other services and tax services include audit fees for other services recognized on accrual basis during the financial year. Fees do not include travel costs and fees payable to the authorities arising from auditing or other assignments. Travel expenses paid to the auditors during the financial year totaled EUR 6 thousand (EUR 4 thousand). - Within one year - After a period of more than one year and less than five years - Maturing later TOTAL INCOME TAXES EUR 1,000 Income taxes from operations Current tax of previous financial years Deferred tax assets TOTAL -2 548 -1 563 9 54 28 9 -2 511 -1 500 Basis of preparation The income taxes in the income statement include the current tax based on the taxable income, as well as tax adjustments for previous years. Current tax based on the taxable income of the financial year has been calculated on taxable income using the tax rate in force. Deferred taxes have been recognized for temporary differences between the accounting and taxation value. 56 Notes to the Parent company’s financial statements INTANGIBLE ASSETS EUR 1,000 Financial Statements 2017 / Parent company TANGIBLE ASSETS Intangible rights Goodwill Other intangible assets TOTAL EUR 1,000 Land and water Buildings and structures Machinery and equipment Other tangible assets Advance payments and assets in progress TOTAL Acquisition cost at Jan. 1, 2017 2 206 0 5 813 8 019 Acquisition cost at Jan. 1, 2017 218 9 777 26 473 355 260 37 083 Additions 1 531 662 97 2 289 Additions - 4 694 - 1 403 2 101 - - 270 270 Disposals - - -94 - - -94 3 737 662 6 180 10 579 Reclassification between items - 209 98 12 -589 -270 218 9 990 27 170 367 1 073 38 819 Reclassification between the items Acquisition cost at Dec. 31, 2017 Acquisition cost at Dec. 31, 2017 Accumulated amortization and depreciation at Jan. 1, 2017 -1 873 0 -5 266 -7 139 Depreciation for the financial year -216 -47 -287 -550 Accumulated amortization and depreciation at Dec. 31, 2017 Accumulated depreciation and amortization at Jan. 1, 2017 - -6 849 -22 440 -334 - -29 623 -2 090 -47 -5 552 -7 689 Depreciation and amortization for the financial year - -303 -1 046 -2 - -1 351 Accumulated depreciation and amortization at Dec. 31, 2017 - -7 152 -23 485 -336 - -30 973 Book value at Dec. 31, 2017 218 2 838 3 685 31 1 073 7 845 Book value at Dec. 31, 2016 218 2 928 4 033 21 260 7 460 Book value at Dec. 31, 2017 Book value at Dec. 31, 2016 1 647 615 628 2 890 333 0 547 880 Basis of preparation The Goodwill recognized in the Parent company’s balance sheet has been generated in the business acquisition from Metriguard, Inc. The identifiable other intangible assets acquired has been presented in the balance sheet item Other intangible assets. These items shall be depreciated over their useful life. Tangible and intangible assets have been recognized in the balance sheet at original cost less accumulated depreciation, with the exception of tangible assets and shares, which have been subject to impairment. Variable costs arising from the acquisition and production of a product have been included in the carrying amount. The carrying values of intangible assets with limited useful lives have been reviewed at each reporting date. If the value of an asset has decreased significantly the impairment has been transferred to the income statement. Book value for production machinery was EUR 2,478 thousand (EUR 2,715 thousand) at the end of the financial year. DEPRECIATION AND AMORTIZATION 2017 EUR 1,000 2016 -550 -318 Depreciation and amortization of tangible assets -1 351 -1 267 TOTAL -1 901 -1 585 Depreciation and amortization of intangible assets Depreciations of tangible assets and amortizations of intangible assets according to a plan have been recorded with the straight-line method over the expected economic lives of the assets as follows: Intangible rights Goodwill Other intangible assets Buildings and structures Machinery and equipment Other tangible assets 10 years 10 years 3–10 years 25–40 years 4–12 years 3–10 years. Depreciations and amortizations have been recorded from the beginning of the month in which the asset has been taken into use. Residual expenditures on decommissioning and disposal of tangible assets are presented under the item Depreciation and amortization in the income statement. Gains and losses on disposal of tangible assets are presented in other operating income or expenses. 57 Notes to the Parent company’s financial statements NON-CURRENT INVESTMENTS EUR 1,000 SHARES OWNED BY THE COMPANY Shares, Group companies Shares, Others Holding and voting rights, % Total Book value, EUR 1,000 Acquisition cost at Jan. 1, 2017 7 888 792 8 680 Subsidiaries Additions 6 286 - 6 286 Raute Inc., Delaware, USA 100 1 058 Disposals - -19 -19 RWS-Engineering Oy, Lahti, Finland 100 203 14 174 773 14 947 Raute Canada Ltd., Delta, B.C., Canada 100 84 Raute WPM Oy, Lahti, Finland 100 9 0 Acquisition cost at Dec. 31, 2017 Accumulated impairments at Jan. 1, 2017 -7 560 -303 -7 863 Raute Group Asia Pte Ltd., Singapore 100 Impairments -5 245 - -5 245 Raute (Shanghai) Machinery Co., Ltd, Shanghai, China 100 0 -12 805 -303 -13 107 50 15 1 369 471 1 840 328 490 817 Accumulated impairments at Dec. 31, 2017 Book value at Dec. 31, 2017 Book value at Dec. 31, 2016 Raute Chile Ltda., Santiago, Chile TOTAL Other shares Lahden Seudun Puhelin Oy Esys Oy FIMECC OY 1 369 Number of shares, pcs Book value, EUR 1,000 1 717 326 600 51 50 50 Other TOTAL 58 44 471 Notes to the Parent company’s financial statements SHAREHOLDERS’ EQUITY EUR 1,000 Share capital at Jan. 1 LIABILITIES 2017 2016 8 256 8 223 - 33 Share capital at Dec. 31 8 256 8 256 Invested non-restricted equity reserve at Jan. 1 5 445 4 950 207 495 5 652 Exercised stock options Financial Statements 2017 / Parent company EUR 1,000 2017 2016 Current liabilities Current liabilities to Group companies 1 938 2 489 - Accounts payable 349 586 - Accrued expenses and prepaid income 425 - - Other current liabilities 3 729 4 161 5 445 Total to Group companies 6 440 7 236 10 229 5 806 Current liabilities to others 8 702 7 725 - Dividends -4 220 Retained earnings at Dec. 31 Exercised stock options Invested non-restricted equity reserve at Dec. 31 Retained earnings at Jan. 1 - Advance payments received 19 764 7 703 - Accounts payable 6 102 6 241 -3 303 - Accrued expenses and prepaid income 8 500 7 238 14 711 10 229 - Other liabilities 560 609 Total to others 34 926 21 790 9 162 8 702 TOTAL 41 366 29 026 37 782 32 632 - Current other liabilities 3 729 4 161 TOTAL 3 729 4 161 Substantial items included in accrued expenses and prepaid income - Accrued personnel expenses Changes during the financial year - Profit from the previous year Profit for the financial year SHAREHOLDERS' EQUITY AT DEC. 31 - Advance payments received Interest-bearing liabilities Distributable funds 14 711 10 229 Profit for the financial year 9 162 8 702 Invested non-restricted equity reserve 5 652 5 445 29 525 24 376 Retained earnings at Dec. 31 Distributable funds at Dec. 31 Shares of the company 991 991 Series A shares (1 vote/shares), 1,000 pcs 3 258 3 215 Shares, 1,000 pcs 4 249 4 206 1,94 5 413 231 282 - Income tax liability 782 1 131 - Accrued investments 542 - - Other accrued expenses 603 411 8 500 7 238 1,96 8 256 6 343 - Accrued project expenses 8 256 Series K shares (ordinary shares, 20 votes/share), 1,000 pcs Book counter value of the share Total book counter value, 1 000 pcs TOTAL 59 Notes to the Parent company’s financial statements FINANCIAL INCOME AND EXPENSES DERIVATIVES 2017 2016 From others 120 114 Economic hedging Total 120 114 - Related to financing EUR 1,000 Dividend income EUR 1,000 2017 2016 Nominal values of forward contracts in foreign currency - Related to the hedging of net sales Other interest and financial income 492 - 2 189 3 275 12 716 2 556 Hedge accounting 679 20 4 383 2 764 236 2 Total 5 298 2 787 Economic hedging Total financial income 5 418 2 901 - Related to financing 52 - - Related to the hedging of net sales 22 -97 -18 -75 From Group companies Reversed impairment on loan receivables from Group companies From others - -1 -5 245 -1 394 -201 -150 Total -5 445 -1 546 Total financial expenses -5 445 -1 546 Financial income and expenses, net -27 1 355 Exchange rate gains (+) / losses (-) included in total financial income -57 -19 Impairments, investment in Group company To others Fair values of forward contracts in foreign currency Hedge accounting Interest and other financial expenses To Group companies - Related to the hedging of net sales Raute Corporation’s result was improved by a reversal of impairment for financing loan receivable EUR 4 383 thousand (EUR 2 114 thousand. At the end of the financil year, Raute Corporation had loan receivables fom its subsidiary Raute Canada Ltd. Raute Corporation had loan receivables from its subsidiary Raute Canada Ltd a total of EUR 997 thousand (2 114 thousand) and froma Group company Metriguard Technologies, Inc. a total of EUR 1 032 thousand. At the end of the financial year Raute Corporation have been recognized an impairment for an investment in a foreign subsidiary a total of EUR 5 245 thousand (EUR 1 394 thousand). - Related to the hedging of net sales Basis of preparation The company’s derivatives include foreign currency derivative contracts. Currency derivatives are used to hedge against currency risks related to currency cash flow. PLEDGED ASSETS AND CONTINGENT LIABILITIES EUR 1,000 2017 On behalf of the Parent company Business mortgages 8 274 6 623 Mortgage agreements on behalf of subsidiaries Financial loans Other obligations Business mortgages Commercial bank guarantees on behalf of the Parent company and subsidiaries 1 413 3 136 313 189 1 726 3 377 25 728 17 793 “Letters of Guarantee” engagements have been issued on behalf of certain subsidiaries. No pledges or other contingent liabilities have been given on behalf of the management or shareholders. No loans have been granted to the management and shareholders. 60 2016 List of the Parent company’s common accounting document types, voucher groups and means of storaging FINANCIAL STATEMENTS DECEMBER 31, 2017 Common accounting document types used Documents’ means of storaging Balance sheet book Separately bound, in paper General journal and general ledger In electronic format Accounts payable and accounts receivable In electronic format Description of voucher group Voucher group Vouchers’ means of storaging Bank and cash vouchers 10, 11 and 15 In paper Purchase invoices 81, 85, 86, 87 and 88 In electronic format Sales invoices 30, 31, 34, 35 and 36 In paper Transactions of purchase and sales invoices 70, 72 ja 80 Fixed asset register In electronic format In paper Salary vouchers 65, 66, 67 and 68 In paper Memo vouchers 6, 20, 21, 22 and 25 In paper Automatic contra entries of memo vouchers 98 In electronic format Imputed and entries of cost accounting 28 ja 29 In electronic format and in paper (28) 61 The Board of Directors’ proposal and the Auditor’s note THE BOARD OF DIRECTORS’ PROPOSAL FOR PROFIT DISTRIBUTION, SIGNATURES FOR THE REPORT OF THE BOARD OF DIRECTORS AND FINANCIAL STATEMENTS AND THE AUDITOR’S NOTE The Parent company’s distributable funds total EUR 29,525,463.81 of which the profit for the financial year is EUR 9,162,464.41 and the balance sheet amounts to EUR 81,127,057.77. The Board of Directors will propose to the Annual General Meeting 2018 that the distributable funds will be used in the following way based on the total amount of shares entitled for the dividend at the date of the proposal for dividend distribution, i.e. 4,249,248 shares: - EUR 1.25 per share to be distributed as dividend, i.e. a total of EUR 5,311,560.00 - Retained in equity EUR 24,213,903.81 Total EUR 29,525,463.81. No material changes have taken place in the company’s financial position after the end of the financial year. The company has good liquidity, and the proposed profit distribution does not pose a risk to solvency. L ahti, February 15, 2018 Erkki Pehu–Lehtonen Chairman of the Board Mika Mustakallio Joni Bask Laura Raitio Tapani Kiiski President and CEO Auditor’s note A report on the audit performed has been issued today. Lahti, February 15, 2018 PricewaterhouseCoopers Oy Authorized Public Accountants 62 Markku Launis Authorized Public Accountant Pekka Suominen Patrick von Essen Auditor’s Report (Translation of the Finnish Original) To the Annual General Meeting of Raute Corporation Report on the Audit of the Financial Opinion In our opinion • • the consolidated financial statements give a true and fair view of the group’s financial position and financial performance and cash flows in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU the financial statements give a true and fair view of the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements in Finland and comply with statutory requirements. Our opinion is consistent with the additional report to the Board of Directors. What we have audited We have audited the financial statements of Raute Corporation (business identity code 0149072-6) for the year ended 31 December 2017. The financial statements comprise: • • the consolidated balance sheet, income statement, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies the parent company’s balance sheet, income statement, statement of cash flows and notes. Basis for Opinion We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our Audit Approach Overview • We have applied an overall group materiality of EUR 1,4 million. • We have audited parent company and its subsidiaries in Finland and Canada. In addition, we have performed group level procedures over specific consolidated accounts and analytical procedures to assess unusual movements across all entities. • Revenue recognition of long-term projects As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial statements as a whole. Independence We are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, the non-audit services that we have provided to the parent company and to the group companies are in accordance with the applicable law and regulations in Finland and we have not provided non-audit services that are prohibited under Article 5(1) of Regulation (EU) No 537/2014. The non-audit services that we have provided are disclosed in note Other operating expenses to the Financial Statements. 63 Auditor’s Report (Translation of the Finnish Original) Overall group materiality EUR 1,4 million How we determined it Net sales Rationale for the materiality benchmark applied We chose net sales as the benchmark because, in our view, the performance of the Group is most commonly measured by using this criteria, and it is a generally accepted benchmark. We chose net sales as the benchmark as we considered that this provides us with a consistent year-on-year basis for determining materiality. How we tailored our group audit scope The group audit scope was tailored to take into account the structure of the Group and the size, complexity and risk of individual subsidiaries. Using this criteria we selected companies into our audit scope and at the same time ensured that we get sufficient coverage to our audit, in order to issue an audit opinion for the Group. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. Key audit matter in the audit of the group Revenue recognition of long-term projects Refer to accounting principles of the consolidated financial statements and notes net sales and long-term projects in the consolidated financial statements The main part of net sales is comprised of wood products industry project deliveries and modernizations in technology services, which are treated as long-term projects. The revenue recognition for long-term projects includes significant management judgments, which have a direct impact on the revenue and profit of the financial year. The most important judgment relates to the estimated total revenues as well as estimated material, subcontracting and labour costs. Revenue and cost from long-term projects have been recognized as an income and expense according to the percentage of completion as soon as the outcome has been reliably estimated. Percentage of completion has been measured on a cost basis as the relation of actual project costs to the estimated total project costs. Our audit procedures focused on the revenue recognition of long-term projects, as they include management judgment. The revenue recognition for long-term projects includes management judgment in a form of estimates affecting both on the amount of revenue being recognized and profitability of the projects. How our audit addressed the key audit matter Our revenue testing included both testing of the company’s controls, as well as substantive audit procedures targeted at selected long-term projects. Our substantive procedures included the following but was not limited to: - We have verified, by sampling new contracts signed during the accounting period, that the revenue recognition method applied was appropriate based on the terms of the arrangement - We have tested by sample, that estimated revenues are based on signed contracts and that new projects have been processed in accordance with Raute’s decision making policy. - We have assessed reliability of the expected expenses for projects by comparing expenses of unfinished projects in the previous year-end to the final outcome. We have had discussions with relevant personnel about uncertainty relating to the estimated total expenses of the projects. We have read minutes from monthly project meetings into which the changes in expected expenses are documented by project. - We have tested the arithmetic of the spreadsheets with which the percentage of completion and revenue to be recognized for projects is calculated. We have no key audit matters to report with respect to our audit of the parent company financial statements. There are no significant risks of material misstatement referred to in Article 10(2c) of Regulation (EU) No 537/2014 with respect to the consolidated financial statements or the parent company financial statements. 64 Auditor’s Report (Translation of the Finnish Original) Responsibilities of the Board of Directors and the Managing Director for the Financial Statements • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the parent company’s or the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the parent company or the group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view. Auditor’s Responsibilities for the Audit of the Financial • Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with good auditing practice will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. The Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, and of financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of financial statements in Finland and comply with statutory requirements. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Board of Directors and the Managing Director are responsible for assessing the parent company’s and the group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liquidate the parent company or the group or to cease operations, or there is no realistic alternative but to do so. As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the parent company’s or the group’s internal control. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 65 Auditor’s Report (Translation of the Finnish Original) Other Reporting Requirements Appointment We were first appointed as auditors by the annual general meeting on 31 March 2010. Our appointment represents a total period of uninterrupted engagement of 8 years. Other Information The Board of Directors and the Managing Director are responsible for the other information. The other information comprises the report of the Board of Directors and the information included in the Annual Report, but does not include the financial statements and our auditor’s report thereon. We have obtained the report of the Board of Directors prior to the date of this auditor’s report and the Annual Report is expected to be made available to us after that date. Our opinion on the financial statements does not cover the other information. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the report of the Board of Directors, our responsibility also includes considering whether the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. In our opinion • • the information in the report of the Board of Directors is consistent with the information in the financial statements the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Lahti 15 February 2018 PricewaterhouseCoopers Oy Authorised Public Accountants Markku Launis Authorised Public Accountant (KHT) 66 Development of Group result and Key ratios 67 67 Development of quarterly results Development quarterly The presented interim report figures have not been audited. Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 39 659 37 152 35 209 36 595 36 043 23 355 27 306 26 427 891 -224 748 489 -894 67 60 917 -190 167 91 28 24 46 73 962 Materials and services -21 183 -19 386 -19 405 -20 747 -17 041 -10 032 -13 513 -14 264 Employee benefits expense -11 437 -9 495 -10 347 -9 756 -9 882 -8 627 -8 966 -9 131 -702 -654 -660 -618 -646 -605 -573 -515 Net sales EUR 1,000 Me 160 140 NET SALES Change in inventories of finished goods and work in progress Other operating income Depreciation and amortization Other operating expenses Total operating expenses OPERATING PROFIT % of net sales 120 100 -3 738 -3 381 -4 223 -3 311 -3 313 -2 838 -2 871 -3 009 -37 060 -32 916 -34 634 -34 432 -30 881 -22 103 -25 923 4 179 1 413 2 681 4 292 1 364 1 516 11,2 4,0 7,3 11,9 5,8 5,6 20 0 2013 2014 2015 2016 2017 1 386 8,3 60 40 -26 919 3 300 80 5,2 Order book Me 120 100 80 Financial income 5 19 17 318 152 -70 -52 93 Financial expenses -39 -121 -145 -105 -139 -134 35 -222 Financial expenses, net -34 -102 -127 212 13 -204 -17 -129 3 266 4 077 1 286 2 894 4 304 1 159 1 499 1 258 8,2 11,0 3,7 7,9 11,9 5,0 5,5 4,8 -376 -660 -396 -790 -689 -219 -274 -353 2 890 3 417 890 2 104 3 615 940 1 224 904 180 7,3 9,2 2,5 5,7 10,0 4,0 4,5 3,4 160 Undiluted earnings per share, euros 0,68 0,81 0,21 0,50 0,86 0,22 0,29 0,22 120 Diluted earnings per share, euros 0,68 0,80 0,21 0,50 0,85 0,22 0,29 0,22 100 Adjusted average number of shares, 1 000 pcs 4 240 4 229 4 225 4 205 4 191 4 192 4 147 4 124 60 Adjusted average number of shares diluted, 1 000 pcs 4 274 4 259 4 242 4 249 4 235 4 201 4 189 4 151 40 60 40 20 PROFIT BEFORE TAX % of net sales Income taxes 0 2013 2014 2015 2016 2017 Order intake Me TOTAL PROFIT FOR THE PERIOD % of net sales 140 80 20 FINANCIAL DEVELOPMENT QUARTERLY Order intake during the period, EUR million Order book at the end of the period, EUR million 0 60 42 29 24 42 92 16 13 110 89 86 93 106 102 32 2013 2014 2016 2017 44 Q1 68 2015 Q2 Q3 Q4 Key ratios describing the Group’s financial development 2017 Net sales 2016 2015 2014 2013 148 615 113 130 127 278 94 021 83 274 31,4 -11,1 35,4 12,9 -17,8 122 801 88 612 97 113 88 696 78 436 82,6 78,3 76,3 94,3 94,2 11 573 8 558 8 120 2 605 1 828 7,8 7,6 6,4 2,8 2,2 11 522 8 220 8 118 2 810 1 589 Change in net sales, % Exported portion of net sales % of net sales Operating profit % of net sales Profit before tax 7,8 7,3 6,4 3,0 1,9 9 300 6 684 6 684 2 361 1 196 6,3 5,9 5,3 2,5 30,4 25,3 28,5 10,9 25,2 20,9 24,7 9,8 69 767 61 760 52 646 48 783 -29 311 -20 633 -5 003 -1 669 -6 677 -19,7 -18,2 -3,9 -1,8 -8,0 44 877 31 760 28 421 22 795 The key ratios have been derived from the consolidated financial statements or are based on items presented in the financial statements which have been prepared in accordance with the accounting standards. 5,0 86 857 The calculation of the key figures and the alternative performance measures has been presented on page 70 and the calculation of share-related data in connection of the share-related data, on page 71. 7,3 Return on equity (ROE), % The purpose of the key ratios and APMs is to give the readers a performance of the Group’s financial position and help in analyzing the financial statements and evaluating the development of the operations. If there is a change in the accounting principles of the Group during a certain financial year, the figures of the comparison years are adjusted to correspond those accounting principles in force for the current year. 1,4 Return on investment (ROI), % Raute Group uses key ratios and alternative performance measures (APM’s) to describe the income, operational financial result, capital structure, return on equity, financial position and cash flows. 18 302 % of net sales Profit for the financial year % of net sales Balance sheet total Interest-bearing net liabilities % of net sales Non-interest-bearing liabilities 64,4 60,4 58,5 55,8 56,6 Gearing, % -73,8 -60,3 -16,8 -6,9 -28,3 Gross capital expenditure 6 962 3 224 2 506 1 675 3 189 4,7 2,8 2,0 1,8 3,8 3 237 2 863 3 092 1 767 2 523 Equity ratio, % % of net sales Research and development costs % of net sales 2,2 2,5 2,4 1,9 3,0 Order book, EUR million 110 106 60 44 28 Order intake, EUR million 155 162 145 112 63 Personnel at Dec. 31 704 643 646 587 534 Personnel, effective, on average 660 631 614 530 515 Personnel, average 682 642 624 545 522 5 312* 4 220 3 303 1 606 801 -* - - 803 1 201 Dividend Repayment of equity * The Board of Directors’ proposal to the Annual General Meeting. 69 Calculation of key ratios Change in net sales, % Net sales of the financial year ./.net sales of the previous financial year x 100 Equity ratio, % Net sales Exported portion of net sales Exported portion of net sales, % Operating profit Operating profit, % of net sales Exported portion of materials and services sold from Finland Exported portion Gearing, % Shareholders’ equity Balance sheet total ./. advance payments received Interest-bearing net financial liabilities Shareholders’ equity x 100 x 100 x 100 Gross capital expenditure Gross capital expenditure includes additions in intangible and tangible assets Operating profit is the net sum calculated by adding other operating income to net sales, deducting purchase expenses that have been adjusted by changes in inventories of finished goods and work in progress and by expenses fom production for own use; and by deducting expenses from employee benefits, depreciation and possible impairment losses, as well as other operating expenses. Gross capital expenditure, % of net sales Gross capital expenditure Operating profit x 100 Research and development costs, % of net sales Net sales of the financial year Net sales of the financial year Research and development costs Net sales of the financial year x 100 Research and development costs include materials and supplies, working hours and other operating costs Research and development costs Net sales of the financial year x 100 Profit before tax, % of net sales Profit before tax Net sales of the financial year x 100 Order book, EUR million Binding sales contracts received but not yet delivered as far the orders have not been recognized in net sales accoridng to the standard IAS 11 at the balance sheet date. Profit for the financial year, % of net sales Profit for the financial year Net sales of the financial year x 100 Order intake, EUR million Binding sales contracts entered into force during the financial year according to the latest net sales estimate. Number of personnel at 31 Dec. Number of employed personnel at the end of the financial year. Profit before tax + financial expenses Return on investment (ROI), % Return on equty (ROE), % Interest-bearing net liabilities Interest-bearing net liabilities, % of net sales Non-interest-bearing liabilities 70 Shareholders’ equity + interest-bearing financial liabilities (average of the financial year) Profit for the financial year Shareholders’ equity (average of the financial year) Average of the number of employed personnel at the end of calendar months. Keskiarvo tilikauden kalenterikuukausien lopussa työsuhteessa olleiden henkilöiden määrästä. Dividend distribution Dividend distribution confirmed or proposed for the financial year. Repayment of equity Repayment of equity from the non-restricted equity reserve confirmed or proposed for the financial year. x 100 Interest-bearing liabilities ./. (cash and cash equivalents + financial assets at fair value through profit or loss) Interest-bearing liabilities ./. (cash and cash equivalents + financial assets at fair value through profit or loss) Personnel, average Henkilöstö, keskimäärin x 100 x 100 Net sales Provisions + current advance payments received + income tax liability + trade payables and other liabilities Share-related data and calculation 2017 2016 2015 2014 2013 Earnings per share, (EPS), undiluted, EUR 2,20 1,60 1,65 0,59 0,30 Earnings per share, (EPS), diluted, EUR 2,18 1,59 1,64 0,59 0,30 Equity to share, EUR 9,34 8,13 7,26 6,06 5,90 Dividend per series A share, EUR 1,25* 1,00 0,80 0,40 0,20 Dividend per series K share, EUR 1,25* 1,00 0,80 0,40 0,20 Dividend per profit, % 56,8* 62,3 48,4 68,0 66,7 Effective dividend return, % 4,3* 6,0 5,7 5,5 2,9 Price/earnings ratio (P/E ratio) 13,17 10,41 8,55 12,42 23,28 - - - 0,20 0,30 Lowest share price for the financial year, EUR 16,84 12,06 7,17 6,90 6,88 Highest share price for the financial year, EUR 30,52 17,98 14,25 8,60 9,33 Average share price for the financial year, EUR 22,70 14,50 11,95 7,69 8,49 Share price at the end of the financial year, EUR 29,00 16,70 14,12 7,30 6,95 123 228 70 248 58 057 29 311 27 833 Profit (loss) for the financial year Earnings per share, undiluted, euros Equity issue-adjusted average number of shares during the financial year Development in share price (series A share) Market value of capital stock at Dec. 31, EUR thousand** Trading of the company’s shares (series A shares) Shares traded during the financial year, 1 000 pcs 846 988 1 095 594 26,0 30,7 35,1 20,0 17,0 Equity to share, euros Share of shareholders’ equity belonging to the owners of the Parent company Undiluted number of shares at the end of the financial year Dividend per series A share, euros Distributed dividend for the financial year Undiluted number of shares at the end of the financial year Dividend per series K share, euros Distributed dividend for the financial year Undiluted number of shares at the end of the financial year Dividend per share Earnings per share x 100 Effective dividend return, % Dividend per share Closing share price at the end of the financial year x 100 Price/earnings ratio (P/E ratio) Closing share price at the end of the financial year Earnings per share 514 % of the number of series A shares Diluted profit (loss) for the financial year Diluted equity issue-adjusted average number of shares during the financial year Dividend per profit, % Repayment of equity from invested non-restricted equity reserve, EUR Earnings per share, diluted, euros Total number of shares (undiluted) Issue-adjusted weighted average number of shares 4 225 082 4 166 966 4 051 034 4 009 777 4 004 758 Issue-adjusted number of shares at the end of the financial year 4 249 248 4 206 462 4 111 708 4 015 228 4 004 758 Average share price for the financial year, euros The deferred tax liabilities have been included in the calculation of the key ratios. Market value of capital stock at Dec. 31, EUR 1,000** *Board of Directors’ proposal to the Annual General Meeting. **Series K shares valued at the value of series A shares. Stock options 2010 C 2010 C series stock options Closing price at Dec. 31 Share subscription price at Dec. 31 Unsubscribed at Dec. 31 20,50 5,00 13 446 Total EUR value of series A shares traded during the financial year Average number of series A shares traded during the financial year Number of shares (series A and series K shares) at the end of the financial year x closing price of the share at the end of the financial year Total number of series A shares traded during the Share tunover (series A shares) during financial year the financial year Average number of series A shares during the financial year Number of shares, average Number of shares, average, diluted x 100 Average of the number of shares at the end of calendar months of the financial year. Average of the issue-adjusted number of shares at the end of calendar months of the financial year. 71 Shares and shareholders 72 Market capitalization and shareholders Raute Corporation Raute is a financially sound Small Cap company with a strong family background. The company’s series A shares are listed on Nasdaq Helsinki Ltd. Raute operates globally and has a leading position in its field. Market capitalization and trading Raute Corporation’s series A shares are listed on the Nasdaq Helsinki Ltd in the Industrials sector. The trading code is RAUTE (previously RUTAV). Raute Corporation has signed a market making agreement with Nordea Bank AB (publ) in compliance with the Liquidity Providing (LP) requirements issued by Nasdaq Helsinki Ltd. In 2017, a total of 845,672 Raute Corporation’s series A shares were traded (987,608 pieces). The total value of trading was EUR 19.2 million (MEUR 14.3). The highest share price was EUR 30.52 (EUR 17.98) and the lowest EUR 16.84 (EUR 12.06). At the end of the year 2017, the share price was EUR 29.00 (EUR 16.70). The average price was EUR 22.70 (EUR 14.50). The company’s market capitalization at the end of the financial year was EUR 123.2 million (MEUR 70.2), with series K shares valued at the closing price of series A shares on the last listing day December 29, 2017. Share-based incentive program 2014–2018 Information is presented in note Employee benefits, page 25. Board authorizations The Annual General Meeting on March 28, 2017 authorized the Board to decide on the repurchase of a maximum of 400,000 Raute Corporation’s series A shares using assets from the company’s non-restricted equity, which would lead to a decrease in the company’s distributable assets. The authorization entitles the Board to acquire the company’s series A shares to be used for the development of the company’s capital structure, as consideration for funding or carrying out any acquisitions or other arrangements, or to be otherwise disposed of or cancelled. The purchase consideration paid for shares purchased by virtue of the authorization shall be based on the price of the series A share in public trading so that the minimum price of acquired shares is the lowest market price quoted in public trading during the term of validity of the authorization and the maximum price, correspondingly, the highest market price quoted in public trading during the term of validity of the authorization. The authorization includes the right to acquire shares other than in proportion to the holdings of the shareholders. A targeted repurchase of the company’s own shares can take place, for example, by acquiring shares in public trading in markets where, according to regulations, the company is permitted to engage in the trade of its own shares. Repurchasing shares in public trading as mentioned above or otherwise in a targeted way, requires that the company has a weighty financial reason to do so. Financial Statements 2017 / Group Articles of Association. The Board of Directors will decide on the other conditions related to share repurchases. By the authority granted to the Board at the Annual General Meeting on March 28, 2017, the Board can decide on an issue of Raute Corporation’s series A shares, as well as on all of the related conditions, including the recipients and the sum of consideration to be paid. The Board of Directors may decide to issue either new shares or company shares held by Raute. The maximum number of shares that can be issued is 400,000 series A shares. As proposed, the authorization can be used to fund or carry out acquisitions or other arrangements or for other purposes decided by the Board of Directors. The authorizations are valid until the end of the next Annual General Meeting. On September 25, 2017, the Board of Directors resolved on the issuance of new shares to the company itself without consideration, so that it will have own shares held by the company availab le for the payment of the share rewards payab le based on the company’s share incentive plan 2016–2018. The 8,913 new series A shares were entered in the Trade Register on October 17, 2017. No decisions on share issues were made during the financial year, nor were any convertible bonds issued. At the end of the financial year, the company held a total of 8,913 pieces of its own shares. On December 31, 2017, the company had no valid share issues. Series K shares can be converted to series A shares in accordance with Article 3 of Raute Corporation’s 73 Distribution of ownership ENTIRE CAPITAL STOCK SERIES A SHARES Series A and series K shares by shareholder category Households Financial and insurance institutions Number of shareholders Number of % shares Number of voting % rights % 85,0 22 445 697 97,2 5 0,1 180 967 4,3 180 967 0,8 Series A shares by shareholder category Households Financial and insurance institutions 164 3,4 147 122 3,5 147 122 0,6 Companies 15 0,3 76 771 1,8 76 771 0,3 Non-profit institutions 1 0,0 51 950 1,2 51 950 0,2 Public institutions Foreign shareholders 11 0,2 7 335 0,2 7 335 0,0 Nominee-registered 8 0,2 171 465 4,0 171 465 0,7 Companies Non-profit institutions Public institutions 4 593 95,7 3 613 638 4 797 100,0 Total 4 249 248 100,0 23 081 307 100,0 Number of shareholders Series A and series K shares by by number of shares % Number of shares Number of voting % rights % % 4 571 95,7 2 622 477 80,5 2 622 477 80,5 0,1 180 967 5,6 180 967 5,6 3,4 147 122 4,5 147 122 4,5 15 0,3 76 771 2,4 76 771 2,4 1 0,0 51 950 1,6 51 950 1,6 Foreign shareholders 11 0,2 7 335 0,2 7 335 0,2 Nominee-registered 8 0,2 171 465 5,3 171 465 5,3 Total Series A shares by by number of shares 1–1 000 4 775 100,0 Number of shareholders 3 258 087 100,0 Number of % shares 3 258 087 100,0 Number of voting % rights % 4 493 94,1 860 931 26,4 860 931 26,4 1 001–5 000 227 4,8 460 622 14,1 460 622 14,1 5 001–10 000 22 0,5 152 816 4,7 152 816 4,7 10 001–50 000 22 0,5 588 383 18,1 588 383 18,1 11 0,2 1 195 335 36,7 1 195 335 36,7 93,7 861 102 20,3 896 632 3,9 225 4,7 451 023 10,6 703 381 3,0 5 001–10 000 21 0,4 145 194 3,4 661 994 2,9 10 001–50 000 35 0,7 862 871 20,3 9 111 322 39,5 50 001– 50 001– 19 0,4 1 929 058 45,4 11 707 978 50,7 Total 4 797 100,0 Number of voting % rights 5 4 497 Total Number of % shares 164 1 001–5 000 1–1 000 Number of shareholders 4 775 100,0 3 258 087 100,0 3 258 087 100,0 4 249 248 100,0 23 081 307 100,0 SERIES K SHARES Series K shares by shareholder category Number of shareholders Number of % shares Number of voting % rights % Households 55 100,0 991 161 100,0 19 823 220 100,0 Total 55 100,0 991 161 100,0 19 823 220 100,0 Shareholding at December 31, 2017 Institutions 7,3 % Nominee registered 4,0 % Series K shares by by number of shares 1–1 000 Number of % shares Number of voting % rights % 18,2 2 250 0,2 45 000 0,2 8 14,5 21 551 2,2 431 020 2,2 5 001–10 000 6 10,9 32 100 3,2 642 000 3,2 10 001–50 000 Management 6,0 % 10 1 001–5 000 Companies 3,5 % 26 47,3 645 880 65,2 12 917 600 65,2 5 9,1 289 380 29,2 29,2 50 001– Total Households 79,1 % 74 Number of shareholders 55 100,0 5 787 600 991 161 100,0 19 823 220 100,0 Largest shareholders 20 LARGEST SHAREHOLDERS AT DECEMBER 31, 2017 BY NUMBER OF SHARES Number of series K shares 1. 2. Sundholm Göran 3. Laakkonen Mikko Kalervo 4. Suominen Pekka 5. Siivonen Osku Pekka 6. Kirmo Kaisa Marketta 7. 8. 9. Number Total of series number of A shares shares % of total shares - 509 557 131 396 509 557 131 396 12,0 3,1 - 119 919 119 919 48 000 62 429 110 429 50 640 53 539 55 680 48 341 Suominen Tiina Sini-Maria 48 000 Keskiaho Kaija Leena 33 600 Mustakallio Mika Tapani Mandatum Life Unit-Linked Financial Statements 2017 / Group 20 LARGEST SHAREHOLDERS AT DECEMBER 31, 2017 BY NUMBER OF VOTES Total number of votes % of voting rights Number of series K shares Number Total of series number of A shares shares % of total shares Total number of votes % of voting rights 509 557 131 396 2,2 0,6 2,8 119 919 0,5 3. Mustakallio Kari Pauli 60 480 500 60 980 1,4 1 210 100 5,2 2,6 1 022 429 4,4 4. Kirmo Kaisa Marketta 55 680 48 341 104 021 2,4 1 161 941 5,0 104 179 2,5 1 066 339 4,6 5. Siivonen Osku Pekka 50 640 53 539 104 179 2,5 1 066 339 4,6 104 021 2,4 1 161 941 5,0 6. Suominen Pekka 48 000 62 429 110 429 2,6 1 022 429 4,4 53 356 101 356 2,4 1 013 356 4,4 7. Suominen Tiina Sini-Maria 48 000 53 356 101 356 2,4 1 013 356 4,4 51 116 84 716 2,0 723 116 3,1 8. Suominen Jussi 48 000 - 48 000 1,1 960 000 4,2 Mustakallio Ulla Sinikka 1. Mustakallio Mika Tapani 62 100 21 170 83 270 2,0 1 263 170 5,5 2. Särkijärvi Anna Riitta 60 480 22 009 82 489 1,9 1 231 609 5,3 62 100 21 170 83 270 2,0 1 263 170 5,5 9. 10. Särkijärvi Anna Riitta 60 480 22 009 82 489 1,9 1 231 609 5,3 10. Mustakallio Marja Helena 11. Mustakallio Kari Pauli 60 480 500 60 980 1,4 1 210 100 5,2 12. Mustakallio Marja Helena 46 740 12 547 59 287 1,4 947 347 4,1 13. Särkijärvi Timo Juha 12 000 43 256 55 256 1,3 283 256 1,2 14. Särkijärvi Anu Riitta 12 000 43 256 55 256 1,3 283 256 1,2 13. Keskiaho Vesa Heikki 29 680 - 29 680 0,7 593 600 2,6 15. Suominen Jukka Matias 24 960 27 964 52 924 1,2 527 164 2,3 14. Keskiaho Juha-Pekka 27 880 5 716 33 596 0,8 563 316 2,4 - 51 950 51 950 1,2 51 950 0,2 16. Keskinäinen työeläkevakuutusyhtiö Varma 17. Relander Pär-Gustaf 11. Mustakallio Risto Knut kuolinpesä 12. Keskiaho Kaija Leena 1,1 954 800 4,1 1,4 947 347 4,1 42 240 - 42 240 1,0 844 800 3,7 33 600 51 116 84 716 2,0 723 116 3,1 24 960 27 964 52 924 1,2 527 164 2,3 24 780 19 094 43 874 1,0 514 694 2,2 - 51 000 51 000 1,2 51 000 0,2 17. Sundholm Göran - 48 000 1,1 960 000 4,2 18. Kirmo Lasse 19. Mustakallio Ulla Sinikka 20. Keskiaho Ilta Marjaana 47 740 - 47 740 1,1 954 800 4,1 24 780 19 094 43 874 1,0 514 694 2,2 635 200 1 322 399 1 957 599 46,1 14 026 399 60,8 NOMINEE-REGISTERED SHARES AT DECEMBER 31, 2017 Nominee-registered shares accounted for 4.0 percent (2.1%) of the total shares. 47 740 59 287 15. Suominen Jukka Matias 48 000 MANAGEMENT’S SHAREHOLDING AT DECEMBER 31, 2017 The Board of Directors, the President and CEO as well as the Executive Board held altogether 126,003 series A shares and 127,890 series K shares at December 31, 2017, equaling 6.0 percent of the company shares and 11.6 percent of the votes. The figures include the holding of their own, minor children and control entitities. 12 547 16. Keskiaho Ilta Marjaana 18. Suominen Jussi Total 47 740 46 740 - 509 557 509 557 12,0 509 557 2,2 22 525 2 967 25 492 0,6 453 467 2,0 19. Kultanen Leea Annikka 21 595 8 031 29 626 0,7 439 931 1,9 20. Molander Sole 20 160 - 20 160 0,5 403 200 1,7 775 280 898 336 1 673 616 39,4 16 403 936 71,1 Total NUMBER OF SHAREHOLDERS AT DECEMBER 31, 2017 The number of shareholders totaled 4,797 (3,625) at the end of the year 2017. Series K shares were owned by 55 (50) private individuals at the end of the financial year. Number of shareholders 5 000 4 000 3 000 2 000 1 000 0 2013 2014 2015 2016 2017 75 RAUTE CORPORATION Rautetie 2 P.O. Box 69, FI–15551 Nastola Tel. +358 3 829 11 ir@raute.com 76 Follow us online: www.raute.com Twitter: @rautemachinery, @RauteOyj LinkedIn: Raute Oyj Youtube: www.youtube.com/RauteMachinery Facebook: Raute Corporation Instagram: @raute_corporation 76