Metso Corporation's Financial Statements Review
(Thomson Reuters ONE) - Metso Corporation's Financial Statements Review,January 1 - December 31, 2009Metso's Company Release on February 8, 2010 at 3.00 p.m. local timeStrong cash flow and satisfactory profitability in a demanding marketenvironmentHighlights of 2009· New orders worth EUR 4,358 million were received in 2009, i.e. 32 percent lessthan in the previous year (EUR 6,384 million in 2008).· At the end of 2009, the order backlog was 16 percent lower than at the end ofDecember 2008, amounting to EUR 3,415 million (EUR 4,088 million on December31, 2008).· Net sales decreased by 22 percent from the previous year, and were at EUR5,016 million (EUR 6,400 million in 2008).· Earnings before interest, tax and amortization (EBITA) were EUR 334.3 million,i.e. 6.7 percent of net sales (EUR 680.9 million and 10.6% in 2008).· Operating profit (EBIT) was EUR 293.6 million, i.e. 5.9 percent of net sales(EUR 637.2 million and 10.0% in 2008).· EBITA and EBIT include approximately EUR 75 million in non-recurring expensesrelating to capacity adjustment measures, before which the EBITA margin was 8.2percent.· Earnings per share were EUR 1.06 (EUR 2.75 in 2008).· Free cash flow was EUR 717 million (EUR 29 million in 2008).· Return on capital employed (ROCE) before taxes was 10.0 percent (23.2% in2008).· The Board proposes a dividend of EUR 0.70 per share (EUR 0.70 in 2008).Highlights of the last quarter of 2009· New orders worth EUR 1,365 million were received in October-December, i.e. 54percent more than in the comparison period (EUR 889 million in Q4/2008).· Net sales decreased by 26 percent on the comparison period, and were at EUR1,353 million (EUR 1,839 million in Q4/2008).· Earnings before interest, tax and amortization (EBITA) were EUR 66.2 million,i.e. 4.9 percent of net sales (EUR 200.0 million and 10.9% in Q4/2008).· Operating profit (EBIT) was EUR 55.0 million, i.e. 4.1 percent of net sales(EUR 190.1 million and 10.3% in Q4/2008).· EBITA and EBIT for October-December include approximately EUR 31 million innon-recurring expenses relating to capacity adjustment measures. The EBITAmargin before the non-recurring expenses was 7.2 percent.· Earnings per share were EUR 0.18 (EUR 0.79 in Q4/2008).Metso's President and CEO Jorma Eloranta is satisfied with the financialperformance and achievements in 2009. "Our most significant achievement was thestrong cash flow. Also our profitability was at a satisfactory level despite thedemanding market situation. We strengthened our product and services portfoliothrough acquisitions, continued with our key investments and enhanced ouroperating model. We also estimate that we have maintained our market position inall our core customer segments. Metso is now more competitive as the marketsgradually begin to recover. I appreciate the efforts of our employees inachieving these good results in a difficult year."The Board of Directors' dividend proposal of EUR 0.70 per share reflects notonly our confidence in the gradual recovery in our operating environment, butalso our solid financial position."In the last quarter of the year our profitability was hampered, as expected, byhigh non-recurring expenses related to the capacity adjustment measures and tothe development of our operating model. It was encouraging that we saw a niceincrease in our order intake. This indicates that our customers are regainingtheir confidence in the recovery of their operating environment and in theavailability of financing. For 2010 we estimate our net sales to remain at aboutthe same EUR 5 billion level as in 2009 and profitability to remainsatisfactory," Eloranta notes."Winning new orders continues to be a key priority. Price competition in themarkets has escalated, so we will continue developing our operating model tomaintain competitiveness and profitability. Key priorities are also continuingto further develop our services business and our solutions based on bioenergyand other renewable energy sources."Metso's key figures EUR million Q4/09 Q4/08 Change 2009 2008 Change % %-------------------------------------------------------------------------------- Net sales 1,353 1,839 -26 5,016 6,400 -22-------------------------------------------------------------------------------- Net sales of services business 524 651 -20 2,052 2,343 -12-------------------------------------------------------------------------------- % of net sales 39 36 41 37-------------------------------------------------------------------------------- EBITA before non-recurring capacity adjustment expenses 97.3 200.0 -51 409.0 680.9 -40-------------------------------------------------------------------------------- % of net sales 7.2 10.9 8.2 10.6-------------------------------------------------------------------------------- Earnings before interest, tax and amortization (EBITA) 66.2 200.0 -67 334.3 680.9 -51-------------------------------------------------------------------------------- % of net sales 4.9 10.9 6.7 10.6-------------------------------------------------------------------------------- Operating profit 55.0 190.1 -71 293.6 637.2 -54-------------------------------------------------------------------------------- % of net sales 4.1 10.3 5.9 10.0-------------------------------------------------------------------------------- Earnings per share, EUR 0.18 0.79 -77 1.06 2.75 -61-------------------------------------------------------------------------------- Orders received 1,365 889 54 4,358 6,384 -32-------------------------------------------------------------------------------- Order backlog at end of period 3,415 4,088 -16-------------------------------------------------------------------------------- Free cash flow 268 -22 n/a 717 29 n/a-------------------------------------------------------------------------------- Return on capital employed (ROCE) before taxes, % 10.0 23.2-------------------------------------------------------------------------------- Equity to assets ratio at end of period, 35.7 30.9 %-------------------------------------------------------------------------------- Gearing at end of period, % 32.5 75.7--------------------------------------------------------------------------------Metso's last quarter 2009 reviewOperating environment and demand for products in October-DecemberOur operating environment continued to be demanding in the last quarter of2009. Our customers remained cautious in their investment decisions althoughtowards the end of the year there were the first signs of a recovery in theglobal economy. We saw gradual improvement in our customers' capacityutilization rates while orders for our services business and requests forquotations increased slightly. Uncertainties in the order backlog alsodiminished as customers restarted projects earlier put on hold.Low demand and the reduction of suppliers' order backlogs led to harder pricecompetition in the latter half of the year in all customer segments. We wereable to partly offset this in our procurement costs as competition among rawmaterials and components suppliers and subcontractors also became harder.As a result of the strengthened demand for and price levels of minerals, in thelatter part of the year several mining companies announced increases in theirinvestment plans for 2010. Quotation activity clearly improved, although by theend of the year, only a few new equipment orders were finalized. Demand forconstruction industry equipment continued to be weak in the final quarter of2009. Many countries have introduced stimulus measures relating toinfrastructure development which are expected to have a positive effect on thedemand for construction industry products in the long-term, but which, for thepresent, have had little effect. Demand for services business in the mining andconstruction industry was satisfactory.Demand for power plants utilizing renewable energy sources remained satisfactoryin Europe and North America. The availability of financing improved towards theyear-end leading to a strengthening of the operating environment andcontributing to the closing of several new orders in the fourth quarter.Requests for quotations by oil and gas customers for our automation solutionsincreased, but demand continued to be lower than it was in the previous year.Demand for metals recycling equipment continued to be weak, owing to the lowprice of scrap metal and the low utilization rates of European and NorthAmerican steelworks. Demand for our services business for power generation andautomation solutions was satisfactory. Services demand for metal recyclingremained weak.Demand for new fiber lines continued to be weak, but towards the end of the yearthere was an upturn in the demand for rebuild projects. Demand for paper andboard production lines remained satisfactory in the fourth quarter afterimproved market activity in China during the previous two quarters thanks tolocal stimulus packages. The low capacity utilization rates in the pulp andpaper industry kept the demand for our services business weak, particularly inNorth America and Europe, although new orders were slightly up in the fourthquarter.Orders received in October-DecemberOrders received in the final quarter of the year increased by more than 50percent on the comparison period and totaled EUR 1,365 million. In making thecomparison it is important to note that new orders in the final quarter of 2008were exceptionally low, as our customers reacted strongly to the financialcrisis that escalated since September 2008. More important was that compared tothe first three quarters of 2009, orders were clearly at a higher level.Previously received smaller mining and recycling equipment orders amounting tosome EUR 37 million were cancelled from the order backlog in the fourth quarter.The amount of uncertain orders in the order backlog decreased and was below EUR500 million, as customers restarted projects which had earlier put on hold.Orders received in Mining and Construction Technology totaled EUR 457 million inOctober-December, an increase of more than one third on the comparison period.Orders received from mining customers increased more than 70 percent on thecomparison quarter, and new orders in the fourth quarter were 20 percent higherthan during the previous three quarters. Orders received from constructioncustomers were down about 10 percent on the comparison period and on par withthe previous quarters of the year. Orders received in the fourth quarter weremostly for unit equipment and services business.Orders received in Energy and Environmental Technology totaled EUR 504 millionin the fourth quarter, which is 48 percent more than in the comparison period,and the final quarter was clearly the strongest quarter of the year in terms ofnew orders. The Power business line received several new orders for powerboilers and the last quarter was clearly stronger in new orders than theprevious quarters and the comparison period. The fourth quarter was also thestrongest of the year for the Automation business line and new orders were atthe same satisfactory level as during the comparison period. Demand for therecycling products remained weak and orders decreased even further from the lowlevel of the comparison period. The segment's orders received in the fourthquarter include a biomass boiler and automation system for the NacogdochesGenerating Facility in the United States, a waste gasification plant andautomation system for Lahti Energy Oy in Finland, biomass power plant forcombined heat and power production including the plant automation system for4HamCogen S.A. in Belgium and a power boiler for CMPC Celulosa S.A. in Chile.Paper and Fiber Technology's new orders increased 94 percent on the very weakcomparison period and were EUR 401 million in October-December. New orders inthe Paper business line increased clearly from the comparison period and were onpar with the previous two quarters. Orders received in the Tissue business linefell 34 percent from the strong levels of the comparison period. The Fiberbusiness line received orders for several small and medium-sized rebuildprojects in the fourth quarter, which turned out to be clearly stronger in neworders than the previous quarters in 2009 and the comparison quarter. Orders forOctober-December include a coated fine paper production line to Shouguang MeiLunPaper Co. Ltd. in China, a complete tissue line to Hayat Kimya A.S. in Turkeyand the delivery of pulping technology to CMPC Celulosa S.A. in Chile. Thesegment's orders received in the services business increased towards the end ofthe year, but remained still lower than in the previous year, as customerscontinued strict control of their operating costs.Financial performance in October-DecemberIn October-December, our net sales were EUR 1,353 million, which was 26 percentless than a year earlier (EUR 1,839 million in Q4/2008). Net sales of theservices business decreased by 20 percent on the comparison period, andaccounted for 39 percent (36% in Q4/2008) of fourth quarter net sales in 2009.Our fourth-quarter earnings before interest, tax and amortization (EBITA) were66.2 million, i.e. 4.9 percent of net sales (EUR 200.0 million and 10.9% inQ4/2008). EBITA includes approximately EUR 31 million in non-recurring expensesresulting from capacity adjustment measures. Most of these costs were related tocapacity adjustment measures in the Finnish and Swedish units of the Fiberbusiness line. The EBITA-margin before these non-recurring expenses was 7.2percent. The financial result also includes over EUR 9 million in non-recurringcapital gains from the sale of Talvivaara Mining Company Plc's shares. Metso'soperating profit was EUR 55.0 million, i.e. 4.1 percent of net sales (EUR 190.1million and 10.3% in Q4/2008). The weakening of profitability on the comparisonperiod resulted from the 26 percent decrease in net sales, low capacityutilization rates, tougher price competition and the high level of non-recurringcapacity adjustment expenses.The profit attributable to shareholders was EUR 25 million in the fourth quarter(EUR 112 million in Q4/2008), corresponding to earnings per share (EPS) of EUR0.18 (EUR 0.79 in Q4/2008).Our free cash flow remained strong during the fourth quarter and was EUR 268million. The strong cash flow was supported by a EUR 224 million reduction innet working capital. Key elements in releasing net working capital in the fourthquarter were EUR 189 million decrease of inventories across the businesses andEUR 90 million decrease in trade receivables in the Paper and Fiber Technologysegment after successfully closing several delivery projects.Metso's Financial Statements Review 2009Operating environment and demand for products in 2009Our operating environment continued to be demanding throughout the year. As aresult of the decline in the global economy and uncertainty in the financialmarkets, our custo-mers were cautious in their investment decisions. However,the first signs of a recovery in demand in some of our customer industries werevisible during the fourth quarter. The demand situation was particularly toughfor our new equipment and project business. As a consequence of our customers'low capacity utilization rates, demand for our services business also declined,but remained satisfactory thanks to our large installed equipment base. Economicstimulus measures launched in many countries, mostly aimed at developinginfrastructure, have so far, with the exception of China, had little effect onthe demand for our products.Low demand for new equipment and the decline in suppliers' order backlogs led toincreased price competition in the latter half of the year in all customersegments. This was partly offset by the reduction in procurement costs caused bythe intensified competition among raw materials and components suppliers andsubcontractors.In the first half of 2009, most mining companies cut their investment planssignificantly and curtailed their production. The positive development in demandfor and prices of minerals and metals during the year, however, improved thesituation towards the end of the year and led to an increase in requests forquotations on mining equipment during the fourth quarter. In the constructionindustry, demand for equipment used in aggregates production was weak throughoutthe year.The demand for power plants fuelled by biomass and waste has been boosted asseveral countries have announced plans to increase the use of renewable energysources. However, the limited availability of financing has delayed theimplementation of these projects. Towards the end of the year, however, theavailability of financing improved, which led to several new orders during thefourth quarter. The oil and gas industry, which is important for Metso'sautomation solutions, made considerable cuts to their investment plans early inthe year. Those cuts, coupled with the very low level of pulp and paper industryinvestments, clearly decreased demand for our automation solutions from theprevious year. Signs of gradual improvement in the demand in the oil and gasindustry were visible by the end of the year. Demand for metals recyclingequipment continued to be weak due to low scrap metal prices and the cleardecrease in steel production, particularly in Europe and North America. Demandin our services business for power generation and automation solutions wassatisfactory and for metal recycling weak.Economic stimulus measures in China and the subsequent new orders contributed toa mini-boom in demand for paper and board production lines during the second andthird quarter. Elsewhere in the world, demand for paper and board lines remainedweak throughout the year. Demand for complete fiber lines remained low all year,but by the end of the year demand for fiber line rebuild projects improved,leading to several small and mid-sized orders in the fourth quarter. Demand fortissue machines was satisfactory. Capacity utilization rates in the pulp andpaper industry remained low for all of 2009. As a consequence, the demand forservices business was low but showed some improvement towards the end of theyear.Orders received and order backlogIn 2009, we received new orders worth EUR 4,358 million, i.e. 32 percent lessthan in the comparison period. Orders increased towards the end of the year andthe final quarter was clearly the strongest in terms of new orders. During theyear, previously received orders worth some EUR 335 million were cancelled.These cancellations were booked off directly from our order backlog andtherefore had no impact on reported new orders in 2009 or on the comparisonperiod. Almost EUR 200 million of the cancellations related to the ZhanjiangChenming pulp project, around EUR 65 million to our Construction business line,some EUR 48 million to our Mining business line and some EUR 28 million to ourRecycling business line.Regarding the value of new orders, the most important countries were China, theUnited States and Finland. When combined, these countries accounted for 39percent of all orders received. As a result of the global economic downturn, thevalue of new orders was down on the comparison period in all reporting segmentsand in all geographical areas. The share of emerging markets in orders receivedwas 48 percent (48% in 2008).At the end of December, our order backlog was EUR 3,415 million, which is 16percent less than at the end of 2008. Uncertainties in the order backlogdecreased by approximately EUR 100 million during the fourth quarter ascustomers restarted previously suspended projects. Around EUR 2.7 billion of thedeliveries in our end-of-December order backlog are expected to be completed in2010, and around EUR 700 million of these are services business orders. Theorder backlog includes some EUR 500 million in projects with somewhat uncertaindelivery schedules and which will, according to present estimates, be deliveredafter 2010. The pulp mill project for Fibria, Brazil, is included in theseprojects.Orders received by reporting segments 2009 2008 EUR % of orders EUR % of orders million received million received--------------------------------------------------------------------- Mining and Construction Technology 1,660 38 2,709 42--------------------------------------------------------------------- Energy and Environmental Technology 1,297 30 1,658 26--------------------------------------------------------------------- Paper and Fiber Technology 1,384 31 2,021 31--------------------------------------------------------------------- Valmet Automotive 56 1 65 1--------------------------------------------------------------------- Intra-Metso orders received -39 -69--------------------------------------------------------------------- Total 4,358 100 6,384 100---------------------------------------------------------------------Orders received by market area | | | 2009 | 2008--------------------------+-------+-----------+-------+------------ | EUR|% of orders| EUR|% of orders |million| received|million| received--------------------------+-------+-----------+-------+------------ Europe | 1,580| 36| 2,375| 38--------------------------+-------+-----------+-------+------------ North America | 796| 18| 1,070| 17--------------------------+-------+-----------+-------+------------ South and Central America| 510| 12| 1,056| 16--------------------------+-------+-----------+-------+------------ Asia-Pacific | 1,220| 28| 1,476| 23--------------------------+-------+-----------+-------+------------ Rest of the world | 252| 6| 407| 6--------------------------+-------+-----------+-------+------------ Total | 4,358| 100| 6,384| 100--------------------------+-------+-----------+-------+------------Net salesOur net sales for 2009 declined by 22 percent on the comparison period and stoodat EUR 5,016 million (EUR 6,400 million in 2008). Net sales decreased in allreporting segments: in Mining and Construction Technology by 20 percent, inEnergy and Environmental Technology by 14 percent and in Paper and FiberTechnology by 31 percent. The net sales of our services business declined by 12percent and its share of total net sales was 41 percent (37% in 2008).Measured by net sales, the largest countries were the United States, China andGermany, which together accounted for about 29 percent of our total net sales.Net sales by reporting segments 2009 2008 EUR % of EUR million % of million net sales net sales-------------------------------------------------------------------- Mining and Construction Technology 2,075 41 2,586 40-------------------------------------------------------------------- Energy and Environmental Technology 1,523 30 1,775 27-------------------------------------------------------------------- Paper and Fiber Technology 1,408 28 2,044 32-------------------------------------------------------------------- Valmet Automotive 56 1 65 1-------------------------------------------------------------------- Intra-Metso net sales -46 -70-------------------------------------------------------------------- Total 5,016 100 6,400 100--------------------------------------------------------------------Net sales by market area 2009 2008 EUR % of EUR % of million net sales million net sales--------------------------------------------------------------- Europe 2,167 44 2,680 41--------------------------------------------------------------- North America 774 15 1,015 16--------------------------------------------------------------- South and Central America 609 12 770 12--------------------------------------------------------------- Asia-Pacific 1,080 21 1,516 24--------------------------------------------------------------- Rest of the world 386 8 419 7--------------------------------------------------------------- Total 5,016 100 6,400 100---------------------------------------------------------------Financial resultOur earnings before interest, tax and amortization (EBITA) for 2009 weakenedfrom the comparison period and were EUR 334.3 million, or 6.7 percent of netsales (EUR 680.9 million and 10.6% in 2008). Our financial result includesnon-recurring expenses of some EUR 75 million resulting from capacity adjustmentmeasures, of which around EUR 42 million are related to Paper and FiberTechnology, some EUR 22 million to Mining and Construction Technology and someEUR 11 million to Energy and Environmental Technology. EBITA before thesenon-recurring capacity adjustment expenses was EUR 409.0 million, i.e. 8.2percent of net sales. Other significant non-recurring items included in ourresult were some EUR 23 million in capital gains from the sale of TalvivaaraMining Company Plc's shares, EUR 9 million in non-recurring expenses fromdissolving hedging arrangements related to the cancellation of our Chinesecustomer Zhanjiang Chenming's pulp mill project and EUR 4 million credit lossreserve related to the initiation of the debt restructuring proceedings of twoof our paper industry customers.The EBITA of Mining and Construction Technology before non-recurring capacityadjustment expenses was EUR 224.7 million in 2009, i.e. 10.8 percent of netsales, down 38 percent from the year before. The reduced profitability is mainlyattributed to the 20 percent decrease in delivery volumes, low capacityutilization rates of production units and tougher price competition towards theend of the year.The EBITA of Energy and Environmental Technology before non-recurring capacityadjustment expenses was EUR 147.5 million, i.e. 9.7 percent of net sales,representing a decrease of 26 percent on the previous year. The weakenedprofitability was due to the decrease in delivery volumes and the low capacityutilization rate of some production units and tougher pricing environmenttowards the end of the year.The EBITA of Paper and Fiber Technology before non-recurring capacity adjustmentexpenses was EUR 58.2 million, i.e. 4.1 percent of net sales, representing adecrease of 60 percent on the previous year. The lower profitability was due toa 31 percent decline in net sales and low capacity utilization rates.Our operating profit in 2009 was EUR 293.6 million, or 5.9 percent of net sales(EUR 637.2 million and 10.0% in 2008). Operating profit before non-recurringexpenses related to capacity adjustment measures was EUR 368.3 million or 7.3percent of net sales.Our net financing expenses in 2009 were EUR 72 million (EUR 89 million in2008). Although our cash situation was strong throughout the year, our grossdebt level was higher than in 2008 and this increased our interest expenses toEUR 75 million (EUR 71 million in 2008).Our profit before tax was EUR 222 million (EUR 548 million) and our tax rate for2009 was 32 percent (29% in 2008). Our taxes include a EUR 6 million tax chargerelated to the taxation of our Brazilian operations in 1995-96, which increasedour tax rate by approximately 3 percentage points.The profit attributable to shareholders in 2009 was EUR 150 million (EUR 389million), corresponding to earnings per share (EPS) of EUR 1.06 (EUR 2.75 pershare).The return on capital employed (ROCE) before taxes was 10.0 percent (23.2%) andthe return on equity (ROE) was 9.8 percent (26.0%).Cash flow and financingNet cash provided by operating activities in 2009 was EUR 770 million (EUR 137million in 2008).One of our main goals has been to release at least EUR 500 million from our networking capital during 2009-2010. Our efforts paid off and we managed to releaseEUR 518 million already in 2009. EUR 530 million of this release came frominventories and EUR 272 million from trade receivables. Simultaneously, tradepayables decreased by EUR 173 million and advances received by EUR 160 million.As a result of the special inventory control initiative in Mining andConstruction Technology, its inventories had decreased by EUR 360 million during2009 by the end of the year.As a result of the strong decrease of net working capital and the low level ofcapital expenditure, our free cash flow in 2009 was a strong EUR 717 million(EUR 29 million in 2008).Net interest-bearing liabilities decreased considerably and were EUR 583 millionat the end of the year (December 31, 2008: EUR 1,099 million). The decrease wasmainly due to the strong release of net working capital.The total amount of short-term debt maturing over the next 12 months was EUR242 million at the end of December. EUR 17 million of the short-term debtconsisted of commercial papers issued in the Finnish markets, EUR 173 millionwere current portions of long-term debt and the remainder was local workingcapital financing of subsidiaries, mainly in Brazil.We obtained EUR 365 million of new long-term debt with maturity of 4-5 years.The largest single transaction was a EUR 200 million five-year fundingarrangement under the Euro Medium Term Note (EMTN) program. New loans wereprimarily meant for the refinancing of our existing debt and for the extensionof the debt maturity structure. The amount of this new long-term debt exceedsthe repayments of our earlier long-term loans from 2009 until mid 2011. At theend of the year, our total cash assets amounted to EUR 976 million. Out of thisEUR 249 million has been invested in instruments with initial maturity exceedingthree months and the remaining EUR 727 million is being accounted for as cashand cash equivalents. The syndicated EUR 500 million revolving loan facility isavailable until late 2011, and it is currently undrawn. Metso's liquidityposition is good.In April, following the Annual General Meeting, we paid EUR 99 million individends for 2008.As a result of strong operating cash flow and low level of capital expenditure,our gearing clearly improved in 2009 and was at the end of December 32.5 percent(75.7%). The equity-to-assets ratio was at the year-end 35.7 percent (30.9%).The Tamfelt acquisition, which was carried out as a share exchange, strengthenedour equity to assets ratio by 2 percentage points and lowered our gearing by 3percentage points.Capital expenditureOur gross capital expenditure in 2009, excluding business acquisitions,decreased by 54 percent on the comparison period, to EUR 117 million (EUR 255million in 2008). The share of maintenance investments was 52 percent, i.e. EUR61 million. We maintained strict criteria for new capital expenditure andpostponed spending in some projects approved in 2007-2008. We will continuestrict criteria for new capital expenditure in 2010 and estimate them to beabout on par with the 2009 level.We are constructing new plant and office premises for the Automation businessline in Shanghai, China. The Metso Park industrial facility, designed especiallyto serve the mining and construction industry, is under construction inRajasthan, India. In Finland, we are upgrading a pilot machine at the PaperTechnology Center in Jyv?yl?In Zibo we are establishing our third servicecenter in China for the pulp and paper industry. We have extended theimplementation schedules of our Metso Park and Zibo Service Center investmentsdue to slowdown in global economic growth. Investment projects in globalenterprise resource planning systems are underway in Mining and ConstructionTechnology and in the Automation business line.Acquisitions, divestments and joint venturesIn November, we purchased the American Pacific/Hoe Saw&Knife Company's coaterand doctor blade business, consumables for pulp and paper industry. The annualnet sales of the purchased business are about USD 5 million.In October we purchased the Danish M&J Industries A/S, a manufacturing companyof mobile and stationary products for solid-waste crushing. The debt-freeacquisition price was approximately EUR 15 million. M&J Industries employs some100 people and the company's annual net sales are approximately EUR 30 million.In May, we sold Metso Paper Turku Works Oy, a manufacturer of air systems forthe pulp and paper industry, to Stairon Oy. The air system technology and therelated business will remain in Metso's ownership. Metso Paper Turku Works Oyemployed 91 people.In January, we sold our composites manufacturing business, part of our Paperbusiness line, and related assets in Oulu, Finland, to xperion Oy. The annualnet sales of the divested business were less than EUR 5 million and the numberof personnel was 21.The joint venture MW Power Oy, the result of a combination of W?sil?'sBiopower business and Metso's Heat & Power business, began operations on January1, 2009. We own 60 percent of the company, and as of January 1, 2009, it hasbeen entirely consolidated into our Power business line. An order backlog ofapproximately EUR 116 million was transferred with W?sil?iopower Oy to thejoint venture. The net sales of the company in 2009 were approximately EUR 100million and the number of employees about 100.Tamfelt acquisitionIn November, we concluded a combination agreement with Tamfelt, one of theworld's leading suppliers of technical textiles, and subsequently made a publicexchange offer for all of Tamfelt's shares. The acquisition strengthened ourservices business, particularly in the pulp and paper industry. The acquisitioncreates new growth opportunities for Tamfelt products, especially outside ofEurope, where Metso has an extensive installed base and a wide sales andservices network.The exchange offer, in which Metso offered three new shares in Metso for everyten Tamfelt shares, was carried out in November-December of 2009 andsuccessfully completed on December 23, 2009. The shares tendered in the shareexchange offer represent 95.2 percent of all shares and votes in Tamfelt. Metsoheld 2.8 percent of Tamfelt's shares worth EUR 4 million already before theoffer. The remainder of Tamfelt's shares, 2.0 percent, will be redeemed withcash in the spring of 2010 as per the Finnish Companies Act. A total of8,593,642 new Metso shares were subscribed for in the share issue relating tothe share exchange offer and were registered with the Trade Register on December28, 2009. The share issue totaling EUR 206 million, corresponding to EUR 23.98per share, was recorded into the invested non-restricted equity fund.The value of the Tamfelt transaction was EUR 215 million, and when assuming netinterest bearing debt of EUR 17 million transferred in the transaction, the debtfree transaction value was EUR 232 million. The transaction value exceeded thenet assets of Tamfelt by EUR 117 million, of which EUR 53 million was allocatedto acquired customer base, order backlog and technology, and EUR 10 million toacquired buildings. We recorded deferred tax liability of EUR 16 millionresulting from these allocations. The goodwill from the acquisition is EUR 70million. The allocated values to intangible assets and buildings are amortizedduring their economically useful lives. The amortization is about EUR 15 millionin 2010, EUR 7 million in 2011 and 2012, and EUR 4 million thereafter. Tamfelt'sbalance sheet and personnel were consolidated into Metso as of December31, 2009, and as of January 1, 2010, Tamfelt is functionally andadministratively a part of our Paper and Fiber Technology segment.Research and developmentOur research and development activities focus on environmental technology, suchas energy and raw material efficiency, utilization of recycled raw materials,process control technology and, increasingly, on new services businesssolutions, which also play a role in supporting sustainable development. As aresult of the global economic downturn, we have concentrated our R&D work onprojects that offer the best potential for capitalizing on our future growthopportunities.Our R&D expenses were EUR 115 million in 2009, i.e. 2.3 percent of Metso's netsales (EUR 134 million and 2.1% in 2008). In addition to this, expenses forintellectual property rights amounted to EUR 15 million (EUR 14 million). R&Demployed 763 people (905) in 2009. Our R&D resources are spread throughout 40networked units in Europe, North America, South America and Asia. Our personnelmade approximately 620 invention disclosures (900), which led to more than 200priority patent applications (230). At the end of the year, approximately 3,000Metso inventions were protected by patents (3,000).During 2009, we launched about 80 new products. One example, DNAmachineAssessor,a product that complements our automation solutions, helps to predict equipmentmaintenance needs and prevent disruptions in production. We have also developednew crushing and screening solutions that provide higher capacity utilizationand eco-efficiency through improved process optimization. We strengthened ouroffering for the pulp and paper industry by introducing several new solutionsand services that improve the energy and process efficiency of production lines.Environment and environmental technologyThe environmental impact of our own production is minor and relates mainly tothe consumption of raw materials and energy, emissions to air, water consumptionand waste. We are continuously improving our environmental management practicesand the eco-efficiency of our production facilities, as well as developing ourco-operation, aiming at environmental efficiency with our subcontractors and theentire supply chain.In 2009, we set global energy savings and carbon dioxide emissions targets forour production operations in an effort to reduce our energy consumption andemissions by 15 percent by 2015 and 20 percent by 2020, in line with the EUgoals.Many of Metso's environmental technology solutions have been developed in closeco-operation with our customers. The solutions are related to renewable energysolutions, energy efficiency of our customers' production processes, wastemanagement, recycling, efficient utilization of raw materials and water,reducing dust, noise, carbon dioxide and particle emissions, and processoptimization, to name a few. About 60 percent of Metso's net sales can beclassified as environmental business, according to the OECD definition.During the year, we launched several co-operation projects with our partnerslike UPM, Fortum and VTT (Technical Research Center of Finland). These projectscover, for example, the manufacture of bio-oil from biomass and the utilizationof bio-oil as an alternative to fossil fuels and exploring oxyfuel combustiontechnology. Oxyfuel combustion enables carbon capture in power and heatgeneration.We also provide training, maintenance and other services related to ourtechnology. We take care of the entire life-cycle of production processes andpromote the optimal and environmentally sustainable way to use our solutions.Risks and business uncertaintiesOur operations are affected by various strategic, financial, operational andhazard risks. We take measures to manage and limit the potential adverse effectsof these risks. If such risks materialized, they could have material adverseeffects on our business, financial situation, and operating result or on thevalue of Metso shares and other securities.Our risk assessments take into consideration the probability of the risks andthe estimated impact of them on our net sales and financial results. Themanagement estimates that the overall risk level of the company is currentlymanageable in proportion to the scope of our operations and the practicalmeasures available to manage these risks.Due to the uncertainty in the financial markets and the slow-down of globaleconomic growth, our operating environment was demanding in 2009, and inparticular the risks related to cyclical fluctuations and financing were infocus. We estimate that the operating environment will continue to be demanding,even though financial markets have stabilized and there are first signs ofgradual recovery in the global economy and in demand.Uncertainty surrounding projects in our order backlog has decreased, and about14 percent of our order backlog had uncertain delivery schedules at the end ofthe year. We apply the percentage-of-completion method to long-term deliveryagreements, meaning that we recognize revenue on long-term delivery agreementsaccording to the progress of the delivery. The customer advance payment istypically 10-30 percent of the value of the project, in addition to which thecustomer makes progress payments based on the milestones during the projectexecution, which significantly decreases risk related to projects as well as ourneed for financing. We continually assess our customers' creditworthiness andability to meet their obligations. If a customer faces liquidity problems, wewill discuss the possibility of changing project delivery schedules and terms ofpayment and any other measures needed. As a rule, we do not finance customerprojects.We have adjusted our capacity and cost structure to correspond with the currentdemand, in order to maintain our competitiveness. The slowdown in globaleconomic growth has led to tougher price competition, which we are partly ableto compensate in lower procurement costs. Although there have been no majorchanges in our competitive field in 2009, the situation might change due tobankruptcies, acquisitions and the arrival of new players.The levels of net working capital and capital expenditure have a fundamentaleffect on the adequacy of financing. We have successfully released cash from networking capital in 2009. Although we have developed our net working capitalmanagement practices, there is a risk that working capital will start to growagain when economic activity picks up. We do not have any large-scale investmentprojects underway, and we estimate that we are well positioned to keep ourcapital expenditure at a moderate level in the coming years.Securing the continuity of our operations requires that sufficient funding isavailable under all circumstances. The financial crisis, which is stillaffecting the financial markets, could make the availability of debt financingmore difficult and/or raise the cost thereof. We estimate that our cash assets,totaling EUR 976 million in December 31, 2009, and available credit facilitiesare sufficient to secure short-term liquidity. Our committed credit facilitiesavailable for withdrawal amounted at the year-end to EUR 500 million. Theaverage repayment period for our long-term loan capital is 3.4 years and morethan half of our long-term debt will mature after 2011. There are no prepaymentcovenants in our debt facilities that would be triggered by changes in creditratings. Some of our debt facilities include financial covenants related tocapital structure. Currently we fully meet the covenants and other terms relatedto our financing agreements and we consider our flexibility in relation to theseto be adequate.Changes in the prices of raw materials and components could affect ourprofitability. However, the risk of increased direct procurement costs typicallydiminishes during an economic downturn. On the other hand, some of our customersare raw material producers, whose ability to operate and invest may be hamperedby declining raw material prices.We had EUR 863 million of goodwill on our balance sheet at the end of 2009,which was related to business acquisitions made over the last 10 years.Following the significant changes in our business environment, we have conductedimpairment testing reviews at the end of every quarter since September 2008, andhave not found any impairment necessary. The quarterly testing reviews have beenconducted with the same principles as the annual tests and the discount rateshave been adjusted when appropriate. The principles of the impairment testingare presented in our annual report.Around EUR 350 million of the goodwill on our balance sheet arises from theacquisition of Svedala in 2001, and is thereby related to the Mining andConstruction Technology segment and the Recycling business line. EUR 260 millionof our goodwill stems from the Aker Kvaerner Pulping and Power businessoperations, which were acquired at the end of 2006. This is allocated to ourPower and Fiber business lines. EUR 50 million of our goodwill arises from theBeloit paper machine maintenance operations acquired in 2000, which is allocatedto our Paper and Fiber Technology segment. EUR 70 million of the goodwill is theresult of our acquisition of Tamfelt's technical textile business at the end of2009. The remainder of our goodwill stems from several smaller acquisitions. Inproportion to net sales and profitability, the largest share of goodwill is heldby our Power business line. Its outlook is good due to the favorable growthoutlook for power generation based on renewable energy sources. Goodwill relatedto the Tamfelt business is relatively high, as a consequence of the increase inMetso's share price between the launch of the share exchange offer in November2009 and the completion of it towards the end of December 2009.Currency exchange rate risks are among the most substantial financial risks.Exchange rate changes can affect our business, although the wide geographicalscope of our operations decreases the impact of any individual currency. Thegeneral uncertainty in the economy is likely to increase exchange ratefluctuations. We hedge the currency exposures that arise from firm delivery andpurchase agreements. In addition, our units can hedge anticipated foreigncurrency denominated cash flows by taking into account the significance of suchcash flows, the competitive situation and other opportunities to adapt.Subpoena from the United States Department of Justice requiring Metso to producedocumentsIn November 2006, Metso Minerals Industries, Inc., our U.S. subsidiary, receiveda subpoena from the Antitrust Division of the United States Department ofJustice calling for Metso Minerals Industries, Inc. to produce certaindocuments. The subpoena relates to an investigation of potential antitrustviolations in the rock crushing and screening equipment industry. We areco-operating fully with the Department of Justice. We recognized about EUR 1.5million in expenses resulting from the inquiry in 2009. No separate provisionrelating to the investigation has been recognized in the 2009 financialstatements.Adjusting capacity to demandWe began adjusting our capacity and cost structure to the lower demand alreadyin early 2008 and continued the measures during 2009. Our aim has been to securethe competitiveness, flexibility and profitability of our operations. This hasmeant reducing the use of external work force, reducing permanent personnel,temporary lay-offs, and shorter work time, closing down smaller units and tightcost discipline throughout the organization.We estimated originally that if our net sales would come down 25-30 percentduring this down cycle from the 2008 level and we would target satisfactoryprofitability we would need to reduce our annual capacity cost (all fixed costsrelated to our operations, including personnel costs) by about EUR 500-600million. As the actual decline in our net sales has been about 20 percent, andwe do not foresee currently further deterioration of net sales, the capacitycost adjustment need is reduced to EUR 400-450 million. We estimate that themeasures we have initiated by the end of 2009 almost entirely cover the EUR400-450 million adjustment need, and that more than half of the savings impactsof these measures materialized already in 2009. Over half of the savings stemfrom personnel reductions and the rest from other measures. The cost savingsyielded by personnel reductions are more permanent by nature, while the majorityof other costs are expected to come back gradually, as market activity recovers.From the end of June 2008 to the end of 2009 we have reduced the number of ourpermanent personnel by 3,848. Additionally, decisions have already been made ornegotiations are ongoing to further reduce the number of personnel by 760 duringthe first half of 2010. Altogether, we estimate that our personnel will bereduced by approximately 4,600 people between June 2008 to mid-2010. About3,000 of them are from Finland and Sweden.During 2009, we recorded about EUR 75 million in non-recurring expensesresulting from these personnel reductions and unit closures.In 2009, selling, general and administrative expenses decreased by about EUR140 million on a comparable basis from 2008 and our personnel related costsrecognized in cost of goods sold decreased by about EUR 100 million. In additionto personnel-related costs there has also been a reduction in other fixed costsof goods sold items.The number of personnel decreased in Mining and Construction Technology by 15percent, the most in Finland, Brazil and the United States. The number ofpersonnel in Energy and Environmental Technology declined primarily in Finlandand the United States. The number of personnel in Paper and Fiber Technologydecreased especially in Finland and Sweden.The table below details the personnel reductions related to the capacityadjustment measures.+-------------------------------------+------------+----------+---------+------+| | Mining and|Energy and|Paper and| Metso|| |Construction| Environ-| Fiber| || | Technology| mental| Tech-| || | |Technology| nology| |+-------------------------------------+------------+----------+---------+------+|Personnel as of June 30, 2008 | 10,503| 6,311| 10,089|28,069|+-------------------------------------+------------+----------+---------+------+|Acquisitions, July 2008 - December | 590| 223| 2,421| 3,234||2009 | | | | |+-------------------------------------+------------+----------+---------+------+|Divestitures, July 2008 - December | -| -| -289| -289||2009 | | | | |+-------------------------------------+------------+----------+---------+------+|Comparable personnel amount | 11,093| 6,534| 12,221|31,014|+-------------------------------------+------------+----------+---------+------+|Personnel as of December 31, 2009 | 9,541| 6,060| 10,459|27,166|+-------------------------------------+------------+----------+---------+------+|Actual reduction July 2008- | 1,552| 474| 1,762| 3,848||December 2009 | | | | |+-------------------------------------+------------+----------+---------+------+|Estimated additional reductions | | | | ||decided | 200| 170| 390| 760||and underway | | | | |+-------------------------------------+------------+----------+---------+------+|Total personnel reductions decided | 1 ,752| 644| 2,152| 4,608|+-------------------------------------+------------+----------+---------+------+|Temporary lay-offs in man years | | | | 600|+-------------------------------------+------------+----------+---------+------+PersonnelAt the end of the year, Metso had 27,166 employees, which was 2,156 less than atthe end of 2008 (29,322 employees on December 31, 2008). The number of employeesdeclined in all reporting segments and especially in Finland and Sweden, as aresult of capacity adjustment measures. The acquisitions concluded during theyear brought about 1,600 new employees to Metso and when excluding this,personnel reduction was about 3,750. The share of our personnel working in theemerging markets stayed on par with the previous year and was 31 percent. DuringJanuary-December, we had an average of 27,813 employees.Mining and Construction Technology employed 35 percent of our personnel, theEnergy and Environmental Technology 22 percent, and the Paper and FiberTechnology 39 percent, while Valmet Automotive, service centers and Group HeadOffice employed 4 percent of the personnel. The countries with the largestnumbers of personnel were Finland, the United States, Sweden, China and Brazil.These countries employed 69 percent of Metso's total personnel.Despite the demanding environment, we continued renewing our global HRmanagement practices and the supporting processes, systems and organization. Wealso carried out our key training programs and continued developing work safety.During 2009, we decided to set new Metso-wide targets for occupational healthand safety. We set a common, global target to decline the amount of lost timeincidents in our units. Our goal for every Metso unit is less than 10 lost timeincidents per million working hours from 2012 onwards.The salaries and wages of Metso employees are determined on the basis of localcollective and individual agreements, employee performance and job evaluations.Basic salaries and wages are complemented by performance-based compensationsystems. In 2009, altogether EUR 991 million were paid in salaries and wages(EUR 1,066 million in 2008).Personnel by area Dec 31, % of total Dec 31, % of total Change 2009 personnel 2008 personnel %------------------------------------------------------------------------ Finland 8,746 32 9,252 32 -5------------------------------------------------------------------------ Other Nordic countries 2,995 11 3,332 11 -10------------------------------------------------------------------------ Rest of Europe 3,678 13 3,842 13 -4------------------------------------------------------------------------ North America 3,428 13 3,964 14 -14------------------------------------------------------------------------ South and Central America 2,618 10 2,991 10 -12------------------------------------------------------------------------ Asia-Pacific 4,316 16 4,469 15 -3------------------------------------------------------------------------ Rest of the world 1,385 5 1,472 5 -6------------------------------------------------------------------------ Total 27,166 100 29,322 100 -7------------------------------------------------------------------------Corporate Governance StatementWe have prepared a separate Corporate Governance Statement which follows therecommendations of the Finnish Corporate Governance Code for listed companies.It also covers other central areas of corporate governance. The statement isincluded in our Annual Report, and it is published separately from the Board ofDirectors' Report. The statement is also available on our website atwww.metso.com
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