GS-Hydro | Annual Report 2008 GS-Hydro | Annual Report 2008 ... welded is an inherently more...

GS-Hydro | Annual Report 2008

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GS-Hydro | Annual Report 2008 2

GS-Hydro in brief

Headquartered in Finland, GS-Hydro is the world’s leading supplier of non-welded piping systems. Operations began in 1974 with the commercialization of an innovative flange which allowed the rapid and secure connection of pipes without the need for welding.

The company operates in the global market for industrial piping, primarily in the offshore and marine industries, as well as in selected land-based industries. The main application for non-welded piping is in hydraulic power transmission, where very high pressures place stringent requirements on piping systems.

GS-Hydro develops and manufactures original GS-branded flanges at its own facility in Finland, while globally sourcing other piping products required by customers. The key benefits of GS-Hydro’s non-welded piping are zero fire hazard, inherent cleanliness, leak-free reliability and rapid on-site installation. Employing 640 piping system specialists, GS-Hydro operates directly through its own subsidiaries in 17 countries, covering the key markets in Europe, Asia and North America. Selected agents and distributors complete the world-wide sales and customer service channel.

With over three decades of experience, and its technology validated in tens of thousands of demanding applications, GS-Hydro is uniquely able to deliver turn-key piping projects to global customers’ local sites virtually anywhere in the world.

GS-Hydro is a wholly-owned subsidiary of Sweden-based Ratos AB, a listed private equity company.

Headquarters

Subsidiaries

Agents


CONTENTS

GS-Hydro in brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Year 2008 in review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Letter from the President & CEO . . . . . . . . . . . . . . . . . . 6Our offering and market segments . . . . . . . . . . . . . . . . 8Markets and customers in 2008. . . . . . . . . . . . . . . . . . 10Our strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Non-welded: benefiting the environment. . . . . . . . . . . 18Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Board of Directors´ report. . . . . . . . . . . . . . . . . . . . . . . 22 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Consolidated income statement . . . . . . . . . . . . . . . 26 Consolidated balance sheet . . . . . . . . . . . . . . . . . . 27 Consolidated cash flow statement . . . . . . . . . . . . . 28 Consolidated statement of changes in equity . . . . . 29 Income statement for the parent company . . . . . . . 30 Balance sheet for the parent company . . . . . . . . . . 31 Cash flow statement for the parent company . . . . . 32 Statement of changes in parent company equity . . 33Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 34 Auditor´s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . 59Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Executive Committee . . . . . . . . . . . . . . . . . . . . . . . . . . 61Market insight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Historical milestones . . . . . . . . . . . . . . . . . . . . . . . . . . 63

GS-Hydro | Annual Report 2008 4 GS-Hydro | Annual Report 2008

Year 2008 in review

Financial highlights in 2008 • Sales of EUR 159.0 million (2007: EUR 141.9 million), an increase of 12% (at constant currency exchange rates, sales increased 16%) • Profit (EBIT) of EUR 17.6 million (2007: EUR 16.3 million), an increase of 8.0%

• Offshore segment sales grew 18%

• Marine segment sales grew 35%

Operational highlights in 2008

• Strengthened capabilities in Chinese and Korean subsidiaries

• Acquisition of Airedale Tubes & Fittings Ltd and BSH Ltd in the U.K.

• Awarded piping contract for 15 derrick rigs in China

• GS-Hydro Norge AS won largest ever contract for industrial hoses in Norway

• Service offering extended with new, rugged pipe flushing unit meeting North Sea requirements

30

25

20

15

10

5

0

%

2004 2005 2006 2007 2008

28.028.5

22.6

10.0

-0.3

Return on capital employed 2004 – 2008

Sales and profit development 2004 – 2008

Sales Profit (EBIT)

200

180

160

140

120

100

80

60

40

20

0

20

15

10

5

0

SalesEUR million

ProfitEUR million

2004 2005 2006 2007 2008

159

17.6

142

106

69

53

16.3*

3.7

10.9

-0.1

*) Excluding the EUR 3.6 million gain from a property sale


Systems

Products

Services

Revenues by type of business

57%

12%

31%

Revenues by segment

Offshore

Marine

Land-based

34%37%

29%

Offshore segment Sales development 2004 – 2008, CAGR 46%

80

70

60

50

40

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20

10

0

54

46

29

1611

2004 2005 2006 2007 2008

EUR million

Marine segment Sales development 2004 – 2008, CAGR 23%

2004 2005 2006 2007 2008

46

3428

1814

80

70

60

50

40

30

20

10

0

EUR million

Land-based segment Sales development 2004 – 2008, CAGR 20%

5962

49

3528

2004 2005 2006 2007 2008

80

70

60

50

40

30

20

10

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EUR million


Despite market turbulence, 2008 turned out to be a good year for GS-Hydro, with the company setting new records for both sales and profits. Sales rose to EUR 159 million in 2008, from EUR 142 million in 2007, which represents growth of 12% (16% at constant currency exchange rates). Operating results also developed posi-tively. Profit before interest and taxes (EBIT) improved to a record EUR 17.6 million in 2008, from EUR 16.3 million in 2007.

The strategy to focus our sales efforts on the Offshore and Marine segments was rewarded during the final months of 2008. While our customers in the Land-based segment reduced their orders, the order flow from our offshore and marine customers continued to be strong. Activity in the Offshore and Marine segments was especially strong for GS-Hydro in Asia and North America. Overall, we can be pleased with our performance in what was a challeng-ing year.

At the beginning of 2008 we invested in developing our local presence in Asia through our own frontline subsidiaries. As a result, these units performed well during the second half of the year. With the strong growth in local frontline subsidiaries of the past few years, we also focused on developing our organizational structure in 2008. Now, all subsidiaries report directly either to the President & CEO or to a member of the Executive Committee. Today, we can be confident that all of our operations around the world are on a sound footing, giving us the confidence to develop the global busi-ness further, despite the tougher times we are currently facing. We maintain our goal of strong, long-term growth and have identified many initiatives to seize in order to be successful.

Our core strategy is to emphasize system sales and our ability to work together with our customers to add significant value to their businesses. Large, turn-key projects concretely demonstrate all of the skills we can offer, and several success stories from 2008 are highlighted in this annual report. The efforts to build partner-ships with our strategic customers and selected suppliers paid off handsomely during the year. Most of the growth in sales can be attributed to increased business with our main strategic customers. This positive development was also reflected in the higher ratings we received in our customer satisfaction measurements.

Focusing on organic growth in 2008, we did not participate in any major merger and acquisition activity, although we continue to fol-low opportunities with interest. Two small acquisitions were made to support our local product business in the U.K. The integration of these businesses into GS-Hydro UK has gone smoothly and sales have grown strongly in the UK subsidiary.

Letter from the President & CEO


In the marketing efforts to new potential customers we are putting increased emphasis on communicating the benefits of non-welded technology. In 2008, we arranged an increased number of customer events to promote non-welded technology. Non-welded solutions have clear advantages regarding worker safety and non-welded is an inherently more environmentally responsible method of joining pipes than arc welding.

With the overriding theme of improving operating efficiency, we also aim to make great strides in internal development during 2009. The backbone of our effort will be the work required to unify operations under a planned new enterprise resource planning (ERP) system. Although fully implementing the ERP system is a long-term project, the first implementation stages will highlight the large potential information technology offers to improve opera-tions and to facilitate seamless and effective co-operation. In 2009, we also have plans to improve competence levels, through our GS-Academy, improve internal communications and develop quality management.

With the changes in the market, cash management needs to take a greater role in the Group. We will therefore be emphasizing actions to improve efficiencies particularly, in logistics and financing.

The GS-Hydro Group has demonstrated very strong operating per-formance over the last few years. The operating profits have been retained and re-invested in the business to finance the rapid growth we were experiencing since 2005. In September 2008, GS-Hydro was refinanced, resulting in a release of EUR 50 million to Ratos.

The outlook for 2009 is very uncertain and there are signs that our main markets will be weaker than last year. However, we are enter-ing this uncertain period as a very strong company. We also have new market areas available to us which have substantial growth potential. We are therefore confidently moving ahead to face our new challenges. Last year I wrote that we need to be able to react fast to any changes in our business environment in order to sustain profitable growth. My observation then was more prescient than I could have imagined, it is worth repeating in this year’s shareholder letter.

I wish to thank all our employees and customers for making 2008 a successful year for GS-Hydro. The past four years of strong growth have radically transformed GS-Hydro into a professional mid-sized company. I believe that our next phase of development will be no less interesting.

Thomas RönnholmPresident & CEO


Our offering and market segments

Systems

Products

Services

Revenues by type of business, 2008

57%

12%

31%

Systems

Products

Services


GS-Hydro's offering ranges from the supply of piping products to the delivery of complete, non-welded piping systems, including products, design, engineering and prefabrication, as well as the necessary on-site work which includes supervision, installation, flushing, testing and documentation.

GS-Hydro supplies its own connection technology, primarily under frame agreements to customer specifications. The company’s core products are the GS-Retain Ring System flanges, and other con-nectors, invented by GS-Hydro and manufactured in-house. The pipes, fittings, clamps, hoses and other materials required in piping systems are sourced globally from selected third-party suppliers. Key sourced products are marketed under the GS-Hydro brand.

In the systems business, GS-Hydro sells value-adding services in addition to products. Customers contracting for turn-key projects benefit from GS-Hydro’s ability to optimize every phase of a piping project and ensure high quality, on-budget and on-time delivery.

In the services business, GS-Hydro offers “stand-alone” services as well as services in connection with a GS-Hydro system installation. Sales in the service segment include rental of bending and flaring machines, as well as installation and after-sales services, such as pipe flushing.

Source of market data: Arthur D. Little survey, 2008

In 2008, systems accounted for 31% of sales and products for 57%. The remaining 12% of sales were generated by services.

Market segments

GS-Hydro operates in the multi-billion global market for hydraulic and other high pressure industrial piping. Based on industry and customer requirements, two large billion-euro segments can be readily identified: the Offshore segment and the Marine segment. GS-Hydro’s third segment comprises all Land-based industries.

The market for hydraulic and other high pressure piping in the Offshore segment was worth approximately EUR 1 billion in 2008. The company defines the Marine segment as the piping market for vessels with an intensive requirement for hydraulic and other high pressure piping. These vessels represented a market of approxi-mately EUR 2 billion in 2008. Collectively, the land-based industries account for the largest market for hydraulic, high pressure and specialized piping. There are numerous niche applications in land-based industries, many in demanding applications which can significantly benefit from non-welded solutions.

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Revenues by segment, 2008

Offshore

Marine

Land-based

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29%

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Markets and customers in 2008

Offshore segment

Offshore segment sales as a share of total GS-Hydro sales

Non-welded share of sales in the overall Offshore piping market

GS-Hydro Offshore segment sales

80

70

60

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54

46

2007 2008

EUR million

34%

Non- welded 30%

Welded 70%

Offshore is GS-Hydro’s most important segment, accounting for the highest sales to a single industry in 2008. The Offshore yards build and convert some of the largest and most com-plex structures on earth, ranging from mobile jack-up rigs to semi-submersible drilling rig hulls weighing up to 16,000 tons. A modern offshore oil platform for deep-water exploration or production has to operate in some of the most hostile environ-mental conditions known to man, placing rigorous demands on hydraulic power systems.

The primary applications for GS-Hydro piping systems are in high-pressure hydraulics for the drilling package, cranes, winches, motion compensation systems and the main ring line. In addition, GS-Hydro is a significant supplier of high pressure and specialty piping systems in all areas of offshore installations, including drilling, utilities and processing. Since the hydraulic content is significantly larger on a drilling unit than on a production unit, oil and gas exploration is the main driving force behind the company’s growth in the Offshore segment.

The total global market for hydraulic and other high pressure piping in the offshore industry is estimated to be EUR 1 billion. Non-welded technology penetration is estimated at 30%, implying a total non-welded piping market value of approximately EUR 300 million in 2008.

In 2008, GS-Hydro’s sales to the Offshore segment rose 18% to EUR 54.2 million and accounted for 34% of GS-Hydro’s total sales.



2008 win: The Blackford Dolphin offshore project

In late 2008, GS-Hydro completed a series of piping project deliver-ies for the upgrade of the Blackford Dolphin semi-submersible offshore drilling platform, converting it for deepwater operation. Now fully upgraded, the Blackford Dolphin can drill for oil or gas at up to a depth of 7000 feet (2300 meters). The various sub-projects/systems included piping for the derrick, the ring main hydraulics, the blowout preventer (BOP)-system for oil testing, water-tight doors, raiser columns, hose cooling, propulsion and hydraulic valves. In total, GS-Hydro delivered and installed over 5 kilometers of non-welded piping on the platform.

The Blackford Dolphin platform was upgraded in the Netherlands by a globally operating offshore and marine customer. This was the first project where GS-Hydro employed an on-site project secretary to manage purchase orders and invoicing on a daily basis – with highly satisfactory results.

GS-Hydro Benelux B.V. won the contract based on their track record of successfully executing turn-key projects for customers in the Netherlands in the past. In this complex project the customer required all the skills and services GS-Hydro offers, in addition to piping and connector materials. The GS-Hydro Benelux subsidi-ary co-operated with the GS-Hydro UK unit on implementation, together supplying engineering, prefabrication, installation, testing, flushing and full documentation services for the piping systems.

In Spring 2009, the Blackford Dolphin platform is off the coast of the Republic of Ghana in Africa, drilling the deepwater Hyedua wells to appraise the oil reserves of the recently discovered Jubilee field. GS-Hydro piping is enabling the platform to drill to a total depth of nearly 4 kilometers in a water depth exceeding 1.2 kilometers. Ghana has already struck oil in the shallow waters of the Jubilee field, enabling the country to be an oil producer as early as 2010. With the reserves already estimated to be as much as 1.8 billion barrels of oil, further successful finds could enable this West African country to become a significant oil exporter.

GS-Hydro – Creating Value Together



Marine segmentGS-Hydro Marine segment sales

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60

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0 2007 2008

EUR million

46

34

Marine segment sales as a share of total GS-Hydro sales

29%

Non-welded share of sales in the overall Marine piping market

Non- welded 20%

Welded 80%

GS-Hydro´s piping solutions are extensively used in the ship-building industry for hydraulic, seawater and other piping systems. With ship owners’ special requirements for high integ-rity and cleanliness, fast installation and flexible engineering, GS-Hydro’s non-welded piping can offer significant time and cost benefits for shipyards and their suppliers.

Marine is another important segment for GS-Hydro, generating a piping market with sales of approximately EUR 2 billion. Tug boats, offshore supply vessels, chemical tankers, fishing vessels, naval ships, dredgers and seismic vessels are all examples of ships in the Marine segment with an intensive requirement for hydraulic and other high pressure piping.

Non-welded piping penetration in the Marine segment is estimated at approximately 20%, implying a total non-welded piping market value of approximately EUR 400 million in 2008.

In 2008, GS-Hydro’s sales to the Marine segment rose 35% to EUR 46.2 million and accounted for 29% of GS-Hydro’s total sales.



2008 win: The Seven Atlantic Diving Support / Offshore Construction Vessel

In 2008, GS-Hydro’s UK subsidiary won a contract to install over 10 kilometers of non-welded stainless steel and tungum piping solutions on the Seven Atlantic, a unique, fully Dynamic Positioned Diving Support / Offshore Construction Vessel (DSV). The hydraulic piping for the Air Dive System Equipment, Hoop Boom, Constant Tension Winches, and Triple Drum Winches, as well as the vital gas piping for the diving spread, was supplied by GS Hydro. For the diving spread, GS-Hydro supplied non-welded piping systems for gas management, the divers’ environmental control unit (ECU) and the ancillary systems.

The Seven Atlantic was designed and is being built in the Nether-lands by the IHC Merwede, the world leader in specialized offshore subsea construction vessels, to fulfill the requirements of a contract Subsea 7. With a capacity for 150 personnel, a heave-compensated 120 ton crane and a large deck area of 1200 square meters, the vessel will be the most versatile and advanced of its kind.

GS-Hydro won the contract due to its ability to rapidly implement piping in concert with the suppliers of the diving spread, the well treatment, the robotically operated vehicles (ROV), and the crane equipment. During the contract negotiation phase, GS-Hydro was best able to meet the yard’s requirements for delivery, hook-up and commissioning times in synchronization with other suppliers’ engineering and production stages. Internally, GS-Hydro benefited from being able to bring together expertise from several frontline subsidiaries.

Diving Support Vessels (DSV) are designed to facilitate air and satu-ration diving. By saturating their bloodstream with inert helium and spending their rest periods also at similar deep-sea pressures, divers

avoid the need for time-consuming frequent decompression and the risk of decompression sickness, “the bends”. Saturation diving spreads have been developed to allow divers to work effectively on oil or gas wells and piping deep underwater for long periods of time. Saturation divers operate in some of the harshest condi-tions known to man. Indeed, the challenge of working under such extreme conditions is not dissimilar to space travel.

In the Seven Atlantic, the diving spread has a total of eight chambers, twin diving bells and two observation-class robotically operated vehicles. The diving spread will enable up to 24 divers in eight teams to work up to a depth of 350 meters and live under the equivalent sea water pressure for up to 28 days at a time. Non-welded piping was a clear choice for the cleanliness needed in the breathing systems for the diving spread. GS-Hydro’s non-welded technology ensures that the divers breathe gas mixtures free of contamination.

The project is a high profile showcase for GS-Hydro’s capabilities. On schedule for delivery in mid 2009, the Seven Atlantic is part of the largest single contract award in the history of the UK subsea sector.



Land-based segment sales as a share of total GS-Hydro sales


Land-based industries segment

Non-welded share of sales in the overall Land-based piping market

5962

GS-Hydro Land-based segment sales

80

70

60

50

40

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20

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EUR million

37%

Welded 98,5%

Non-welded 1,5%

GS-Hydro piping systems are installed in a wide range of customer environments outside the core Offshore and Marine segments. GS-Hydro serves a hugely diverse range of customers operating in the metals, mining, pulp and paper, sugar/ethanol, testing, aerospace and defense sectors. Overall, the Land-based segment represents the largest market for hydraulic and other high pressure piping. However the segment comprises a large number of industries with varied, and sometimes local needs, unlike the more focused requirements in the global offshore and marine industries. Steel and mining were two of the largest Land-based industries for GS-Hydro in 2008. The steel industry accounts for approximately EUR 1.2 billion of the total sales in the Land-based market, with the mining industry accounting for approximately EUR 200 million in sales.

Overall, the market penetration of non-welded piping technology is estimated at approximately 1 – 2% of the overall market, with high variations amongst the industries served.

In 2008, GS-Hydro’s sales to the Land-based segment were EUR 59.4 million, 5% lower than in 2007, and accounted for 37% of GS-Hydro’s total sales.



2008 win: Metal Forge and extrusion presses for Danieli Breda

In 2008, GS-Hydro delivered multiple hydraulic piping systems to Danieli Breda’s forge and extrusion press installations in Russia, Italy, Germany and Australia. GS-Hydro has earned the role of preferred supplier to Danieli Breda through the successful implantation of over ten forge projects, to date. Danieli Breda, a division of the Italy-based Danieli Group, is a world-leading supplier of turn-key forging presses rated up to an immense 100 MN of force.

Danieli Breda has been successful through offering its custom-ers improved product quality while reducing their production and depreciation costs. One of their largest projects of the year was the installation of a new 30-MN forge press for a major steel mill mod-ernization program in Russia.In total, the press required delivery of over 3 kilometers of on-site hydraulic piping, weighing in at over 20 000 kilograms.

Forging squeezes metal into the desired shape, resulting in inher-ently stronger parts compared to the more traditional hammering. Most metals are cold forged, but iron and steel, being extremely hard, need to be hot forged. Not surprisingly, a forge press requires the application of considerable force. Indeed, Danieli Breda deliv-ers forges rated up to an immense 100 million newtons of force. This level of controlled force is only achieved in practice through the transfer of power via hydraulic piping. In extrusion, there is a similar need for tremendous force to squeeze metal through a die into the desired shape.

GS-Hydro Finland Oy won the Danieli Breda projects based on prov-en ability in turn-key project management and the ability to benefit from the worldwide reach of the whole GS-Hydro Group. The large diameters of the hydraulic pipes, combined with the high maximum working pressure of 350 bar, made GS-Hydro non-welded connec-tions a reliable choice. In addition, the numerous T-junctions in such complex systems make non-welded technology the only practical solution for assured cleanliness with on-site flushing. With cleanliness and leak-free operation assured, Danieli Breda can realize its customer promise of lower production and depreciation costs.



Our strategy

Moving up the value chain

GS-Hydro’s strategy is to increase its “footprint” in its customers’ businesses by increasingly selling systems, value-adding services together with materials and products. The company is pursuing specific strategies to market and sell major projects and deepen its relationships with its key customers. The company is also systemati-cally developing the after-sales capabilities required to serve the total installed base of non-welded installations. The company be-lieves that its growing ability to implement large turn-key projects creates a barrier to entry for smaller competitors and a sustainable business model as a system provider.

Converting the market to clean non-welded solutions

GS-Hydro is making long-term marketing investments to promote the benefits of GS-Hydro non-welded technology compared to traditional arc welding, as well as promoting the use of original GS-Hydro connections compared to other materials. The benefits of GS-Hydro non-welded piping are zero fire hazard, inherent cleanli-ness, leak-free reliability, small space requirement and full docu-mentation, as well as pre-fabrication for fast, on-site installation.

The company’s marketing strategies have proven successful so far, especially in Europe, and continue to be implemented. The plan is to repeat this marketing success in North America and the growing Asian markets.

Developing personnel skills

GS-Hydro invests in recruiting and training skilled personnel in or-der to allow GS-Hydro to partner with its customers and be valued as an expert consultant in their choice of solutions.

Unifying operations

During the last few years operating margins have been positively impacted by integrating local and HQ operations, as well as increas-ing cooperation between frontline subsidiaries more efficiently. Strategies to further unify and integrate sourcing, administration and manufacturing are to be implemented in order to fully realize the operating efficiencies of a unified global enterprise.

Non-welded piping solutions are a small but growing segment of the overall industrial piping solutions market, where the majority of piping systems are installed using traditional “hot” arc weld-ing. In 2008, the size of the hydraulic and other high pressure industrial piping market was estimated to be EUR 13 billion, ex-cluding the markets in automotive and off-highway applications, which GS-Hydro does not address. In 2008, non-welded solutions accounted for approximately 6% market share, or approximately EUR 800 million in annual sales. With 94% of the market still served by traditional welding, GS-Hydro has significant long-term growth potential.

GS-Hydro is the leading supplier of non-welded piping solutions, with a market share approaching 20% overall. In the Offshore and Marine segments, the more demanding applications where GS-Hydro has focused its marketing, the company has signifi-cantly higher market shares.


We provide innovative, non-welded piping solutions for demanding applications.

Mission

Vision

The recognized global leader in non-welded piping products, systems and services.

Partnering with customers and selected suppliers, we deliver high-quality products, systems and services worldwide. Our people provide the best service level, consistently.

Competitive strategy


Non-welded: benefiting the environment

GS-Hydro’s business is fundamentally about replacing welding, a traditional but environmentally detrimental method of joining pipe sections. Our solutions offer a clean, safe alternative that takes advantage of modern working methods. Compared to welding, non-welded products and services are genuinely in the interest of a better environment, economical use of resources and environmental sustainability, as well as improved worker health and safety.

Using GS-Hydro’s connectors and services makes good business sense for customers in terms of overall costs, absence of fire haz-ard, cleanliness, leak-free reliability, documentation, prefabrication and speed of implementation. When also considering the positive environmental benefits, the case for using non-welded piping solu-tions is even stronger.

A clean start

GS-Hydro’s non-welded piping has the overwhelming benefit that the pipe spools and connectors are delivered ready-clean from the pre-fabrication process. Since the materials are not contaminated in the first place, a simple oil flush is all that is required before a GS-Hydro non-welded piping system is commissioned. Welded pip-ing systems, however, require acid flushing to dissolve and remove left-over contaminates from welding. An acid flush needs to be fol-lowed by acid-neutralizing flushing, flushing with hydraulic oil and finally filtering. Apart from being a time consuming activity in the most expensive phase of a piping project, cleaning produces large quantities of liquid toxic waste for disposal.

Sustainably clean

Maximum cleanliness is important in hydraulic systems because they utilize sophisticated components with high-tolerance moving parts, such as servo-valves, proportional valves and piston pumps. Contaminates remaining in the piping after commissioning gradu-ally destroy hydraulic components from within. Even sub micron-sized particles aggregate over time, forming larger particles that eventually have a destructive effect. Cleanliness is therefore not just an issue for the piping, but quickly becomes an issue for the entire hydraulic system. A clean system will not only reduce the need for frequent filter and fluid changing, but also increase the longevity of all hydraulic components used. Important for environmental sustainability, cleaner, well-maintained hydraulic systems also result in lower power consumption and less energy wasted.

During its working lifetime, hydraulic piping is subject to continu-ous vibration. Despite clamping the pipes securely, the enormous forces in hydraulics systems always result in some level of move-ment. Vibration does not affect non-welded connectors, but welded piping joints may be left with rough internal edges, called “welding icicles”. These imperfections can not always be success-fully removed by flushing, and vibration can cause small pieces of metal residue to break off – eventually damaging hydraulic components.


Non-welded connectors are designed to be serviceable. By contrast, repairing welded hydraulic piping is very challenging. Welding qual-ity is highly dependent on individual welder skill. If weak, poorly welded joints need to be repaired, the entire piping system may need to be rewelded, followed by acid cleaning, neutralizing and oil flushing before being finally recommissioned.

Removing welding removes environmental risks

Traditional arc welding is “hot work” which inevitably creates the risk of explosions. Indeed welding is not possible in many demand-ing applications, such as installing piping on oil rigs or tankers. Welding torches emit gases, particulates and fumes which are poisonous in confined spaces and detrimental to the atmosphere. Welding results in small amounts of slag and solid residual waste for disposal, but the most insidious danger to the environment is the on-site storage of acids, neutralizing liquids and waste flushing oils which creates serious toxic spill risks to the local groundwater and soils.


Personnel

With continued growth in operations, the number of personnel employed by GS-Hydro increased during the year. At the end of 2008, the company employed 640 piping specialists in 17 coun-tries, an increase from 527 in 2007.

Growth in personnel outpaced growth in sales during the year. This was partly due to the business mix continuing to evolve to include more added-value sales of services and projects, which are inherently more labor intensive, as well as the result of replacing outsourced labor with own skilled personnel.

The need to also broaden the range of competences available to the Group was another factor behind the continued growth in recruitment. In previous years, the main concern had been recruit-ment necessary to keep up with the rapid expansion in sales. In rec-ognition of the fact that GS-Hydro needs to attract and retain the best possible candidates, a unified global recruitment and induction process was introduced in 2008.

GS-Hydro’s goal of developing the Group into a unified global operation has tremendous implications for our personnel and personnel management, especially in the areas of competence and learning development. The future development of Group Human Resources management is a strategic imperative. The Group’s growth ambitions require personnel that are flexible, motivated and, above all, customer focused. Raising the personnel’s individual competence levels and the combined experience of the workforce will be crucial to the company’s future success.

During the year, strong emphasis was placed on increasing compe-tence in turn-key project delivery and strategic account manage-ment. During the 2008 strategy review process, it was decided to form an internal Competence and Learning Center to share globally agreed forms of development in knowledge, skills and attitude development. The main development area for the Center in 2008 was product and application knowledge sharing. Piloted in Asia, the resulting comprehensive, global training concept is ready for roll-out to other subsidiaries in 2009.

Our people, their knowledge and competence, are our strongest asset through which we can add value to our customers’ business. In turn, GS-Hydro recognizes that personnel satisfaction is vital for their continued commitment.

Company values and principles

Satisfaction of customers’ requirements and expectations is the key to realizing the value proposition GS-Hydro offers. The company trains all employees on understanding these requirements. Each individual employee within the organization is responsible for the quality of their own work and its development. Company policy is continuous improvement of functional quality of processes and services and provides the necessary resources for compliance with the quality policy. The performance of suppliers in understanding and supporting our quality policy is monitored closely. A code of business ethics has been actively communicated and shared with all GS-Hydro frontline subsidiaries and its enforcement is closely monitored by management.


Health & Safety policy

GS-Hydro is committed to ensuring the health, safety and welfare of its employees as well as the safety of their working environment. The company accepts responsibility for customers and visitors who may be affected by our operations and ensures that statutory duties and obligations to them are met at all times. Company principle is that every employee in the company is provided with information, instruction and training as necessary, to carry out their duties safely. Management takes the responsibility to ensure that all processes and systems of work are designed to comply with all relevant local Health & Safety legislative requirements. GS-Hydro provides a safe and healthy working environment for its employees, customers and associates.


Board of Directors´report

The Board of Directors hereby submit their report for 2008.

Ownership structure

Since 2004, the GS-Hydro Group has been wholly-owned by Sweden-based Ratos AB, a private equity company listed on the NASDAQ OMX Stockholm stock exchange. As part of the re-financ-ing of the Group in 2008, the corporate structure was reorganized as Ratos transferred its ownership of GS-Hydro Oy into a wholly owned holding company, GS Hydro Holding AB.

Operations

The GS-Hydro Group delivers complete, non-welded piping sys-tems, products (material packages and products) and services to its customers. The Group has a factory, located in Hämeenlinna, Finland, for manufacturing and developing its flange connectors. The business mix by sales is approximately 57% products and 43% systems and services. The main application for non-welded technology is in hydraulics, where the high-pressure sets demand-ing requirements on pipe connection quality. The Group operates directly through its own subsidiaries in 17 countries, covering the main markets of Europe, Asia and North America. Selected agents and distributors support sales in certain other markets.

In 2008, GS-Hydro acquired two small operations in the UK, BSH Ltd and Airedale Tubes & Fittings Ltd, which are wholly-owned by GS-Hydro UK Ltd.

Markets

GS-Hydro divides its markets into three segments: Offshore, Marine and Land-based. The latter segment comprises customers in several industries, including the metals, mining, pulp and paper, sugar/eth-anol, testing, aerospace and defense industries. Significant custom-ers for GS-Hydro are, for example, operators of oil exploration rigs, rig equipment manufacturers, shipyards and heavy engineering companies. In the Marine segment, GS-Hydro’s offering is mainly utilized by vessels with intensive hydraulic requirements, including those serving the offshore sector.

The markets for GS-Hydro products have grown rapidly during the last few years on the back of strong global growth in indus-trial investment, world trade and, in particular, new investments into oil and gas exploration. In 2008, the economies in most of GS-Hydro’s geographical market areas grew modestly overall, with strong growth at the beginning of the year, and modest growth or contraction at the end of the year.

The price of oil largely determines investments in oil exploration. In 2008, the price of oil was volatile. The average price for oil was $100/barrel (WTI), up 38% from 2007, which encouraged investments in the offshore industry. This was reflected by the good demand for GS-Hydro’s projects, materials and services in the Offshore and also Marine segments throughout the year. A significantly lower oil price at the end of the year had a negative impact on the rig manufacturers’ order intake but the yards’ order books remain at high levels. The overall demand outlook for piping systems remains positive also due the strong underlying drivers for long-term growth in the Offshore segment. The strong develop-ment in sales for the Marine segment reflected the large order books shipyards had built in the prior years. At the beginning of 2009, shipyard orders are, however, very weak. The Land-based segment experienced a slow-down in sales towards the end of 2008 due to the global recession.

Sales and financial result

Sales in 2008 benefitted from the long-term marketing of the benefits of GS-Hydro’s offering and the Group’s strategy to focus on the growing Offshore and Marine segments. GS-Hydro’s sales totaled EUR 159.0 million in 2008 (2007: EUR 141.9 million), an increase of 12% from 2007. At constant currency exchange rates, sales increased 16% in 2008 compared to 2007. Marine was the fastest growing segment of the Group, with sales up 35% in 2008. The Marine segment represented 29% (24%) of total sales in 2008. Sales to the Offshore segment also grew significantly faster than the overall growth in Group sales, with growth of 18%. The Offshore segment accounted for 34% (32%) of sales in 2008. Sales to the Land-based segment were slightly lower in 2008, compared to 2007, and accounted for 37% (44%) of Group sales.

For 2008, the operating profit before interests and taxes (EBIT) improved by 8.0% compared to 2007 and amounted to EUR 17.6 million, (2007: EUR 16.3 million, excluding the profit on the sale of real estate). In 2008, the positive development in profit was primarily attributable to the increased volume of sales. For 2008, the return on capital employed was 28%, compared to 28.5% in 2007. The profit before interest and taxes (EBIT) was 11.1% of sales in 2008 (2007: 11.5%). The financial expenses include a cost of EUR 1.358 million (2007: EUR 0.276 million) from currency rate fluctuations. The Group did not have financial instruments to hedge foreign currency risks at the balance sheet date.


Investments, amortization and depreciation

Investments in property, plant and equipment amounted to EUR 4.887 million in 2008 (2007: EUR 3.253 million), the increase was largely due to the acquisition of machinery and equipment. Depre-ciation and amortization totaled EUR 2.415 million in 2008 (2007: EUR 2.094 million).

Acquisition costs

Net acquisition costs for the purchase of the businesses in Norway and the U.K. were EUR 1.746 million in 2008. There were no acqui-sition costs recorded in 2007. The acquisition of Slangeservice Stord AS, via GS-Hydro Norge AS, was made in 2007, but the financial impact is recorded in 2008.

Refinancing

In September 2008, GS-Hydro was re-financed, resulting in a release of EUR 50 million. Ratos conducted the refinancing through selling all of its shares in GS-Hydro to a newly established entity, GS Hydro Holding AB, wholly owned by Ratos. The change in the par-ent company’s ownership triggered the repurchasing of the Group’s synthetic shares and options, as agreed under the terms of the option program. The costs of the re-financing are reflected in the increase in net financing costs, which rose to EUR 8.38 million, of which the one-time cost of repurchasing the synthetic shares and options was EUR 3.458 million. In 2007, total financing costs were EUR 3.602 million, including costs of EUR 1.106 million related to the synthetic shares and options.

Balance sheet, financing and cash flow

Net cash flow from operating activities for 2008 was positive and amounted to EUR 2.267 million (2007: EUR -1.088 million). The main reasons for the improvement in 2008 were the improved operating profit (when excluding the extraordinary items in 2007) and the small drop in inventories. These factors were partially offset by higher accounts receivable, lower accounts payable and higher net financing costs.

The cash position was EUR 11.24 million (2007: EUR 7.20 million). Inventories decreased slightly to EUR 34.7 million in 2008 (2007: EUR 35.0 million), resulting in a modest increase in inventory turns.

Liquidity and debt

At the year end 2008, liquid funds were EUR 11.24 million (2007: EUR 7.20 million) and interest-bearing liabilities totaled EUR 44.907 million (2007: EUR 36.097 million). Net debt amounted to EUR 33.67 million (2007: EUR 28.90 million). Interest-bearing liabilities consist of interest-bearing bank loans and credit limits. In 2008, the equity ratio was 33.4% (2007: 33.8%).

The Group signed a new facility agreement in September 2008. The EUR 60 million financing agreement with institutional investors includes term loans amounting to EUR 25 million, short term com-mitted credit limits amounting to an additional EUR 25 million and committed guarantees and L/C’s for EUR 10 million. The Group has covered the related interest risks by hedging 50% of the term loan interests with interest SWOPs which link the otherwise employed 3-month interest periods into a 3-year fixed rate. The Group uses hedge accounting for the interest. The SWOPs and changes in SWOP values were booked directly to the equity in the balance sheet.

Orders received and order book

Orders received in 2008 totaled EUR 165 million (2007: EUR 143 million), an increase of 15% from 2007. At the end of 2008 the order book totaled EUR 33 million, compared to EUR 30 million at the end of 2007.

Risk management

Business risks can be allocated to three categories: Financial Risks, Business Risks related to system deliveries and Raw Material Risks related to material availability and cost variability.

- Financial Risks: currency exchange rate risk and other financial risks are covered centrally at GS-Hydro Group level, The contractual cash flows are hedged through forward contracts by the sales subsidiaries on a case-by-case basis when receivables or payables are in a foreign currency. Receivables collection has high importance to mitigate risks related to accounts receivable outstanding.

- Business Risks: These risks relate to system deliveries around the world. Successful system deliveries not only secure profitability and growth, but are also the corner stone of customer satisfaction with GS-Hydro. Senior management has a system in place for specific risk review of all customer projects greater than EUR 250 thousand.


Board of Directors´report

- Raw Material Risks: These risks relate to the availability and cost of raw materials and are addressed by working in close cooperation with strategic suppliers.

GS-Hydro management is responsible for continuous assessment of potential business risks and their impact on company operations.

Short-term risks and uncertainties

The global economic situation is highly uncertain due to the finan-cial crisis and global economic downturn. GS-Hydro’s operations are subject to market risks, eased to some extent by the fact that the system business is late-cyclical. However, shipbuilding in par-ticular has been affected by significant order cancellations due to lower shipping utilization rates, combined with significant increases in financing costs. Furthermore, customers’ and suppliers’ financial situations will increase risks related to collection of receivables and the level of bad debts.

Personnel

At year-end 2008, the GS-Hydro Group employed 640 people in 17 countries, compared to 527 people in 2007. The corresponding cost of salaries and wages was EUR 34.436 million in 2008 (2007: EUR 28.881 million). The average number of personnel in 2008 was 584 compared to 466 in 2007. With the high growth in sales, the number of employees at GS-Hydro Group has correspondingly increased over the last three years. Developing human resources is a strategic priority for the company.

Research and development

The Group’s R&D activities are centralized in the GS-Supply unit in Finland. R&D activities primarily concentrate on ensuring the competitiveness of GS-Hydro’s product offering by maintaining type approvals and certificates. In addition, R&D also develops new products. In 2008, R&D expenses were EUR 0.1 million (2007: EUR 0.1 million).

Quality and certificates

Quality Management System

GS-Hydro operates under a Quality Management System, conform-ing to the International Standard ISO 9001:2000. The company’s Leadership System also complies with ISO 9001:2000. Quality of operations, products and customer solutions are critical business factors for GS-Hydro. The company manufactures, sources and

delivers only products and materials which have all the relevant certificates needed in different customer segments. In system sales, the Quality Management System also covers projects and services for piping system implementations. The annual customer satisfac-tion measurement audit, used to monitor the effectiveness of operations, showed improved customer experiences in 2008.

Certification

GS-Piping System products have undergone rigorous test programs and have been certified by leading global oil companies and classifi-cation agencies, including Lloyd’s Register, the American Bureau of Shipping and Bureau Veritas. GS-Piping Systems are also specifically approved to be used offshore by NORSOK (piping specifications IS70, IS80, GS70 and JS80). GS-Hydro as a manufacturer of piping systems has been audited by DNV according Directive 97/23/EC on Pressure Equipment and is allowed to affix a CE-mark followed by the DNV identification number to its piping system deliveries.

Health and safety

GS-Hydro is responsible for ensuring the health, safety and wel-fare of its employees and their working environment. Company management has the responsibility to ensure that all processes and systems of work are designed to comply with all relevant Health and Safety legislative requirements.

Environmental sustainability

GS-Hydro believes its product innovations are in the interest of en-vironmental safety, economical use of resources and environmental sustainability. The company’s environmental system complies with legal obligations, identification of environmental aspects and risk. The company aims for continuous improvement in environmental performance when developing operations, processes and products. In 2008, the Group conducted an internal environmental survey of its facilities world-wide. No major environmental risks were identi-fied in the survey.

Competition

GS-Hydro operates in a competitive environment. The company’s non-welded offering is a relatively recent innovation and competes mainly with traditional welded solutions, which represent the bulk of the market. GS-Hydro also competes with smaller, locally operating companies specialized in delivering non-welded piping systems. In materials and products, the company also competes with diversified multi-national companies. Non-welded piping


solutions compete favorably with traditional welding on criteria such as high cleanliness, serviceability, pre-fabrication, rapid on-site installation, and zero-fire hazard. The material costs for non-welded solutions are sometimes higher than for welded solutions, but GS-Hydro’s piping solutions compete favorably on overall system costs, implementation times, and piping life-cycle costs. Addition-ally, GS-Hydro’s high-quality solutions improve customers’ business metrics, including higher up-times, lower maintenance costs and lower investment depreciation costs.

Outlook for 2009

The growth in global gross domestic production is forecast to be negative in 2009. The global recession, which has deepened during the first months of 2009, will also impact growth and profitability at GS-Hydro. However, the Group has built a strong foundation during the last few years which will enable it to cope with slowing markets. During this period of uncertainty, the Group will also use the opportunities to further develop internal skills and efficiencies in preparation for the resumption of market growth.

During the first months of 2009 the demand for GS-Hydro’s solu-tions has been good, but due to the global financial and economic uncertainty it is very difficult to forecast the Group’s full-year performance for 2009.

Proposals of the Board of Directors The Board proposes that no dividend be paid for 2008.


Financial Statements

Note 1 Jan–31 Dec 2008 1 Jan–31 Dec 2007

3. NET SALES 159 033 141 944

4. Other operating income 0 3 601

Changes in inventories of

finished goods and work in progress 2 557 -102

Materials and services -84 422 -71 926

5. Employee benefit expenses -34 436 -28 881

6. Depreciation, amortisation and impairment losses -2 415 -2 094

7. Other operating expenses -22 753 -22 655

OPERATING PROFIT 17 564 19 887

8. Finance income 962 297

8. Finance expenses -8 376 -3 602

PROFIT BEFORE INCOME TAXES 10 150 16 582

9. Income taxes -3 952 -5 587

PROFIT FOR THE PERIOD 6 198 10 995

CONSOLIDATED INCOME STATEMENT, EUR thousand


CONSOLIDATED BALANCE SHEET, EUR thousand

Note 31 Dec 2008 31 Dec 2007

ASSETS

Non-current assets

2.,10. Goodwill 15 750 15 137

10. Other intangible assets 408 688

11. Property, plant and equipment 8 343 6 455

17. Non-current receivables 397 440

12. Deferred tax assets 1 487 881

Total non-current assets 26 385 23 601

Current assets

13. Inventories 34 656 34 983

14. Trade and other receivables 39 552 35 608

Current tax receivables 393 112

15. Cash and cash equivalents 11 235 7 196

Total current assets 85 836 77 899

TOTAL ASSETS 112 221 101 500

EQUITY AND LIABILITIES

16. Equity

Share capital 4 528 4 528

Other reserves 6 256 6 325

Translation differences -691 49

Retained earnings 27 443 23 426

Total equity 37 536 34 328

Non-current liabilities

12. Deferred tax liabilities 432 694

18. Provisions 136 177

19. Interest-bearing liabilities 20 953 3 397

Total non-current liabilities 21 521 4 268

Current liabilities

20. Trade and other payables 28 544 29 446

Current tax liabilities 666 758


Total current liabilities 53 164 62 904

Total liabilities 74 685 67 172

TOTAL EQUITY AND LIABILITIES 112 221 101 500


Financial Statements cont.

CONSOLIDATED CASH FLOW STATEMENT, EUR thousand


Cash flows from operating activities

Profit for the period 6 198 10 995

Adjustments:

Depreciation, amortisation and impairment losses 2 415 2 094

Gains on sales of property, plant and equipment - -2 837

Finance income and expenses 7 414 3 305

Income taxes 3 952 5 587

Other adjustments 1 356 276

Change in working capital:

Change in trade and other receivables -5 714 -8 108

Change in inventories -1 034 -11 298

Change in trade and other payables -1 015 6 332

Change in provisions -41 -155

Interests paid -6 334 -3 247

Interests received 287 272

Income taxes paid -5 217 -4 304

Net cash flow from operating activities 2 267 -1 088

Cash flows from investing activities

2. Acquisition of subsidiaries, net of cash at the acquisition date -1 476 -

Acquisition of property, plant and equipment -4 887 -3 253

Proceeds from sale of investments - 6 438

Net cash flow from investing activities -6 363 3 185

Cash flows from financing activities

Proceeds (+) / repayment (-) of non-current liabilities 17 294 -1 658

Proceeds (+) / repayment (-) of current liabilities -8 727 3 323

Payment of finance lease liabilities -20 -19

Net cash flow from financing activities 8 547 1 646

Change in cash and cash equivalents 4 451 3 743

Cash and cash equivalents at the beginning of the financial period 7 196 3 532

Effect of foreign exchange rate fluctuations -412 -79

Cash and cash equivalents at the end of the financial period 11 235 7 196


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY, EUR thousand

Share capital

Other reserves

Hedging reserve

Translation reserve

Retained earnings Total

Equity at 31 Dec 2006 4 528 6 325 -258 12 504 23 099

Change in translation differences 334 334


Recognised income and expenses for the period 334 10 995 11 329

Other adjustments -100 -100

Equity at 31 Dec 2007 4 528 6 325 76 23 399 34 328

Equity at 1 Jan 2008 4 528 6 325 76 23 399 34 328

Change in translation differences -2 921 -2 921

Recognised profit or loss of hedging of cash flow -69 -69


Recognised income and expenses for the period -69 -2 921 6 198 3 208

Equity 31 Dec 2008 4 528 6 325 -69 -2 845 29 597 37 536



INCOME STATEMENT FOR THE PARENT COMPANY, EUR thousand


3. NET SALES 25 167 21 236

4. Other operating income 2 562 2 340

Changes in inventories of finished goods and work in progress 1 434 751

Materials and services -16 609 -13 675

5. Employee benefit expenses -3 338 -2 497

6. Depreciation, amortisation and impairment losses -240 -307

7. Other operating expenses -5 622 -4 634

OPERATING PROFIT 3 355 3 213

8. Finance income 4 183 2 205

8. Finance expenses -9 410 -10 044

PROFIT BEFORE INCOME TAXES -1 872 -4 626

9. Income taxes 17 -81

LOSS/PROFIT FOR THE PERIOD -1 855 -4 707


BALANCE SHEET FOR THE PARENT COMPANY, EUR thousand

Note 31 Dec 2008 31 Dec 2007

ASSETS

Non-current assets

10. Goodwill 12 376 12 376

10. Other intangible assets 155 212

11. Property, plant and equipment 386 369

Investments 6 812 5 912

12. Deferred tax assets 466 301

Total non-current assets 20 196 19 170

Current assets

13. Inventories 6 059 4 625

14. Trade and other receivables 29 303 13 642

15. Cash and cash equivalents 21 1 482

Total current assets 35 383 19 749

TOTAL ASSETS 55 579 38 920

EQUITY AND LIABILITIES

16. Equity

Share capital 4 528 4 528

Other reserves 6 256 6 325

Retained earnings -3 016 -1 162

Total equity 7 768 9 692

Non-current liabilities


Total non-current liabilities 21 211 2 440

Current liabilities

20. Trade and other payables 6 241 4 469


Total current liabilities 26 600 26 788

Total liabilities 47 811 29 228

TOTAL EQUITY AND LIABILITIES 55 579 38 920



CASH FLOW STATEMENT FOR THE PARENT COMPANY, EUR thousand


Cash flows from operating activities

Profit for the period -1 855 -4 707

Adjustments:

Depreciation, amortisation and impairment losses 240 307

Finance income and expenses 5 227 7 839

Income taxes -17 81

Change in working capital:

Change in trade and other receivables -4 029 5 206

Change in inventories -1 434 -751

Change in trade and other payables 1 773 -4 004

Interests paid -1 095 -1 159

Interests received 151 227

Income taxes paid -124 -22

Net cash flow from operating activities -1 165 3 016

Cash flows from investing activities

2. Acquisition of subsidiaries, net of cash at the acquisition date -3 000 -3 858

Acquisition of property, plant and equipment -60 -103

Acquisition of intangible assets -37 -36

Loans granted -13 790 -1 612

Dividend received 3 248 1 688

Net cash flow from investing activities -13 639 -3 921

Cash flows from financing activities

Proceeds (+) / repayment (-) of non-current liabilities 15 303 1 444

Proceeds (+) / repayment (-) of current liabilities -1 942 -6

Payment of finance lease liabilities -19 -19

Net cash flow from financing activities 13 343 1 420

Change in cash and cash equivalents -1 461 515

Cash and cash equivalents at the beginning of the financial period 1 482 967

Cash and cash equivalents at the end of the financial period 21 1 482


STATEMENT OF CHANGES IN PARENT COMPANY EQUITY, EUR thousand

Share capital

Other reserves

Hedging reserve

Retained earnings

Total

Equity at 31 Dec 2006 4 528 6 325 3 545 14 399


Recognised income and expenses for the period -4 707 -4 707

Other adjustments

Equity at 31 Dec 2007 4 528 6 325 -1 162 9 692

Equity at 1 Jan 2008 4 528 6 325 -1 162 9 692

Recognised profit or loss of hedging of cash flow -69 -69


Recognised income and expenses for the period -69 -1 855 -1 924

Equity at 31 Dec 2008 4 528 6 325 -69 -3 016 7 768


Notes to Financial Statements

CONTENTS

35 Reporting entity

Reporting entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 1. Significant accounting policies . . . . . . . . . . . . . . . . . . . . . . . 35 2. Business combinations, EUR thousand . . . . . . . . . . . . . . . . . 39 3. Distribution of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4. Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5. Employee benefit expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 41 6. Depreciation, amortisation and impairment losses. . . . . . . . . 42 7. Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 8. Finance income and expenses . . . . . . . . . . . . . . . . . . . . . . . . 42 9. Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 10. Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 11. Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . 45 12. Deferred tax assets and liabilities. . . . . . . . . . . . . . . . . . . . . . 47 13. Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 14. Trade and other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . 48 15. Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 48 16. Capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 17. Pension obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 18. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 19. Carrying amounts of financial non-current and

current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 20. Trade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 21. Financial risk management . . . . . . . . . . . . . . . . . . . . . . . . . . 54 22. Capital management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 23. Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 24. Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 25. Commitments and contingent liabilities . . . . . . . . . . . . . . . . 57 26. Events after the balance sheet date. . . . . . . . . . . . . . . . . . . . 57


REPORTING ENTITY

GS-Hydro Oy delivers complete, non-welded piping systems, prefabricated piping modules, separate piping components and after-sales services to its customers. GS-Hydro Oy is the parent company of the GS-Hydro Group, which is a part of the Ratos Group. The parent company of the Ratos Group is Ratos AB which is domiciled in Stockholm, Sweden. On Sep-tember 3rd, 2008, Ratos reorganized the corporate structure by transferring its ownership of GS-Hydro Oy into a wholly owned holding company, GS Hydro Holding AB.

Copies of the consolidated financial statements of GS-Hydro Oy are available at the GS-Hydro Oy’s main office, Lauta-tarhankatu 4, 13110 Hämeenlinna, Finland.

At its meeting on 30 March 2009, the Board of Directors of GS-Hydro Oy approved the publishing of these financial state-ments.

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

These are the second consolidated financial statements of GS-Hydro Oy prepared in accordance with the International Financial Reporting Standards (IFRS), complying with the IAS and IFRS standards, as well as the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) interpretations effective on 31 December 2008. In the Finnish Accounting Act and ordinances based on the provisions of the Act, IFRS refer to the standards and to their interpretations adopted in accordance with the procedures laid down in the regulation (EC) No 1606/2002 of the European parliament and of the Council. The notes to the financial statements are also in accordance with the requirements of Finnish Accounting and Companies’ Act supporting the IFRS requirements.

The parent company GS-Hydro Oy applies the same accounting principles as the GS-Hydro Group. GS-Hydro Oy’s date of transition to IFRS was 1 January 2006 and IFRS 1 First-time Adoption of International Financial Reporting Standards was applied in the transition. The Group applies the exemption provided in IFRS 1, which states that if a subsidiary becomes a first-time adopter later than its parent, the subsidiary may measure its assets and liabilities at the transition date at those amounts that were used in the Group reporting prior to the transition date. Ratos AB’s transition date to IFRS reporting was 1.1.2004.

The consolidated financial statements have been prepared on the historical cost basis except for those financial instru-ments that are measured to their fair value with changes in their value shown in the profit and loss statement. The consolidated financial statements are presented in thousands of euros.

Principles of consolidation

The consolidated financial statements include the parent company GS-Hydro Oy and all subsidiaries under the parent’s control. Control exists when over 50% of the voting rights are held directly or indi rectly by the parent company, or the parent company has otherwise the power to govern a subsidiary’s financial and operating policies.

The mutual shareholding has been eliminated by the purchase method. The financial statements of acquired subsidiaries are includ ed in the consolidated financial statements from the date that control commences, until the date that control ceases. Intra-Group transactions, receivables, liabilities and unrealised gains, as well as intra-Group distribution of profits, are eliminated. Unrealised losses are eliminated only to the extent that there is no evidence of impairment.

Items denominated in foreign currencies

The consolidated financial statements are presented in euro, which is the Group’s functional and presentation currency. The foreign currency transactions are translated into the functional currency using the exchange rate at the transaction date - in practice, a rate corresponding to approximately the transaction date exchange rate used in the translation. Receivables and liabilities denominated in foreign currency are translated into the functional currency using the exchange rate at the balance sheet date. The foreign exchange gains and losses relating to operating activities are included in the items above the operating profit, while foreign exchange gains and losses relating to financing activities are included in the finance income and expenses.

The income statements of those Group companies, whose functional currency is other than euro, are translated into euro by using the average exchange rate for the period and the balance sheets are translated at the exchange rate prevailing on the balance sheet date. The translation difference arising from such translations is recognised as a separate compo-nent of equity. Respectively, translation differences arising from the elimination of foreign subsidiaries’ acquisition cost and post-acquisition retained equity components are recognised as translation differences in equity. When a subsidiary is disposed of, the cumulative translation differences are recognised in the income statement as part of the gain or loss on the sale. Translation differences that have arisen before the adoption of IFRS in the Group reporting have been recognised in retained earnings and such translation differences will not, on disposal of the subsidiary, be recognised in the income statement in the future. From the IFRS transition date of the Ratos Group, 1 January 2004, the translation differences aris-ing from the consolidation are presented as a separate component of equity in the financial statements of GS-Hydro Oy. consolidation are presented as a separate component of equity in the financial statements of GS-Hydro Oy.

1.


Notes to Financial Statements cont.

Intangible assets

GoodwillGoodwill represents the excess of the acquisition cost over the Group’s share of the fair values of the identifiable assets, liabilities and contingent liabilities on the acquisition date. In respect of business combinations carried out prior to the IFRS transition date of the Ratos Group, i.e. 1 January 2004, the carrying amount of goodwill is the carrying amount under FAS (Finnish Accounting Standards) on the date of transition, according to the transition rules in IFRS 1.

Goodwill is carried at acquisition cost, less accumulated impairment losses. Goodwill is not amortized, but is tested annu-ally for impairment.

Other intangible assets

Other intangible assets are recognised in the balance sheet at cost if they can be reliably measured and it is probable that the future economic benefits will flow to the Company. Other intangible assets are depreciated on a straight-line basis over their useful lives, which are 4 – 10 years.

Property, plant and equipment

Items of property, plant and equipment are measured at acquisition cost less accumulated depreciation and impairment losses. Normal maintenance costs are expensed as incurred.

Depreciation on property, plant end equipment is calculated on a straight-line basis over their estimated useful lives. Land areas are not depreciated. The estimated useful lives are as follows:

Buildings 25–40 yearsStructures 5–10 yearsMachinery and equipment 3–10 yearsOther tangible assets 5 years

The residual value and the useful life of the items of property, plant and equipment are reviewed on each balance sheet date and adjusted when necessary to reflect any changes in expected economic benefits. Gains and losses on disposal of property, plant and equipment are included in either other operating income or other operating expenses.

Impairment

On each balance sheet date the Group assesses whether there are indications of impairment of assets. If such indications exist, the assets’ recoverable amount is estimated. Goodwill is tested annually irrespective of whether any indications exist. The recoverable amount is the higher of an asset’s fair value (less the costs to sell) and its value in use. Value in use represents the present value of the discounted future net cash flows expected to be derived from the asset or a cash-generating unit. The discount rate used is a pre-tax interest rate.

An impairment loss is recognised when the carrying amount of an asset exceeds its recoverable amount. When the impairment loss is recognised, the Group also reassesses the useful life of the asset. An impairment loss, other than an impairment loss in respect of goodwill, is reversed if there is a change in the estimates used to determine the recoverable amount of an asset. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised in prior periods. An impairment loss in respect of goodwill is never reversed.

Inventories

Inventories are measured at procurement costs or at the lower net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and costs to sell. Inventories are measured using the FIFO method (first-in, first-out). The cost of finished goods and work in progress consists of raw mate-rials, direct labour and other direct costs, as well as an appropriate share of production overheads.

Leases

The Group has leased items of machinery and equipment under finance and operating lease agreements. Those leases, which transfer substantially all the risks and rewards incidental to ownership of an asset to the lessee, are classified as finance leases. Assets acquired under finance leases are capitalised at the lower of their fair value or present value of mini-mum lease payments at the beginning of the lease period. Lease payments are divided into reduction of the lease liability and the interest charge for the period, so that a constant rate of interest is recognised on the outstanding balance of the lease liability. The lease liability is included in interest-bearing liabilities on the balance sheet.

Leases, which do not transfer the risks and rewards incidental to ownership of an asset to the lessee, are classified as operating leases. Rental payments made under operating leases are expensed as incurred.

Employee benefits

The Group’s pension plans are classified as defined contribution plans or defined benefit plans. Under defined contribu-tion plans, the Group pays fixed contributions into a separate entity and these payments are recognised as expenses in the


period to which they relate. In respect of defined contribution plans, the Group does not have any legal or constructive obligation to pay further contributions if the entity, which receives the payments, does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.

In respect of each defined benefit plan, the pension liability presented in the balance sheet is calculated using the pro-jected unit credit method. The pension costs are recognised as an expense in the income statement over the working lives of the employees based on actuarial calculations. The discount rate used in calculating the present value of the pension obligation is the yield on high quality corporate bonds or government bonds with a similar maturity to the obligation. The present value of the pension obligation to be recognised as a liability in the balance sheet is derived from the pension plan assets (measured at fair value on the balance sheet date), the proportion of unrecognised actuarial gains and losses, and the past service costs.

Actuarial gains and losses arise from the changes in actuarial assumptions used, or differences between the actuarial assumptions and actual outcomes. All accumulated actuarial gains and losses were recognised in retained earnings in the opening balance sheet at 1 January 2004 when GS-Hydro adopted IFRS-standards in its Group reporting to Ratos Group. Subsequently, the Group applied the corridor method, according to which the actuarial gains and losses are recognised in the income statement over the average remaining working lives of the employees to the extent that they exceed, by 10%, the greater of the present value of the defined benefit obligation or the fair value of the plan assets.

Past service costs are recognised as an expense, in equal portions, over the period during which the benefits vest. In case the benefits vest immediately, they are also recognised immediately in the income statement.

Borrowing costs

Borrowing costs are recognised as an expense in the period in which they are incurred.

Research and development expenditure

Research expenditure is recognised in the income statement as an expense as incurred. The Group has no such expendi-ture on development activities that would qualify under the capitalisation criteria set out in IAS 38 Intangible Assets.

Provisions

A provision is recognised when, as a result of a past event, the Group has a present legal or constructive obligation, whose realisation is probable and which can be measured reliably. The settlement of the obligation requires an outflow of economic benefits from the Group. The provisions consist mainly of the guarantee provisions.

Income taxes

Income tax expense consists of current and deferred taxes. Current taxes include taxes of the Group companies for the period in accordance with local tax regulations. Current taxes are adjusted by possible taxes in prior periods. Excluding the items that are recognised directly in equity, the income tax expense is recognised in the income statement.

Deferred taxes are calculated on all temporary differences between the carrying amounts and the tax bases of assets and liabilities. The most significant temporary differences arise from losses, pensions, accumulated depreciation in excess of plan and intangible assets in business combinations. The deferred tax asset is recognised to the extent that it is prob-able that future taxable profit will be available, against which the deductible temporary differences can be utilised. The deferred taxes have been calculated by using the enacted tax rates on the balance sheet date.

Financial assets and liabilities

The financial assets and liabilities of the Group are classified in accordance with IAS 39 Financial Instruments: Recognition and Measurement to the following categories: financial assets and liabilities at fair value through profit or loss, loans and receivables and other financial liabilities. The classification is made at initial recognition and it is determined by the nature of the item. The purchases and sales of financial assets and liabilities are accounted for on trade dates. All financial assets and liabilities are included in the balance sheet as current assets or current liabilities when their maturities are less than 12 months.

Financial assets and liabilities at fair value through profit or lossThe category of financial assets and liabilities through profit or loss includes financial assets and liabilities that are acquired for trading purposes or are designated on initial recognition to be measured as one. Derivatives are included in this cat-egory when they do not qualify as hedging instruments in accordance with IAS 39.

Derivatives are initially recognised on the balance sheet at cost, which equals the instrument’s fair value. Subsequently, the derivative instruments are measured to market value based on market quotations on balance sheet date. Realised and unrealised changes in the fair value of the foreign exchange forward contracts relating to operating items are recognised immediately in the income statement in the net sales or materials and services that they relate to. Changes in the fair value of the foreign exchange forward contracts relating to liabilities are recognised in the income statement, respectively. Changes in the value of instruments used in hedging interest rates are recognised as a change in equity when hedge ac-counting proves the instruments to be fully effective. Any possible ineffective instruments are recognised as expenses.

1.



Synthetic options granted are measured using the Black-Scholes pricing model. Changes in fair value of the synthetic op-tions are recognised through the income statement.

Loans and receivablesThis category includes current trade and other receivables. They are not quoted on an active market and are not kept for trading purposes. Payments from loans and receivables are fixed or determinable. Loans and receivables are measured at amortised cost. For trade receivables the Group assesses at each balance sheet date if there is any objective evidence that any trade receivable is impaired. If such evidence exists, the amount of the impairment loss determined, based on the individual risks related to the trade receivable. Other financial liabilitiesOther financial liabilities comprise loans from financial institutions, trade payables and other financial liabilities. Financial liabilities are initially measured at fair value, which is based on the consideration received. Transaction costs associated with financial liabilities are included in the initial measurement. Subsequent to initial recognition, financial liabilities are measured at amortised cost using the effective interest method.

Cash and cash equivalentsCash and cash equivalents comprise cash in hand, cash held in bank accounts and highly liquid investments with original maturities of three months or less at the date of acquisition. Bank overdrafts are included in the other financial liabilities.

Derivative instruments and hedge accounting

The Group does not apply hedge accounting in accordance with IAS 39 to hedging instruments other than the interest rate hedging instruments even though the Group may have derivatives with hedging purposes. Accordingly, derivatives are measured at fair value and recognised through profit or loss.

Revenue recognition principles

Most of the revenue arises from the sale of goods. The sale of goods is recognised when the significant risks and rewards of ownership are transferred to the buyer and there is no continuing management involvement with the goods. Revenue from services is recognised in the period, in which the service is rendered to the customer. Constructing contracts are specifically negotiated contracts for construction of an asset or a combination of assets that are closely interrelated. For a constructing contract the revenue associated with the transaction shall be recognised by refer-ence to the stage of completion of the transaction at the balance sheet date, when the outcome of the contract can be estimated reliably. The outcome of a transaction can be estimated reliably, when the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the company; the stage of completion of the transaction on the balance sheet can be measured reliably; and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

Net sales include the revenue from the sales of goods and services and from constructing contracts, after deducting indirect taxes and discounts given.

Operating profit

IAS 1 Presentation of Financial Statements does not define the concept of operating profit. The Group has defined it as follows: the operating profit is the net amount of net sales, other operating income, change in inventories of finished goods and work in progress, materials and services, employee benefit expenses, depreciation, amortisation and possible impairment losses and other operating expenses. Operating profit includes foreign exchange differences if they relate to normal business operations.

Accounting policies requiring management’s judgment, future estimates and key sources of estimation uncertainty

In preparing the financial statements the management of the Group makes estimates and assumptions, whose actual outcome may differ from the estimates and assumptions made. In addition, management’s judgment is required in apply-ing the accounting policies. Estimates are based on management’s experience of past events and developments, as well as the likely impact of management strategies. Any changes in estimates and assumptions are accounted for in the financial period in which the estimate or the assumption is changed, as well as in all subsequent financial periods.

In management’s opinion, the following accounting policies are those in which management’s judgment and key sources of estimation uncertainty are believed to have the strongest effect on the amounts presented in the consolidated financial statements.

Impairment testingDuring each financial period the Group’s management assesses if there exists any indication of impairment of goodwill or other intangible assets. Goodwill is tested for impairment annually even if no indication of impairment exists. An impairment loss is recognised when the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is based on management’s estimations of future cash flows and discount rates. These estimations require management’s judgment.


Income taxesA deferred tax asset is recognised in tax losses carried forward and temporary differences between the carrying amounts and the tax bases of assets and liabilities. A deferred tax asset is recognised only when the estimations show that enough taxable profit will be generated for utilising the temporary difference, otherwise prior tax losses are carried forward. The estimates made by the management concerning the taxable income in future financial periods have been taken into account in estimating the amount of deferred tax assets. A change in tax legislation or tax practice can affect estimations made by the management.

Revenue recognitionRevenue recognition requires management estimations of whether significant risks and rewards have been transferred to the buyer. When the stage of completion method is used in constructing contract services, management needs to use its judgement on whether the outcome of the transaction can be reliably estimated, and if all recognition conditions have been fulfilled.

Adoption of new or amended IFRS standards and interpretations

The following new or amended standards and interpretations published by the International Accounting Standards Board. (IASB) will be adopted by the Group:

To be adopted in 2009:– IAS 1 (Amendment) Presentation of Financial Statements (effective in the financial period beginning on 1 January 2009),

affecting mainly the Income statement and the Statement of the changes in equity. – IAS 23 (Amendment) Borrowing Costs (effective in the financial period beginning on 1 January 2009), which requires

the capitalisation of the borrowing costs that are attributable to constructing, building or producing certain assets defined in the standard.

According to the Group’s preliminary estimate these amended standards will not have a material effect on the financial statements of the Group or the parent company. The amended standards have not yet been approved by the EU.

2. BUSINESS COMBINATIONS, EUR THOUSAND

On January 1, 2008 the Group acquired the shares of Norwegian Slangeservice Stord AS via GS-Hydro Norge AS for EUR 437 thousand in cash. Slangeservice Stord AS operates in the industrial hose and hydraulic business. After the busi-ness combination the Group has an ownership of 100% in Slangeservice Stord AS. The acquisition cost also includes the legal expenses relating to the acquisition. The net sales of the acquired company for the year 2007 totalled EUR 701 thousand and the EBIT for the same period amounted to EUR 175 thousand.

The following assets and liabilities were recognised for the acquisition:

Slangeservice Stord ASNote

Recognised fair values on the

acquisition

Pre-acquisition carrying amounts

Property, plant and equipment 11. 17 17Intangible assets 10. - -Deferred tax assets 12. - -Inventories 79 79Trade receivables 72 72Other current assets 9 9Cash and cash equivalents 167 167Total assets 344 344

Deferred tax liabilities 12. 1 1Interest-bearing liabilities 25 25Other liabilities 131 131Total liabilities 157 157

Net assets 187 187Acquisition cost 437Goodwill on acquisition 10. 250

Consideration paid in cash 437Acquired cash and cash equivalents -167Net cash outflow 270

The assets acquired and liabilities assumed in the business combination were measured to their fair value at the acquisi-tion date. The Group estimates that the goodwill of EUR 250 thousand results from the synergy benefits in the industrial hose and hydraulic business.



On April 1, 2008 the Group acquired the assets of English Airedale Tubes and Fittings Ltd. via GS-Hydro UK Ltd. for EUR 577 thousand in cash. Airedale Tubes and Fittings are involved in the sale of hydraulic fittings and other products.


Airedale Tubes and Fittings Ltd.Note


acquisition


Property, plant and equipment 11. 179 179Intangible assets 10. - -Deferred tax assets 12. - -Inventories 221 221Trade receivables 354 354Other current assets 20 20Current receivables - -Cash and cash equivalents 6 6Total assets 780 780

Deferred tax liabilities 12. 16 16Interest-bearing liabilities 108 108Other liabilities 297 297Total liabilities 421 421



The assets acquired and liabilities assumed in the business combination were measured to their fair value at the acquisi-tion date. The Group estimates that the goodwill of EUR 218 thousand results from the synergy benefits in the hydraulic hoses business.

On August 1, 2008 the Group acquired the assets and shares of BSH Ltd. via GS-Hydro UK Ltd. for EUR 732 thousand in cash. BSH Ltd. is involved in hydraulic, pneumatic and transmission products business.


BSH Ltd.Note


acquisition


Property, plant and equipment 11. 47 47Intangible assets 10. - -Deferred tax assets 12. - -Inventories 33 33Trade receivables 188 188Other current assets 8 8Current receivables - -Cash and cash equivalents 97 97Total assets 373 373

Deferred tax liabilities 12. - -Interest-bearing liabilities 15 15Other liabilities 191 191Total liabilities 206 206




The assets acquired and liabilities assumed in the business combination were measured to their fair value at the acquisition date. The Group estimates that the goodwill of EUR 565 thousand results from the synergy benefits integrating the BSH customer base and strategic location with the products and service GS-Hydro provide.

3. DISTRIBUTION OF NET SALES

EUR thousand

Group

2008 2007

Parent

2008 2007

Products and services 156 696 141944 25 168 21 236Construction contracts 2 337 - - -Total 159 033 141 944 25 168 21 236

Total EUR 400 thousand of the construction contracts were realised as recognised profit by the year end 2008. The prepayments of construction contracts were EUR 235 thousand in 2008.

4. OTHER OPERATING INCOME

EUR thousand

Group

2008 2007

Parent

2008 2007

Gain on sales of property, plant and equipment - 3 601 - -Service fees - - 2 562 2 340Total - 3 601 2 562 2 340

The gain on sales of property, plant and equipment in 2007 arose from the sale of building in Norway.

5. EMPLOYEE BENEFIT EXPENSES

EUR thousand

Group

2008 2007

Parent

2008 2007

Wages and salaries 27 871 23 435 2 616 1 963Pension expenses Defined contribution plans 1 467 1 113 463 318 Defined benefit plans 196 252 - - Other personnel expenses 4 902 4 081 258 216Total 34 436 28 881 3 337 2 497

Average number of personnel during the financial period White-collars 343 292 32 22 Blue-collars 241 174 16 15Total 584 466 48 37

Disclosures about the synthetic shares and options are presented in note 19. Carrying amounts of financial non-current and current liabilites.



6. DEPRECIATION, AMORTISATION AND IMPAIRMENT LOSSES

EUR thousand

Group

2008 2007

Parent

2008 2007

Depreciation and amortisation by asset itemIntangible assets Intangible rights 235 171 94 129 Other intangible assets 18 - - -Total 253 171 94 129

Property, plant and equipmentBuildings 25 72 - -Machinery and equipment 2 137 1 748 146 178Other tangible assets - 141 - -Total 2 162 1 961 146 178

Impairment losses by asset itemGoodwill - -38 - -Total - -38 - -

Total depreciation and amortisation 2 415 2 094 240 307

7. OTHER OPERATING EXPENSES

EUR thousand

Group

2008 2007

Parent

2008 2007

Selling and administration expenses 15 061 14 663 3 087 2 963Rental expenses 4 411 3 108 524 465Other expenses 3 281 4 884 2 011 1 206Total 22 753 22 655 5 622 4 634

8. FINANCE INCOME AND EXPENSES

EUR thousand

Group

2008 2007

Parent

2008 2007

Finance income

Foreign exchange gains on financial liabilities measured at amortised cost 687 81 - -Interest income on loans and receivables 166 207 601 517Dividend income - - 3 582 1 688Other finance income 109 9 - -Total 962 297 4 183 2 205

Finance expenses

Foreign exchange losses on financial liabilities measured at amortised cost 2 043 357 250 16Interest expenses on financial liabilities measured at amortised cost 2 355 1 794 1 552 1 107Other finance expenses 3 978 1 451 7 608 8 921Total 8 376 3 602 9 410 10 044


Foreign exchange gains and losses amounting to EUR 30 thousand in 2007 and EUR 20 thousand in 2008 are included in net sales and material and services.

Other finance expenses include costs of synthetic shares and options EUR 1,106 thousand in 2007 and EUR 2,209 thou-sand in 2008.

Other finance expenses of parent company in 2007 include EUR 7,765 thousand, and in 2008 EUR 2,100 thousand writ-edowns of shares and EUR 1,746 thousand writedowns of loan receivables in group companies.

9. INCOME TAXES

Group

EUR thousand 2008 2007

Current tax 4 820 4 717Deferred taxes -868 870Total 3 952 5 587

Reconciliation between the income tax expense recognised in the income statement andthe income tax expense calculated using the parent company’s domestic tax rate:


Profit before taxes 10 150 16 582Income tax calculated using the parent company’s domestic tax rate (26%) 2 639 4 311Effect of changed tax rates for foreign subsidiaries 327 427Utilisation of previously unrecognised tax losses -437 -459Unrecognised deferred tax assets from losses in taxation 1 495 1 238Other -72 70Income tax expense in the consolidated income statement 3 952 5 587

Parent


Current tax 31 22Adjustments to prior periods’ taxes 93 -Deferred taxes -141 59Total -17 81

Reconciliation between the income tax expense recognised in the income statement andthe income tax expense calculated using the domestic tax rate:


Profit before taxes -1 872 -4 626Income tax calculated using the domestic tax rate (26%) -487 -1 203Tax exempt income -931 -439Non-deductible expenses 1 007 1 847Utilisation of previously unrecognised tax losses 327 -141Taxes for previous years 93 -Other -26 17Income tax expense in the income statement of the parent company -17 81



10. INTANGIBLE ASSETS

Group

EUR thousandGoodwill

Intangible rights

Other intangible

assetsTotal

Acquisition cost at 1 Jan 2008 15 099 1 953 170 17 222Business combinations 1 033 - - 1 033Additions - 30 - 30Effect of fluctuations in foreign exchange differences -420 -57 - -477Acquisition cost at 31 Dec 2008 15 712 1 926 170 17 808

Accumulated amortisation and impairment losses at 1 Jan 2008 38 -1 283 -152 -1 397Amortisation for the period - -235 -18 -253Accumulated amortisation and impairment losses at 31 Dec 2008 38 -1 518 -170 -1 650 Carrying amount at 1 Jan 2008 15 137 670 18 15 825Carrying amount at 31 Dec 2008 15 750 408 - 16 158

Acquisition cost at 1 Jan 2007 15 039 1 953 152 17 144Additions -4 - 18 14Effect of fluctuations in foreign exchange differences 64 - - 64Acquisition cost at 31 Dec 2007 15 099 1 953 170 17 222

Accumulated amortisation and impairment losses at 1 Jan 2007 - -1 112 -152 -1 264Amortisation for the period - -171 - -171Disposals and reclassifications 38 - - 38Accumulated amortisation and impairment losses at 31 Dec 2007 38 -1 283 -152 -1 397 Carrying amount at 1 Jan 2007 15 039 841 - 15 880Carrying amount at 31 Dec 2007 15 137 670 18 15 825

Parent

EUR thousandGoodwill

Intangible rights

Other intangible

assetsTotal

Acquisition cost at 1 Jan 2008 12 376 779 75 13 230Additions - 37 - 37Acquisition cost at 31 Dec 2008 12 376 816 75 13 267

Accumulated amortisation and impairment losses at 1 Jan 2008 - -567 -75 -642Amortisation for the period - -94 - -94Accumulated amortisation and impairment losses at 31 Dec 2008 - -661 -75 -736 Carrying amount at 1 Jan 2008 12 376 212 - 12 588Carrying amount at 31 Dec 2008 12 376 155 - 12 531


Accumulated amortisation and impairment losses at 1 Jan 2007 - -438 -75 -513Amortisation for the period - -129 - -129Accumulated amortisation and impairment losses at 31 Dec 2007 - -567 -75 -642 Carrying amount at 1 Jan 2007 12 376 305 - 12 681Carrying amount at 31 Dec 2007 12 376 212 - 12 588


Impairment testing

At 31.12.2008, the Group’s goodwill was valued at EUR 15,750 million. The Group also had intangible assets EUR 408 thousand. In impairment testing, the Group’s recoverable amounts are determined according to the asset’s value-in-use. Cash flow estimates are based on Board’s projections for the three years following the balance sheet date. Beyond the Board’s estimate period, cash flows have been extrapolated using the assumption of zero growth in sales.

The following variables were employed in calculating value-in-use:

– The budgeted operating margin percentage, which has been determined based on the on the realized historical trend. No significant changes in the operating margin are expected during the projected period.

– The discount rate has been determined based on the weighted average cost of capital. The discount rate is pre-tax.

– The sales growth percentage for the projected period describes, in addition to the realized historical growth, also the Group’s key strategic targets. The variable takes into account the impact of the 2008 financial crisis, to the extent which it could be estimated at the balance sheet date.

Sensitivity analysis of the impairment testing

In estimating the Group’s recoverable amounts, for instance a change in the discount rate was used. Based on the tests, a change of one per cent point does not decrease the recoverable amounts below the balance sheet value. Thus, there is no need for goodwill amortization.

11. PROPERTY, PLANT AND EQUIPMENT

Group

EUR thousandLand areas

BuildingsMachinery

and equipment

Other tangible assets

Total

Acquisition cost at 1 Jan 2008 - 1 165 18 834 250 20 249Business combinations - - 243 - 243Additions - 21 4 197 256 4 474

Effect of fluctuations in foreign exchange differences - -18 -649 - -667Acquisition cost at 31 Dec 2008 - 1 168 22 625 506 24 299

Accumulated amortisation and impairment losses at 1 Jan 2008 - -1 017 -12 527 -250 -13 794Depreciation for the period - -25 -2 137 - -2 162

Accumulated amortisation and impairment losses at 31 Dec 2008 - -1 042 -14 664 -250 -15 956 Carrying amount at 1 Jan 2008 - 148 6 307 - 6 455Carrying amount at 31 Dec 2008 - 126 7 961 256 8 343

Acquisition cost at 1 Jan 2007 519 3 172 15 613 250 19 554Business combinations - - - - -Additions - 124 3 251 - 3 375Reclassifications - - - - -Disposals -537 -2 204 - - -2 741

Effect of fluctuations in foreign exchange differences 18 73 -30 - 61Acquisition cost at 31 Dec 2007 - 1 165 18 834 250 20 249

Accumulated amortisation and impairment losses at 1 Jan 2007 - -945 -10 779 -109 -11 833Depreciation for the period - -72 -1 748 -141 -1 961

Accumulated amortisation and impairment losses at 31 Dec 2007 - -1 017 -12 527 -250 -13 794 Carrying amount at 1 Jan 2007 519 2 227 4 834 141 7 721Carrying amount at 31 Dec 2007 - 148 6 307 - 6 455



Property, plant and equipment include machinery and equipment leased under finance lease agreements as follows:

EUR thousand

Machinery and equipment

2008


2007

Acquisition cost 70 70Accumulated depreciation -51 -32Carrying amount 19 38

Parent

EUR thousandBuildings


Other tangible assets

Total


Accumulated amortisation and impairment losses at 1 Jan 2008 -13 -1 392 -11 -1 416Depreciation for the period - -146 - -146

Accumulated amortisation and impairment losses at 31 Dec 2008 -13 -1 538 -11 -1 562 Carrying amount at 1 Jan 2008 - 369 - 369Carrying amount at 31 Dec 2008 - 386 - 386

Acquisition cost at 1 Jan 2007 13 1 685 11 1 709Additions - 76 - 76Reclassifications - - - -Acquisition cost at 31 Dec 2007 13 1 761 11 1 785

Accumulated amortisation and impairment losses at 1 Jan 2007 -13 -1 214 -11 -1 238Depreciation for the period - -178 - -178

Accumulated amortisation and impairment losses at 31 Dec 2007 -13 -1 392 -11 -1 416 Carrying amount at 1 Jan 2007 - 471 - 471Carrying amount at 31 Dec 2007 - 369 - 369

Property, plant and equipment include machinery and equipment leased under finance lease agreements as follows:

EUR thousand


2008


2007

Acquisition cost 70 70Accumulated depreciation -51 -32Carrying amount 19 38


12. DEFERRED TAX ASSETS AND LIABILITIES

Group

EUR thousand1 Jan 2008

Recognised in the income

statement

Subsidiaries acquired /

disposed of31 Dec 2008

Changes in deferred taxes in 2008

Deferred tax assetsProvisions 116 263 - 379Intra group margin in inventory 319 14 - 333Tax losses carried forward 427 149 - 576Employee benefits 19 -19 - -Other - 199 - 199Total 881 606 - 1 487

Deferred tax liabilitiesAccumulated depreciation in excess of plan 120 - - 120Business combinations - - 17 17

Financial assets at fair value through profit or loss 489 -278 - 211Other 85 -1 - 84Total 694 -279 17 432



statement31 Dec 2007


Deferred tax assetsProvisions 322 -206 116Intra group margin in inventory 207 112 319Tax losses carried forward 475 -48 427Employee benefits 357 -338 19Other 42 -42 -Total 1 403 -522 881

Deferred tax liabilitiesAccumulated depreciation in excess of plan 119 1 120Intangible assets at fair value in business combinations 102 387 489Other 124 -39 85Total 345 349 694

The group has unused tax losses amounting to EUR 6,375 thousand for which no deferred tax asset is recognised in the balance sheet, because it is not probable that future taxable profit will be available against which the tax losses could be utilized. These tax losses expire in 2014.

Parent

1 Jan 2008Recognised

in the income statement

31 Dec 2008


Deferred tax assetsTax losses carried forward 273 169 442Other 29 -5 24Total 302 164 466





statement31 Dec 2007


Deferred tax assetsTax losses carried forward 306 -33 273Other 55 -26 29Total 360 -59 301

13. INVENTORIES

EUR thousand

Group

2008 2007

Parent

2008 2007

Materials and supplies 4 692 3 471 4 305 3 471Work in progress 3 162 2 165 582 122Finished goods 26 802 29 347 1 172 1 032Total 34 656 34 983 6 059 4 625

GS-Hydro Oy recognised write-downs of inventories totalling EUR 213 thousand in 2007 and EUR 226 thousand in 2008.

14. TRADE AND OTHER RECEIVABLES

EUR thousand

Group

2008 2007

Parent

2008 2007

Trade receivables (loans and receivables) 34 259 33 683 9 343 7 783Prepaid expenses and accrued income 4 317 1 278 2 322 265Other receivables (loans and receivables) 976 647 17 638 5 594Total 39 552 35 608 29 303 13 642

The analysis of the age of the trade receivables that are past due but not impaired:

2008 2007 2008 2007

Past 0–30 days 28 471 29 682 2 754 3 423Past 31–60 days 2 738 1 710 1 739 395Past 61–90 days 1 232 716 293 573Past 91–120 days 680 257 352 172Past more than 120 days 1 138 1 318 4 810 3 220Total 34 259 33 683 9 948 7 783

In 2007, a total of EUR 406 thousand and in 2008 EUR 1,070 thousand were recognised as bad debts in the Group. Due to short maturity, the carrying amounts of trade and other receivables are considered to correspond their fair values. The receivables do not carry significant concentrations of credit risk, thus the maximum credit risk equates to the carrying amounts.


15. CASH AND CASH EQUIVALENTS

EUR thousand

Group

2008 2007

Parent

2008 2007

Cash and bank accounts 11 235 7 196 21 1 482Total 11 235 7 196 21 1 482

The cash and cash equivalents in the statement of cash flows equals to cash and bank accounts above. The carrying amounts equate the maximum credit risk and fair value.

16. CAPITAL AND RESERVES

EUR thousand

Number of shares (in

thousands)

Share capital

Other reserves, EUR

1 Jan 2007 28 302 4 528 6 32531 Dec 2007 28 302 4 528 6 325

1 Jan 2008 28 302 4 528 6 325Hedging reserve -6931 Dec 2008 28 302 4 528 6 256

The maximum number of shares at 31 December 2008 was 28,301,900. All the shares issued have been totally paid. Nominal value is EUR 0,16.

After the balance sheet dates, the Board of Directors proposed that no dividend will be distributed in 2007 and 2008.

17. PENSION OBLIGATIONS

The Group has primarily defined contribution plans, wheras the subsidiary in Norway has two defined benefit plans. As of 31 December 2008, the plans had 54 active members and 4 retirees.

The main condition is a pension of 66% of the final salary when retiring turning 67 years of age given full vesting period of 30 years. After turning 77 years of age the pension contribution is halved. The plan also includes contributions to retirement pension and disability pensions. The pension payment is including a pension from the life insurance company Folketrygden in Norway. The actual total pension may differ from 66%, based on total vesting period.

The Managing Director has an additional pension plan giving him an early retirement option from 66 years. The Managing Director’s pension will not be halved after turning 77 years. The plans are organized through the life insurance company Vital AS.

Amounts recognised in the balance sheet:


Present value of funded obligations 2 374 1 824Fair value of plan assets -1 503 -1 550Deficit / surplus 871 274

Unrecognised actuarial gains (+) and losses (-) -1 268 -707Other changes - -Net liability (receivable) -397 -433



Expense recognised in the income statement:


Current service cost 147 186Interest on obligation 88 85Expected return on plan assets -96 -102Actuarial gains (+) and losses (-) 42 20Administration costs 15 15Other employer costs - 48Total 196 252

The actual return on plan assets amounted to EUR 283 thousand in 2007.Changes in the present value of the defined benefit obligations:


Opening defined benefit obligation 1 351 1 961Service cost 147 186Interest cost 88 85Actuarial gains (+) and losses (-) 1 022 -390Exchange differences on foreign plans -191 -1Equity adjustment - -Benefits paid -43 -17Closing defined benefit obligation 2 374 1 824

Changes in the fair values of plan assets:


Opening fair value of plan assets 1 124 1 770Expected return 81 102Actuarial gains (+) and losses (-) 185 -566Contributions by employer 226 263Exchange differences on foreign plans -71 -2Benefits paid -43 -17Closing fair values of plan assets 1 503 1 550

The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2008 2007

Bonds 67% 21%Hold to maturity bonds 0% 28%Money marked 0% 7%Equity instruments 13% 25%Real Estate 17% 16%Other 4% 3%

Actuarial assumption as at 31 December

2008 2007

Discounting rate 4,50% 4,35%Yield on pension assets 6,50% 5,40%Wage growth 4,50% 4,50%G-regulations 4,25% 4,25%Future pension regulations 2,75% -Social security 14,10% 14,10%Average turnover (< 40 years/> 40 years) 2% / 0% 2% / 0%


In calculating the pension costs and net pension liabilities, the assumptions above have been made. The discount rate is based on government bonds in Norway adjusted for the duration of the pension obligation. Salary rates, pension adjust-ments, and G-regulations, is based on historical observations and an expected future inflation of 2.5%. The actuarial assumptions are based on assumptions of demografical factors normally used within the insurance industry.

The amounts for the current and previous financial periods are the following:

2008 2007

Present value of the obligation 2 374 1 824Fair value of plan assets -1 503 -1 550Surplus (+) / Deficit (-) 871 274

The Group expects to contribute EUR 200 thousand to its defined benefit plans in 2008.

18. PROVISIONS

Group

EUR thousandGuarantee provisions

Other provisions

Total

Carrying amount at 31 Dec 2007 151 26 177Provisions used -49 8 -41Carrying amount at 31 Dec 2008 102 34 136

The Group gives a guarantee to its certain products. During the guarantee period, the defects found in the products are repaired on the Group’s expense or the customer is given a similar new product. The guarantee provision is based on an estimate which is based on historical guarantee data associated with similar products.

Other provisions include provisions relating to pensions and taxation.

All the provisions are long-term provisions.

19. CARRYING AMOUNTS OF FINANCIAL NON-CURRENT AND CURRENT LIABILITIES

Group

EUR thousand

2008

Carryingamount

2007

Carrying amount

Non-currentLoans from financial institutions (financial liabilities measured at amortised cost) 20 719 938Finance lease liabilities 11 20Derivative financial instruments in hedge accounting 93Other non-current liabilities (financial liabilities measured at amortised cost) 130 2 439Total 20 953 3 397

CurrentLoans from financial institutions (financial liabilities measured at amortised cost) 23 945 32 681Finance lease liabilities 9 19Total 23 954 32 700



Parent

EUR thousand

2008

Carrying amount

2007

Carrying amount

Non-currentFinance lease liabilities 11 20Other non-current liabilities (financial liabilities measured at amortised cost) 21 107 2 420Derivative financial instruments in hedge accounting 93 -Total 21 211 2 440

CurrentLoans from financial institutions (financial liabilities measured at amortised cost) 20 349 22 300Finance lease liabilities 9 19Total 20 358 22 319

The Group’s interest-bearing non-current liabilities consist mainly of variable rate bank loans and finance lease liabilities. However, the Group has entered into an interest rate swop to transfer 50% of its loans into a fixed, three-year interest rate. The average interest rate of the Group’s bank loans was 4.5%. In calculating the finance lease liabilities, the incre-mental borrowing rate of interest has been used as the interest rate. Bank loan agreements have ordinary loan covenants.

The carrying amounts of the liabilities are measured at amortised cost using the effective interest rate method. Fair values of liabilities have been calculated by using discounted cash flow method and the market interest rates at the balance sheet date. Fair values of the liabilities correspond substantially their carrying amounts.

Maturity schedule of current and non-current interest-bearing liabilities

Group 2008, EUR thousand 2009 2010 2011 2012 2013 Total

Bank overdraft 1 622 - - - - 1 622Trade payables 14 577 - - - - 14 577Loans from financial institutions 24 047 5 227 5 030 5 296 10 415 50 015Interest derivative in hedge accounting 364 316 257 - - 937Other liabilities 397 - - - - 397Finance lease liabilities 10 8 3 - - 21Total 41 017 5 551 5 290 5 296 10 415 67 569

Group 2007, EUR thousand 2008 2009 2010 2011 2012 Total

Bank overdraft 3 364 - - - - 3 364Trade payables 14 909 - - - - 14 909Loans from financial institutions 30 391 525 251 126 - 31 293Other liabilities 2 465 5 - - - 2 470Finance lease liabilities 21 10 8 3 - 42Total 51 150 540 259 129 - 52 078

Parent 2008, EUR thousand 2009 2010 2011 2012 2013 Total

Trade payables 3 925 - - - - 3 925Loans from financial institutions 21 827 4 726 5 030 5 296 10 415 47 294Interest derivative in hedge accounting 364 316 257 - - 937Other liabilities 4 5 - - - 9Finance lease liabilities 10 8 3 - - 21Total 26 130 5 055 5 290 5 296 10 415 52 186


Parent 2007, EUR thousand 2008 2009 2010 2011 2012 Total

Trade payables 2 584 - - - - 2 584Loans from financial institutions 23 355 - - - - 23 355Other liabilities (incl. Synthetic option) 2 420 5 - - - 2 425Finance lease liabilities 21 10 8 3 - 42Total 28 380 15 8 3 - 28 406

Liabilities by currencies, excluding trade payables:

Thousand 2008 2007

EUR 41 308 26 091NOK - 4 464USD 1 655 1 615PLN - 1 447KRW 1 443 1 344GBP - 442CAD 24 694CNY 477 -Total 44 907 36 097

Synthetic shares and options in non-current liabilities

In November 2006, GS-Hydro Group granted 1 470 000 synthetic shares and 588 000 synthetic options to its key person-nel. In August 2007, GS-Hydro Group granted an additional 277 500 synthetic shares and 111 000 synthetic options to its key personnel. Synthetic shares and options were valued at fair value at the grant date. The Group received a correspond-ing cash amount which was recognised as debt.

In September 2008, the synthetic shares and options were re-purchased. The purchase price was EUR 5,734 thousand and the company booked a cost of EUR 3,458 thousand, which was the difference of the re-purchase value and the book value.

Finance lease liabilities are payable as follows:

Group


Minimum lease paymentsLess than one year 10 21Between one and five years 11 21Total minimum lease payments 21 42

Present value of minimum lease paymentsLess than one year 9 19Between one and five years 11 20Total present value of minimum lease payments 20 39

Future finance charges 1 3Total finance lease liabilities 21 42



Parent


Minimum lease paymentsLess than one year 10 21Between one and five years 11 21Total minimum lease payments 21 42

Present value of minimum lease paymentsLess than one year 9 19Between one and five years 11 20Total present value of minimum lease payments 20 39

Future finance charges 1 3Total finance lease liabilities 21 42

20. TRADE AND OTHER PAYABLES

EUR thousandGroup2008

2007Parent2008

2007

Trade payables (other liabilities) 14 577 14 909 3 925 2 584Accrued wages, salaries and related costs 3 467 3 121 555 508Interest payable 48 25 35 6Other accrued expenses and deferred income 4 792 6 422 1 666 1 314Other liabilities (other liabilities) 5 425 4 969 61 57Prepayments of constructions contracts 235 - - -Total 28 544 29 446 6 242 4 469

The carrying amounts of trade and other payables are considered to correspond to their fair values.

21. FINANCIAL RISK MANAGEMENT

The GS-Hydro Group is exposed to several financial risks in its business operations. The objective of financial risk manage-ment is to minimise the unfavourable impact of changes in the financial markets on the profit and loss of the Group, as well as to minimise financial expenses, foreign exchange risk exposures and the amount of net debt. The most important financial risks are market risk and liquidity risk. The Group executes its financial risk management policy with effective cash management, entering into favourable commercial agreements and by using derivative contracts. The general principles of the Group’s financial risk management are approved by the Board of Directors, the finance function in the parent com-pany is responsible for the implementation of the approved policy.

Market risks

Foreign exchange risk

The Group operates internationally and is thus exposed to foreign exchange risks. The objective of foreign exchange risk management is to limit the impact of changes in foreign exchange rates on the Group’s cash flows and result. The most important currencies in the Group are the euro (EUR) and Norwegian crown (NOK).

Foreign exchange risks arise from commercial transactions, monetary items in the balance sheet and net investments in foreign subsidiaries. In the GS-Hydro Group, the main foreign exchange risks arise through the net investments in foreign subsidiaries that, in accordance with the financial risk management policy, are not hedged.

Transaction risks are minimised, when necessary, with foreign exchange forward contracts. The contractual cash flows are hedged through forward contracts by the sales company on a case-by-case basis when receivables or payables are in a for-eign currency. Hedge accounting in accordance with IAS 39 is not applied to derivatives used for hedging foreign currency sales and purchases. The Group had no derivatives at the balance sheet date.


SEK NOK CAD CNY GBP KRW PLN USD

External Accounts Receivable 8 324 13 2839 143 12 017 2 648 2 002 4 758 1 776External Accounts Payable 1 301 6 8871 65 1 463 589 756 3 548 461External Loans - - 42 2 745 - - - 2 333Exposure 7 023 63 968 36 7 809 2 059 1 246 1 210 -1 019in EUR thousand 641 6 501 21 810 2 114 655 292 -723

The table shows the local receivables and payables of the sales subsidiaries.

Interest rate risk

The majority of the Group’s liabilities consist of floating-rate bank loans and overdraft limits. The financial liabilities expose the Group to interest rate risks and hence the Group employs interest rate derivatives to protect against interest rate fluctuations. Liabilities of the Group are mainly fixed to the three-month Euribor rate while half of the bank loans have been fixed to the three-year Euribor rate using interest rate swap agreements. For interest rate derivatives, hedge account-ing in accordance with IAS 39 is applied. Changes in the fair values of effective derivative instruments are recognized as changes in equity when the hedge accounting criteria are met. The ineffective remainders of changes in fair value are recognized in the income statement. Hedge accounting is discontinued immediately once a hedging instrument expires, is sold, its contract is cancelled, when it is exercised or when it no longer fills the requirements of hedge accounting. The profit or loss incurred by a hedging instrument remains recognized in equity until a firm commitment or forecast cash flow is realised. Changes in fair value of derivative instruments that do not qualify for hedge accounting are recognized in the income statement. At 31.12.2008, the fair value was EUR -93 thousand. If the interest rate would have been 1%-point higher, the equity would have increased by EUR 155 thousand and if the interest rate would have been 1%-point lower, the equity would have decreased by EUR 352 thousand.

Liquidity risk

GS-Hydro Group intends to continuously evaluate and monitor operational cash flows and profitability in order to secure adequate funding and liquidity in the Group. The liquidity of the Group is secured with long-term overdraft limits that amounted to EUR 21,402 thousand at the balance sheet date 2008 (2007: 3,364 thousand).

In order to manage liquidity risk, the Group has negotiated a committed multi-currency credit facility, totalling EUR 60 million, from an international credit syndicate for the period 2008-2013. The credit facility includes EUR 25 million in fixed-term loans, EUR 25 million in overdraft limits and EUR 10 million in guaranteed liability limits. At the end of 2008, short-term overdraft limits of EUR 18 million were utilized.

Credit and counterparty risk

The objective of credit risk management is to ensure that the counterparty to an agreement fulfils its payment obligations. The requirements for customer creditworthiness are determined by the Group’s risk management policy. The GS-Hydro Group has no significant concentrations of credit risk due to the broad nature of its global customer base, and because the Group only makes credit available to customers with a good credit rating. Historically, realised bad debts have been insignificant. The maximum credit risk equates to the carrying amounts of the financial assets.

22. CAPITAL MANAGEMENT

The objective of the Group’s capital management is to ensure efficient capital structure.Group monitors its capital structure by using equity ratio, which needs to be higher than 30%.In addition, the Group closely monitors, the Working Capital development and efficiency.


Equity 37 536 34 328



23. OPERATING LEASES

Non-cancellable operating lease rentals are payable as follows:

EUR thousand

Group as lessee

2008 2007

Parent as lessee

2008

2007

Less than one year 710 447 99 82Between one and five years 1 448 601 92 57Total 2 158 1 048 191 139

The Group has leased its production and office premises. The lease periods are from 1 to 5 years in average and normally they include an option to continue the lease agreement after the original date of expiration of the lease.

24. RELATED PARTIES

The Group has a related party relationship with parent company GS-Hydro Holding AB, subsidiaries and Group management.

The parent company and subsidiaries of GS Hydro Group are as follows:

DomicileOwnership interest (%)

Share of the voting rights (%)

The parent company Finland 100GS Hydro Oy

Other Group companiesGS-Hydro Finland Oy Finland 100GS-Hydro Ab Sweden 100GS-Hydro Austria GmbH Austria 100GS-Hydro Benelux B.V. The Netherlands 100GS-Hydro Danmark AS Denmark 100GS-Hydro Korea Ltd South Korea 100GS-Hydro Norge AS Norway 100GS-Hydro (North America) Ltd. Canada 100GS-Hydro Piping Systems Ltd. China 100GS-Hydro S.A. Spain 100GS-Hydro Singapore PTE Ltd. Singapore 100GS-Hydro Sp. Zo.o Poland 100GS-Hydro Systems GmbH Germany 100GS-Hydro UK Ltd. United Kingdom 100GS-Hydro U.S. Inc. USA 100

The related party transactions were as follows:


Sales of goods and services to subsidiaries 10 578 9 021Purchases of goods and services from subsidiaries 4 692 4 214Receivables from subsidiaries 23 654 10 628Liabilities to subsidiaries 1 892 2 518


25. COMMITMENTS AND CONTINGENT LIABILITIES

EUR thousand

Group

2008 2007

Parent

2008 2007

Collaterals given for own liablities and on behalf of other Group companiesFloating charges 120 082 111 000Pledged receivables from subsidiaries 6 401 7 695 6 401 7 695Pledged shares in subsidiaries 6 6Guarantees 82 - 82 -

26. EVENTS AFTER THE BALANCE SHEET DATE

The Company’s management is not aware of any significant events subsequent to the balance sheet date that might impact the amounts recorded in the financial statements presented.

Hämeenlinna, 30 March 2009

Anders Lindblad Chairman

Rolf Ahlqvist Magdalena Aniansson

Staffan Paues Johan Pålsson

Eli Vassenden

Thomas Rönnholm President & CEO

The audit report was submitted on 30 March, 2009


Auditor´s report

This document is an English translation of the Finnish auditor's report.

Only the Finnish report is legally binding.

To the Annual General Meeting of GS-Hydro Oy

We have audited the accounting records, the financial statements, the report of the Board of Directors, and the administration of GS-Hydro Oy for the year ended on 31 December 2008. The financial statements comprise the consolidated and parent company balance sheets, income statements, cash flow statements, statements of changes in equity and notes to the financial statements.

The Responsibility of the Board of Directors and the Managing Director

The Board of Directors and the Managing Director are responsible for the preparation of the financial statements and the report of the Board of Directors and for the fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the fair pres-entation of the financial statements and the report of the Board of Directors in accordance with laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. The Board of Directors is responsible for the appropriate arrangement of the control of the company’s accounts and finances, and the Managing Director shall see to it that the ac-counts of the company are in compliance with the law and that its financial affairs have been arranged in a reliable manner.

Auditor’s Responsibility

Our responsibility is to perform an audit in accordance with good auditing practice in Finland, and to express an opinion on the par-ent company’s financial statements, on the consolidated financial statements and on the report of the Board of Directors based on our audit. Good auditing practice requires that we comply with ethical requirements and plan and perform the audit to obtain rea-sonable assurance whether the financial statements and the report of the Board of Directors are free from material misstatement and whether the members of the Board of Directors of the parent com-pany and the Managing Director have complied with the Limited Liability Companies Act.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements and the report of the Board of Directors. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether

due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by manage-ment, as well as evaluating the overall presentation of the financial statements and the report of the Board of Directors.

The audit was performed in accordance with good auditing practice in Finland. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

• Inouropinion,thefinancialstatementsgiveatrueandfairview of the financial position, financial performance, and cash flows of both the consolidated and parent company in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.

• Inouropinion,thefinancialstatementsandthereportofthe Board of Directors give a true and fair view of both the consolidated and the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland.

• TheinformationinthereportoftheBoardofDirectorsiscon- sistent with the information in the financial statements.

Helsinki, 30 March 2009

KPMG OY AB

MARKKU SOHLMAN

Authorized Public Accountant


Corporate governance

The Shareholders’ Meeting

The Shareholders’ Meeting is the highest decision-making body in GS-Hydro Oy and the forum where the company’s owner, Ratos AB, exercises its formal influence through GS Hydro Holding AB. In the Shareholders’ Meeting, which is governed by the Companies Act and company’s Articles of Association, the owner decides, among other things, the composition of the Board of Directors and the capital structure of the company.

The Board of Directors

The Board of Directors is the company’s highest decision-making body between the Shareholders’ Meetings. The Board of Directors’ task is governed by the Articles of Association and the Companies Act. In addition, the work of the Board of Directors is regulated by the formal work plan. The work plan also governs the duties between the Board of Directors, the Chairman of the Board and the President & CEO.

The Board of Directors has, among other responsibilities, the task of determining the Group’s overall strategy, organization and policies, as well as the approval of major investment decisions, budgets and interim and annual reports. The Board of Directors also appoints and dismisses the President & CEO, monitors the President & CEO’s work and monitors the company’s development and controls.

The Board of Directors elects its officers in the first Board meeting after the Annual Shareholders’ Meeting. The formal work plan and the instructions for the President & CEO are also defined in this meeting.

The Chairman of the Board plans and leads the work of the Board. He is responsible for ensuring that the Board members continuously receive the information required for the work of the Board to be exercised with good quality and in accordance with the Companies Act. The Chairman is also responsible for preparing the President & CEO’s conditions of employment.

The Board holds four regular meetings annually and additional meetings as required.

Audit Committee

The Board of Directors established an Audit Committee in Septem-ber 2007 in order to oversee the following issues in more detail on its behalf: audit procedure, audit fees, audit coverage, review of audit work and the company’s internal controls, as well as review-ing the company’s risk management.

The Audit Committee members and chairman are appointed by the Board of Directors. The Audit Committee comprises a minimum of three board members. The majority of the Audit Committee mem-bers are required to be independent of the company. At least one of the audit committee members needs to be independent of the major owner. The Audit Committee may have company manage-ment, external auditor or other suitable person represented in the Audit Committee’s work.

Audit Committee Matters 2008

In 2008 the Audit Committee had four meetings. Members of the Audit Committee were Anders Lindblad (Chairman), Staffan Paues, Thomas Rönnholm, and Jari Punkari (replacing Jyrki Pihlava from the third meeting).

The President & CEO

The President & CEO is responsible to the Board of Directors and shall lead and develop the company. The President & CEO is re-sponsible for the day-to-day management of the company's affairs. The President & CEO shall, within the framework of the Finnish Companies Act and the business plan adopted by the Board and by following the instructions as well as other guidelines and directions issued by the Board, make the decisions required for the develop-ment of the business. The President & CEO shall also compile and present information required by the Board for its assessment of the company's financial position, in accordance with the instructions for financial reporting adopted by the Board.

The Executive Committee

The Executive Committee supports the President & CEO in imple-menting the strategy. The Executive Committee monitors devel-opments in the business, initiates actions and defines operating principles in accordance with the guidelines given by the President & CEO. The Executive Committee held 8 meetings during 2008.

Audit

GS-Hydro’s auditors are elected by the Annual General Meeting for a period of one year. This assignment has been carried out through regular auditing and the audit of the annual accounts. The company’s auditor reports the findings of the audit annually to the Board of GS-Hydro and to the owners.

In addition to the ordinary audit assignment, the auditor may assist with advice on tax and accounting matters. This advice is of limited scope and is not considered to constitute a conflict of interest.

Corporate Governance Matters in 2008

The Annual Shareholders’ Meeting was held on April 28, 2008 and the present Board of Directors was elected in the meeting. Anders Lindblad was re-elected Chairman of the Board.

During 2008, the Board of Directors held 9 meetings. The main items in these meetings were the President & CEO’s report on the current situation, confirmation of results, investment decisions, or-ganizational development and decisions about the Group’s overall strategy and policies.

KPMG Oy AB was elected as auditor for 2008, with authorized public accountant Markku Sohlman bearing the main responsibility. KPMG has had the main responsibility for the audit since 2000 and Markku Sohlman since 2004.


Board of Directors

Anders Lindblad Born 1950 Chairman of the Board of GS-Hydro since 2001. Industrial Advisor at Ratos AB. Chairman of the Board of Jøtul AS and MCC AB. Member of the Board of Allehanda Media AB, Lidan Marine AB and Pressmaster AB.

Rolf Ahlqvist Born 1948, Phil. (Cand.) Member of the Board of GS-Hydro since 2005. Employed by Procom Venture AS as partner and chairman since 2002. Chairman of the Board and Partner in Procom Venture AS, Member of the Board of IOR Chemco AS, Member of the Board of IOR Aqua AS, Member of the Board of Whitefish Qualitech AS

Magdalena Aniansson Born 1967, MSc. Economics Member of the Board of GS-Hydro since 2005. Employed by Ratos AB and has served as Senior Investment Manager since 2004. Board member of Arcus Gruppen A/S and Medisize Oy.

Leif Johansson Born 1947 Member of the Board of GS-Hydro since 2005. Deputy board member since 2008. Employed by Ratos AB as Investment Director. Member of the Board of Inwido AB, Arcus A/S, Contex AS, and Medizase Oy

Staffan Paues Born 1941, MSc. Engineering. Senior Associate at the Management Centre Europe Member of the Board of GS-Hydro since 2006.

Eli K.Vassenden Born 1962, Business Economics/Purchasing Member of the Board of GS-Hydro since 2005. Employed by Grieg Shipping Group and has served as Chief Operating Officer since 2006. 2nd Chairman / Member of the Board of Incentra AL. Board member of Seabound Maritime Services Inc.

Johan Pålsson Born 1979, MSc Business Administration and Economics Member of the Board of GS-Hydro since 2008. Employed by Ratos AB as Investment Manager since 2007. Deputy board member of Hafa Bathroom Group AB

Thomas Rönnholm Born 1954, MSc. Economics Member of the Board of GS-Hydro since 2006. Employed by GS-Hydro and has served as President & CEO since 2006.

GS-Hydro Board of Directors, from the left Magdalena Aniansson, Anders Lindblad, Eli K. Vassenden, Johan Pålsson, Thomas Rönnholm, Jari Punkari (Secretary of the Board), Rolf Ahlqvist, Staffan Paues and Leif Johansson (not in the photo).


Executive Committee

Employed by GS-Hydro and has served as President & CEO since 2006. Previously served as Senior Vice President, Global Marketing of Kone Corpora-tion 2003–2006, as Managing Director, Finland, Eastern Europe, Middle East and Africa of Kone Corporation 2001–2003, President, Canada of Kone Corpo-ration 1998–2001, Senior Vice President, Business Development and Information Systems of Kone Corporation1995–1998, Managing Director, Denmark of Kone Corporation 1993–1995, Executive Vice President (Finance) of Kone Americas 1988–1993, and various roles with Primo Oy 1978–1988.

Thomas RönnholmPresident & CEOBorn 1954 MSc. Economics

Jari Punkari Chief Financial Officer (CFO)Born 1965 MSc. Economics

Employed by GS-Hydro and has served as CFO since August 2008. Previously served as Vice President, Modernization Business of Kone Corporation 2006–2008, as Director, Service Business of KONE Finland 2003–2006, Managing Director, Czech and Slovak Republics of Kone Corporation 2001–2003, Director, Maintenance & Finance of Kone Finland 1997–2001, and various other roles with Kone Finland 1991–1997.

Krister Blomqvist V.P. Business DevelopmentBorn 1954 MSc. Naval Architecture and Marine Engineering

Employed by GS Hydro since September 2008. Previously served as Regional Director Rolls-Royce Marine North East Asia and Managing Director Rolls-Royce Marine Korea ltd 2004–2008, Branch Manager/VP Rolls-Royce OyAb/KaMeWa Finland OY 1998–2004, Managing Director Axel Johnson Oy,Axel Johnson Marine Oy, AxMarine Oy 1989–1998 and has served in various roles in Axel Johnson & Co Oy, Wärtsilä Oy and Valmet Oy.

Fernando Guarido Managing Director, SpainBorn 1971 MSc. Naval Arquitecture & Marine Engineering, Master in Maritime Business

Employed by GS-Hydro since 2006, serving as Managing Director Spain since 2007. Previously served as Operations Manager of GS-Hydro Spain, Project Manager & Head of Integration Department for Naval Surface Vessels in Navantia 2003–2006 and other management roles on Engineering, Research & Develop-ment with Navantia, Spanish Navy, Bazan and Polytechnic University of Madrid.

Christopher Hargreaves Managing Director, UKBorn 1969 ONC & HNC in Production Plant Engineering

Employed by GS-Hydro since 1992 and has served as Managing Director, UK since 2000. Previously served as General Manager and Sales & Contracts Manager of GSHydro UK Ltd, 1992–2000 and has served in various roles with MacGREGOR Group companies.

Terho HoskonenV.P. Sales & Marketing Born 1956 BSc. Telecommunication Engineering Executive MBA

Employed by GS-Hydro and has served as Sales & Marketing Director since 2007. Previously served as Director of Sales, EMEA Distributor Markets of Spacelabs Medical Finland 2004–2007, Director, Strategic Marketing and Global Channel Relationships of Spacelabs Medical 2002–2004, Marketing Director, Patient Monitoring Business Area of Datex-Ohmeda, Instrumentarium Corporation 2000–2002, Director, Critical Care Market Management of Datex-Ohmeda, Instrumentarium Corporation 1998–2000 and various marketing and product management positions in Instrumentarium Corporation 1987–1998.

Harri JokinenV.P. Technology Born 1961 MSc. Mechanical Engineering

Employed by GS-Hydro and has served as Technology Director since 2003. Previously served as Production & Development Manager of Abloy Oy 1993–2003, Production Manager of Tamglass Tempering Oy 1992–1993, and various roles with Sandvik Tamrock Oy 1985–1992.

Lauri Leskinen V.P. Sourcing & LogisticsBorn 1967 MSc. (officer´s degree), Executive MBA

Employed by GS-Hydro and has served in this position since January 2007. Previously served in various management roles with Nokia, mostly in sourcing in the Group and Networks 2000–2007, and in various roles with the Defence Forces of Finland 1990–2000.

Heikki PennanenManaging Director, FinlandBorn 1961 BSc. Machine Automation Engineering

Employed by GS-Hydro since 1991 and has served as Managing Director, Finland since 2004. Previously served as Designer of JOT Automation 1989–1991 and Designer of Kuopion Energialaitos 1988–1988.

Bjørn Morten Olesen Managing Director, NorwayBorn 1960 MSc. Mechanical Process – Fluid dynamics, Hydraulics

Employed by GS-Hydro and has served as Managing Director, Norway since 2004. Previously served as Managing Director of Fläkt Woods 2002–2004, Technology & Marketing Manager of ABB Building Systems 1999–2001,Division Manager in ABB Miljø Norsk Viftefabrikk – Offshore 1995–1999,Various Engineering roles in Kværner Engineering 1987–1995.


Market insight

Hydraulics – efficiently controlling high power

Hydraulics, or fluid power, is a motion control technology that is used to transfer and control force and power through fluids under pressure. Hydraulic systems are typically comprised of pumps, valves, manifolds and actuators. Pumps are used to move fluid from one location to another. Pressure is generated when the fluid encounters resistance. Valves and manifolds control the flow of fluids, and actuators, such as cylinders and rotary motors, convert pressure into mechanical energy. To be useful, however, that force and power has to be transferred to where it is required – requiring high-pressure piping – and creat-ing a major business opportunity for GS-Hydro.

Hydraulic systems offer significant advantages over mechanical or electrical systems, including efficiency and space-saving. Hydraulics can provide the force to move and position materials and equip-ment weighing several tons as well as the precision to move very light loads with a high degree of accuracy. As a result, hydraulic systems are integral to a wide variety of industrial, marine, offshore and mobile applications. Virtually every production process uses hydraulic power, as does almost every machine, vehicle and aircraft. And, in principle, each

of these markets and products generates an opportunity for non-welded piping solutions from GS-Hydro.

The hydraulic pump and valve market is a multi-billion dollar worldwide industry, although highly fragmented. The “high-end” specialty segment comprises highly-engineered, high-performance hydraulic products. These products, which are generally more complex, are used in demanding applications and place high requirements on their piping systems. Specialty markets for pumps and piping, for example, tend to be less price sensitive, generally have higher margins and are more likely to utilize servicing and maintenance.

Growth in different application sectors of the hydraulics industry is ultimately governed by economic factors. Offshore sales are largely impacted by the price of oil. Sales of civilian marine systems have largely been influenced by growth in global cargo trade. The industrial sector of the hydraulics industry has typically followed the cyclicality of the overall economy. Sales of mobile hydraulic systems and components have been driven by infrastructure development.


Historical milestones

GS-Hydro was founded in 1974, in Finland, based on innovations in pipe jointing technology.

Initial sales successes were primarily in the marine industry. Reli-ability and cleanliness combined with flexible engineering and fast installation were recognized as significant benefits when building complex hydraulic machinery to tight schedules. GS-Hydro’s first foreign subsidiary was established in Norway, in 1982, to serve the growing marine industry. As the North Sea oil industry expanded rapidly during the 1980’s, the offshore industry became another important customer segment. Our ability to prefabricate all piping and jointing products on land is of great value to the offshore industry, where work at sea is far more expensive and potentially more dangerous. Additional subsidiaries in Europe were established in rapid succession during the 1980’s in Sweden, Denmark, the Netherlands, and Germany. During this period, sales to land-based industries such as metals & mining, construction & mobile equip-

ment and pulp & paper started to increase significantly, and the first sales to testing applications in the automotive and aerospace industries were made. During the 1990’s, growth continued from global expansion, with acquisitions and new subsidiaries being established in Spain, the UK, Poland, Russia, the USA and Korea.

The first subsidiary of the new millennium was established in Shanghai, China in 2002. Later this decade, subsidiaries were established in Canada (2006) and Singapore (2007). Renewed focus and investments in marketing and sales, together with favo-rable changes in market demand, sparked a new period of strong growth.

Today, with well over three decades of experience, GS-Hydro has established itself as the leading global non-welded piping systems specialist.

1974 GS-Hydro Oy established in Finland

1978 GS-Retain Ring System introduced

1982 First subsidiary founded in Norway. GS-37° Flare Flange System introduced

1983 GS-Hydro Sweden established. GS-Hydro Denmark established

1984 GS-Hydro acquired by KONE Oy, GS-90° Flare Flange System introduced

1994 Management buy-out

2001 Ratos (Sweden) and 3i (UK) jointly acquire GS-Hydro

2004 GS-Hydro became wholly owned by Ratos

2006 Sales pass the EUR 100 million landmark

2008 Strong performance in key Offshore and Marine segments drives sales to over EUR 150 million

Major milestones

GS-Hydro Group Headquarters Itsehallintokuja 6 FI-02600 Espoo, FINLAND tel. +358 3 65641 fax +358 9 6969 7007 [email protected]

www.gshydro.com

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