##### Table of Contents



As
filed with the Securities and Exchange Commission on March 15, 2006.
 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THESECURITIES EXCHANGE ACT OF 1934
 OR
 þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THESECURITIES EXCHANGE ACT OF 1934
 For the year ended December 31, 2005
 OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THESECURITIES EXCHANGE ACT OF 1934
 OR
 o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THESECURITIES EXCHANGE ACT OF 1934
 Commission file number 1-14400
 METSO CORPORATION
 Exact name of Registrant as specified in its charter
 The Republic of Finland  Jurisdiction of incorporation or organization
 P.O. Box 1220
FI-00101 Helsinki
Finland  Address of principal executive offices
  Title of each class:
    
    Name of each exchange on which registered:Shares, nominal value 1.70 each,
represented by American Depositary Shares
    
    New York Stock Exchange, Inc.
 None
 None
  141,654,614
  þ o
  o þ
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
  o þ
  o þ




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##### Table of Contents



TABLE OF CONTENTS
 PageINTRODUCTION
    
    iiiPART IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    1Item 2. Offer Statistics and Expected Timetable
    
    
    1Item 3. Key Information
    
    
    1Selected Financial Data
    
    
    1Exchange Rates
    
    
    2Risk Factors
    
    
    4Item 4. Information on the Company
    
    
    11Organization
    
    
    11History and Development of the Company
    
    
    11Strategy
    
    
    11Corporate Structure
    
    
    13Business Summary
    
    
    15Discontinued Operations
    
    
    27Raw Materials
    
    
    29Seasonality
    
    
    29Dependence on Intellectual Property
    
    
    29Governmental Regulation and Environmental Matters
    
    
    29Property, Plants and Equipment
    
    
    31Significant Subsidiaries
    
    
    34Associated Companies
    
    
    34Item 4A. Unresolved Staff Comments
    
    
    34Item 5. Operating and Financial Review and Prospects
    
    
    34Business Overview
    
    
    34Key Management Issues
    
    
    35Recent Acquisitions and Divestments
    
    
    36Critical Accounting Policies
    
    
    37Results of Operations
    
    
    41Principal Differences between IFRS and U.S. GAAP
    
    
    45Liquidity and Capital Resources
    
    
    46Capital Expenditure
    
    
    48Research and Development
    
    
    48Foreign Currency Fluctuations
    
    
    50Inflation
    
    
    51New Accounting Standards
    
    
    51Off-Balance Sheet Arrangements
    
    
    52Item 6. Directors, Senior Management and Employees
    
    
    52Board of Directors
    
    
    52
 (i)




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PageChief Executive Officer and Our Executive Team
    
    
    54Compensation of Directors and Officers
    
    
    56Audit Committee and Compensation Committee
    
    
    56Home Country Practices
    
    
    57Employees
    
    
    57Share Ownership
    
    
    58Authorizations for Board of Directors
    
    
    59Item 7. Major Shareholders and Related Party Transactions
    
    
    60Major Shareholders
    
    
    60Related Party Transactions
    
    
    60Item 8. Financial Information
    
    
    61Consolidated Financial Statements
    
    
    61Export Sales
    
    
    61Legal Proceedings
    
    
    61Dividend Policy
    
    
    62Significant Changes
    
    
    62Item 9. The Offer and Listing
    
    
    63Nature of Trading Market
    
    
    63Trading and Settlement on the Helsinki Stock Exchange
    
    
    64Regulation of the Finnish Securities Market
    
    
    64The Finnish Book-Entry Securities System
    
    
    65Item 10. Additional Information
    
    
    66Articles of Association
    
    
    66Material Contracts
    
    
    69Exchange Controls
    
    
    69Control of Foreign Ownership
    
    
    69Taxation
    
    
    69Documents on Display
    
    
    74Item 11. Quantitative and Qualitative Disclosures about Market Risk
    
    
    74Exchange Rates and Foreign Currency Exposure
    
    
    74Interest Rate Risk
    
    
    75Equity Price Risk
    
    
    76Commodity Price Risk
    
    
    76Item 12. Description of Securities Other than Equity Securities
    
    
    76PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    77Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    77Item 15. Controls and Procedures
    
    
    77Item 16. [Reserved]
    
    
    77Item 16A. Audit Committee Financial Expert
    
    
    77
 (ii)




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PageItem 16B. Code of Ethics
    
    
    78Item 16C. Principal Accountant Fees and Services
    
    
    78Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    79Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    79PART IIIItem 17. Financial Statements
    
    
    80Item 18. Financial Statements
    
    
    80Item 19. Exhibits
    
    
    81EXHIBIT 1.1EXHIBIT 8.1EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1EXHIBIT 13.2
 (iii)




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INTRODUCTION
  CURRENCY PRESENTATION
  
    
    euro,   or EUR means the lawful currency of the member states of the European
Union (the EU) participating in the EUs Economic and Monetary Union;
    
    U.S. dollar, U.S.$ or USD means the lawful currency of the United States of America;
    
    pound sterling or GBP means the lawful currency of the United Kingdom of Great
Britain and
Northern Ireland;
    
    Canadian dollar or CAD means the lawful currency of Canada;
    
    South African rand or ZAR means the lawful currency of the Republic of South Africa; and
    
    Swedish krona or SEK means the lawful currency of the Kingdom of Sweden.
    
 FINANCIAL AND OTHER INFORMATION
     (iv)




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FORWARD-LOOKING STATEMENTS
  
    
    operating factors, such as the continued success of our manufacturing activities and
the achievement of efficiencies therein, continued success of product development,
acceptance of new products or services by our targeted customers, success of the
existing and future collaboration arrangements, changes in business strategy or
development plans or targets, changes in the degree of protection created by our
patents and other intellectual property rights, the availability of capital on
acceptable terms,
    
    success of future acquisitions and restructuring and changes in our business
strategy,
    
    industry conditions, such as strength of product demand, intensity of competition,
prevailing and future global market prices for our products and the pricing pressures
thereto, financial condition of the customers and competitors, the potential
introduction of competing products and technologies by our competitors, and
    
    general economic conditions, such as rates of economic growth in our principal
geographic markets or fluctuations in exchange and interest rates, and various other
factors both referenced and not referenced in this annual report.
  (v)




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers.
  
 Item 2. Offer Statistics and Expected Timetable.
  
 Item 3. Key Information.
 
 Selected Financial Data
   For the year ended December 31,2004
    
    
    2005EUR
    
    
    EUR(in millions, except per share data)INCOME STATEMENT DATAAmounts in Accordance with IFRSNet sales
    
    
    3,602
    
    
    
    4,221Operating profit
    
    
    199
    
    
    
    335Financial income and expenses, net
    
    
    (59
    )
    
    
    (43
    )Profit on continuing operations before tax
    
    
    140
    
    
    
    292Income taxes on continuing operations
    
    
    18
    
    
    
    (72
    )Profit on continuing operations
    
    
    158
    
    
    
    220(Loss) Profit on Discontinued Operations, net of taxes
    
    
    (14
    )
    
    
    17Profit
    
    
    144
    
    
    
    237Profit attributable to minority interests
    
    
    1
    
    
    
    1Profit attributable to equity shareholders
    
    
    143
    
    
    
    236Profit
    
    
    144
    
    
    
    237Earnings per share from Continuing Operations(1)Basic
    
    
    1.16
    
    
    
    1.57Diluted
    
    
    1.16
    
    
    
    1.57Earnings per share from Discontinued Operations(1)Basic
    
    
    (0.11
    )
    
    
    0.12Diluted
    
    
    (0.11
    )
    
    
    0.12
 (1)




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For the year ended December 31,2004
    
    
    2005EUR
    
    
    EUREarnings per share from Continuing and Discontinued operations(1)
    
    (in millions, except per share data)Basic
    
    
    1.05
    
    
    
    1.69Diluted
    
    
    1.05
    
    
    
    1.69BALANCE SHEET DATAAmounts in Accordance with IFRSTotal assets
    
    
    3,570
    
    
    
    3,904Cash and cash equivalents
    
    
    372
    
    
    
    323Net interest bearing liabilities
    
    
    495
    
    
    
    289Equity attributable to shareholders
    
    
    990
    
    
    
    1,285OTHER DATAAmounts in Accordance with IFRSNet cash provided by (used in) operating activities
    
    
    261
    
    
    
    164Net cash provided by (used in) investing activities
    
    
    312
    
    
    
    (90
    )Net cash provided by (used in) financing activities
    
    
    (332
    )
    
    
    (136
    )Capital expenditures on fixed assets(2)
    
    
    89
    
    
    
    104Cash dividends declared and paid per share (EUR )(3)
    
    
    0.35
    
    
    
    1.40Cash dividends declared and paid per share (U.S.$)(3)(4)
    
    
    0.47
    
    
    
    1.66
 As of and for the year ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR(in millions, except per share data)INCOME STATEMENT DATAAmounts in Accordance with U.S. GAAPIncome (loss) from continuing operations
    
    
    127
    
    
    
    3
    
    
    
    (196
    )
    
    
    57
    
    
    
    178Income (loss) from Discontinued Operations
    
    
    0
    
    
    
    19
    
    
    
    (39
    )
    
    
    17
    
    
    
    1(Loss) Gain on disposal of Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    18Profit (loss)
    
    
    127
    
    
    
    22
    
    
    
    (235
    )
    
    
    2
    
    
    
    197Basic and diluted earnings (loss) per share from
continuing operations (1)
    
    
    0.93
    
    
    
    0.02
    
    
    
    (1.44
    )
    
    
    0.42
    
    
    
    1.27Basic and diluted earnings (loss) per share from
Discontinued Operations (1)
    
    
    0.00
    
    
    
    0.14
    
    
    
    (0.29
    )
    
    
    (0.41
    )
    
    
    0.14BALANCE SHEET DATAAmounts in Accordance with U.S. GAAPTotal assets
    
    
    5,275
    
    
    
    4,520
    
    
    
    3,996
    
    
    
    3,697
    
    
    
    4,055Long-term liabilities
    
    
    1,553
    
    
    
    1,334
    
    
    
    1,256
    
    
    
    1,231
    
    
    
    990Shareholders equity
    
    
    1,503
    
    
    
    1,326
    
    
    
    998
    
    
    
    978
    
    
    
    1,239
 
 (1)
    
    The average numbers of shares used in calculating this amount were as follows: Number of shares issued
    
    Number of diluted sharesYear ended December 31,
    
    and outstanding
    
    issued and outstanding2001
    
    
    136,135,223
    
    
    
    136,135,2232002
    
    
    136,189,704
    
    
    
    136,189,7042003
    
    
    136,189,704
    
    
    
    136,189,7042004
    
    
    136,189,704
    
    
    
    136,192,0372005
    
    
    139,639,425
    
    
    
    139,665,197
 (2)
    
    Excluding business acquisitions.(3)
    
    Dividends are generally paid after the decision by the annual general meeting held in the
year following the year for which they are attributed to. The dividend for the year ended
December 31, 2005 is the proposal of our Board of Directors to the annual general meeting to
be held on April 4, 2006.(4)
    
    Amounts in euro have been converted into U.S. dollars at the noon buying rate on December 30
or 31, as the case may be, of the respective year solely for the readers convenience. 
 Exchange Rates
  (2)




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Euro per U.S. Dollar
 Year
    
    Average
    
    High
    
    Low
    
    Period End2001
    
    
    1.1711
    
    
    
    1.1947
    
    
    
    1.0488
    
    
    
    1.12352002
    
    
    1.0531
    
    
    
    1.1636
    
    
    
    0.9537
    
    
    
    0.95372003
    
    
    0.8782
    
    
    
    0.9652
    
    
    
    0.7938
    
    
    
    0.79382004
    
    
    0.8014
    
    
    
    0.8474
    
    
    
    0.7339
    
    
    
    0.73872005
    
    
    0.8064
    
    
    
    0.8571
    
    
    
    0.7421
    
    
    
    0.84452006
(through March 14)
    
    
    0.8308
    
    
    
    0.8432
    
    
    
    0.8139
    
    
    
    0.8316
 Calendar Period
    
    Low
    
    High2005September
    
    
    0.7976
    
    
    
    0.8326October
    
    
    0.8232
    
    
    
    0.8393November
    
    
    0.8287
    
    
    
    0.8571December
    
    
    0.8305
    
    
    
    0.85482006January
    
    
    0.8139
    
    
    
    0.8347February
    
    
    0.8264
    
    
    
    0.8432March
(through March 14)
    
    
    0.8314
    
    
    
    0.8413
 (3)




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##### Table of Contents



U.S. Dollars per Euro
 Year
    
    Average
    
    High
    
    Low
    
    Period End2001
    
    
    0.8952
    
    
    
    0.9535
    
    
    
    0.8370
    
    
    
    0.89012002
    
    
    0.9492
    
    
    
    1.0485
    
    
    
    0.8594
    
    
    
    1.04852003
    
    
    1.1411
    
    
    
    1.2597
    
    
    
    1.0361
    
    
    
    1.25972004
    
    
    1.2478
    
    
    
    1.3625
    
    
    
    1.1801
    
    
    
    1.35382005
    
    
    1.2400
    
    
    
    1.3476
    
    
    
    1.1667
    
    
    
    1.18422006
(through March 14)
    
    
    1.2036
    
    
    
    1.2287
    
    
    
    1.1860
    
    
    
    1.2025
 Calendar Period
    
    High
    
    Low2005September
    
    
    1.2538
    
    
    
    1.2011October
    
    
    1.2148
    
    
    
    1.1914November
    
    
    1.2067
    
    
    
    1.1667December
    
    
    1.2041
    
    
    
    1.16992006January
    
    
    1.2287
    
    
    
    1.1980February
    
    
    1.2100
    
    
    
    1.1860March
(through March 14)
    
    
    1.2028
    
    
    
    1.1886
    
 Risk Factors
   (4)




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Business Risks
 Business Development Risks
     Business Environment Risks
  Market Risks
  (5)




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##### Table of Contents



Technology Risks
    Political, Economic, Cultural and Legislative Development Trends
   (6)




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##### Table of Contents



Phenomena Related to Climate Change and Environment
   Financial Risks
 Liquidity
  Interest Rate Risks
  Currency Risks
  (7)




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##### Table of Contents



Credit Risks and Other Counterparty Risks
     (8)




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##### Table of Contents



Internal Controls
    Profitability Risks
    Business Interruption Risks
   (9)




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##### Table of Contents



Project Activity Risks
  Contract and Product Liability Risks
   Hazard Risks
   Major Shareholders May Exercise Their Influence to Detriment of Other Shareholders
  (10)




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##### Table of Contents



Item 4. Information on the Company.
 
 Organization
  
 History and Development of the Company
      
 Strategy
   (11)




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Management Agenda
     Financial Targets for the 2006-2008 Strategy Period
     (12)




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##### Table of Contents



Financial Targets for 2006
  
 Corporate Structure
  (13)




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##### Table of Contents




    
    Metso Paperdesigns, develops and delivers processes, machinery, equipment and
related know-how and aftermarket services to the pulp and paper industry. Metso Papers
offering extends over the entire life cycle of the process covering new lines, rebuilds
and various services. It operates under five business lines: Fiber, Paper & Board,
Finishing, Tissue and Service.
    
    Metso Mineralsdesigns, develops and manufactures equipment and total solutions as
well as aftermarket solutions for rock and minerals processing industries through its
four business lines: Crushing and Screening, Minerals Processing, Wear Protection and
Conveying and Recycling.
    
    Metso Automationdesigns, develops and supplies both process automation and field
solutions for automation and information management in selected process industries
through its two business lines: Process Automation Systems and Field Systems. All Metso
Automations operations in North America are conducted by a separate North American
business unit. Metso Automations operations cover the three principal areas of process
automation: (1) automation and information management application networks and systems
and life cycle services, (2) flow control solutions, automated and manual control
valves, and (3) process measurement solutions and analyzers.
    
    Metso Venturesmain businesses are Metso Panelboard, Foundries, Metso Powdermet and
Valmet Automotive. Metso Panelboard develops and supplies complete production lines for
the panelboard industry. Foundries manufacture castings for various engineering
industry needs. Metso Powdermet develops materials technology and component solutions
for our customer industries and us. Valmet Automotive is an independent contract
manufacturer of specialty cars.
  
   (14)




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Business Summary
 Net Sales by Geographic Area
  (15)




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##### Table of Contents



Year ended December 31,2004
    
    
    2005(EUR in millions)Finland
    
    
    312
    
    
    
    352Other Nordic countries
    
    
    301
    
    
    
    484Other European countries
    
    
    888
    
    
    
    1,064North America
    
    
    757
    
    
    
    889South and Central America
    
    
    286
    
    
    
    485Asia-Pacific
    
    
    829
    
    
    
    735Rest of the world
    
    
    229
    
    
    
    212Total
    
    
    3,602
    
    
    
    4,221
 Metso Paper
   As of and for the year ended December 31,2004
    
    2005(EUR in millions, except personnel data)Net sales(1)
    
    
    1,559
    
    
    
    1,702Operating profit(2)
    
    
    48
    
    
    
    91Capital employed
    
    
    323
    
    
    
    329Gross capital expenditure
    
    
    33
    
    
    
    34Research and development
    
    
    50
    
    
    
    51Order backlog
    
    
    946
    
    
    
    1,267Personnel
    
    
    8,660
    
    
    
    8,201
 
 (1)
    
    Includes net sales to Metsos other business areas of EUR 9 million and EUR 10 million
for the years ended December 31, 2004 and 2005, respectively.(2)
    
    Includes a reversal of Finnish pension liability of EUR 39.8 million and EUR 3.2 million for
the years ended December 31, 2004 and 2005, respectively. Products and Services
 Fiber.
 Paper & Board.
 (16)




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##### Table of Contents



Finishing.
 Tissue.
 Service
 Markets and Customers
  Year ended December 31,2004
    
    
    2005(Percent of total net sales)Finland
    
    
    12
    
    
    
    12Other Nordic countries
    
    
    10
    
    
    
    20Other European countries
    
    
    17
    
    
    
    19North America
    
    
    19
    
    
    
    19South and Central America
    
    
    5
    
    
    
    7Asia-Pacific
    
    
    32
    
    
    
    21Rest of the world
    
    
    5
    
    
    
    2Total
    
    
    100
    
    
    
    100
    (17)




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Marketing
  Competition
     Recent Developments
   (18)




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##### Table of Contents



Metso Minerals
     As of and for the year ended December 31,2004
    
    2005(EUR in millions, except personnel data)Net sales(1)
    
    
    1,366
    
    
    
    1,735Operating profit(2)
    
    
    105
    
    
    
    177Capital employed
    
    
    712
    
    
    
    895Gross capital expenditure
    
    
    24
    
    
    
    55Research and development
    
    
    9
    
    
    
    11Order backlog
    
    
    560
    
    
    
    852Personnel
    
    
    8,048
    
    
    
    8,521
 
 (1)
    
    Includes net sales to Metsos other business areas of EUR 1 million and EUR 2 million for
the years ended December 31, 2004 and 2005, respectively.(2)
    
    Includes a reversal of Finnish pension liability of EUR 4.9 million and EUR 0.4 million for
the years ended December 31, 2004 and 2005, respectively. Products and Services
  Crushing and Screening.
 Minerals Processing.
 (19)




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##### Table of Contents



Wear Protection and Conveying.
 Recycling.
 Markets and Customers
  Year ended December 31,2004
    
    
    2005(Percent of total net sales)Finland
    
    
    2
    
    
    
    3Other Nordic countries
    
    
    9
    
    
    
    7Other European countries
    
    
    29
    
    
    
    25North America
    
    
    23
    
    
    
    23South and Central America
    
    
    13
    
    
    
    19Asia-Pacific
    
    
    14
    
    
    
    15Rest of the world
    
    
    10
    
    
    
    8Total
    
    
    100
    
    
    
    100
  Marketing
  Competition
  (20)




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##### Table of Contents



Recent Developments
     Metso Automation
     As of and for the year ended December 31,2004
    
    2005(EUR in millions, except personnel data)Net sales(1)
    
    
    535
    
    
    
    584Operating profit(2)
    
    
    69
    
    
    
    81Capital employed
    
    
    135
    
    
    
    125Gross capital expenditure
    
    
    6
    
    
    
    11Research and development
    
    
    31
    
    
    
    29Order backlog
    
    
    176
    
    
    
    179Personnel
    
    
    3,267
    
    
    
    3,169
 
 (1)
    
    Includes net sales to Metsos other business areas of EUR 42 million and EUR 39 million
for the years ended December 31, 2004 and 2005, respectively.(2)
    
    Includes a reversal of Finnish pension liability of EUR 13.7 million and EUR 0.8 million for
the years ended December 31, 2004 and 2005, respectively. (21)




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Products and Services
  Process Automation Systems
   Field Systems
    Customer Support Services
  (22)




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##### Table of Contents



Markets and Customers
  Year ended December 31,2004
    
    
    2005(Percent of total net sales)Finland
    
    
    19
    
    
    
    20Other Nordic countries
    
    
    4
    
    
    
    4Other European countries
    
    
    27
    
    
    
    25North America
    
    
    28
    
    
    
    28South and Central America
    
    
    4
    
    
    
    4Asia-Pacific
    
    
    14
    
    
    
    15Rest of the world
    
    
    4
    
    
    
    4Total
    
    
    100
    
    
    
    100
  Marketing
   Competition
   Recent Developments
  (23)




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##### Table of Contents



Metso Ventures
  Metso Panelboard
    As of and for the year ended December 31,2004
    
    2005(EUR in millions, except personnel data)Net sales(1)
    
    
    104
    
    
    
    112Operating loss(2)
    
    
    (1
    )
    
    
    (3
    )Capital employed
    
    
    (14
    )
    
    
    16Gross capital expenditure
    
    
    1
    
    
    
    1Research and
development
    
    
    3
    
    
    
    3Order backlog
    
    
    32
    
    
    
    50Personnel
    
    
    264
    
    
    
    281
 
 (1)
    
    Includes net sales to Metsos other business areas of EUR 1 million and EUR 1 million
for the years ended December 31, 2004 and 2005, respectively.(2)
    
    Includes a reversal of Finnish pension liability of EUR 0.7 million for the year ended
December 31, 2004. Competition
  Markets and Customers
  (24)




---



##### Table of Contents



Year ended December 31,2004
    
    
    2005(Percent of total net sales)Finland
    
    
    0
    
    
    
    0Other Nordic countries
    
    
    2
    
    
    
    4Other European countries
    
    
    35
    
    
    
    57North America
    
    
    4
    
    
    
    5South and Central America
    
    
    5
    
    
    
    5Asia-Pacific
    
    
    51
    
    
    
    29Rest of the world
    
    
    3
    
    
    
    0Total
    
    
    100
    
    
    
    100
 Marketing
  Foundries
   As of and for the year ended December 31,2004
    
    2005(EUR in millions, except personnel data)Net sales(1)
    
    
    75
    
    
    
    82Operating profit(2)
    
    
    7
    
    
    
    5Capital employed
    
    
    25
    
    
    
    30Gross capital expenditure
    
    
    3
    
    
    
    6Research and development
    
    
    0
    
    
    
    0Order backlog
    
    
    28
    
    
    
    45Personnel
    
    
    587
    
    
    
    618
 
 (1)
    
    Includes net sales to Metsos other business areas of EUR 34 million and EUR 32 million for
the years ended December 31, 2004 and 2005, respectively.(2)
    
    Includes a reversal of Finnish pension liability of EUR 3.3 million and EUR 0.2 million for
the years ended December 31, 2004 and 2005, respectively. Products and Services
   Markets and Customers
  (25)




---



##### Table of Contents



Year ended December 31,2004
    
    
    2005(Percent of total net sales)Finland
    
    
    70
    
    
    
    72Other Nordic countries
    
    
    17
    
    
    
    17Other European countries
    
    
    7
    
    
    
    3North America
    
    
    3
    
    
    
    4South and Central America
    
    
    1
    
    
    
    1Asia-Pacific
    
    
    2
    
    
    
    3Rest of the world
    
    
    0
    
    
    
    0Total
    
    
    100
    
    
    
    100
 Marketing
  Competition
  Valmet Automotive
   As of and for the year ended December 31,2004
    
    2005(EUR in millions, except personnel and vehicle data)Net sales
    
    
    40
    
    
    
    78Operating profit(1)
    
    
    (13
    )
    
    
    6Capital employed
    
    
    24
    
    
    
    30Gross capital expenditure
    
    
    12
    
    
    
    8Research and development
    
    
    2
    
    
    
    1Approximate number of vehicles assembled
    
    
    10,051
    
    
    
    21,233Personnel
    
    
    763
    
    
    
    1,068
 
 (1)
    
    Includes a reversal of Finnish pension liability of EUR 10.4 million and EUR 0.4 million
for the years ended December 31, 2004 and 2005, respectively. (26)




---



##### Table of Contents



Products and Services
  Markets and Customers
  Competition
   Recent Developments
  Metso Powdermet
   
 Discontinued Operations
  (27)




---



##### Table of Contents



As of and for the year ended December 31,2004
    
    2005(EUR in millions, except personnel data)Net sales
    
    
    397
    
    
    
    26Operating profit(1)
    
    
    3
    
    
    
    17Capital employed
    
    
    80
    
    
    
    Gross capital expenditure
    
    
    6
    
    
    
    0Research and development
    
    
    10
    
    
    
    1Order backlog
    
    
    53
    
    
    
    Personnel
    
    
    897
    
    
    
    
 
 (1)
    
    Includes losses on disposals of EUR 29 million and gain on disposals of
EUR 17 million for the years ended December 31, 2004 and 2005, respectively. Drives
  Dynapac
  Drilling
  Converting
   (28)




---



##### Table of Contents



Raw Materials
    
 Seasonality
  
 Dependence on Intellectual Property
    
 Governmental Regulation and Environmental Matters
  (29)




---



##### Table of Contents



(30)




---



##### Table of Contents



Property, Plants and Equipment
  (31)




---



##### Table of Contents



Owned orLocation of Facility
    
    Leased
    
    Size (sq.ft)
    
    Principal ActivitiesMetso CorporationHelsinki, Finland
    
    Owned
    
    
    86,920
    
    
    Corporate head officeMetso PaperJyväskylä, Finland
    
    Owned
    
    
    1,009,683
    
    
    Large-sized Paper MachinesJärvenpää, Finland
    
    Owned
    
    
    622,596
    
    
    Paper Finishing MachinesValmet-Xian, Xian, China(1)
    
    Leased
    
    
    533,890
    
    
    Paper and Board Machines, Foundry,
Air Drying SystemsSundsvall, Sweden
    
    Owned
    
    
    424,417
    
    
    Pulping MachineryKarlstad, Sweden
    
    Owned
    
    
    421,224
    
    
    Board and Tissue MachinesLaem Chabang, Thailand
    
    Owned
    
    
    312,524
    
    
    Service CenterValkeakoski, Finland
    
    Owned
    
    
    230,921
    
    
    Mechanical Pulping, Refiner
Segments, Stock Preparation
Equipment and SystemsAppleton, Wisconsin, United States
    
    Owned
    
    
    166,000
    
    
    Finishing Products, Roll ServiceTurku, Finland
    
    Leased
    
    
    155,252
    
    
    Air Drying SystemsColumbus, Mississippi, United States
    
    Owned
    
    
    149,079
    
    
    Roll CoveringAiken, South Carolina, United States
    
    Owned
    
    
    124,400
    
    
    Roll CoveringTurku, Finland
    
    Leased
    
    
    118,403
    
    
    Air Drying SystemsNeenah, Wisconsin, United States
    
    Owned
    
    
    111,360
    
    
    Roll CoveringCernay, France
    
    Leased
    
    
    110,312
    
    
    Roll CoveringClarks Summit, Pennsylvania,
United States
    
    Owned
    
    
    110,000
    
    
    Roll CoveringComo, Italy
    
    Leased
    
    
    96,835
    
    
    Paper and Board Machine RebuildsPfungstadt, Germany
    
    Owned
    
    
    95,488
    
    
    Service CenterTampere, Finland
    
    Leased
    
    
    91,386
    
    
    Roll FactoryGorizia, Italy
    
    Owned
    
    
    89,179
    
    
    Air Drying SystemsBiddeford, Maine, United States
    
    Owned
    
    
    88,000
    
    
    Tissue Air Drying Systems, Tissue
Process Services for Paper MachinesBeloit, Wisconsin, United States
    
    Leased
    
    
    86,800
    
    
    Service CenterOulu, Finland
    
    Owned
    
    
    82,258
    
    
    Roll CoveringHollola, Finland
    
    Owned
    
    
    77,149
    
    
    Roll HandlingHagfors, Sweden
    
    Owned
    
    
    70,865
    
    
    Refiner SegmentsJärvenpää, Finland
    
    Leased
    
    
    68,049
    
    
    Paper Finishing MachinesFederal Way, Washington, United States
    
    Owned
    
    
    62,683
    
    
    Roll CoveringComo, Italy
    
    Leased
    
    
    54,311
    
    
    Paper and Board Machine RebuildsThunder Bay, Canada
    
    Leased
    
    
    50,908
    
    
    Air Drying SystemsWuxi, China
    
    Owned
    
    
    50,388
    
    
    Service CenterMelbourne, Australia
    
    Owned
    
    
    49,060
    
    
    Service CenterCorbehem, France
    
    Leased
    
    
    48,450
    
    
    Roll CoveringMontreal, Canada
    
    Leased
    
    
    45,000
    
    
    Service Center, ComponentsShanghai, P.R. China
    
    Leased
    
    
    43,670
    
    
    Logistics CenterSorocaba, São Paulo, Brazil
    
    Owned
    
    
    43,011
    
    
    Service CenterFlorence, Alabama, United States
    
    Owned
    
    
    40,000
    
    
    WoodhandlingValkeakoski, Finland
    
    Leased
    
    
    32,832
    
    
    Mechanical Pulping, Refiner
Segments, Stock Preparation
Equipment and SystemsDarmstadt, Germany
    
    Leased
    
    
    9,149
    
    
    Service CenterMetso MineralsSorocaba, São Paulo, Brazil
    
    Owned
    
    
    740,260
    
    
    Rock Crushers, Vibrating Equipment,
Castings, Rubber manufacturingIsithebe, South Africa
    
    Leased
    
    
    602,140
    
    
    Manganese Wear PartsViña del Mar, Chile
    
    Owned
    
    
    538,000
    
    
    Wear Protection and ConveyorsMâcon, France
    
    Owned
    
    
    532,723
    
    
    Rock Crushers and Vibrating EquipmentTampere, Finland
    
    Owned
    
    
    510,990
    
    
    Rock Crushers, Mobile Crushing
Equipment
 (32)




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##### Table of Contents



Owned orLocation of Facility
    
    Leased
    
    Size (sq.ft)
    
    Principal ActivitiesDüsseldorf, Germany
    
    Owned
    
    
    420,223
    
    
    Metal Recycling MachinesVereeniging, South Africa
    
    Owned
    
    
    330,386
    
    
    Rock Crushers, Pave partsAhmedabad, India
    
    Owned
    
    
    63,399
    
    
    Castings and Parts for Rock Crushers
and PumpsBawal, India
    
    Owned
    
    
    41,979
    
    
    Rock Crushers, Vibrating Equipment
and PumpsSala, Sweden
    
    Owned
    
    
    247,570
    
    
    Slurry Pumps and Process EquipmentTrelleborg, Sweden
    
    Leased
    
    
    242,100
    
    
    Rubber ManufacturingColumbia, South Carolina, United States
    
    Owned
    
    
    203,000
    
    
    Vibrating Equipment and Spare PartsGastonia, North Carolina, United
States(2)
    
    Owned
    
    
    168,000
    
    
    Vibrating EquipmentWarrenton, Missouri, United States
    
    Owned
    
    
    150,000
    
    
    Wire Screen Media ManufacturingClarksdale, Mississippi, United States
    
    Leased
    
    
    138,400
    
    
    Conveyor Component ManufacturingNewcastle, Australia
    
    Owned
    
    
    132,500
    
    
    Vibrating Equipment and Spare PartsYork, Pennsylvania, United States
    
    Owned
    
    
    131,965
    
    
    Mill Equipment and PartsKongsvinger, Norway
    
    Leased
    
    
    107,639
    
    
    Conveyor BeltsTampere, Finland
    
    Owned
    
    
    96,875
    
    
    Conveyor BeltsErsmark, Sweden
    
    Owned
    
    
    95,800
    
    
    Rubber ManufacturingVicálvaro, Spain
    
    Owned
    
    
    80,000
    
    
    Rock Crusher Spare Parts and Vibrating
EquipmentPortland, Oregon, United States
    
    Owned
    
    
    70,968
    
    
    Rock Crusher Service and Spare PartsMatamata, New Zealand
    
    Owned
    
    
    62,400
    
    
    Rock Crushers and Spare PartsBelleville, Canada
    
    Owned
    
    
    58,000
    
    
    Idler ManufacturingDungannon, Northern Ireland
    
    Owned
    
    
    56,000
    
    
    Mobile ScreensNorth Bay, Canada
    
    Owned
    
    
    55,000
    
    
    Rubber ManufacturingPerth, Australia
    
    Owned
    
    
    48,438
    
    
    Rubber ManufacturingMoers, Germany
    
    Owned
    
    
    47,361
    
    
    Conveyor BeltsTianjin, China
    
    Owned
    
    
    46,466
    
    
    Rock CrushersEvergem, Belgium
    
    Leased
    
    
    46,285
    
    
    Conveyor BeltsSan Antonio, Texas, United States
    
    Owned
    
    
    40,000
    
    
    Office, Metal Recycling MachinesMetso AutomationHelsinki, Finland
    
    Leased
    
    
    442,400
    
    
    Office, Valve and Accessories
Manufacturing and TestingTampere, Finland
    
    Owned
    
    
    323,300
    
    
    Office, Automation Systems
Manufacturing and TestingShrewsbury, Massachusetts, United
States
    
    Owned
    
    
    175,000
    
    
    Valve and Accessories ManufacturingShanghai, China(1)
    
    Leased
    
    
    173,000
    
    
    Valve ManufacturingLansdale, Pennsylvania, United States
    
    Leased
    
    
    84,700
    
    
    Office, Control Systems ManufacturingKajaani, Finland
    
    Leased
    
    
    73,800
    
    
    Office, Specialty Analyzers
Manufacturing and TestingMetso VenturesUusikaupunki, Finland
    
    Owned
    
    
    1,216,000
    
    
    Car AssemblyHannover, Germany
    
    Leased
    
    
    41,441
    
    
    Office, Energy plants, dryersSundsvall, Sweden
    
    Leased
    
    
    10,700
    
    
    Office, MDF line machinesNastola, Finland
    
    Leased
    
    
    35,572
    
    
    Office, Particleboard and OSB
linemachinesJyväskylä, Finland
    
    Owned
    
    
    394,000
    
    
    FoundryTampere, Finland
    
    Owned
    
    
    288,020
    
    
    FoundryKarlstad, Sweden
    
    Owned
    
    
    526,258
    
    
    Foundry
 
 (1)
    
    Joint Venture, see  Associated Companies below.(2)
    
    Scheduled to be closed during 2006.  (33)




---



##### Table of Contents



Significant Subsidiaries
  Company Name
    
    Country of IncorporationMetso Paper Oy
    
    FinlandMetso Minerals Oy
    
    FinlandMetso Minerals Holding AB
    
    SwedenMetso USA Inc.
    
    United States
 
 Associated Companies
  
 Item 4A. Unresolved Staff Comments.
  
 Item 5. Operating and Financial Review and Prospects.
  
 Business Overview
 Our Customers
  Business Drivers
  (34)




---



##### Table of Contents



Key Management Issues
  (35)




---



##### Table of Contents



Metso Papers Business Concept Renewal Program of 2004
  Efficiency Improvement Program of 2003
      
 Recent Acquisitions and Divestments
  (36)




---



##### Table of Contents



Critical Accounting Policies
   Trade Receivables
   (37)




---



##### Table of Contents



Allowance for Slow-Moving and Obsolete Inventory
     Revenue Recognition
  Accounting for Income Taxes
   (38)




---



##### Table of Contents



Allocation of Excess Purchase Price to Acquired Assets
  Valuation of Property, Plant and Equipment and Intangible Assets and Goodwill
  
    
    material permanent deterioration in the economic or political environment of our
customers or of our own activity;
    
    significant under-performance relative to expected historical or projected future
performance; and
    
    significant changes in Metsos strategic orientations affecting the business plans
and previous investment policies.
        (39)




---



##### Table of Contents



U.S. GAAP
   Reserve for Warranty Costs
  Restructuring Costs
     
    
    although management has devised a formal plan, the plan has not yet been fully
implemented at the time the expense is recorded. There could be significant changes to
the plan and associated costs upon completion of the measures included in the plan;
    
    the estimated reduction in capacity for specific manufacturing plants is based on
our managements anticipated future levels of production based on estimated future
order intake. Final outcome could differ from projected amounts due to changes in the
overall market conditions; and
    
    estimated write-downs of asset values are based on calculations that are inherently
subjective. These calculations include assumptions of future cash flows to be generated
from the assets, estimated growth rates and estimated discount rate of the future cash
flows, as well as an overall assurance regarding the intended use of these assets.
 (40)




---



##### Table of Contents



Pensions
  
    
    A weighted average expected return on plan assets. Actual return on plan assets
may differ significantly based on market activity;
    
    An assumed discount rate to be used in the calculation of the current year
pension expense and pension liability balance. This rate may not be indicative of
actual rates realized in the market; and
    
    Estimated rates of future pay increases. Actual increases may not reflect actual
future increases. Based on the significant changes in the Companys structure and
the uncertainty of the global market place, these estimates are difficult to
project.
  
 Results of Operations
   Year ended December 31,2004
    
    2005(EUR in millions)Metso Paper
    
    
    1,559
    
    
    
    1,702Metso Minerals
    
    
    1,366
    
    
    
    1,735Metso Automation
    
    
    535
    
    
    
    584Metso Ventures
    
    
    230
    
    
    
    284Intra Metso net sales
    
    
    (88
    )
    
    
    (84
    )Metso total
    
    
    3,602
    
    
    
    4,221
 (41)




---



##### Table of Contents



Year ended December 31,2004(1)
    
    
    2005(2)(EUR in millions)Metso Paper
    
    
    48
    
    
    
    91Metso Minerals
    
    
    105
    
    
    
    177Metso Automation
    
    
    69
    
    
    
    81Metso Ventures
    
    
    (6
    )
    
    
    11Corporate Office and Other
    
    
    (17
    )
    
    
    (25
    )Metso total
    
    
    199
    
    
    
    335
 
 (1)
    
    The operating profit includes nonrecurring income resulting from reversal of Finnish
pension liability as follows: Metso Paper EUR 39.8 million, Metso Minerals EUR 4.9 million,
Metso Automation EUR 13.7 million, Metso Ventures EUR 14.6 million and Corporate Office and
Other EUR 2.3 million.(2)
    
    The operating profit includes nonrecurring income resulting from reversal of Finnish pension
liability of EUR 5 million. Results of Operations for the Year Ended December 31, 2005 compared to the Year Ended December
31, 2004
 Net Sales for Continuing Operations
 The Group.
 Metso Paper.
   Metso Minerals.
 (42)




---



##### Table of Contents



Metso Automation.
   Metso Ventures.
  Net Sales for Discontinued Operations
 Discontinued Operations.
 (43)




---



##### Table of Contents



Operating Profit/(Loss) for Continuing Operations
 The Group.
 Metso Paper.
 Metso Minerals.
 Metso Automation.
 (44)




---



##### Table of Contents



Metso Ventures.
 Operating Profit for Discontinued Operations
  Profit on Continuing Operations Before Tax
   Profit Attributable to Equity Shareholders and Earnings per Share from Continuing and Discontinued
Operations
 Income Taxes.
 Profit
Attributable to Equity Shareholders and Earnings per share.
 
 Principal Differences between IFRS and U.S. GAAP
  (45)




---



##### Table of Contents



Liquidity and Capital Resources
        (46)




---



##### Table of Contents



Disclosure about Contractual Obligations and Commercial Commitments
  Payments Due by PeriodLess than 1
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    year
    
    1-3 years
    
    3-5 years
    
    5 years(EUR in millions)Contractual ObligationsLong-term debt, incl. short-term
portion
    
    
    732
    
    
    
    157
    
    
    
    121
    
    
    
    105
    
    
    
    349Capital lease obligations
    
    
    21
    
    
    
    3
    
    
    
    6
    
    
    
    5
    
    
    
    7Operating leases
    
    
    125
    
    
    
    37
    
    
    
    47
    
    
    
    26
    
    
    
    15Total contractual cash obligations
    
    
    878
    
    
    
    197
    
    
    
    174
    
    
    
    136
    
    
    
    371
 (47)




---



##### Table of Contents



Total
    
    Amount of Commitmentamounts
    
    Less than 1
    
    
    
    
    
    
    
    
    
    More thancommitted
    
    year
    
    1-3 years
    
    3-5 years
    
    5 years(EUR in millions)Other Commercial CommitmentsGuarantees
    
    
    5
    
    
    
    5
    
    
    
    0
    
    
    
    0
    
    
    
    Standby repurchase obligations
    
    
    6
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    0Purchase commitments
    
    
    254
    
    
    
    250
    
    
    
    4
    
    
    
    0
    
    
    
    Other commitments
    
    
    6
    
    
    
    4
    
    
    
    2
    
    
    
    0
    
    
    
    Total commercial commitments
    
    
    271
    
    
    
    262
    
    
    
    8
    
    
    
    1
    
    
    
    0
  
 Capital Expenditure
   Year ended December 31,2004
    
    2005(EUR in millions)Finland
    
    
    54
    
    
    
    49Other Nordic countries
    
    
    10
    
    
    
    9Other European countries
    
    
    11
    
    
    
    13North America
    
    
    9
    
    
    
    15South and Central America
    
    
    8
    
    
    
    14Asia-Pacific
    
    
    4
    
    
    
    5Rest of the world
    
    
    1
    
    
    
    2Total
    
    
    97
    
    
    
    107
 
 Research and Development
  (48)




---



##### Table of Contents



Metso Paper
     Metso Minerals
    (49)




---



##### Table of Contents



Metso Automation
   Metso Ventures
      
 Foreign Currency Fluctuations
     (50)




---



##### Table of Contents



Inflation
  
 New Accounting Standards
 IFRS
 IFRS 7
   IAS 39
  1)
    
    Cash flow hedge accounting of forecast intra-group transactions, which
extends the application of hedge accounting to certain type of internal foreign
currency denominated transactions provided these generate a currency risk that is
not eliminated in the consolidated financial statements, and2)
    
    Fair value option, which allows the designation of financial
instruments at fair value through profit and loss under certain circumstances.
  U.S. GAAP
 Share Based Payment
 (51)




---



##### Table of Contents



Accounting for
Conditional Asset Retirement Obligations
 Accounting changes and error corrections Accounting changes Reporting Accounting
Changes in Interim Financial Statements
 The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments
 
 Off-Balance Sheet Arrangements
  
 Item 6. Directors, Senior Management and Employees.
   
 Board of Directors
   (52)




---



##### Table of Contents



Name
    
    Position
    
    Year of BirthMatti Kavetvuo
    
    Chairman of the Board of Directors
    
    
    1944Jaakko Rauramo
    
    Vice Chairman of the Board of Directors
    
    
    1941Svante Adde
    
    Director; Managing Director of Compass Advisers
    
    
    1956Maija-Liisa Friman
    
    Director; President and Chief
Executive Officer of Aspocomp Group Oyj
    
    
    1952Satu Huber
    
    Director; Director of Finance and
Head of Finance Division in the
Finnish State Treasury
    
    
    1958Juhani Kuusi
    
    Director
    
    
    1938
 Matti Kavetvuo
 Jaakko Rauramo
 Svante Adde
 Maija-Liisa Friman
 (53)




---



##### Table of Contents



Satu Huber
 Juhani Kuusi
     
 Chief Executive Officer and Our Executive Team
   (54)




---



##### Table of Contents



Name
    
    Position
    
    Year of BirthJorma Eloranta
    
    President and Chief Executive Officer
    
    
    1951Olli Vaartimo
    
    Executive Vice President and Chief
Financial Officer, deputy to the
President and Chief Executive
Officer
    
    
    1950Risto Hautamäki
    
    President, Metso Paper
    
    
    1945Vesa Kainu
    
    President, Metso Ventures
    
    
    1947Matti Kähkönen
    
    President, Metso Automation
    
    
    1956Bertel Langenskiöld
    
    President, Metso Minerals
    
    
    1950
 Jorma Eloranta
 Olli Vaartimo
 Risto Hautamäki
 Vesa Kainu
 Matti Kähkönen
 Bertel Langenskiöld
 (55)




---



##### Table of Contents



Compensation of Directors and Officers
      
 Audit Committee and Compensation Committee
 Audit Committee.
   Compensation Committee
 (56)




---



##### Table of Contents



Home Country Practices
   
    
    The annual general meeting of our shareholders held on April 4, 2005 established a
nomination committee, which consisted of the representatives of our four biggest
shareholders on December 1, 2005 along with the Chairman of our Board of Directors as an expert member. The
nomination committee has prepared proposals in respect of the composition of our Board of
Directors and the director remuneration for the following annual general meeting of our
shareholders, which is scheduled for April 4, 2006. Pursuant to Section 303A.04 of the NYSE
listing standards, domestic companies listed on the New York Stock Exchange must have a
nominating or corporate governance committee composed entirely of independent directors.
    
    Our Compensation Committee makes recommendations to our Board of Directors with respect
to the compensation of our President and Chief Executive Officer. In accordance with the
Finnish Companies Act, the compensation of our President and CEO is approved by our entire
Board of Directors. Section 303A.05 of the NYSE listing standards requires that the
compensation committee of a company must determine and approve the compensation of the
chief executive officer.
    
    Under the Finnish Companies Act, a general meeting of shareholders of a Finnish company
appoints the independent auditor(s) of the company. Similarly, only a general meeting of
shareholders can remove the independent auditor(s) and appoint their successor. Section
303.06 of the NYSE listing standards requires, pursuant to Rule 10A-3 of the U.S.
Securities Exchange Act of 1934, that the audit committee of a company must be directly
responsible for the appointment and retention of the independent auditor of the company.
    
    Finnish laws and regulations do not mandatorily require companies to have an internal
audit function, which is required by the Section 303.07 of the NYSE listing standards.
Metso has internal audit function and has additionally covered this requirement by
comprehensive risk management and internal control processes.
 
 Employees
   (57)




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##### Table of Contents



As of December 31,
    
    Percentage of2004
    
    2005
    
    GroupEmployees by business areaMetso Paper
    
    
    8,660
    
    
    
    8,201
    
    
    
    37Metso Minerals
    
    
    8,048
    
    
    
    8,521
    
    
    
    39Metso Automation
    
    
    3,267
    
    
    
    3,169
    
    
    
    14Metso Ventures
    
    
    1,637
    
    
    
    1,993
    
    
    
    9Corporate Office and Shared Services
    
    
    293
    
    
    
    294
    
    
    
    1Continuing Operations
    
    
    21,905
    
    
    
    22,178
    
    
    
    100Discontinued Operations
    
    
    897
    
    
    
    
    
    
    
    Metso total
    
    
    22,802
    
    
    
    22,178
    
    
    
    100
 As of December 31,
    
    Percentage of2004
    
    2005
    
    GroupEmployees by geographic areaFinland
    
    
    9,089
    
    
    
    8,340
    
    
    
    38Other Nordic countries
    
    
    2,622
    
    
    
    2,491
    
    
    
    11Other European countries
    
    
    2,902
    
    
    
    2,959
    
    
    
    13North America
    
    
    3,557
    
    
    
    3,526
    
    
    
    16South and Central America
    
    
    1,950
    
    
    
    2,070
    
    
    
    9Asia-Pacific
    
    
    1,366
    
    
    
    1,498
    
    
    
    7Rest of the world
    
    
    1,316
    
    
    
    1,294
    
    
    
    6Total
    
    
    22,802
    
    
    
    22,178
    
    
    
    100
 
 Share Ownership
   Sole Voting
    
    Beneficially
    
    Number of
    
    Number of Sharesor
    
    Shared
    
    Metso
    
    allocated based onInvestment
    
    Voting
    
    2003A
    
    the 2006 SharePower
    
    Power
    
    options
    
    Ownership PlanBoard of DirectorsMatti Kavetvuo(1)
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    Jaakko Rauramo
    
    
    4,205
    
    
    
    
    
    
    
    
    
    
    
    Svante Adde
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Maija-Liisa Friman
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    Satu Huber
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    Juhani Kuusi
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Metso Executive TeamJorma Eloranta
    
    
    3,300
    
    
    
    
    
    
    
    100,000
    
    
    
    5,000Olli Vaartimo
    
    
    1,144
    
    
    
    
    
    
    
    
    
    
    
    4,000Risto Hautamäki
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    3,700Vesa Kainu
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    2,000Matti Kähkönen(2)
    
    
    
    
    
    
    871
    
    
    
    
    
    
    
    3,500Bertel Langenskiöld
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    3,700
 
 (1)
    
    Includes 94 shares held by Mr. Kavetvuos spouse. (58)




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##### Table of Contents



(2)
    
    Includes 871 shares held by Mr. Kähkönens spouse.    
 Authorizations for Board of Directors
      (59)




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions.
 
 Major Shareholders
    Number ofTitle of Class
    
    Identity of Person or Group
    
    Shares
    
    PercentShares, nominal value
     EUR 1.70 each
    
    The Finnish State
    
    
    15,695,287
    
    
    
    11.08Shares, nominal value
     EUR 1.70 each
    
    Fidelity Management Research Corp.
    
    
    7,123,900
    
    
    
    5.03Shares, nominal value
     EUR 1.70 each
    
    Fidelity International Limited
    
    
    7,082,803
    
    
    
    5.00Shares, nominal value
     EUR 1.70 each
    
    Members of our Board of Directors
    
    
    16,299
    
    
    
    0.02
 Ownership of Our Securities in the United States
  
 Related Party Transactions
   (60)




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##### Table of Contents



Item 8. Financial Information.
 
 Consolidated Financial Statements
  
 Export Sales
  Year ended December 31,2004
    
    2005(EUR in millions)Other Nordic countries
    
    
    210
    
    
    
    353Other European countries
    
    
    420
    
    
    
    523North America
    
    
    141
    
    
    
    158South and Central America
    
    
    75
    
    
    
    96Asia-Pacific
    
    
    526
    
    
    
    331Rest of the world
    
    
    23
    
    
    
    31Total
    
    
    1,395
    
    
    
    1,492
  
 Legal Proceedings
     (61)




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Dividend Policy
     
 Significant Changes
  (62)




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##### Table of Contents



Item 9. The Offer and Listing.
 
 Nature of Trading Market
   Helsinki Stock Exchange
    
    New York Stock ExchangePrice per Share
    
    Price per ADSHigh
    
    Low
    
    High
    
    Low(EUR)
    
    (U.S.$)Annual2001
    
    
    14.10
    
    
    
    7.81
    
    
    
    11.30
    
    
    
    7.682002
    
    
    15.15
    
    
    
    7.73
    
    
    
    14.26
    
    
    
    7.812003
    
    
    11.41
    
    
    
    7.52
    
    
    
    12.77
    
    
    
    8.312004
    
    
    12.89
    
    
    
    9.12
    
    
    
    16.49
    
    
    
    11.102005
    
    
    24.46
    
    
    
    11.31
    
    
    
    28.44
    
    
    
    14.702006
(through March 14)
    
    
    32.00
    
    
    
    23.21
    
    
    
    38.04
    
    
    
    27.84Quarterly2004First Quarter
    
    
    11.47
    
    
    
    9.60
    
    
    
    14.37
    
    
    
    12.21Second Quarter
    
    
    11.72
    
    
    
    9.12
    
    
    
    14.04
    
    
    
    11.10Third Quarter
    
    
    11.05
    
    
    
    9.90
    
    
    
    13.53
    
    
    
    12.27Fourth Quarter
    
    
    12.89
    
    
    
    10.27
    
    
    
    16.49
    
    
    
    12.722005First Quarter
    
    
    14.90
    
    
    
    11.31
    
    
    
    20.00
    
    
    
    14.70Second Quarter
    
    
    18.12
    
    
    
    13.22
    
    
    
    22.11
    
    
    
    17.20Third Quarter
    
    
    21.95
    
    
    
    17.67
    
    
    
    26.58
    
    
    
    21.03Fourth Quarter
    
    
    24.46
    
    
    
    19.00
    
    
    
    28.44
    
    
    
    23.152006First
Quarter (through March 14)
    
    
    32.00
    
    
    
    23.21
    
    
    
    38.04
    
    
    
    27.84Monthly2005September
    
    
    21.95
    
    
    
    19.86
    
    
    
    26.58
    
    
    
    24.81October
    
    
    21.74
    
    
    
    19.00
    
    
    
    26.04
    
    
    
    23.15November
    
    
    22.60
    
    
    
    21.50
    
    
    
    26.62
    
    
    
    25.20December
    
    
    24.46
    
    
    
    22.13
    
    
    
    28.44
    
    
    
    26.272006January
    
    
    27.20
    
    
    
    23.21
    
    
    
    32.90
    
    
    
    27.84February
    
    
    32.00
    
    
    
    25.80
    
    
    
    38.04
    
    
    
    32.15March
(through March 14)
    
    
    29.37
    
    
    
    28.55
    
    
    
    34.81
    
    
    
    34.47
 (63)




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##### Table of Contents



Trading and Settlement on the Helsinki Stock Exchange
     
 Regulation of the Finnish Securities Market
   1 3 2 3
  (64)




---



##### Table of Contents



The Finnish Book-Entry Securities System
 General
    Registration
    (65)




---



##### Table of Contents



Custody of the Shares and Nominees
    
 Item 10. Additional Information.
 
 Articles of Association
 Organization and Register
 osakeyhtiö
 Purpose and Object
  Share Capital and Shares
  Corporate Governance
  (66)




---



##### Table of Contents



Preemptive Rights
  General Meeting of Shareholders
  (67)




---



##### Table of Contents



Voting
   Liquidation
  Purchase Obligations
 1 3
 (68)




---



##### Table of Contents



Material Contracts
  
 Exchange Controls
  
 Control of Foreign Ownership
  
 Taxation
  Finnish Taxation
  (69)




---



##### Table of Contents



Companies
  Shareholders and Holders of ADSs
 Tax Credit on Dividends
 avoir fiscal
  Withholding Tax on Dividends
   (70)




---



##### Table of Contents



avoir fiscal
 Finnish Transfer Tax
  Finnish Capital Gains and Other Taxes
  U.S. Federal Income Taxation
 General
    (71)




---



##### Table of Contents



Ownership of ADSs in General
   Distributions
 pro rata
     (72)




---



##### Table of Contents



Sale or Exchange of Shares or ADSs
     Backup Withholding Tax and Information Reporting Requirements
   (73)




---



##### Table of Contents



Documents on Display
  
 Item 11. Quantitative and Qualitative Disclosures about Market Risk.
 .
     
 Exchange Rates and Foreign Currency Exposure
  (74)




---



##### Table of Contents



Interest Rate Risk
    (75)




---



##### Table of Contents



Equity Price Risk
  
 Commodity Price Risk
     
 Item 12. Description of Securities Other than Equity Securities.
  (76)




---



##### Table of Contents



PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies.
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
  
 Item 15. Controls and Procedures.
   
    
    expanded our control procedures to include additional analysis and other
post-closing procedures;
    
    implemented the preparation of a full U.S. GAAP balance sheet as part of our
reconciliation process from our IFRS balance sheet to U.S. GAAP;
    
    implemented the entry of our U.S. GAAP adjustments into our financial reporting
system to produce system generated U.S. GAAP balance sheets and income statements;
    
    implemented training related to enhancing and improving the level of knowledge of
U.S. GAAP at each of our significant operating subsidiaries as well as at our
corporate office; and
    
    enhanced our understanding of U.S. GAAP during our transition from Finnish GAAP to
IFRS.
   
 Item 16. [Reserved].
 
 Item 16A. Audit Committee Financial Expert.
  (77)




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##### Table of Contents



Item 16B. Code of Ethics.
  
 Item 16C. Principal Accountant Fees and Services.
 Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
  Audit Committee Pre-Approval Policies and Procedures
   (78)




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##### Table of Contents



Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
  (79)




---



##### Table of Contents



PART III
 
 Item 17. Financial Statements.
  
 Item 18. Financial Statements.
  (80)




---



##### Table of Contents



Item 19. Exhibits.
 Documents filed as exhibits to this annual report:1.1
    
    Articles of Association of Metso Corporation.2.1
    
    Not applicable.*4.1
    
    Service contract for Jorma Eloranta, president and chief executive officer of Metso
Corporation, dated November 30, 2003.**6.1
    
    See Note 10 to our consolidated financial statements included in this annual report for
information on how earnings per share information was calculated.8.1
    
    Subsidiaries of Metso Corporation.12.1
    
    Certification of Jorma Eloranta, president and chief executive officer of Metso Corporation,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification of Olli Vaartimo, executive vice president and chief financial officer of Metso
Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification of Jorma Eloranta, president and chief executive officer of Metso Corporation,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.13.2
    
    Certification of Olli Vaartimo, executive vice president and chief financial officer of Metso
Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    The total amount of long-term debt securities authorized under any instrument does not exceed
ten percent of the total assets of the Group on a consolidated basis.**
    
    Incorporated by reference to our annual report on Form 20-F for the financial year ended
December 31, 2003, filed with the SEC on March 25, 2004. (81)




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##### Table of Contents



SIGNATURES
  Date:
March 15, 2006
    METSO CORPORATIONBy:
    /s/ JORMA ELORANTAName:
    Jorma ElorantaTitle:
    President and Chief Executive Officer By:
    /s/    OLLI VAARTIMOName:
    Olli VaartimoTitle:
    Executive Vice President and Chief Financial Officer (82)




---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF METSO CORPORATION
 PageReport of Independent Registered Public Accounting Firm.
    
    F-2Consolidated Statements of Income for each of the years ended December 31, 2004 and 2005
    
    F-3Consolidated Balance Sheets as of December 31, 2004 and 2005.
    
    F-4Consolidated Statements of Cash Flows for each of the years ended December 31, 2004 and 2005
    
    F-6Consolidated Statements of Changes in Shareholders Equity as of December 31, 2004 and 2005
    
    F-8Notes to the Consolidated Financial Statements.
    
    F-9
  F-1




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##### Table of Contents



METSO
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Shareholders of
Metso Corporation:
    
   F-2




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##### Table of Contents



METSO
 
 Consolidated Statements of Income
(in millions, except for per share amounts)
 Year ended December 31,Note
    
    2004
    
    
    2005
    
    
    Net sales
    
    35
    
    
    3,602
    
    
    
    4,221Cost of goods sold
    
    8,9
    
    
    (2,673
    )
    
    
    (3,110
    )Gross profit
    
    
    
    
    929
    
    
    
    1,111Selling, general and administrative expenses
    
    4,8,9
    
    
    (798
    )
    
    
    (794
    )Other operating income and expenses, net
    
    5,35
    
    
    (11
    )
    
    
    12Share in profits and losses of associated companies
    
    16,35
    
    
    4
    
    
    
    1Reversal of Finnish pension liability
    
    7,29,35
    
    
    75
    
    
    
    5Operating profit
    
    35
    
    
    199
    
    
    
    335Financial income and expenses, net
    
    10
    
    
    (59
    )
    
    
    (43
    )Profit on continuing operations before tax
    
    
    
    
    140
    
    
    
    292Income taxes on continuing operations
    
    11
    
    
    18
    
    
    
    (72
    )Profit on continuing operations
    
    
    
    
    158
    
    
    
    220Profit (loss) on discontinued operations, net of taxes
    
    13
    
    
    (14
    )
    
    
    17Profit
    
    
    
    
    144
    
    
    
    237Profit attributable to minority interests
    
    
    
    
    1
    
    
    
    1Profit attributable to equity shareholders
    
    
    
    
    143
    
    
    
    236Profit
    
    
    
    
    144
    
    
    
    237Earnings per share from continuing operationsBasic, 
    
    14
    
    
    1.16
    
    
    
    1.57Diluted, 
    
    14
    
    
    1.16
    
    
    
    1.57Earnings per share from discontinued operationsBasic, 
    
    14
    
    
    (0.11
    )
    
    
    0.12Diluted, 
    
    14
    
    
    (0.11
    )
    
    
    0.12Earnings per share from continuing and discontinued
operationsBasic, 
    
    14
    
    
    1.05
    
    
    
    1.69Diluted, 
    
    14
    
    
    1.05
    
    
    
    1.69
 The accompanying Notes form an integral part of these consolidated financial statements.
 F-3




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##### Table of Contents



METSO
 
 Consolidated Balance Sheets
(in millions)
 As at December 31,Note
    
    
    2004
    
    
    2005
    
    
    ASSETSNon-current assets
Intangible assets
    
    
    15Goodwill
    
    
    
    
    
    
    491
    
    
    
    498Other intangible assets
    
    
    
    
    
    
    94
    
    
    
    99585
    
    
    
    597Property, plant and equipment
    
    
    15Land and water areas
    
    
    
    
    
    
    70
    
    
    
    58Buildings and structures
    
    
    
    
    
    
    253
    
    
    
    220Machinery and equipment
    
    
    
    
    
    
    307
    
    
    
    286Assets under construction
    
    
    
    
    
    
    19
    
    
    
    17649
    
    
    
    581Financial and other assetsInvestments in associated companies
    
    
    16
    
    
    
    17
    
    
    
    20Available-for-sale equity investments
    
    
    17
    
    
    
    10
    
    
    
    12Treasury stock
    
    
    
    
    
    
    1
    
    
    
    Loan and other interest bearing receivables
    
    
    20
    
    
    
    12
    
    
    
    5Available-for-sale financial assets
    
    
    20
    
    
    
    3
    
    
    
    34Deferred tax asset
    
    
    11
    
    
    
    159
    
    
    
    163Other non-current assets
    
    
    20
    
    
    
    37
    
    
    
    39239
    
    
    
    273Total non-current assets
    
    
    
    
    
    
    1,473
    
    
    
    1,451Current assetsInventories
    
    
    19
    
    
    
    692
    
    
    
    888ReceivablesTrade and other receivables
    
    
    20
    
    
    
    766
    
    
    
    918Costs and earnings of projects under
construction in excess of advance billings
    
    
    18
    
    
    
    190
    
    
    
    173Loan and other interest bearing receivables
    
    
    20
    
    
    
    2
    
    
    
    2Available-for-sale financial assets
    
    
    20
    
    
    
    51
    
    
    
    135Tax receivables
    
    
    11
    
    
    
    24
    
    
    
    141,033
    
    
    
    1,242Cash and cash equivalents
    
    
    21
    
    
    
    372
    
    
    
    323Total current assets
    
    
    
    
    
    
    2,097
    
    
    
    2,453Assets held for sale
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    
    
    
    
    3,570
    
    
    
    3,904
 The accompanying Notes form an integral part of these consolidated financial statements.
 F-4




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##### Table of Contents



METSO
 Consolidated Balance Sheets -- Continued
(in millions)
 As at December 31,Note
    
    
    2004
    
    
    2005
    
    
    SHAREHOLDERS EQUITY AND LIABILITIESEquity
    
    
    22Share capital
    
    
    
    
    
    
    232
    
    
    
    241Share premium reserve
    
    
    
    
    
    
    14
    
    
    
    76Cumulative translation adjustments
    
    
    
    
    
    
    (48
    )
    
    
    (9
    )Fair value and other reserves
    
    
    
    
    
    
    431
    
    
    
    424Retained earnings
    
    
    
    
    
    
    361
    
    
    
    553Equity attributable to shareholders
    
    
    
    
    
    
    990
    
    
    
    1,285Minority interests
    
    
    
    
    
    
    5
    
    
    
    7Total equity
    
    
    
    
    
    
    995
    
    
    
    1,292Mortgages and contingent liabilities
    
    
    30
    
    
    
    
    
    
    
    LiabilitiesNon-current liabilitiesLong-term debt
    
    
    24
    
    
    
    885
    
    
    
    593Post employment benefit obligations
    
    
    29
    
    
    
    171
    
    
    
    157Deferred tax liability
    
    
    11
    
    
    
    16
    
    
    
    20Provisions
    
    
    26
    
    
    
    31
    
    
    
    33Other long-term liabilities
    
    
    
    
    
    
    6
    
    
    
    7Total non-current liabilities
    
    
    
    
    
    
    1,109
    
    
    
    810Current liabilitiesCurrent portion of long-term debt
    
    
    24
    
    
    
    19
    
    
    
    160Short-term debt
    
    
    27
    
    
    
    31
    
    
    
    35Trade and other payables
    
    
    28
    
    
    
    873
    
    
    
    925Provisions
    
    
    26
    
    
    
    160
    
    
    
    191Advances received
    
    
    
    
    
    
    227
    
    
    
    312Billings in excess of cost and earnings
of projects under construction
    
    
    18
    
    
    
    124
    
    
    
    146Tax liabilities
    
    
    11
    
    
    
    32
    
    
    
    33Total current liabilities
    
    
    
    
    
    
    1,466
    
    
    
    1,802Liabilities held for sale
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    
    
    
    
    2,575
    
    
    
    2,612Total shareholders equity and liabilities
    
    
    
    
    
    
    3,570
    
    
    
    3,904
 The accompanying Notes form an integral part of these consolidated financial statements.
 F-5




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##### Table of Contents



METSO
 
 Consolidated Statements of Cash Flows
(in millions)
 Year ended December 31,Note
    
    2004
    
    
    2005
    
    
    Cash flows from operating activities:Profit
    
    
    
    
    144
    
    
    
    237Adjustments to reconcile profit to net cash provided by
operating activities:Depreciation and amortization
    
    9
    
    
    115
    
    
    
    102Change of provisions related to restructuring programs
    
    6
    
    
    (11
    )
    
    
    (12
    )Gain on sale of fixed assets
    
    5
    
    
    (11
    )
    
    
    (18
    )Loss (gain) on sale of subsidiaries and associated companies
    
    13
    
    
    29
    
    
    
    (17
    )Gain on sale of available-for-sale equity investments
    
    5
    
    
    (9
    )
    
    
    (2
    )Share of profits and losses of associated companies
    
    16
    
    
    (4
    )
    
    
    (1
    )Interests and dividend income
    
    
    
    
    52
    
    
    
    39Income taxes
    
    
    
    
    (4
    )
    
    
    72Other non-cash items
    
    
    
    
    (21
    )
    
    
    24Change in net working capital, net of effect from business
acquisitions and disposals
    
    
    
    
    63
    
    
    
    (170
    )Interest paid
    
    
    
    
    (60
    )
    
    
    (55
    )Interest received
    
    
    
    
    6
    
    
    
    13Dividends received
    
    
    
    
    3
    
    
    
    2Taxes paid
    
    
    
    
    (31
    )
    
    
    (50
    )Net cash provided by (used in) operating activities
    
    
    
    
    261
    
    
    
    164Cash flows from investing activities:Capital expenditures on fixed assets
    
    15
    
    
    (89
    )
    
    
    (104
    )Proceeds from sale of fixed assets
    
    
    
    
    39
    
    
    
    46Business acquisitions, net of cash acquired
    
    12
    
    
    (2
    )
    
    
    (14
    )Proceeds from sale of businesses, net of cash sold
    
    13
    
    
    389
    
    
    
    95Investments in associated companies
    
    16
    
    
    (1
    )
    
    
    (2
    )Proceeds from sale of associated companies
    
    
    
    
    1
    
    
    
    Investments in available-for-sale equity investments
    
    
    
    
    (7
    )
    
    
    (1
    )Proceeds from sale of available-for-sale equity investments
    
    
    
    
    27
    
    
    
    3Investments in available-for-sale financial assets
    
    
    
    
    (47
    )
    
    
    (166
    )Proceeds from sale of available-for-sale financial assets
    
    
    
    
    7
    
    
    
    52Increase in loan receivables
    
    
    
    
    (6
    )
    
    
    (2
    )Decrease in loan receivables
    
    
    
    
    6
    
    
    
    3Other items
    
    
    
    
    (5
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    
    
    312
    
    
    
    (90
    )Cash flows from financing activities:Share options exercised
    
    22
    
    
    
    
    
    
    72Dividends paid
    
    
    
    
    (27
    )
    
    
    (48
    )Hedging of net investment in foreign subsidiaries
    
    
    
    
    11
    
    
    
    (2
    )Net borrowings (payments) on short-term debt
    
    
    
    
    (258
    )
    
    
    (2
    )Proceeds from issuance of long-term debt
    
    
    
    
    454
    
    
    
    6Principal payments of long-term debt
    
    
    
    
    (485
    )
    
    
    (156
    )Principal payments of finance leases
    
    
    
    
    (4
    )
    
    
    (6
    )Other items
    
    
    
    
    (23
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    
    
    (332
    )
    
    
    (136
    )Net increase (decrease) in cash and cash equivalents
    
    
    
    
    241
    
    
    
    (62
    )Effect of changes in exchange rates on cash and cash
equivalents
    
    
    
    
    1
    
    
    
    13Cash and cash equivalents at beginning of year
    
    
    
    
    130
    
    
    
    372Cash and cash equivalents at end of year
    
    
    
    
    372
    
    
    
    323
 The accompanying Notes form an integral part of these consolidated financial statements.
 F-6




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##### Table of Contents



METSO
 Consolidated Statements of Cash Flows  Continued
(in millions)
 Year ended December 31,2004
    
    
    2005
    
    
    Change in net working capital, net of effect from business
acquisitions and disposals:(Increase) decrease in assets and increase (decrease) in liabilities:Inventory
    
    
    (129
    )
    
    
    (178
    )Trade and other receivables
    
    
    (87
    )
    
    
    (139
    )Percentage of completion: recognized assets and liabilities, net
    
    
    113
    
    
    
    42Trade and other payables
    
    
    166
    
    
    
    105Total
    
    
    63
    
    
    
    (170
    )Supplemental cash flow information:Revolving credit facility activityBorrowings
    
    
    50
    
    
    
    Payments
    
    
    116
    
    
    
    Non-cash exchange of bondsNew bonds issued
    
    
    274
    
    
    
    Bonds redeemed
    
    
    256
    
    
    
    
 The accompanying Notes form an integral part of these consolidated financial statements.
 F-7




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##### Table of Contents



METSO
 
 Consolidated Statements of Changes in Shareholders Equity
(in millions)
 EquityShare
    
    
    Cumulative
    
    
    Fair value
    
    
    
    
    
    
    attributableShare
    
    
    premium
    
    
    translation
    
    
    and other
    
    
    Retained
    
    
    to
    
    
    Minority
    
    
    Totalcapital
    
    
    reserve
    
    
    djustments
    
    
    reserves
    
    
    earnings
    
    
    shareholders
    
    
    interests
    
    
    equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at January 1, 2004
    
    
    232
    
    
    
    14
    
    
    
    (50
    )
    
    
    431
    
    
    
    252
    
    
    
    879
    
    
    
    7
    
    
    
    886Translation differences
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (11
    )Transfer of translation differences
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    Deferred tax asset
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    (3
    )
    
    
    (2
    )Net income (expense) recognized
directly in equity
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (7
    )
    
    
    (5
    )
    
    
    (3
    )
    
    
    (8
    )Profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143
    
    
    
    143
    
    
    
    1
    
    
    
    144Total recognized income for 2004
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    136
    
    
    
    138
    
    
    
    (2
    )
    
    
    136Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27
    )
    
    
    (27
    )
    
    
    
    
    
    
    (27
    )Balance at December 31, 2004
    
    
    232
    
    
    
    14
    
    
    
    (48
    )
    
    
    431
    
    
    
    361
    
    
    
    990
    
    
    
    5
    
    
    
    995Effects of adopting IAS 32
Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Effects of adopting IAS 39
Cash flow hedges, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Available-for-sale equity
investments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    2Balance at January 1, 2005
    
    
    232
    
    
    
    14
    
    
    
    (48
    )
    
    
    435
    
    
    
    364
    
    
    
    997
    
    
    
    5
    
    
    
    1,002Cash flow hedges, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (11
    )Available-for-sale financial
assets, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    0Net investment hedge effects, net
of taxes
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )Translation differences
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    60Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    2Net income (expense) recognized
directly in equity
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    (11
    )
    
    
    1
    
    
    
    29
    
    
    
    1
    
    
    
    30Profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236
    
    
    
    236
    
    
    
    1
    
    
    
    237Total recognized income for 2005
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    (11
    )
    
    
    237
    
    
    
    265
    
    
    
    2
    
    
    
    267Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (48
    )
    
    
    
    
    
    
    (48
    )Share options exercised
    
    
    9
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    71Balance at December 31, 2005
    
    
    241
    
    
    
    76
    
    
    
    (9
    )
    
    
    424
    
    
    
    553
    
    
    
    1,285
    
    
    
    7
    
    
    
    1,292
 The accompanying Notes form an integral part of these consolidated financial statements.
 F-8




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##### Table of Contents



METSO
 
 Notes to Consolidated Financial Statements
 Note 1. Accounting principles
 Description of businesses
   Basis of presentation
    Use of estimates
  Accounting convention
  Principles of consolidation
 Subsidiaries
  F-9




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##### Table of Contents



METSO
 Notes
to Consolidated Financial Statements  (Continued)
    Associated companies
  Foreign currency translation
    Derivative financial instruments
 Accounting principles applicable to derivative financial instruments before January 1, 2005
   F-10




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##### Table of Contents



METSO
 Notes
to Consolidated Financial Statements  (Continued)
  Accounting principles applicable to derivative financial instruments after January 1, 2005
   Hedging currency risk
     Hedging interest rate risk
  Hedging commodity risk
  F-11




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##### Table of Contents



METSO
 Notes
to Consolidated Financial Statements  (Continued)
  Fair value estimation
  Employee benefits
 Share-based payments
  Pensions and coverage of pension liabilities
    Revenue recognition
  Percentage-of-completion method
  F-12




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##### Table of Contents



METSO
 Notes
to Consolidated Financial Statements  (Continued)
  Sales with repurchase commitments
  Trade-ins
  Government grants
  Shipping and handling costs
  Advertising costs
  Other operating income and expenses, net
  Income taxes
    F-13




---



##### Table of Contents



METSO
 Notes
to Consolidated Financial Statements  (Continued)
 Earnings per share
   Intangible assets
  Amortization of intangible assets
  Patents and licenses
    
    5  10 yearsComputer software
    
    3  5 yearsOther intangibles
    
    3  12 years
   Impairment of intangible assets with indefinite useful life
  F-14




---



##### Table of Contents



METSO
 Notes
to Consolidated Financial Statements  (Continued)
 Research and development
  Property, plant and equipment
   Buildings
and structures
    
    15  40 yearsMachinery
and equipment
    
    3  20 years
    Capitalization of interest expenses
  Leases
   Financial investments
  F-15




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Available-for-sale equity investments
   Available-for-sale financial assets
  Non-current available-for-sale financial assets
  Current available-for-sale financial assets
  Loan and other interest bearing receivables
   F-16




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Inventories
    Trade receivables and securitization
    Cash and cash equivalents
  Assets classified as held-for-sale
   Treasury stock
  F-17




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Long-term debt
   Capitalization of transaction costs related to issuance of debt instruments
  Capitalization of transaction costs related to exchange of debt instruments
  Provisions
  Restructuring costs
  Environmental remediation costs
  Warranty costs
  F-18




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 2. Financial risk management
   Foreign currency risk management
   Trade flow related derivatives
   Foreign currency denominated equity
  Foreign currency denominated loans
  Short-term funding and liquidity management
  F-19




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Interest rate management
  Commodity risks
  Credit risks and other counterparty risks
  Note 3. Critical accounting estimates and judgements
  Trade receivables
  Allowance for slow-moving and obsolete inventory
  Revenue recognition
  F-20




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Accounting for income taxes
   Allocation of excess purchase price to acquired assets
  Valuation of property, plant and equipment and intangible assets and goodwill
  
    
    material permanent deterioration in the economic or political environment of the
customers or of own activity;
    
    significant under-performance relative to expected historical or projected future
performance; and
    
    significant changes in Metsos strategic orientations affecting the business plans
and previous investment policies.
  F-21




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Reserve for warranty costs
  Pensions
  
    
    a weighted average expected return on plan assets. Actual return on plan assets
may differ significantly based on market activity.
    
    an assumed discount rate to be used in the calculation of the current year
pension expense and pension liability balance. This rate may not be indicative of
actual rates realized in the market.
    
    estimated rates of future pay increases. Actual increases may not reflect actual
future increases. Based on the significant change in the Companys structure and
the uncertainty of the global market place, these estimates are difficult to
project.
  Note 4. Selling, general and administrative expenses
  Year ended December 31,2004
    
    2005(  in millions)Marketing and selling expenses
    
    
    (443
    )
    
    
    (435
    )Research and development expenses, net
    
    
    (92
    )
    
    
    (89
    )Administrative expenses
    
    
    (263
    )
    
    
    (270
    )Total
    
    
    (798
    )
    
    
    (794
    )
 F-22




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Year ended December 31,2004
    
    2005( in millions)Research and development expenses, total
    
    
    (96
    )
    
    
    (96
    )Capitalized development costs
    
    
    2
    
    
    
    0Capital expenditure
    
    
    4
    
    
    
    6Grants received
    
    
    8
    
    
    
    8Depreciation and amortization
    
    
    (10
    )
    
    
    (7
    )Research and development expenses, net
    
    
    (92
    )
    
    
    (89
    )
 Note 5. Other operating income and expenses, net
  Year ended December 31,2004
    
    2005( in millions)Gain on sale of fixed assets (1)
    
    
    11
    
    
    
    15Gain on sale of available-for-sale equity investments
    
    
    9
    
    
    
    2Rental income
    
    
    5
    
    
    
    3Foreign exchange gains (2)
    
    
    
    
    
    
    12Change in fair value of derivatives (3)
    
    
    
    
    
    
    3Other income
    
    
    8
    
    
    
    11Other operating income, total
    
    
    33
    
    
    
    46Nonrecurring expenses related to 2003 restructuring program (4)
    
    
    (14
    )
    
    
    3Nonrecurring expenses related to 2004 restructuring program (4)
    
    
    (24
    )
    
    
    (7
    )Write-downs on fixed assets
    
    
    
    
    
    
    (8
    )Foreign exchange losses (2)
    
    
    
    
    
    
    (11
    )Change in fair value of derivatives (3)
    
    
    
    
    
    
    (10
    )Other expenses
    
    
    (6
    )
    
    
    (1
    )Other operating expenses, total
    
    
    (44
    )
    
    
    (34
    )Other operating income and expenses, net
    
    
    (11
    )
    
    
    12
 
 (1)
    
    Gains on sale of fixed assets were  11 million and  18 million for the years ended
December 31, 2004 and 2005, respectively. In 2005,  3 million resulted from the sale of
assets related to outsourcing and they have been included in the Metso 2003 restructuring
program.(2)
    
    Includes foreign exchange gains and losses resulting from trade receivables and payables and
related derivatives.(3)
    
    For more information on derivative instruments, see Notes 32 and 33.(4)
    
    For more information on restructuring programs, see Note 6. Note 6. Restructuring costs
 2003 Program
  F-23




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
   As at December 31,2004
    
    2005( in millions)Pensions and postretirement benefits(1)
    
    
    7
    
    
    
    6Employee termination and exit costs
    
    
    7
    
    
    
    2Restructuring expenses
    
    
    1
    
    
    
    0Other expenses
    
    
    1
    
    
    
    0Total
    
    
    16
    
    
    
    8
 
 (1)
    
    As at December 31, 2004 and 2005, accrued pensions comprised long-term liabilities of  6
million and of  5 million, respectively. 2004 Program
   Year ended December 31,2004
    
    2005( in millions)Pensions and postretirement benefits
    
    
    (6
    )
    
    
    (1
    )Employee termination and exit costs
    
    
    (8
    )
    
    
    (4
    )Write-downs on fixed assets
    
    
    (10
    )
    
    
    (3
    )Other expenses
    
    
    0
    
    
    
    1Total
    
    
    (24
    )
    
    
    (7
    )
  As at December 31,2004
    
    2005( in millions)Pensions and postretirement benefits (1)
    
    
    4
    
    
    
    4Employee termination and exit costs
    
    
    6
    
    
    
    3Other expenses
    
    
    0
    
    
    
    0Total
    
    
    10
    
    
    
    7
 
 (1)
    
    As at December 31, 2004 and 2005, accrued pensions comprised long-term liabilities of  4
million and of  4 million, respectively. F-24




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Balance at
    
    Impact of
    
    Additions
    
    Reversal
    
    
    
    
    
    Balancebeginning
    
    exchange
    
    charged
    
    of excess
    
    Realized
    
    at end ofof year
    
    rates
    
    to expense
    
    reserve
    
    reserve
    
    year( in millions)Pension and
postretirement
benefits
    
    
    11
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (2
    )
    
    
    10Employee termination
and exit costs
    
    
    13
    
    
    
    1
    
    
    
    4
    
    
    
    (1
    )
    
    
    (12
    )
    
    
    5Restructuring expenses
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    0Other expenses
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    0Total
    
    
    26
    
    
    
    1
    
    
    
    5
    
    
    
    (1
    )
    
    
    (16
    )
    
    
    15
 Note 7. Reversal of Finnish pension liability (TEL)
      F-25




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 8. Personnel expenses and the number of personnel
 Personnel expenses:
 Year ended December 31,2004
    
    2005( in millions)Salaries and wages
    
    
    (881
    )
    
    
    (854
    )Pension costs, defined contribution plans
    
    
    (84
    )
    
    
    (77
    )Pension costs, defined benefit plans (1)
    
    
    (5
    )
    
    
    (10
    )Reversal of Finnish pension liability (TEL), gross amount (2)
    
    
    80
    
    
    
    5Other post-employment benefits
    
    
    (3
    )
    
    
    (3
    )Share-based payments
    
    
    
    
    
    
    0Other indirect employee costs
    
    
    (167
    )
    
    
    (143
    )Total
    
    
    (1,060
    )
    
    
    (1,082
    )
 
 (1)
    
    For more information on pension costs, see Note 29.(2)
    
    For more information on reversal of Finnish pension liability (TEL), see Note 7. Board remuneration:
 Year ended December 31,2004
    
    2005( in thousands)Serving board members in 2005:Matti Kavetvuo
    
    
    (69
    )
    
    
    (73
    )Jaakko Rauramo
    
    
    (47
    )
    
    
    (50
    )Svante Adde
    
    
    
    
    
    
    (31
    )Maija-Liisa Friman
    
    
    (42
    )
    
    
    (47
    )Satu Huber
    
    
    (32
    )
    
    
    (40
    )Juhani Kuusi
    
    
    (39
    )
    
    
    (40
    )Pentti Mäkinen(1)
    
    
    (36
    )
    
    
    (18
    )Former board members:Risto Hautamäki
    
    
    (31
    )
    
    
    (8
    )Heikki Hakala
    
    
    (9
    )
    
    
    Mikko Kivimäki
    
    
    (10
    )
    
    
    Total
    
    
    (315
    )
    
    
    (307
    )
 
 (1)
    
    Starting from April 4, 2005, has attended meetings as a personnel representative invited by
the Board.  F-26




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Chief Executive Officer and Executive Team remuneration:
 Year ended December 31,2004
    
    2005( in thousands)Salaries and short-term employee benefits
    
    
    (2,170
    )
    
    
    (2,382
    )Termination benefits
    
    
    
    
    
    
    Pension insurance premiums
    
    
    (342
    )
    
    
    (299
    )Other long-term benefits
    
    
    
    
    
    
    Share-based payments
    
    
    
    
    
    
    (215
    )Total
    
    
    (2,512
    )
    
    
    (2,896
    )
   Number of personnel at end of year:
 2004
    
    2005Metso Paper
    
    
    8,660
    
    
    
    8,201Metso Minerals
    
    
    8,048
    
    
    
    8,521Metso Automation
    
    
    3,267
    
    
    
    3,169Metso Ventures
    
    
    1,637
    
    
    
    1,993Corporate Office and Shared Services
    
    
    293
    
    
    
    294Continuing operations
    
    
    21,905
    
    
    
    22,178Discontinued operations
    
    
    897
    
    
    
    Metso total
    
    
    22,802
    
    
    
    22,178
 Average number of personnel during the period:
 2004
    
    2005Metso Paper
    
    
    9,021
    
    
    
    8,451Metso Minerals
    
    
    8,178
    
    
    
    8,283Metso Automation
    
    
    3,294
    
    
    
    3,247Metso Ventures
    
    
    1,598
    
    
    
    1,768Corporate Office and Shared Services
    
    
    263
    
    
    
    297Continuing operations
    
    
    22,354
    
    
    
    22,046Discontinued operations
    
    
    2,009
    
    
    
    359Metso total
    
    
    24,363
    
    
    
    22,405
 F-27




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 9. Depreciation and amortization
  Year ended December 31,2004
    
    2005( in millions)Intangible assets
    
    
    (15
    )
    
    
    (16
    )Property, plant and equipmentBuildings and structures
    
    
    (23
    )
    
    
    (22
    )Machinery and equipment
    
    
    (77
    )
    
    
    (64
    )Total
    
    
    (115
    )
    
    
    (102
    )
  Year ended December 31,2004
    
    2005( in millions)Cost of goods sold
    
    
    (70
    )
    
    
    (60
    )Selling, general and administrative expensesMarketing and selling
    
    
    (7
    )
    
    
    (9
    )Research and development
    
    
    (10
    )
    
    
    (7
    )Administrative
    
    
    (28
    )
    
    
    (26
    )Total
    
    
    (115
    )
    
    
    (102
    )
 Note 10. Financial income and expenses, net
  Year ended December 31,2004
    
    2005( in millions)Financial incomeDividends received
    
    
    3
    
    
    
    1Interest income
    
    
    10
    
    
    
    14Other financial income
    
    
    1
    
    
    
    1Net gain (loss) from foreign exchange
    
    
    (1
    )
    
    
    4Financial income total
    
    
    13
    
    
    
    20Financial expensesInterest expenses
    
    
    (63
    )
    
    
    (52
    )Interest expenses on financial leases
    
    
    0
    
    
    
    (1
    )Other financial expenses
    
    
    (9
    )
    
    
    (10
    )Financial expenses total
    
    
    (72
    )
    
    
    (63
    )Financial income and expenses, net
    
    
    (59
    )
    
    
    (43
    )
 F-28




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 11. Income taxes
  Year ended December 31,2004
    
    2005( in millions)Current tax (expense) benefit
    
    
    (24
    )
    
    
    (61
    )Deferred tax (expense) benefit
    
    
    42
    
    
    
    (11
    )Income taxes, total
    
    
    18
    
    
    
    (72
    )
  Year ended December 31,2004
    
    2005( in millions)Income before taxes
    
    
    140
    
    
    
    292Income tax (expense) benefit at Finnish statutory rate
    
    
    (41
    )
    
    
    (76
    )Income tax for prior years
    
    
    8
    
    
    
    (1
    )Difference between Finnish and foreign tax rates
    
    
    (6
    )
    
    
    (11
    )Write-down of subsidiary shares (1)
    
    
    53
    
    
    
    Benefit of operating loss carryforward
    
    
    10
    
    
    
    22Operating losses with no current tax benefit (2)
    
    
    (4
    )
    
    
    (1
    )Non-deductible expenses and tax exempt income
    
    
    (1
    )
    
    
    (2
    )Change in tax rates and tax legislation
    
    
    (3
    )
    
    
    Other
    
    
    2
    
    
    
    (3
    )Income tax (expense) benefit
    
    
    18
    
    
    
    (72
    )
 
 (1)
    
    The tax benefit of 53 million for the year ended December 31, 2004, relates to a
write-down recorded in 2003.(2)
    
    Operating losses with no current tax benefit relate to current year losses for which no
deferred tax asset has been recognized. F-29




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Charged toBalance at
    
    Charged to
    
    share-
    
    
    
    
    
    Acquisitionsbeginning
    
    income
    
    holders
    
    Translation
    
    and
    
    Balance atof year
    
    statement
    
    equity
    
    differences
    
    disposals
    
    end of year( in millions)2004Deferred tax assetsTax losses carried forward
    
    
    65
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Fixed assets
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Inventory
    
    
    12
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Provisions
    
    
    10
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Accruals
    
    
    26
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Pension provisions
    
    
    28
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    3Other
    
    
    17
    
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    (1
    )
    
    
    16Total deferred tax assets
    
    
    165
    
    
    
    19
    
    
    
    1
    
    
    
    
    
    
    
    (10
    )
    
    
    175Offset against deferred tax
liabilities (1)
    
    
    (35
    )
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Net deferred tax assets
    
    
    130
    
    
    
    38
    
    
    
    1
    
    
    
    
    
    
    
    (10
    )
    
    
    159Deferred tax liabilitiesPurchase price adjustments
    
    
    33
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    18Fixed assets
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    12Inventory
    
    
    3
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax allocation reserve
    
    
    11
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    7
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total deferred tax liabilities
    
    
    67
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    32Offset against deferred tax
assets(1)
    
    
    (35
    )
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Net deferred tax liabilities
    
    
    32
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    16Deferred tax assets, net
    
    
    98
    
    
    
    42
    
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    1432005Deferred tax assetsTax losses carried forward
    
    
    104
    
    
    
    (18
    )
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    95Fixed assets
    
    
    7
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Inventory
    
    
    10
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Provisions
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Accruals
    
    
    19
    
    
    
    (2
    )
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    18Pension provisions
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    6Other
    
    
    16
    
    
    
    13
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    32Total deferred tax assets
    
    
    175
    
    
    
    4
    
    
    
    11
    
    
    
    3
    
    
    
    
    
    
    
    193Offset against deferred tax
liabilities (1)
    
    
    (16
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )Net deferred tax assets
    
    
    159
    
    
    
    (10
    )
    
    
    11
    
    
    
    3
    
    
    
    
    
    
    
    163Deferred tax liabilitiesPurchase price adjustments
    
    
    18
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    26Fixed assets
    
    
    12
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Other
    
    
    2
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Total deferred tax liabilities
    
    
    32
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    50Offset against deferred tax
assets(1)
    
    
    (16
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )Net deferred tax liabilities
    
    
    16
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    20Deferred tax assets, net
    
    
    143
    
    
    
    (11
    )
    
    
    11
    
    
    
    3
    
    
    
    (3
    )
    
    
    143
 
 (1)
    
    Deferred tax assets and liabilities are offset when there is a legally enforceable right to
offset current tax assets against current tax liabilities and when the deferred income taxes
relate to the same fiscal authority. F-30




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Tax losses carried forward
    As at December 31,Tax losses
    
    Potentialcarried
    
    deferred tax
    
    
    
    
    
    Deferred taxforward
    
    asset
    
    Not recorded
    
    asset( in millions)2004Finland
    
    
    269
    
    
    
    70
    
    
    
    9
    
    
    
    61USA
    
    
    189
    
    
    
    71
    
    
    
    70
    
    
    
    1Germany
    
    
    103
    
    
    
    36
    
    
    
    9
    
    
    
    27Other
    
    
    111
    
    
    
    33
    
    
    
    18
    
    
    
    15Total
    
    
    672
    
    
    
    210
    
    
    
    106
    
    
    
    1042005Finland
    
    
    257
    
    
    
    67
    
    
    
    0
    
    
    
    67USA
    
    
    154
    
    
    
    59
    
    
    
    59
    
    
    
    0Germany
    
    
    63
    
    
    
    23
    
    
    
    0
    
    
    
    23Other
    
    
    81
    
    
    
    23
    
    
    
    18
    
    
    
    5Total
    
    
    555
    
    
    
    172
    
    
    
    77
    
    
    
    95
 Note 12. Acquisitions
    F-31




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
   Year ended December 31,2004
    
    2005( in millions)Cash and cash equivalents
    
    
    1
    
    
    
    2Intangible assets
    
    
    1
    
    
    
    8Property, plant and equipment
    
    
    0
    
    
    
    2Other assets
    
    
    1
    
    
    
    17Minority interests
    
    
    
    
    
    
    (1
    )Liabilities assumed
    
    
    (1
    )
    
    
    (15
    )Fair value of net assets acquired
    
    
    2
    
    
    
    13Goodwill
    
    
    1
    
    
    
    3Total purchase consideration
    
    
    3
    
    
    
    16Purchase consideration settled in cash
    
    
    3
    
    
    
    16Cash and cash equivalents acquired
    
    
    (1
    )
    
    
    (2
    )Cash outflow on acquisitions
    
    
    2
    
    
    
    14
 Note 13. Discontinued operations and disposals of businesses
      F-32




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Year ended December 31,2004
    
    2005( in millions)Cash and cash equivalents
    
    
    12
    
    
    
    3Intangible assets
    
    
    36
    
    
    
    1Property, plant and equipment
    
    
    77
    
    
    
    53Goodwill
    
    
    124
    
    
    
    7Other assets
    
    
    334
    
    
    
    50Minority interests
    
    
    (1
    )
    
    
    Liabilities sold
    
    
    (152
    )
    
    
    (33
    )Net assets of disposed businesses
    
    
    430
    
    
    
    81Gain (loss) on disposal
    
    
    (29
    )
    
    
    17Total consideration
    
    
    401
    
    
    
    98Consideration received in cash
    
    
    401
    
    
    
    98Cash and cash equivalents disposed of
    
    
    (12
    )
    
    
    (3
    )Cash inflow on disposals
    
    
    389
    
    
    
    95
  Year ended December 31,2004
    
    2005( in millions)Net sales
    
    
    397
    
    
    
    26Expenses
    
    
    (368
    )
    
    
    (26
    )Profit before tax
    
    
    29
    
    
    
    0Income taxes
    
    
    (4
    )
    
    
    0Profit after tax
    
    
    25
    
    
    
    0Gain (loss) on the disposal of the disposal group before tax
    
    
    (29
    )
    
    
    17Taxes
    
    
    (10
    )
    
    
    0Gain (loss) on the disposal of the disposal group after tax
    
    
    (39
    )
    
    
    17Profit (loss) on discontinued operations, net of taxes
    
    
    (14
    )
    
    
    17
  Year ended December 31,2004
    
    2005( in millions)Cash flows provided by (used in) operating activities
    
    
    5
    
    
    
    2Cash flows provided by (used in) investing activities
    
    
    2
    
    
    
    0Cash flows provided by (used in) financing activities
    
    
    (23
    )
    
    
    (2
    )Cash flows provided by (used in) discontinued activities
    
    
    (16
    )
    
    
    0
 F-33




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 14. Earnings per Share
  Basic
  Year ended December 31,2004
    
    2005( in millions)Profit attributable to equity shareholders, continuing operations
    
    
    157
    
    
    
    219Profit (loss) attributable to equity shareholders, discontinued
operations
    
    
    (14
    )
    
    
    17Profit attributable to equity shareholders, continuing and
discontinued operations
    
    
    143
    
    
    
    236Weighted average number of shares issued and outstanding
(in thousands)
    
    
    136,190
    
    
    
    139,639Basic earnings per share, continuing operations, 
    
    
    1.16
    
    
    
    1.57Basic earnings (loss) per share, discontinued operations, 
    
    
    (0.11
    )
    
    
    0.12Basic earnings per share, continuing and discontinued
operations, 
    
    
    1.05
    
    
    
    1.69
 Diluted
  Year ended December 31,2004
    
    2005( in millions)Profit attributable to equity shareholders, continuing operations
    
    
    157
    
    
    
    219Profit (loss) attributable to equity shareholders, discontinued
operations
    
    
    (14
    )
    
    
    17Profit attributable to equity shareholders, continuing and
discontinued operations
    
    
    143
    
    
    
    236Weighted average number of shares issued and outstanding
(in thousands)
    
    
    136,190
    
    
    
    139,639Adjustment for share options (in thousands)
    
    
    2
    
    
    
    26Weighted average number of diluted shares issued and outstanding
(in thousands)
    
    
    136,192
    
    
    
    139,665Diluted earnings per share, continuing operations, 
    
    
    1.16
    
    
    
    1.57Diluted earnings (loss) per share, discontinued operations, 
    
    
    (0.11
    )
    
    
    0.12Diluted earnings per share, continuing and discontinued
operations, 
    
    
    1.05
    
    
    
    1.69
 F-34




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 15. Intangible assets and property plant and equipment
 :
 Patents
    
    
    
    
    
    Otherand
    
    Capitalized
    
    intangible
    
    IntangibleGoodwill
    
    licences
    
    software
    
    assets
    
    assets total( in millions)2004Acquisition cost at beginning of year
    
    
    720
    
    
    
    78
    
    
    
    15
    
    
    
    77
    
    
    
    890Translation differences
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (10
    )Business acquisitions
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1Disposals of businesses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital expenditure
    
    
    0
    
    
    
    4
    
    
    
    5
    
    
    
    8
    
    
    
    17Reclassifications
    
    
    (4
    )
    
    
    (3
    )(1)
    
    
    16
    (1)
    
    
    (2
    )(1)
    
    
    7Decreases
    
    
    (17
    )
    
    
    (6
    )
    
    
    (3
    )
    
    
    (8
    )
    
    
    (34
    )Acquisition cost at end of year
    
    
    691
    
    
    
    73
    
    
    
    33
    
    
    
    74
    
    
    
    871Accumulated depreciation and
amortization at beginning of year
    
    
    (223
    )
    
    
    (27
    )
    
    
    (8
    )
    
    
    (38
    )
    
    
    (296
    )Translation differences
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    3Disposals of businesses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reclassifications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Decreases
    
    
    20
    
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    22Depreciation and amortization charges
for the year
    
    
    
    
    
    
    (6
    )
    
    
    (3
    )
    
    
    (6
    )
    
    
    (15
    )Accumulated depreciation at end of year
    
    
    (200
    )
    
    
    (33
    )
    
    
    (11
    )
    
    
    (42
    )
    
    
    (286
    )Net book value at end of year
    
    
    491
    
    
    
    40
    
    
    
    22
    
    
    
    32
    
    
    
    5852005Acquisition cost at beginning of year
    
    
    691
    
    
    
    73
    
    
    
    33
    
    
    
    74
    
    
    
    871Translation differences
    
    
    14
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    15Business acquisitions
    
    
    4
    
    
    
    
    
    
    
    0
    
    
    
    7
    
    
    
    11Disposals of businesses
    
    
    (9
    )
    
    
    0
    
    
    
    0
    
    
    
    (3
    )
    
    
    (12
    )Capital expenditure
    
    
    0
    
    
    
    4
    
    
    
    5
    
    
    
    7
    
    
    
    16Reclassifications(1)
    
    
    0
    
    
    
    8
    
    
    
    3
    
    
    
    (6
    )
    
    
    5Decreases
    
    
    (12
    )
    
    
    (5
    )
    
    
    (4
    )
    
    
    (8
    )
    
    
    (29
    )Acquisition cost at end of year
    
    
    688
    
    
    
    80
    
    
    
    37
    
    
    
    72
    
    
    
    877Accumulated depreciation and
amortization at beginning of year
    
    
    (200
    )
    
    
    (33
    )
    
    
    (11
    )
    
    
    (42
    )
    
    
    (286
    )Translation differences
    
    
    (4
    )
    
    
    0
    
    
    
    0
    
    
    
    (1
    )
    
    
    (5
    )Disposals of businesses
    
    
    2
    
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    4Reclassifications
    
    
    
    
    
    
    (3
    )
    
    
    (1
    )
    
    
    4
    
    
    
    0Decreases
    
    
    12
    
    
    
    2
    
    
    
    2
    
    
    
    7
    
    
    
    23Depreciation and amortization charges
for the year
    
    
    
    
    
    
    (6
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    (16
    )Accumulated depreciation at end of year
    
    
    (190
    )
    
    
    (40
    )
    
    
    (15
    )
    
    
    (35
    )
    
    
    (280
    )Net book value at end of year
    
    
    498
    
    
    
    40
    
    
    
    22
    
    
    
    37
    
    
    
    597
 F-35




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Property,Land and
    
    Buildings
    
    Machinery
    
    
    
    plant andwater
    
    and
    
    and
    
    Assets under
    
    equipmentareas
    
    structures
    
    equipment
    
    construction
    
    total( in millions)2004Acquisition cost at beginning of year
    
    
    76
    
    
    
    523
    
    
    
    1,334
    
    
    
    37
    
    
    
    1,970Translation differences
    
    
    0
    
    
    
    (6
    )
    
    
    (12
    )
    
    
    
    
    
    
    (18
    )Business acquisitions
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    
    
    
    
    1Disposals of businesses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital expenditure
    
    
    0
    
    
    
    11
    
    
    
    53
    
    
    
    11
    
    
    
    75Reclassifications (1)
    
    
    0
    
    
    
    0
    
    
    
    19
    
    
    
    (26
    )
    
    
    (7
    )Decreases
    
    
    (6
    )
    
    
    (22
    )
    
    
    (109
    )
    
    
    (3
    )
    
    
    (140
    )Acquisition cost at end of year
    
    
    70
    
    
    
    506
    
    
    
    1,286
    
    
    
    19
    
    
    
    1,881Accumulated depreciation and
amortization at beginning of year
    
    
    
    
    
    
    (240
    )
    
    
    (994
    )
    
    
    
    
    
    
    (1,234
    )Translation differences
    
    
    
    
    
    
    2
    
    
    
    8
    
    
    
    
    
    
    
    10Business acquisitions
    
    
    
    
    
    
    0
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Disposals of businesses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reclassifications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Decreases
    
    
    
    
    
    
    8
    
    
    
    85
    
    
    
    
    
    
    
    93Depreciation and amortization charges
for the year
    
    
    
    
    
    
    (23
    )
    
    
    (77
    )
    
    
    
    
    
    
    (100
    )Accumulated depreciation at end of year
    
    
    
    
    
    
    (253
    )
    
    
    (979
    )
    
    
    
    
    
    
    (1,232
    )Net book value at end of year
    
    
    70
    
    
    
    253
    
    
    
    307
    
    
    
    19
    
    
    
    6492005Acquisition cost at beginning of year
    
    
    70
    
    
    
    506
    
    
    
    1,286
    
    
    
    19
    
    
    
    1,881Translation differences
    
    
    1
    
    
    
    13
    
    
    
    39
    
    
    
    0
    
    
    
    53Business acquisitions
    
    
    0
    
    
    
    2
    
    
    
    1
    
    
    
    0
    
    
    
    3Disposals of businesses
    
    
    (1
    )
    
    
    (22
    )
    
    
    (77
    )
    
    
    0
    
    
    
    (100
    )Capital expenditure
    
    
    0
    
    
    
    8
    
    
    
    49
    
    
    
    31
    
    
    
    88Reclassifications(1)
    
    
    (1
    )
    
    
    11
    
    
    
    17
    
    
    
    (32
    )
    
    
    (5
    )Decreases
    
    
    (11
    )
    
    
    (38
    )
    
    
    (129
    )
    
    
    (1
    )
    
    
    (179
    )Acquisition cost at end of year
    
    
    58
    
    
    
    480
    
    
    
    1,186
    
    
    
    17
    
    
    
    1,741Accumulated depreciation and amortization at beginning of year
    
    
    
    
    
    
    (253
    )
    
    
    (979
    )
    
    
    
    
    
    
    (1,232
    )Translation differences
    
    
    
    
    
    
    (6
    )
    
    
    (28
    )
    
    
    
    
    
    
    (34
    )Business acquisitions
    
    
    
    
    
    
    0
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Disposals of businesses
    
    
    
    
    
    
    2
    
    
    
    45
    
    
    
    
    
    
    
    47Reclassifications
    
    
    
    
    
    
    (7
    )
    
    
    7
    
    
    
    
    
    
    
    0Decreases
    
    
    
    
    
    
    26
    
    
    
    120
    
    
    
    
    
    
    
    146Depreciation and amortization charges for the year
    
    
    
    
    
    
    (22
    )
    
    
    (64
    )
    
    
    
    
    
    
    (86
    )Accumulated depreciation at end of year
    
    
    
    
    
    
    (260
    )
    
    
    (900
    )
    
    
    
    
    
    
    (1,160
    )Net book value at end of year
    
    
    58
    
    
    
    220
    
    
    
    286
    
    
    
    17
    
    
    
    581
 
 (1)
    
    Includes reclassifications between intangible assets and assets under construction of 7
million and 5 million for the years ended December 31, 2004 and 2005, respectively. F-36




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
    Property, plantBuildings and
    
    Machinery and
    
    and equipmentstructures
    
    equipment
    
    total( in millions)2004Acquisition cost at end of year
    
    
    26
    
    
    
    10
    
    
    
    36Accumulated depreciation at end of year
    
    
    (7
    )
    
    
    (2
    )
    
    
    (9
    )Net book value at end of year
    
    
    19
    
    
    
    8
    
    
    
    272005Acquisition cost at end of year
    
    
    26
    
    
    
    8
    
    
    
    34Accumulated depreciation at end of year
    
    
    (8
    )
    
    
    (3
    )
    
    
    (11
    )Net book value at end of year
    
    
    18
    
    
    
    5
    
    
    
    23
  2004
    
    2005( in millions)Net capitalized interest, beginning of year
    
    
    2
    
    
    
    1Amortization of capitalized interest expense
    
    
    (1
    )
    
    
    0Net capitalized interest, end of year
    
    
    1
    
    
    
    1
 Goodwill impairment
    F-37




---



##### Table of Contents



Derivedweightedaverage cost
    
    Balance at
    
    Translation
    
    
    
    
    
    Balanceof capital
    
    beginning
    
    difference and
    
    Impairment
    
    at end ofapplied
    
    of year
    
    other changes
    
    loss
    
    year%
    
    
    
    
    
    ( in millions)2004Metso Paper
    
    
    11.712.2
    
    
    
    77
    
    
    
    (4
    )
    
    
    
    
    
    
    73Metso Minerals
    
    
    9.911.8
    
    
    
    383
    
    
    
    2
    
    
    
    
    
    
    
    385Metso Automation
    
    
    11.511.6
    
    
    
    21
    
    
    
    (2
    )
    
    
    
    
    
    
    19Metso Ventures
    
    
    12.5
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Discontinued operations
    
    
    12.3
    
    
    
    7
    
    
    
    0
    
    
    
    
    
    
    
    7Total
    
    
    9.912.5
    
    
    
    495
    
    
    
    (4
    )
    
    
    
    
    
    
    491
 Derivedweightedaverage cost
    
    Balance at
    
    Translation
    
    
    
    
    
    Balanceof capital
    
    beginning
    
    difference and
    
    Impairment
    
    at end ofapplied
    
    of year
    
    other changes
    
    loss
    
    year%
    
    

    ( in millions)2005Metso Paper
    
    
    9.411.7
    
    
    
    73
    
    
    
    9
    
    
    
    
    
    
    
    82Metso Minerals
    
    
    11.712.1
    
    
    
    385
    
    
    
    4
    
    
    
    
    
    
    
    389Metso Automation
    
    
    14.915.1
    
    
    
    19
    
    
    
    1
    
    
    
    
    
    
    
    20Metso Ventures
    
    
    10.511.5
    
    
    
    7
    
    
    
    0
    
    
    
    
    
    
    
    7Discontinued operations
    
    
    
    
    
    
    7
    
    
    
    (7
    )
    
    
    
    
    
    
    Total
    
    
    9.415.1
    
    
    
    491
    
    
    
    7
    
    
    
    
    
    
    
    498
 F-38




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 16. Investments in associated companies
  2004
    
    
    2005( in millions)Investments in associated companiesAcquisition cost at beginning of year
    
    
    8
    
    
    
    7Translation differences
    
    
    
    
    
    
    0Increases
    
    
    1
    
    
    
    2Disposals and other decreases
    
    
    (2
    )
    
    
    0Acquisition cost at end of year
    
    
    7
    
    
    
    9Equity adjustments in investments in associated companiesEquity adjustments in investments in associated companies at
beginning of year
    
    
    7
    
    
    
    10Share of results
    
    
    4
    
    
    
    1Translation differences
    
    
    
    
    
    
    1Dividend income
    
    
    (1
    )
    
    
    (1
    )Disposals and other changes
    
    
    0
    
    
    
    Equity adjustments in investments in associated companies at
end of year
    
    
    10
    
    
    
    11Book value of investments in associated companies at end of year
    
    
    17
    
    
    
    20
 As at December 31,2004
    
    
    2005Ownership
    
    
    Book value
    
    
    Ownership
    
    
    Book value%
    
    
    ( in millions)
    
    
    %
    
    
    ( in millions)Allimand S.A.
    
    
    35.8
    
    
    
    5
    
    
    
    35.8
    
    
    
    5Valmet-Xian Paper Machinery Co. Ltd.
    
    
    48.3
    
    
    
    7
    
    
    
    48.3
    
    
    
    8Shanghai Neles-Jamesbury Valve Co. Ltd.
    
    
    50.0
    
    
    
    3
    
    
    
    50.0
    
    
    
    4Avantone Oy
    
    
    48.2
    
    
    
    1
    
    
    
    48.2
    
    
    
    1Others
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2Total investments in associated companies
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    20
  Year ended December 31,2004
    
    
    2005( in millions)Assets
    
    
    44
    
    
    
    48Liabilities
    
    
    27
    
    
    
    28Net sales
    
    
    41
    
    
    
    42Profit
    
    
    4
    
    
    
    1
 F-39




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Related party transactions
  Year ended December 31,2004
    
    
    2005( in millions)Net sales to associated companies
    
    
    1
    
    
    
    1Purchases from associated companies
    
    
    8
    
    
    
    16Receivables from associated companies
    
    
    1
    
    
    
    1Payables to associated companies
    
    
    1
    
    
    
    2
 F-40




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 17. Available-for-sale equity investments
  As at December 31,2004
    
    
    2005Number
    
    
    Owner-
    
    
    
    
    
    
    Number
    
    
    Owner-of shares
    
    
    ship %
    
    

Book value
    
    
    of shares
    
    
    ship %
    
    
    Book value( in millions)
    
    
    ( in millions)Tamfelt Corporation
    
    
    726,300
    
    
    
    2.7
    
    
    
    4
    
    
    
    726,300
    
    
    
    2.6
    
    
    
    6Other shares and securities
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Total available-for-sale
equity investments
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    12
  ( in millions)Book value as of December 31, 2004
    
    
    10Fair value adjustment January 1, 2005 (IAS 39)
    
    
    2Book value as of January 1, 2005
    
    
    12Additions
    
    
    1Changes in fair values
    
    
    2Disposals
    
    
    (3
    )Other changes
    
    
    Book value as of December 31, 2005
    
    
    12
 F-41




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 18. Percentage of completion
   Costs andearnings ofuncompleted
    
    
    Billings ofprojects
    
    
    projects
    
    
    Net( in millions)2004Projects where costs and earnings exceed billings
    
    
    575
    
    
    
    385
    
    
    
    190Projects where billings exceed costs and earnings
    
    
    428
    
    
    
    552
    
    
    
    1242005Projects where costs and earnings exceed billings
    
    
    610
    
    
    
    437
    
    
    
    173Projects where billings exceed costs and earnings
    
    
    306
    
    
    
    452
    
    
    
    146
 Note 19. Inventory
 As at December 31,2004
    
    
    2005( in millions)Materials and supplies
    
    
    150
    
    
    
    190Work in progress
    
    
    322
    
    
    
    420Finished products
    
    
    220
    
    
    
    278Total inventory
    
    
    692
    
    
    
    888
  F-42




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 20. Interest bearing and non-interest bearing receivables
  As at December 31,2004
    
    
    2005Non-
    
    
    
    
    
    
    
    
    
    
    Non-current
    
    
    Current
    
    
    Total
    
    
    current
    
    
    Current
    
    
    Total( in millions)
    
    
    ( in millions)Interest bearing receivablesLoan receivables (1)
    
    
    6
    
    
    
    2
    
    
    
    8
    
    
    
    5
    
    
    
    2
    
    
    
    7Available-for-sale financial assets
    
    
    3
    
    
    
    51
    
    
    
    54
    
    
    
    34
    
    
    
    135
    
    
    
    169Trade receivables (1)
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    0
    
    
    
    
    
    
    
    0Total
    
    
    15
    
    
    
    53
    
    
    
    68
    
    
    
    39
    
    
    
    137
    
    
    
    176Non-interest bearing receivablesLoan receivables (1)
    
    
    7
    
    
    
    0
    
    
    
    7
    
    
    
    2
    
    
    
    1
    
    
    
    3Trade receivables (1)
    
    
    1
    
    
    
    651
    
    
    
    652
    
    
    
    27
    
    
    
    764
    
    
    
    791Prepaid expenses and accrued income
    
    
    
    
    
    
    63
    
    
    
    63
    
    
    
    
    
    
    
    68
    
    
    
    68Other receivables (2)
    
    
    29
    
    
    
    52
    
    
    
    81
    
    
    
    10
    
    
    
    85
    
    
    
    95Total
    
    
    37
    
    
    
    766
    
    
    
    803
    
    
    
    39
    
    
    
    918
    
    
    
    957
 
 (1)
    
    For the year ended December 31, 2005, 1 million was expensed to reduce the book value
of loan and trade receivables. For additional information on changes in the allowance for
doubtful notes and receivables, see also Note 25.(2)
    
    During 2004, Metso entered into several transactions with existing lenders to exchange
344 million under its 1 billion Euro Medium Term Note Program for new bonds with lower
interest rate and a longer term. As at December 31, 2004 Metso had capitalized 24 million
of costs related to these transactions, of which non-current 23 million and current 1
million. In accordance with IAS 39 and IAS 32, part of these exchanges were considered as
extinguishment of the original debt resulting in 1 million net reduction of unamortized
transaction costs expensed directly through equity as of January 1, 2005. See also Note 33 on
the effects on implementing IAS 39 and IAS 32.  Note 21. Cash and cash equivalents
 As at December 31,2004
    
    
    2005( in millions)Bank and cash
    
    
    150
    
    
    
    120Commercial papers and other investments
    
    
    222
    
    
    
    203Total cash and cash equivalents
    
    
    372
    
    
    
    323
 Note 22. Equity
  F-43




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
    Share amounts
 2004
    
    
    2005Number of outstanding shares, January 1
    
    
    136,189,704
    
    
    
    136,189,704Share options exercised
    
    
    
    
    
    
    5,404,069Number of outstanding shares, December 31
    
    
    136,189,704
    
    
    
    141,593,773Treasury stock
    
    
    60,841
    
    
    
    60,841Total number of shares, December 31
    
    
    136,250,545
    
    
    
    141,654,614
  Fair value and other reserves
     F-44




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  FairTreasury
    
    
    Hedge
    
    
    value
    
    
    Legal
    
    
    Otherstock
    
    
    reserve
    
    
    reserve
    
    
    reserve
    
    
    reserves
    
    
    Total( in millions)Balance as of January 1, 2004
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    202
    
    
    
    431Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2004
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    202
    
    
    
    431Effects of adopting IAS 32
    
    
    
    
    
    
    
    
    
    
    Treasury stock
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Effects of adopting IAS 39
    
    
    
    
    
    
    
    
    
    
    Cash flow hedges, net of taxes
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Available-for-sale financial
assets, net of taxes
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Share options granted
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    0Balance as of January 1, 2005
    
    
    (1
    )
    
    
    4
    
    
    
    2
    
    
    
    228
    
    
    
    202
    
    
    
    435Cash flow hedges
    
    
    
    
    
    
    
    
    
    
    Fair value gains, net of taxes
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Transferred to profit and loss,
net of taxes
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )Available-for-sale financial assets
    
    
    
    
    
    
    
    
    
    
    Fair value gains, net of taxes
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Transferred to profit and loss,
net of taxes
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Share options granted
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    0Balance as of December 31, 2005
    
    
    (1
    )
    
    
    (7
    )
    
    
    2
    
    
    
    228
    
    
    
    202
    
    
    
    424
  2004
    
    
    2005( in millions)Cumulative translation adjustment as of January 1
    
    
    (50
    )
    
    
    (48
    )Change in foreign currency translation
    
    
    (6
    )
    
    
    60Hedging of net investment denominated in foreign currency
    
    
    3
    
    
    
    (30
    )Tax effect
    
    
    (3
    )
    
    
    9Transfer of translation differences
    
    
    8
    
    
    
    Cumulative translation adjustment as of December 31
    
    
    (48
    )
    
    
    (9
    )
 F-45




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  As at December31, 2005( in millions)Other reserves
    
    
    202Retained earnings
    
    
    317Profit attributable to equity shareholders
    
    
    236Equity share of accelerated depreciation and other untaxed reserves
    
    
    (1
    )Translation differences
    
    
    (9
    )Treasury stock
    
    
    (1
    )Total distributable funds
    
    
    744
  Note 23. Share-based payments
  2003 options program
   F-46




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  As at December 31,2004
    
    
    2005Average
    
    
    
    
    
    
    Averageexercise
    
    
    
    
    
    
    exerciseprice
    
    
    Amount of
    
    
    price
    
    
    Amount/share
    
    
    options
    
    
    /share
    
    
    of optionsBeginning of period
    
    
    
    
    
    
    
    
    
    
    10.45
    
    
    
    100,000Granted
    
    
    10.65
    
    
    
    100,000
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    End of period
    
    
    10.45
    
    
    
    100,000
    
    
    
    10.10
    
    
    
    100,000Exercisable at end of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  2004Share price, 
    
    
    10.85Exercise price, 
    
    
    10.65Volatility, %
    
    
    39.93Risk-free interest rate, %
    
    
    3.29Expected annual dividends.
    
    
    Expected life in years
    
    
    5.17
  2001 options program
   As at December 31,2004
    
    
    2005Average
    
    
    
    
    
    
    Averageexercise
    
    
    
    
    
    
    exerciseprice
    
    
    Amount of
    
    
    price
    
    
    Amount/share
    
    
    options
    
    
    /share
    
    
    of optionsBeginning of period
    
    
    
    
    
    
    
    
    
    
    13,60
    
    
    
    30,000Granted
    
    
    13.80
    
    
    
    30,000
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    13.25
    
    
    
    (30,000
    )End of period
    
    
    13.60
    
    
    
    30,000
    
    
    
    
    
    
    
    Exercisable at end of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 F-47




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Note 24. Long-term debt
  Book values
    
    
    Fair values2004
    
    
    2005
    
    
    2004
    
    
    2005( in millions)
    
    
    ( in millions)Bonds
    
    
    744
    
    
    
    688
    
    
    
    772
    
    
    
    725Loans from financial institutions
    
    
    114
    
    
    
    40
    
    
    
    116
    
    
    
    40Pension loans
    
    
    8
    
    
    
    0
    
    
    
    8
    
    
    
    0Finance lease obligations
    
    
    25
    
    
    
    21
    
    
    
    25
    
    
    
    21Other long-term debt
    
    
    13
    
    
    
    4
    
    
    
    13
    
    
    
    4904
    
    
    
    753
    
    
    
    934
    
    
    
    790Less current maturities
    
    
    19
    
    
    
    160
    
    
    
    19
    
    
    
    160Total
    
    
    885
    
    
    
    593
    
    
    
    915
    
    
    
    630
 Bonds
 Nominal
    
    
    Effective
    
    
    
    
    
    
    Originalinterest rate
    
    
    interest rate
    
    
    Currency
    
    
    loan
    
    
    Outstanding atDec 31, 2005
    
    
    Dec 31, 2005
    
    
    of
    
    
    amount,
    
    
    December 31,%
    
    
    %
    
    
    bond
    
    
    millions2004
    
    
    2005( in millions)19972007
    
    
    6.875
    
    
    
    6.875
    
    
    USD
    
    
    200
    
    
    
    128
    
    
    
    9220012006
    
    
    6.25
    
    
    
    6.25
    
    
    
    
    
    500
    
    
    
    156
    
    
    
    15620042011
    
    
    5.125
    
    
    
    6.46
    
    
    
    
    
    274
    
    
    
    274
    
    
    
    257558
    
    
    
    505Private placements
issued under EMTN
program, maturing 2009-2012
    
    
    
    
    
    
    3.075.12
    
    
    
    
    
    
    
    
    
    186
    
    
    
    183Bonds total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744
    
    
    
    688Less current maturities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Bonds, long-term portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744
    
    
    
    532
    F-48




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 
 F-49




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  
   Loans from
    
    Finance
    
    Otherfinancial
    
    lease
    
    long-termBonds
    
    institutions
    
    obligations
    
    debt
    
    Total(  in millions)Year2006
    
    
    156
    
    
    
    1
    
    
    
    3
    
    
    
    
    
    
    
    1602007
    
    
    92
    
    
    
    8
    
    
    
    3
    
    
    
    1
    
    
    
    1042008
    
    
    
    
    
    
    20
    
    
    
    3
    
    
    
    
    
    
    
    232009
    
    
    83
    
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    892010
    
    
    15
    
    
    
    4
    
    
    
    2
    
    
    
    
    
    
    
    21Later
    
    
    342
    
    
    
    4
    
    
    
    7
    
    
    
    3
    
    
    
    356
 Note 25. Allowances
  Balanceat
    
    
    Impact of
    
    
    Additions
    
    
    
    
    
    
    Deductions
    
    
    Balancebeginning
    
    
    exchange
    
    
    charged to
    
    
    Realized
    
    
    /other
    
    
    at endof year
    
    
    rates
    
    
    expense
    
    
    reserve
    
    
    additions
    
    
    of year( in millions)Allowance for
doubtful notes and
receivables
    
    
    37
    
    
    
    2
    
    
    
    1
    
    
    
    (9
    )
    
    
    4
    
    
    
    35Allowance for
inventory
obsolescence
    
    
    57
    
    
    
    4
    
    
    
    6
    
    
    
    (11
    )
    
    
    (3
    )
    
    
    53Total
    
    
    94
    
    
    
    6
    
    
    
    7
    
    
    
    (20
    )
    
    
    1
    
    
    
    88
  F-50




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 26. Provisions
  As at December 31,2004
    
    
    2005Non-
    
    
    
    
    
    
    
    
    
    
    Non-current
    
    
    Current
    
    
    Total
    
    
    current
    
    
    Current
    
    
    Total( in millions)
    
    ( in millions)Warranty and guarantee liabilities
    
    
    9
    
    
    
    114
    
    
    
    123
    
    
    
    4
    
    
    
    158
    
    
    
    162Accrued restructuring expenses (1)
    
    
    14
    
    
    
    27
    
    
    
    41
    
    
    
    15
    
    
    
    10
    
    
    
    25Environmental and product liabilities
    
    
    
    
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    5
    
    
    
    5Other provisions
    
    
    8
    
    
    
    16
    
    
    
    24
    
    
    
    14
    
    
    
    18
    
    
    
    32Total
    
    
    31
    
    
    
    160
    
    
    
    191
    
    
    
    33
    
    
    
    191
    
    
    
    224
 
 (1)
    
    For additional information on significant restructuring programs, see also Note 6.  Balance at
    
    
    Impact of
    
    
    Additions
    
    
    
    
    
    
    Reversal of
    
    
    Balancebeginning
    
    
    exchange
    
    
    charged to
    
    
    Realized
    
    
    reserve / other
    
    
    at endof year
    
    
    rates
    
    
    expense
    
    
    reserve
    
    
    changes
    
    
    of year( in millions)Accrued restructuring expenses(1)
    
    
    41
    
    
    
    2
    
    
    
    8
    
    
    
    (21
    )
    
    
    (5
    )
    
    
    25Environmental and product liabilities
    
    
    3
    
    
    
    0
    
    
    
    2
    
    
    
    (1
    )
    
    
    1
    
    
    
    5Total
    
    
    44
    
    
    
    2
    
    
    
    10
    
    
    
    (22
    )
    
    
    (4
    )
    
    
    30
 
 (1)
    
    For additional information on significant restructuring programs, see also Note 6.  Accrued restructuring expenses
  Environmental and product liabilities
 
 
 F-51




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Warranty and guarantee liabilities
  Increase for
    
    Increase forBalance at
    
    Impact
    
    current
    
    previous
    
    
    
    
    
    Balancebeginning
    
    of exchange
    
    years
    
    years
    
    
    
    
    
    at endof year
    
    rates
    
    deliveries
    
    deliveries
    
    Deductions(1)
    
    of year( in millions)Warranty and
guarantee
provisions
    
    
    123
    
    
    
    13
    
    
    
    68
    
    
    
    41
    
    
    
    (83
    )
    
    
    162
 
 (1)
    
    Includes  49 million of reversals and changes related to discontinued operations.  Note 27. Short-term debt
  As at December 31,2004
    
    
    2005( in millions)Loans from financial institutions
    
    
    17
    
    
    
    35Other
    
    
    14
    
    
    
    Total
    
    
    31
    
    
    
    35
  
  
 F-52




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 28. Trade and other payables
  As at December 31,2004
    
    
    2005( in millions)Trade payables
    
    
    561
    
    
    
    575Accrued interests
    
    
    7
    
    
    
    6Accrued personnel costs
    
    
    163
    
    
    
    177Accrued project costs
    
    
    39
    
    
    
    34Short-term derivatives
    
    
    
    
    
    
    39Other
    
    
    103
    
    
    
    94Total
    
    
    873
    
    
    
    925
 Note 29. Post employment benefit obligations
  The amounts recognized as of December 31 in the balance sheet are following:
 Year ended December 31,Other postPension benefits,
    
    
    Pension benefits,
    
    
    -employmentdomestic
    
    
    foreign
    
    
    benefits2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005( in millions)Present value of funded obligations
    
    
    (14
    )
    
    
    (11
    )
    
    
    (226
    )
    
    
    (291
    )
    
    
    
    
    
    
    Fair value of plan assets
    
    
    10
    
    
    
    8
    
    
    
    171
    
    
    
    226
    
    
    
    
    
    
    
    (4
    )
    
    
    (3
    )
    
    
    (55
    )
    
    
    (65
    )
    
    
    
    
    
    
    Present value of unfunded
obligations
    
    
    (5
    )
    
    
    
    
    
    
    (75
    )
    
    
    (82
    )
    
    
    (34
    )
    
    
    (44
    )Unrecognized surplus
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    Unrecognized asset
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Unrecognized actuarial (gains)
losses
    
    
    (1
    )
    
    
    2
    
    
    
    10
    
    
    
    36
    
    
    
    (1
    )
    
    
    4Unrecognized past service costs
(credit)
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Net liability recognized
    
    
    (10
    )
    
    
    (3
    )
    
    
    (122
    )
    
    
    (114
    )
    
    
    (36
    )
    
    
    (40
    )Amounts in the balance sheet:Liabilities
    
    
    10
    
    
    
    3
    
    
    
    122
    
    
    
    115
    
    
    
    36
    
    
    
    40Assets
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    1
    
    
    
    
    
    
    
    Net liability recognized
    
    
    10
    
    
    
    3
    
    
    
    122
    
    
    
    114
    
    
    
    36
    
    
    
    40
 F-53




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  
  Foreign pension and otherPension benefits, domestic
    
    
    post-employment benefits2004
    
    
    2005
    
    
    2004
    
    
    2005( in millions)Net liability at beginning of year
    
    
    86
    
    
    
    10
    
    
    
    167
    
    
    
    158Liability for new plans covered
    
    
    4
    
    
    
    (1
    )
    
    
    4
    
    
    
    0Net expense recognized in the
income statement
    
    
    (75
    )
    
    
    (2
    )
    
    
    3
    
    
    
    10Contributions
    
    
    (5
    )
    
    
    (4
    )
    
    
    (13
    )
    
    
    (22
    )Translation difference
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    8Net liability at end of year
    
    
    10
    
    
    
    3
    
    
    
    158
    
    
    
    154
  2004
    
    2005Equity securities
    
    
    52
    %
    
    
    50
    %Bonds
    
    
    45
    %
    
    
    45
    %Other
    
    
    3
    %
    
    
    5
    %
  Other post-Pension benefits,
    
    
    Pension benefits,
    
    
    employmentdomestic
    
    
    foreign
    
    
    benefits2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005( in millions)Service cost
    
    
    9
    
    
    
    2
    
    
    
    5
    
    
    
    5
    
    
    
    1
    
    
    
    1Interest cost
    
    
    5
    
    
    
    1
    
    
    
    17
    
    
    
    18
    
    
    
    2
    
    
    
    2Expected return on plan assets
    
    
    0
    
    
    
    (1
    )
    
    
    (13
    )
    
    
    (15
    )
    
    
    
    
    
    
    Amortization  Past service costs
    
    
    (7
    )
    
    
    (1
    )
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    Net actuarial (gain) loss
recognized in year
    
    
    (1
    )
    
    
    
    
    
    
    2
    
    
    
    0
    
    
    
    0
    
    
    
    0Immediate recognition due to asset
ceiling
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Losses (gains) on immediate
settlements
    
    
    (81
    )
    
    
    (3
    )
    
    
    (11
    )
    
    
    (2
    )
    
    
    
    
    
    
    Expense (income) recognized in
income statement
    
    
    (75
    )
    
    
    (2
    )
    
    
    0
    
    
    
    7
    
    
    
    3
    
    
    
    3Actual return (loss) on plan assets
    
    
    1
    
    
    
    (2
    )
    
    
    16
    
    
    
    20
    
    
    
    
    
    
    
    
 F-54




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Other post-Pension benefits,
    
    
    Pension benefits,
    
    
    employmentdomestic
    
    
    foreign
    
    
    benefits2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005( in millions)Defined benefit obligation at
beginning of year
    
    
    86
    
    
    
    19
    
    
    
    294
    
    
    
    301
    
    
    
    39
    
    
    
    34Service cost
    
    
    9
    
    
    
    2
    
    
    
    5
    
    
    
    5
    
    
    
    1
    
    
    
    1Interest cost
    
    
    5
    
    
    
    1
    
    
    
    17
    
    
    
    18
    
    
    
    2
    
    
    
    2Actuarial (gains) losses
    
    
    (10
    )
    
    
    (1
    )
    
    
    18
    
    
    
    30
    
    
    
    (2
    )
    
    
    5Losses (gains) on curtailment
    
    
    (72
    )
    
    
    (3
    )
    
    
    (12
    )
    
    
    (2
    )
    
    
    
    
    
    
    Plan participant contributions
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    1
    
    
    
    (1
    )
    
    
    0Past service cost
    
    
    (7
    )
    
    
    (3
    )
    
    
    1
    
    
    
    0
    
    
    
    
    
    
    
    Increase in coverage
    
    
    11
    
    
    
    
    
    
    
    6
    
    
    
    7
    
    
    
    
    
    
    
    Settlements
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    Translation differences
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    30
    
    
    
    (2
    )
    
    
    5Benefits paid
    
    
    (3
    )
    
    
    (4
    )
    
    
    (17
    )
    
    
    (17
    )
    
    
    (3
    )
    
    
    (3
    )Defined benefit obligation at
end of year
    
    
    19
    
    
    
    11
    
    
    
    301
    
    
    
    373
    
    
    
    34
    
    
    
    44
  Foreign pension and otherPension benefits, domestic
    
    
    post-employment benefits2004
    
    
    2005
    
    
    2004
    
    
    2005( in millions)Fair value of assets at beginning of year
    
    
    0
    
    
    
    10
    
    
    
    166
    
    
    
    171Adjustments for new plans covered
    
    
    7
    
    
    
    
    
    
    
    2
    
    
    
    7Actual return on plan assets
    
    
    1
    
    
    
    (2
    )
    
    
    16
    
    
    
    20Plan participant contributions
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Employer contributions
    
    
    5
    
    
    
    4
    
    
    
    13
    
    
    
    22Benefits paid
    
    
    (3
    )
    
    
    (4
    )
    
    
    (20
    )
    
    
    (20
    )Translation differences
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    25Fair value of assets at end of year
    
    
    10
    
    
    
    8
    
    
    
    171
    
    
    
    226
  Domestic
    
    Foreign2004
    
    2005
    
    2004
    
    2005%
    
    
    
    %
    
    
    
    %
    
    
    
    %Benefit obligation: discount rate
    
    
    5.00
    
    
    
    4.50
    
    
    
    5.74
    
    
    
    5.05Benefit obligation: rate of compensation
increase
    
    
    3.07
    
    
    
    3.77
    
    
    
    3.68
    
    
    
    3.39Benefit obligation: rate of pension increase
    
    
    2.30
    
    
    
    2.10
    
    
    
    0.91
    
    
    
    0.89Expense in income statement: discount rate
    
    
    5.25
    
    
    
    5.00
    
    
    
    6.04
    
    
    
    5.74Expense in income statement: rate of
compensation increase
    
    
    3.07
    
    
    
    3.07
    
    
    
    3.68
    
    
    
    3.68Expense in income statement: expected
return on plan assets
    
    
    5.40
    
    
    
    5.40
    
    
    
    7.82
    
    
    
    7.64Expense in income statement: rate of
pension increase
    
    
    n/a
    
    
    
    2.30
    
    
    
    n/a
    
    
    
    0.91
  
 F-55




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
    
 Note 30. Mortgages and contingent liabilities
  As at December 31,2004
    
    
    2005( in millions)On own behalfMortgages
    
    
    4
    
    
    
    5Pledged assets
    
    
    4
    
    
    
    0On behalf of associated companiesGuarantees
    
    
    
    
    
    
    On behalf of othersGuarantees
    
    
    9
    
    
    
    5Other commitmentsRepurchase commitments
    
    
    7
    
    
    
    6Other contingencies
    
    
    8
    
    
    
    6Total
    
    
    32
    
    
    
    22
 
  
   
 F-56




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 31. Lease Contracts
   2004
    
    
    2005
    
    
    2004
    
    
    2005Operating leases
    
    
    Finance leases( in millions)
    
    
    ( in millions)Less than 1 year
    
    
    40
    
    
    
    37
    
    
    
    5
    
    
    
    412 years
    
    
    27
    
    
    
    28
    
    
    
    5
    
    
    
    423 years
    
    
    20
    
    
    
    19
    
    
    
    4
    
    
    
    434 years
    
    
    14
    
    
    
    14
    
    
    
    3
    
    
    
    345 years
    
    
    11
    
    
    
    12
    
    
    
    3
    
    
    
    3Over 5 years
    
    
    21
    
    
    
    15
    
    
    
    9
    
    
    
    8Total minimum lease payments
    
    
    133
    
    
    
    125
    
    
    
    29
    
    
    
    26Future financial expenses
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (5
    )Total net present value of finance leases
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    21
  2004
    
    
    2005( in millions)Less than 1 year
    
    
    5
    
    
    
    312 years
    
    
    4
    
    
    
    323 years
    
    
    4
    
    
    
    334 years
    
    
    2
    
    
    
    345 years
    
    
    2
    
    
    
    2Over 5 years
    
    
    8
    
    
    
    7Total net present value of finance leases
    
    
    25
    
    
    
    21
  
  Future lease payments for empty premises
  
 F-57




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 32. Derivative financial instruments
  2004
    
    
    2005Fair
    
    
    
    
    
    
    Fair
    
    
    
    
    
    
    FairNotional
    
    
    value,
    
    
    Notional
    
    
    value,
    
    
    Fair value,
    
    
    value,amount
    
    
    net
    
    
    amount
    
    
    assets
    
    
    liabilities
    
    
    net( in millions)Forward exchange contracts
    
    
    1,770
    
    
    
    18
    
    
    
    1,159
    
    
    
    7
    
    
    
    39
    
    
    
    (32
    )Cross-currency swaps
    
    
    2
    
    
    
    0
    
    
    
    2
    
    
    
    0
    
    
    
    0
    
    
    
    0Currency swaps
    
    
    73
    
    
    
    (8
    )
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    0Interest rate swaps
    
    
    188
    
    
    
    (4
    )
    
    
    183
    
    
    
    0
    
    
    
    4
    
    
    
    (4
    )Interest rate futures contracts
    
    
    10
    
    
    
    0
    
    
    
    20
    
    
    
    0
    
    
    
    0
    
    
    
    0Option agreements
    
    
    26
    
    
    
    0
    
    
    
    27
    
    
    
    0
    
    
    
    0
    
    
    
    0Electricity forward contracts (1)
    
    
    329
    
    
    
    (1
    )
    
    
    354
    
    
    
    2
    
    
    
    0
    
    
    
    2Total
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    9
    
    
    
    43
    
    
    
    (34
    )
 
 (1)
    
    Notional amount GWh   2004(1)
    
    
    2005Net
    
    
    Assets
    
    
    Liabilities( in millions)Interest rate swaps  cash flow hedges
    
    
    
    
    
    
    
    
    
    
    4Interest rate swaps  fair value hedges
    
    
    
    
    
    
    
    
    
    
    0Interest rate swaps  non-qualifying hedges
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    4Forward exchange contracts  cash flow hedges
    
    
    
    
    
    
    2
    
    
    
    21Forward exchange contracts  net investment hedge
    
    
    
    
    
    
    1
    
    
    
    11Forward exchange contracts  non-qualifying hedges
    
    
    18
    
    
    
    4
    
    
    
    718
    
    
    
    7
    
    
    
    39Currency swaps  non-qualifying hedges
    
    
    
    
    
    
    
    
    
    
    Electricity forward contracts  non-qualifying hedges
    
    
    (1
    )
    
    
    2
    
    
    
    Options  non-qualifying hedges
    
    
    
    
    
    
    
    
    
    
    Total derivatives
    
    
    5
    
    
    
    9
    
    
    
    43
 
 (1)
    
    All the derivatives outstanding as at December 31, 2004, have been presented as
non-qualifying hedges, although they were qualifying hedges under FAS, since the hedge
accounting criteria under IAS 39 has been applied only from January 1, 2005, onwards.   F-58




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
    20102006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    and after( in millions)Forward exchange contracts
    
    
    1,067
    
    
    
    89
    
    
    
    3
    
    
    
    
    
    
    
    Cross-currency swaps
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Currency swaps
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    98Interest rate futures contracts
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Option agreements
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Electricity forward contracts (1)
    
    
    177
    
    
    
    128
    
    
    
    49
    
    
    
    
    
    
    
    
 
 (1)
    
    Notional amount GWh Note 33. The adoption of IAS 32 and IAS 39
  Effect ofadoption of IASDec 31, 2004
    
    
    32 and 39
    
    
    Jan 1, 2005ASSETS
    
    ( in millions)Non-current assetsIntangible assets
    
    
    585
    
    
    
    
    
    
    
    585Property, plant and equipment
    
    
    649
    
    
    
    
    
    
    
    649Financial assets
    
    
    239
    
    
    
    (19
    )
    
    
    220Total non-current assets
    
    
    1,473
    
    
    
    (19
    )
    
    
    1,454Current assetsInventories
    
    
    692
    
    
    
    
    
    
    
    692Receivables
    
    
    1,033
    
    
    
    13
    
    
    
    1,046Cash and cash equivalents
    
    
    372
    
    
    
    
    
    
    
    372Total current assets
    
    
    2,097
    
    
    
    13
    
    
    
    2,110Assets held for sale
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    3,570
    
    
    
    (6
    )
    
    
    3,564
 F-59




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Effect ofadoption of IASDec 31, 2004
    
    
    32 and 39
    
    
    Jan 1, 2005SHAREHOLDERS EQUITY AND LIABILITIES
    
    ( in millions)EquityShare capital
    
    
    232
    
    
    
    
    
    
    
    232Other shareholders equity
    
    
    758
    
    
    
    7
    
    
    
    765Minority interests
    
    
    5
    
    
    
    
    
    
    
    5Total equity
    
    
    995
    
    
    
    7
    
    
    
    1,002LiabilitiesNon-current liabilities
    
    
    1,109
    
    
    
    (22
    )
    
    
    1,087Current liabilities
    
    
    1,466
    
    
    
    9
    
    
    
    1,475Liabilities held for sale
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    2,575
    
    
    
    (13
    )
    
    
    2,562Total shareholders equity
and liabilities
    
    
    3,570
    
    
    
    (6
    )
    
    
    3,564
 
      
 
 
 F-60




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note 34. Principal subsidiaries
  % of
    
    
    
    
    
    Researchexternal
    
    
    
    
    
    andCountry
    
    net sales
    
    Production
    
    Sales
    
    developmentMetso Paper Oy
    
    Finland
    
    
    18.1
    
    
    X
    
    X
    
    XMetso Minerals Industries Inc.
    
    USA
    
    
    8.9
    
    
    X
    
    XMetso Paper USA Inc.
    
    USA
    
    
    5.6
    
    
    X
    
    X
    
    XMetso Brazil Indústria e Comércio Ltda
    
    Brasil
    
    
    4.7
    
    
    X
    
    XMetso Paper Sundsvall AB
    
    Sweden
    
    
    3.3
    
    
    X
    
    X
    
    XMetso Minerals (Australia) Ltd
    
    Australia
    
    
    3.3
    
    
    X
    
    XMetso Automation USA Inc.
    
    USA
    
    
    3.1
    
    
    X
    
    X
    
    XMetso Minerals (France) SA
    
    France
    
    
    2.5
    
    
    X
    
    XMetso Paper Ltd
    
    Canada
    
    
    2.3
    
    
    X
    
    X
    
    XMetso Paper Pori Oy
    
    Finland
    
    
    2.2
    
    
    X
    
    X
    
    XMetso Automation Oy
    
    Finland
    
    
    2.2
    
    
    X
    
    X
    
    XMetso Lindemann GmbH
    
    Germany
    
    
    1.9
    
    
    X
    
    X
    
    XMetso Paper Karlstad AB
    
    Sweden
    
    
    1.9
    
    
    X
    
    XValmet Automotive Oy
    
    Finland
    
    
    1.8
    
    
    X
    
    
    
    XMetso Paper Valkeakoski Oy
    
    Finland
    
    
    1.7
    
    
    X
    
    X
    
    XMetso Minerals (Tampere) Oy
    
    Finland
    
    
    1.7
    
    
    XMetso Minerals (UK) Ltd
    
    Great Britain
    
    
    1.5
    
    
    X
    
    X
    
    XMetso Panelboard AB
    
    Sweden
    
    
    1.5
    
    
    
    
    X
    
    XMetso Minerals (Johannesburg) (Pty) Ltd
    
    South Africa
    
    
    1.4
    
    
    X
    
    XMetso Minerals (Canada) Ltd
    
    Canada
    
    
    1.2
    
    
    
    
    XMetso Minerals Espana SA
    
    Spain
    
    
    1.0
    
    
    
    
    XMetso Minerals (Chile) SA
    
    Chile
    
    
    1.0
    
    
    X
    
    XMetso Minerals Canada Inc.
    
    Canada
    
    
    0.9
    
    
    X
    
    XMetso Minerals (Germany) GmbH
    
    Germany
    
    
    0.8
    
    
    
    
    XMetso Endress+Hauser Oy
    
    Finland
    
    
    0.8
    
    
    
    
    XMetso Minerals (Kiruna) AB
    
    Sweden
    
    
    0.8
    
    
    
    
    XMetso Automation GmbH
    
    Germany
    
    
    0.7
    
    
    X
    
    XMetso Minerals (Norway) A/S
    
    Norway
    
    
    0.7
    
    
    X
    
    XMetso Automation S.A.S
    
    France
    
    
    0.7
    
    
    X
    
    XMetso Minerals (Italy) SpA
    
    Italy
    
    
    0.7
    
    
    
    
    XMetso Minerals (Mexico) SA de CV
    
    Mexico
    
    
    0.6
    
    
    X
    
    XMetso Panelboard Oy
    
    Finland
    
    
    0.6
    
    
    
    
    X
    
    XMetso Automation Pte Ltd
    
    Singapore
    
    
    0.6
    
    
    
    
    XMetso Minerals (Sweden) AB
    
    Sweden
    
    
    0.6
    
    
    X
    
    XMetso Paper GmbH
    
    Germany
    
    
    0.6
    
    
    X
    
    XMetso Paper Como S.p.A
    
    Italy
    
    
    0.5
    
    
    X
    
    XMetso Automation GesmbH
    
    Austria
    
    
    0.5
    
    
    X
    
    XMetso Foundries Jyväskylä Oy
    
    Finland
    
    
    0.5
    
    
    XMetso Minerals (Austria) GmbH
    
    Austria
    
    
    0.5
    
    
    
    
    XMetso Paper (Thailand) Co. Ltd
    
    Thailand
    
    
    0.5
    
    
    X
    
    XMetso Minerals (Sala) AB
    
    Sweden
    
    
    0.5
    
    
    X
    
    X
    
    XMetso Texas Shredder Inc.
    
    USA
    
    
    0.4
    
    
    X
    
    XMetso Paper (China) Co. Ltd
    
    China
    
    
    0.4
    
    
    X
    
    XMetso Minerals (India) Private Ltd
    
    India
    
    
    0.4
    
    
    X
    
    XMetso Minerals (Belux) SA
    
    Belgium
    
    
    0.4
    
    
    X
    
    XMetso Automation Max Controls Inc.
    
    USA
    
    
    0.4
    
    
    X
    
    X
    
    XMetso Minerals (Hong Kong) Ltd
    
    China
    
    
    0.4
    
    
    
    
    XMetso Minerals Systems AB
    
    Sweden
    
    
    0.4
    
    
    X
    
    XMetso Automation Projects Oy
    
    Finland
    
    
    0.4
    
    
    X
    
    XMetso  SHI Co. Ltd
    
    Japan
    
    
    0.4
    
    
    X
    
    X
 F-61




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 % of
    
    
    
    
    
    Researchexternal
    
    
    
    
    
    andCountry
    
    net sales
    
    Production
    
    Sales
    
    developmentMetso Minerals (Finland) Oy
    
    Finland
        
    0.4
        
    X
    
    XMetso Automation Canada Ltd.
    
    Canada
        
    0.4
        
    X
    
    X
    
    XMetso Automation AB
    
    Sweden
        
    0.4
        
    X
    
    X
 Note 35. Business area and geographic information
 Corporate structure
   · Metso Paper
 · Metso Minerals
 · Metso Automation
 · Metso Ventures
 · Corporate Office and other
     F-62




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
    CorporateMetso
    
    
    Metso
    
    
    Metso
    
    
    Metso
    
    
    Office and
    
    
    Discontinued
    
    
    Elimi-
    
    
    MetsoPaper
    
    
    Minerals
    
    
    Automation
    
    
    Ventures
    
    
    other
    
    
    operations(4)
    
    
    nations
    
    
    total2004
    
    ( in millions)External net sales
    
    
    1,550
    
    
    
    1,365
    
    
    
    493
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,602Intra-Metso net sales
    
    
    9
    
    
    
    1
    
    
    
    42
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    (88
    )
    
    
    Net sales
    
    
    1,559
    
    
    
    1,366
    
    
    
    535
    
    
    
    230
    
    
    
    
    
    
    
    
    
    
    
    (88
    )
    
    
    3,602Other operating income and
expenses, net
    
    
    (20.4
    )
    
    
    0.4
    
    
    
    (3.8
    )
    
    
    (1.4
    )
    
    
    14.6
    
    
    
    
    
    
    
    
    
    
    
    (10.6
    )Share in profits and losses of
associated companies
    
    
    3.7
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.8Reversal of Finnish pension
liability (1)
    
    
    39.8
    
    
    
    4.9
    
    
    
    13.7
    
    
    
    14.6
    
    
    
    2.3
    
    
    
    
    
    
    
    
    
    
    
    75.3Operating profit(loss)
    
    
    48.0
    
    
    
    105.2
    
    
    
    69.6
    
    
    
    (6.2
    )
    
    
    (17.1
    )
    
    
    
    
    
    
    
    
    
    
    199.5% of net sales
    
    
    3.1
    
    
    
    7.7
    
    
    
    13.0
    
    
    
    (2.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.5Depreciation and amortization
    
    
    53
    
    
    
    26
    
    
    
    11
    
    
    
    11
    
    
    
    4
    
    
    
    10
    
    
    
    
    
    
    
    115Gross capital expenditure
(including business acquisitions)
    
    
    33
    
    
    
    24
    
    
    
    6
    
    
    
    16
    
    
    
    14
    
    
    
    6
    
    
    
    
    
    
    
    99Non-cash write-downs (2)
    
    
    43
    
    
    
    15
    
    
    
    7
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Intangible assets and property,
plant and equipment
    
    
    403
    
    
    
    564
    
    
    
    62
    
    
    
    94
    
    
    
    50
    
    
    
    61
    
    
    
    
    
    
    
    1,234Investments in associated companies
    
    
    12
    
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Available-for-sale equity
investments(3)
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    11Inventories and other non-interest
bearing assets
    
    
    703
    
    
    
    667
    
    
    
    203
    
    
    
    51
    
    
    
    33
    
    
    
    52
    
    
    
    
    
    
    
    1,709Interest bearing assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440
    
    
    
    
    
    
    
    
    
    
    
    440Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    159Total assets
    
    
    1,119
    
    
    
    1,232
    
    
    
    269
    
    
    
    146
    
    
    
    691
    
    
    
    113
    
    
    
    
    
    
    
    3,570Non-interest bearing liabilities
    
    
    796
    
    
    
    520
    
    
    
    134
    
    
    
    107
    
    
    
    33
    
    
    
    33
    
    
    
    
    
    
    
    1,623Interest bearing debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    935
    
    
    
    
    
    
    
    
    
    
    
    935Deferred tax liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    16Total liabilities
    
    
    796
    
    
    
    520
    
    
    
    134
    
    
    
    107
    
    
    
    984
    
    
    
    33
    
    
    
    
    
    
    
    2,574Capital employed
    
    
    323
    
    
    
    712
    
    
    
    135
    
    
    
    39
    
    
    
    642
    
    
    
    80
    
    
    
    
    
    
    
    1,931Orders received
    
    
    1,726
    
    
    
    1,566
    
    
    
    570
    
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    3,989Order backlog
    
    
    946
    
    
    
    560
    
    
    
    176
    
    
    
    66
    
    
    
    
    
    
    
    53
    
    
    
    (43
    )
    
    
    1,758
 
 (1)
    
    Reversal of Finnish pension liability (TEL) is included in operating profit (loss). See
Note 7 for further information.(2)
    
    Other non-cash items recorded in Metso Paper include 15 million of bad debt expense
related to Papiers Gaspésia and 10 million related to the 2004 restructuring program.(3)
    
    Corporate Office and other includes treasury stock of 1 million.(4)
    
    For more information on discontinued operations see Note 13. F-63




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 CorporateMetso
    
    
    Metso
    
    
    Metso
    
    
    Metso
    
    
    Office and
    
    
    Discontinued
    
    
    Elimi-
    
    
    MetsoPaper
    
    
    Minerals
    
    
    Automation
    
    
    Ventures
    
    
    other
    
    
    operations
    
    
    nations
    
    
    total2005
    
    ( in millions)External net sales
    
    
    1,692
    
    
    
    1,733
    
    
    
    545
    
    
    
    251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,221Intra-Metso net sales
    
    
    10
    
    
    
    2
    
    
    
    39
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    Net sales
    
    
    1,702
    
    
    
    1,735
    
    
    
    584
    
    
    
    284
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    4,221Other operating income and expenses, net
    
    
    (4.6
    )
    
    
    6.7
    
    
    
    (0.9
    )
    
    
    3.4
    
    
    
    7.4
    
    
    
    
    
    
    
    
    
    
    
    12.0Share in profits and losses of associated companies
    
    
    2.3
    
    
    
    0.2
    
    
    
    0.5
    
    
    
    (1.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.3Reversal of Finnish pension liability 1)
    
    
    3.2
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    5.1Operating profit (loss)
    
    
    90.9
    
    
    
    177.6
    
    
    
    80.7
    
    
    
    10.8
    
    
    
    (25.0
    )
    
    
    
    
    
    
    
    
    
    
    335.0% of net sales
    
    
    5.3
    
    
    
    10.2
    
    
    
    13.8
    
    
    
    3.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.9Depreciation and amortization
    
    
    47
    
    
    
    28
    
    
    
    10
    
    
    
    12
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    102Gross capital expenditure (including business
acquisitions)
    
    
    34
    
    
    
    55
    
    
    
    11
    
    
    
    15
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    121Non-cash write-downs
    
    
    10
    
    
    
    5
    
    
    
    3
    
    
    
    0
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    20Intangible assets and property, plant and equipment
    
    
    379
    
    
    
    592
    
    
    
    66
    
    
    
    97
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    1,178Investments in associated companies
    
    
    14
    
    
    
    1
    
    
    
    4
    
    
    
    0
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    20Available-for-sale equity investments
    
    
    1
    
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    12Inventories and other non-interest bearing assets
    
    
    758
    
    
    
    962
    
    
    
    197
    
    
    
    91
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    2,032Interest bearing assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    499
    
    
    
    
    
    
    
    
    
    
    
    499Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    163Total assets
    
    
    1,152
    
    
    
    1,556
    
    
    
    267
    
    
    
    188
    
    
    
    741
    
    
    
    
    
    
    
    
    
    
    
    3,904Non-interest bearing liabilities
    
    
    823
    
    
    
    661
    
    
    
    142
    
    
    
    110
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    1,804Interest bearing debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    788
    
    
    
    
    
    
    
    
    
    
    
    788Deferred tax liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Total liabilities
    
    
    823
    
    
    
    661
    
    
    
    142
    
    
    
    110
    
    
    
    876
    
    
    
    
    
    
    
    
    
    
    
    2,612Capital employed
    
    
    329
    
    
    
    895
    
    
    
    125
    
    
    
    78
    
    
    
    653
    
    
    
    
    
    
    
    
    
    
    
    2,080Orders received
    
    
    1,993
    
    
    
    1,936
    
    
    
    580
    
    
    
    324
    
    
    
    
    
    
    
    
    
    
    
    (88
    )
    
    
    4,745Order backlog
    
    
    1,267
    
    
    
    852
    
    
    
    179
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    2,350
 
 (1)
    
    Reversal of Finnish pension liability (TEL) is included in operating profit (loss). See
Note 7 for further information.  Other
    
    
    Other
    
    
    
    
    
    
    South and
    
    
    
    
    
    
    RestNordic
    
    
    European
    
    
    North
    
    
    Central
    
    
    Asia-
    
    
    of the
    
    
    
    
    
    
    MetsoYear
    
    Finland
    
    
    countries
    
    
    countries
    
    
    America
    
    
    America
    
    
    Pacific
    
    
    world
    
    
    Eliminations
    
    
    total( in millions)2004
    
    
    312
    
    
    
    301
    
    
    
    888
    
    
    
    757
    
    
    
    286
    
    
    
    829
    
    
    
    229
    
    
    
    
    
    
    
    3,6022005
    
    
    352
    
    
    
    484
    
    
    
    1,064
    
    
    
    889
    
    
    
    485
    
    
    
    735
    
    
    
    212
    
    
    
    
    
    
    
    4,221
  Other
    
    
    Other
    
    
    
    
    
    
    South and
    
    
    
    
    
    
    RestNordic
    
    
    European
    
    
    North
    
    
    Central
    
    
    Asia-
    
    
    of theYear
    
    countries
    
    
    countries
    
    
    America
    
    
    America
    
    
    Pacific
    
    
    world
    
    
    Total( in millions)2004
    
    
    210
    
    
    
    420
    
    
    
    141
    
    
    
    75
    
    
    
    526
    
    
    
    23
    
    
    
    1,3952005
    
    
    353
    
    
    
    523
    
    
    
    158
    
    
    
    96
    
    
    
    331
    
    
    
    31
    
    
    
    1,492
 F-64




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Other
    
    
    Other
    
    
    
    
    
    
    South and
    
    
    
    
    
    
    RestNordic
    
    
    European
    
    
    North
    
    
    Central
    
    
    Asia-
    
    
    of the
    
    
    
    
    
    
    MetsoYear
    
    Finland
    
    
    countries
    
    
    countries
    
    
    America
    
    
    America
    
    
    Pacific
    
    
    world
    
    
    Eliminations
    
    
    total( in millions)2004
    
    
    429
    
    
    
    529
    
    
    
    36
    
    
    
    169
    
    
    
    22
    
    
    
    40
    
    
    
    9
    
    
    
    
    
    
    
    1,2342005
    
    
    357
    
    
    
    523
    
    
    
    15
    
    
    
    192
    
    
    
    38
    
    
    
    44
    
    
    
    9
    
    
    
    
    
    
    
    1,178
  Other
    
    
    Other
    
    
    
    
    
    
    South and
    
    
    
    
    
    
    RestNordic
    
    
    European
    
    
    North
    
    
    Central
    
    
    Asia-
    
    
    of the
    
    
    
    
    
    
    MetsoYear
    
    Finland
    
    
    countries
    
    
    countries
    
    
    America
    
    
    America
    
    
    Pacific
    
    
    world
    
    
    Eliminations
    
    
    total( in millions)2004
    
    
    54
    
    
    
    10
    
    
    
    11
    
    
    
    9
    
    
    
    8
    
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    972005
    
    
    49
    
    
    
    9
    
    
    
    13
    
    
    
    15
    
    
    
    14
    
    
    
    5
    
    
    
    2
    
    
    
    
    
    
    
    107
 Note 36. Transition to IFRS reporting
  Application of certain exemptions:
 1. Presentation of comparative data
  2. Business combinations
  3. Post employment benefit obligations
  4. Property, plant and equipment
  F-65




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 5. Intangible assets
  6. Cumulative translation differences
  7. Share-based payments
  8. Financial instruments (IAS 32, IAS 39) January 1  December 31, 2004
   9. Insurance contracts
  The main changes between FAS and IFRS and their impact are the following:
  
 1. Accounting for goodwill (IFRS 3, IAS 36)
   
 2. Post employment benefit obligations (IAS 19)
   F-66




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
     
 
 3. Income taxes (IAS 12)
   
 4. Recognition of liabilities related to restructuring measures
     
 5. Revenue recognition (IAS 18)
  
 6. Nonrecurring operating income and expenses
  7. Capitalization of development costs (IAS 38)
  F-67




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 
 8. Provisions (IAS 37)
  
 9. Cash and cash equivalents
   
 10. Net interest bearing liabilities
 
 
  11. Non-current assets held for sale and discontinued operations (IFRS 5)
   F-68




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Year ended December 31,Effect ofFAS
    
    transition to
    
    IFRS1-12/2004
    
    IFRS
    
    1-12/2004( in millions)Net sales
    
    
    3,976
    
    
    
    (374
    )
    
    
    3,602Cost of goods sold
    
    
    (2,959
    )
    
    
    286
    
    
    
    (2,673
    )Gross profit
    
    
    1,017
    
    
    
    (88
    )
    
    
    929Selling, general and administrative expenses
    
    
    (844
    )
    
    
    46
    
    
    
    (798
    )Nonrecurring operating income and expenses, net
    
    
    (25
    )
    
    
    25
    
    
    
    Other operating income and expenses, net
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Share in profits and losses of associated companies
    
    
    
    
    
    
    4
    
    
    
    4Reversal of Finnish pension liability
    
    
    
    
    
    
    75
    
    
    
    75Amortization of goodwill
    
    
    (37
    )
    
    
    37
    
    
    
    Operating profit
    
    
    111
    
    
    
    88
    
    
    
    199Financial income and expenses, net
    
    
    (62
    )
    
    
    3
    
    
    
    (59
    )Profit on continuing operations before taxes
    
    
    49
    
    
    
    91
    
    
    
    140Income taxes on continuing operations
    
    
    21
    
    
    
    (3
    )
    
    
    18Profit on continuing operations before taxes
    
    
    70
    
    
    
    88
    
    
    
    158Profit (loss) on discontinued operations, net of taxes
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Profit
    
    
    70
    
    
    
    74
    
    
    
    144Profit attributable to minority interests
    
    
    1
    
    
    
    
    
    
    
    1Profit attributable to equity shareholders
    
    
    69
    
    
    
    74
    
    
    
    143Profit
    
    
    70
    
    
    
    74
    
    
    
    144Earnings per share from continuing operationsBasic, 
    
    
    n/a
    
    
    
    n/a
    
    
    
    1.16Diluted, 
    
    
    n/a
    
    
    
    n/a
    
    
    
    1.16Loss per share from discontinued operationsBasic, 
    
    
    n/a
    
    
    
    n/a
    
    
    
    (0.11
    )Diluted, 
    
    
    n/a
    
    
    
    n/a
    
    
    
    (0.11
    )Earnings per share from continuing and discontinued
operationsBasic, 
    
    
    0.51
    
    
    
    0.54
    
    
    
    1.05Diluted, 
    
    
    0.51
    
    
    
    0.54
    
    
    
    1.05
 F-69




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Reconciliation of consolidated balance sheets
 FAS
    
    Effect of
    
    IFRS
    
    FAS
    
    Effect of
    
    IFRSJan 1,
    
    transition
    
    Jan 1,
    
    Dec 31,
    
    transition
    
    Dec 31,ASSETS
    
    2004
    
    to IFRS
    
    2004
    
    2004
    
    to IFRS
    
    2004( in millions)Non-current assetsIntangible assetsGoodwill
    
    
    623
    
    
    
    (128
    )
    
    
    495
    
    
    
    458
    
    
    
    33
    
    
    
    491Other intangible assets
    
    
    137
    
    
    
    (40
    )
    
    
    97
    
    
    
    104
    
    
    
    (10
    )
    
    
    94760
    
    
    
    (168
    )
    
    
    592
    
    
    
    562
    
    
    
    23
    
    
    
    585Property, plant and equipmentLand and water areas
    
    
    80
    
    
    
    (5
    )
    
    
    75
    
    
    
    65
    
    
    
    5
    
    
    
    70Buildings and structures
    
    
    329
    
    
    
    (46
    )
    
    
    283
    
    
    
    257
    
    
    
    (4
    )
    
    
    253Machinery and equipment
    
    
    364
    
    
    
    (24
    )
    
    
    340
    
    
    
    300
    
    
    
    7
    
    
    
    307Assets under construction
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    19
    
    
    
    
    
    
    
    19810
    
    
    
    (75
    )
    
    
    735
    
    
    
    641
    
    
    
    8
    
    
    
    649Financial and other assetsInvestments in associated companies
    
    
    15
    
    
    
    
    
    
    
    15
    
    
    
    17
    
    
    
    
    
    
    
    17Available-for-sale equity investments
    
    
    29
    
    
    
    
    
    
    
    29
    
    
    
    10
    
    
    
    
    
    
    
    10Treasury stock
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    1Loan and other interest bearing
receivables
    
    
    20
    
    
    
    (6
    )
    
    
    14
    
    
    
    17
    
    
    
    (5
    )
    
    
    12Available-for-sale financial assets
    
    
    
    
    
    
    8
    
    
    
    8
    
    
    
    
    
    
    
    3
    
    
    
    3Deferred tax asset
    
    
    
    
    
    
    130
    
    
    
    130
    
    
    
    
    
    
    
    159
    
    
    
    159Other non-current assets
    
    
    29
    
    
    
    (13
    )
    
    
    16
    
    
    
    48
    
    
    
    (11
    )
    
    
    3794
    
    
    
    119
    
    
    
    213
    
    
    
    93
    
    
    
    146
    
    
    
    239Total non-current assets
    
    
    1,664
    
    
    
    (124
    )
    
    
    1,540
    
    
    
    1,296
    
    
    
    177
    
    
    
    1,473Current assetsInventories
    
    
    743
    
    
    
    (114
    )
    
    
    629
    
    
    
    687
    
    
    
    5
    
    
    
    692ReceivablesTrade and other receivables
    
    
    862
    
    
    
    (80
    )
    
    
    782
    
    
    
    792
    
    
    
    (26
    )
    
    
    766Costs and earnings of projects under
construction in excess of advance
billings
    
    
    269
    
    
    
    (57
    )
    
    
    212
    
    
    
    191
    
    
    
    (1
    )
    
    
    190Loan and other interest bearing
receivables
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    6
    
    
    
    (4
    )
    
    
    2Available-for-sale financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    51Tax receivables
    
    
    145
    
    
    
    (145
    )
    
    
    
    
    
    
    187
    
    
    
    (163
    )
    
    
    241,286
    
    
    
    (282
    )
    
    
    1,004
    
    
    
    1,176
    
    
    
    (143
    )
    
    
    1,033Cash and cash equivalents
    
    
    130
    
    
    
    (1
    )
    
    
    129
    
    
    
    419
    
    
    
    (47
    )
    
    
    372Total current assets
    
    
    2,159
    
    
    
    (397
    )
    
    
    1,762
    
    
    
    2,282
    
    
    
    (185
    )
    
    
    2,097Assets held for sale
    
    
    
    
    
    
    513
    
    
    
    513
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    3,823
    
    
    
    (8
    )
    
    
    3,815
    
    
    
    3,578
    
    
    
    (8
    )
    
    
    3,570
 F-70




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 FAS
    
    Effect of
    
    IFRS
    
    FAS
    
    Effect of
    
    IFRSSHAREHOLDERS EQUITY AND
    
    Jan 1,
    
    transition
    
    Jan 1,
    
    Dec 31,
    
    transition
    
    Dec 31,LIABILITIES
    
    2004
    
    to IFRS
    
    2004
    
    2004
    
    to IFRS
    
    2004( in millions)EquityShare capital
    
    
    232
    
    
    
    
    
    
    
    232
    
    
    
    232
    
    
    
    
    
    
    
    232Share premium reserve
    
    
    14
    
    
    
    
    
    
    
    14
    
    
    
    14
    
    
    
    
    
    
    
    14Cumulative translation adjustments
    
    
    (76
    )
    
    
    26
    
    
    
    (50
    )
    
    
    (80
    )
    
    
    32
    
    
    
    (48
    )Fair value and other reserves
    
    
    431
    
    
    
    
    
    
    
    431
    
    
    
    431
    
    
    
    
    
    
    
    431Retained earnings
    
    
    423
    
    
    
    (171
    )
    
    
    252
    
    
    
    455
    
    
    
    (94
    )
    
    
    361Equity attributable to shareholders
    
    
    1,024
    
    
    
    (145
    )
    
    
    879
    
    
    
    1,052
    
    
    
    (62
    )
    
    
    990Minority interests
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    5
    
    
    
    
    
    
    
    5Total equity
    
    
    1,030
    
    
    
    (145
    )
    
    
    885
    
    
    
    1,057
    
    
    
    (62
    )
    
    
    995LiabilitiesNon-current liabilitiesLong-term debt
    
    
    957
    
    
    
    (29
    )
    
    
    928
    
    
    
    920
    
    
    
    (35
    )
    
    
    885Post employment benefit obligations
    
    
    
    
    
    
    253
    
    
    
    253
    
    
    
    
    
    
    
    171
    
    
    
    171Deferred tax liability
    
    
    22
    
    
    
    10
    
    
    
    32
    
    
    
    8
    
    
    
    8
    
    
    
    16Provisions
    
    
    
    
    
    
    31
    
    
    
    31
    
    
    
    
    
    
    
    31
    
    
    
    31Other long-term liabilities
    
    
    139
    
    
    
    (132
    )
    
    
    7
    
    
    
    128
    
    
    
    (122
    )
    
    
    6Total non-current liabilities
    
    
    1,118
    
    
    
    133
    
    
    
    1,251
    
    
    
    1,056
    
    
    
    53
    
    
    
    1,109Current liabilitiesCurrent portion of long-term debt
    
    
    17
    
    
    
    (1
    )
    
    
    16
    
    
    
    19
    
    
    
    
    
    
    
    19Short-term debt
    
    
    295
    
    
    
    
    
    
    
    295
    
    
    
    31
    
    
    
    
    
    
    
    31Trade and other payables
    
    
    1,175
    
    
    
    (370
    )
    
    
    805
    
    
    
    1,072
    
    
    
    (199
    )
    
    
    873Provisions
    
    
    
    
    
    
    198
    
    
    
    198
    
    
    
    
    
    
    
    160
    
    
    
    160Advances received
    
    
    147
    
    
    
    27
    
    
    
    174
    
    
    
    219
    
    
    
    8
    
    
    
    227Billings in excess of cost and
earnings of projects under
construction
    
    
    41
    
    
    
    (12
    )
    
    
    29
    
    
    
    124
    
    
    
    
    
    
    
    124Tax liabilities
    
    
    
    
    
    
    39
    
    
    
    39
    
    
    
    
    
    
    
    32
    
    
    
    32Total current liabilities
    
    
    1,675
    
    
    
    (119
    )
    
    
    1,556
    
    
    
    1,465
    
    
    
    1
    
    
    
    1,466Liabilities held for sale
    
    
    
    
    
    
    123
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    2,793
    
    
    
    137
    
    
    
    2,930
    
    
    
    2,521
    
    
    
    54
    
    
    
    2,575Total shareholders equity and
liabilities
    
    
    3,823
    
    
    
    (8
    )
    
    
    3,815
    
    
    
    3,578
    
    
    
    (8
    )
    
    
    3,570Net interest bearing liabilitiesLong-term interest bearing debt
    
    
    957
    
    
    
    (29
    )
    
    
    928
    
    
    
    920
    
    
    
    (35
    )
    
    
    885Short-term interest bearing debt
    
    
    312
    
    
    
    (1
    )
    
    
    311
    
    
    
    51
    
    
    
    (1
    )
    
    
    50Cash and cash equivalents
    
    
    (130
    )
    
    
    1
    
    
    
    (129
    )
    
    
    (419
    )
    
    
    47
    
    
    
    (372
    )Other interest bearing assets
    
    
    (30
    )
    
    
    (2
    )
    
    
    (32
    )
    
    
    (23
    )
    
    
    (45
    )
    
    
    (68
    )Total
    
    
    1,109
    
    
    
    (31
    )
    
    
    1,078
    
    
    
    529
    
    
    
    (34
    )
    
    
    495
 F-71




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Reconciliation of condensed consolidated statements of cash flows
 Effect ofFAS
    
    transition
    
    IFRS1-12/2004
    
    to IFRS
    
    1-12/2004( in millions)Cash flows from operating activities:Profit
    
    
    69
    
    
    
    75
    
    
    
    144Adjustments to reconcile profit to net cash provided by
operating activities:Depreciation and amortization
    
    
    155
    
    
    
    (40
    )
    
    
    115Change in provisions related to restructuring programs
    
    
    (31
    )
    
    
    20
    
    
    
    (11
    )Interests and dividend income
    
    
    
    
    
    
    52
    
    
    
    52Income taxes
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Other
    
    
    7
    
    
    
    (23
    )
    
    
    (16
    )Change in net working capital
    
    
    62
    
    
    
    1
    
    
    
    63Cash flows from operations
    
    
    262
    
    
    
    81
    
    
    
    343Interests paid and dividends received
    
    
    
    
    
    
    (51
    )
    
    
    (51
    )Income taxes paid
    
    
    
    
    
    
    (31
    )
    
    
    (31
    )Net cash provided by (used in) operating activities
    
    
    262
    
    
    
    (1
    )
    
    
    261Cash flows from investing activities:Capital expenditures on fixed assets
    
    
    (89
    )
    
    
    
    
    
    
    (89
    )Proceeds from sale of fixed assets
    
    
    39
    
    
    
    
    
    
    
    39Business acquisitions, net of cash acquired
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Proceeds from sale of businesses, net of cash sold
    
    
    389
    
    
    
    
    
    
    
    389(Investments in) proceeds from sale of financial assets
    
    
    27
    
    
    
    (47
    )
    
    
    (20
    )Other
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Net cash provided by (used in) investing activities
    
    
    359
    
    
    
    (47
    )
    
    
    312Cash flows from financing activities:Dividends paid
    
    
    (27
    )
    
    
    
    
    
    
    (27
    )Net funding
    
    
    (294
    )
    
    
    1
    
    
    
    (293
    )Other
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )Net cash provided by (used in) financing activities
    
    
    (333
    )
    
    
    1
    
    
    
    (332
    )Net increase (decrease) in cash and cash equivalents
    
    
    288
    
    
    
    (47
    )
    
    
    241Effect from changes in exchange rates
    
    
    1
    
    
    
    
    
    
    
    1Cash and cash equivalents at beginning of period
    
    
    130
    
    
    
    
    
    
    
    130Cash and cash equivalents at end of period
    
    
    419
    
    
    
    (47
    )
    
    
    372
 F-72




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Reconciliation of statements of changes in shareholders equity:
 Share
    
    
    
    
    
    CumulativeShare
    
    premium
    
    Legal
    
    translation
    
    Treasury
    
    Other
    
    Retainedcapital
    
    reserve
    
    reserve
    
    differences
    
    stock
    
    reserves
    
    earnings
    
    Total( in millions)January 1, 2004, FAS
    
    
    232
    
    
    
    14
    
    
    
    228
    
    
    
    (76
    )
    
    
    1
    
    
    
    202
    
    
    
    423
    
    
    
    1,024Effect of transition
to IFRS:Efficiency
improvement program
of 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    18Deferred tax asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    (47
    )Pensions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (108
    )
    
    
    (108
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )January 1, 2004, IFRS
    
    
    232
    
    
    
    14
    
    
    
    228
    
    
    
    (50
    )
    
    
    1
    
    
    
    202
    
    
    
    252
    
    
    
    879Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27
    )
    
    
    (27
    )Translation differences
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Transfer of
translation
differences
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    Deferred tax asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Profit attributable to
equity shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143
    
    
    
    143December 31, 2004, IFRS
    
    
    232
    
    
    
    14
    
    
    
    228
    
    
    
    (48
    )
    
    
    1
    
    
    
    202
    
    
    
    361
    
    
    
    990
 F-73




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note
37. Lawsuits and claims
  Pending asbestos litigation
  Other claims
    
 Note
38. New accounting standards
 IFRS 7
   IAS 39
  1)
    
    Cash flow hedge accounting of forecast intra-group transactions, which
extends the application of hedge accounting to certain type of internal foreign
currency denominated transactions provided these generate a currency risk, which is
not eliminated in the consolidated financial statements.
 F-74




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 2)
    
    Fair value option, which allows the designation of financial
instruments at fair value through profit and loss under certain circumstances.
  Note
39. Events after balance sheet date
 Acquisitions
 
 
 Metsos corporate structure
   F-75




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Note
40. Differences between International Financial Reporting Standards and U.S. GAAP
  Year ended December 31,2004
    
    2005Reconciliation of net incomeProfit attributable to equity shareholders in accordance with IFRS
    
    
    143
    
    
    
    236U.S. GAAP adjustments:a) Business combination, net
    
    
    (21
    )
    
    
    (18
    )b) Purchase accounting, net
    
    
    (7
    )
    
    
    (7
    )c) Reversal of liabilities recognized in connection with a
business combination
    
    
    (3
    )
    
    
    d) Capitalized development costs
    
    
    (1
    )
    
    
    (1
    )e) Fair value of financial derivatives
    
    
    3
    
    
    
    (1
    )f) Employee benefit plans
    
    
    (91
    )
    
    
    (17
    )g) Restructuring costs
    
    
    (7
    )
    
    
    1h) Net investment hedge
    
    
    1
    
    
    
    i) Fees on bond exchange
    
    
    (2
    )
    
    
    0o) Discontinued operations
    
    
    (41
    )
    
    
    2p) Miscellaneous items
    
    
    1
    
    
    
    0q) Stock compensation
    
    
    0
    
    
    
    (1
    )Deferred tax effect of U.S. GAAP adjustments
    
    
    27
    
    
    
    3Net income in accordance with U.S. GAAP
    
    
    2
    
    
    
    197Income from continuing operations
    
    
    57
    
    
    
    178Discontinued operations:Income from Discontinued operations, net of income tax expense
tax expense of 5 million and tax expense of 0 million,
respectively
    
    
    17
    
    
    
    1Income (Loss) on disposal of Discontinued operations, net of
income tax expense of 9 million and tax benefit of 0 million,
respectively
    
    
    (72
    )
    
    
    18Net income (loss) on Discontinued operations
    
    
    (55
    )
    
    
    19Net income in accordance with U.S. GAAP
    
    
    2
    
    
    
    197Basic and diluted earnings (loss) per share:Continuing operations
    
    
    0.42
    
    
    
    1.27Discontinued operations
    
    
    (0.41
    )
    
    
    0.14Total basic and diluted earnings (loss) per share
    
    
    0.01
    
    
    
    1.41Weighted average number of common shares outstanding under U.S.
GAAP (in thousands):Basic
    
    
    136,190
    
    
    
    139,639Diluted
    
    
    136,192
    
    
    
    139,665
 F-76




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 As of December 31,2004
    
    2005( in millions)Reconciliation of shareholders equityEquity attributable to shareholders in accordance with IFRS
    
    
    990
    
    
    
    1,285U.S. GAAP adjustments:a) Business combination, net
    
    
    77
    
    
    
    59b) Purchase accounting, net
    
    
    (23
    )
    
    
    (30
    )c) Reversal of liabilities recognized in connection with a
business combination
    
    
    (3
    )
    
    
    (3
    )d) Capitalized development costs
    
    
    (1
    )
    
    
    (2
    )e) Fair value of financial derivatives
    
    
    2
    
    
    
    5f) Employee benefit plans
    
    
    (87
    )
    
    
    (114
    )g) Restructuring costs
    
    
    (1
    )
    
    
    i) Fees on bond exchange
    
    
    (2
    )
    
    
    (1
    )j) Goodwill impairment
    
    
    (44
    )
    
    
    (44
    )k) Amortization of goodwill
    
    
    85
    
    
    
    85l) Treasury stock
    
    
    (1
    )
    
    
    m) Investments
    
    
    2
    
    
    
    n) Translation difference
    
    
    (56
    )
    
    
    (32
    )o) Discontinued operations
    
    
    2
    
    
    
    p) Miscellaneous items
    
    
    1
    
    
    
    0Deferred tax effect of U.S. GAAP adjustments
    
    
    37
    
    
    
    31Shareholders equity in accordance with U.S. GAAP
    
    
    978
    
    
    
    1,239
 a) Business combination, net
    Year ended December 31,2004
    
    2005( in millions)Net incomeDepreciation of buildings and structures
    
    
    (5
    )
    
    
    (5
    )Depreciation of other tangible assets
    
    
    (19
    )
    
    
    (20
    )Write down of fixed assets
    
    
    (10
    )
    
    
    Disposal of fixed assets
    
    
    3
    
    
    
    Deferred taxes
    
    
    10
    
    
    
    7Total
    
    
    (21
    )
    
    
    (18
    )
 F-77




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 As of December 31,2004
    
    2005( in millions)Shareholders equityHistorical goodwill of Rauma
    
    
    (15
    )
    
    
    (15
    )Land and water areas
    
    
    1
    
    
    
    1Buildings and structures
    
    
    67
    
    
    
    62Machinery and equipment
    
    
    72
    
    
    
    52Current liabilities
    
    
    (12
    )
    
    
    (12
    )Deferred taxes
    
    
    (36
    )
    
    
    (29
    )Total
    
    
    77
    
    
    
    59
  
  Opening
    
    
    
    
    
    Accumulated
    
    Closingbalance
    
    Decreases
    
    depreciation
    
    balance( in millions)Year 2004:Land and water areas
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Buildings
    
    
    92
    
    
    
    (10
    )
    
    
    (15
    )
    
    
    67Machinery and equipment
    
    
    126
    
    
    
    
    
    
    
    (54
    )
    
    
    72Total
    
    
    219
    
    
    
    (10
    )
    
    
    (69
    )
    
    
    140Year 2005:Land and water areas
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Buildings
    
    
    82
    
    
    
    
    
    
    
    (20
    )
    
    
    62Machinery and equipment
    
    
    126
    
    
    
    
    
    
    
    (74
    )
    
    
    52Total
    
    
    209
    
    
    
    
    
    
    
    (94
    )
    
    
    115
  F-78




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 b) Purchase accounting, net
   in millionsGoodwill
    
    
    711Land and buildings
    
    
    34Other tangible assets
    
    
    15Patents
    
    
    7Trademarks
    
    
    58Customer value
    
    
    67Order backlog
    
    
    30Inventories
    
    
    10Liability for pensions under FAS87 and FAS106
    
    
    (28
    )Deferred taxation on the above adjustments
    
    
    (56
    )Excess of purchase consideration over the net assets acquired
    
    
    848
  Purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchaseaccounting
    
    
    
    
    
    
    
    
    
    
    
    
    
    accountingadjustments at
    
    Decreases/
    
    Accumulated
    
    Translation
    
    adjustments atbeginning of year
    
    Increases
    
    amortization
    
    differences
    
    end of year( in millions)Brand names(1)
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    15Customer value
    
    
    57
    
    
    
    
    
    
    
    (39
    )
    
    
    3
    
    
    
    21Patents(1)
    
    
    6
    
    
    
    
    
    
    
    (3
    )
    
    
    0
    
    
    
    3Land and water areas(1)
    
    
    10
    
    
    
    (1
    )
    
    
    
    
    
    
    1
    
    
    
    10Buildings(1)
    
    
    11
    
    
    
    (3
    )
    
    
    (2
    )
    
    
    1
    
    
    
    7Other tangible assets(1)
    
    
    10
    
    
    
    4
    
    
    
    (8
    )
    
    
    0
    
    
    
    6Deferred taxes
    
    
    (31
    )
    
    
    0
    
    
    
    15
    
    
    
    (2
    )
    
    
    (18
    )Total
    
    
    77
    
    
    
    (0
    )
    
    
    (37
    )
    
    
    4
    
    
    
    44
 
 (1)
    
    In the year of acquisition, Metso recorded following purchase accounting adjustments under
IFRS (as gross values): 58 million for brands, 7 million for patents, 13 million for land
and water areas, 21 million for buildings and 15 million for other tangible assets.  Buildings
    
    20 yearsOther tangible assets
    
    8 yearsPatents
    
    Average of 9 years and 5 monthsCustomer value
    
    From 40 months to 80 months depending
on the type of customer groupOrder backlog and inventory
    
    Average of 15 months
 F-79




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Year ended December 31,2004
    
    2005( in millions)Difference between net income under IFRS and U.S. GAAPAmortization of customer value under U.S. GAAP
    
    
    (10
    )
    
    
    (10
    )Difference between amortization of other intangible assets
    
    
    0
    
    
    
    0Deferred taxes
    
    
    3
    
    
    
    3Total difference between net income for continuing
operations under IFRS and U.S. GAAP
    
    
    (7
    )
    
    
    (7
    )Difference of cumulative effect on shareholders equity
between IFRS and U.S. GAAP after disposals
    
    
    (23
    )
    
    
    (30
    )
 c) Reversal of liabilities recognized in connection with a business combination
   d) Capitalized development costs
   e) Fair value of financial derivatives
 2004
    F-80




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  
 
 
 
 2005
    
 
 F-81




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Gross
    
    Tax
    
    Net( in millions)Changes in fair values recognized through 2004 U.S.
GAAP earnings:Continuing Operations
    
    
    3
    
    
    
    (1
    )
    
    
    2Discontinued Operations
    
    
    (4
    )
    
    
    1
    
    
    
    (3
    )Retained earnings difference as at December 31, 2004
    
    
    2
    
    
    
    (1
    )
    
    
    1Recognition of forwards at fair value in retained
earnings under IFRS:
    
    
    (3
    )
    
    
    1
    
    
    
    (2
    )Changes in fair values recognized through 2005 U.S.
GAAP earnings:Continuing Operations
    
    
    (1
    )
    
    
    (0
    )
    
    
    (1
    )Reversal of hedge reserve
    
    
    7
    
    
    
    (2
    )
    
    
    5Retained earnings difference as at December 31, 2005
    
    
    5
    
    
    
    (2
    )
    
    
    3
 f) Employee benefit plans
 Pensions and other postretirement benefits
  
     
   F-82




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Pension and post-Pension benefits, domestic
    
    retirement benefits, foreign2004
    
    2005
    
    2004
    
    2005( in millions)
    
    ( in millions)Service cost
    
    
    9
    
    
    
    10
    
    
    
    6
    
    
    
    6Interest cost
    
    
    6
    
    
    
    5
    
    
    
    19
    
    
    
    20Expected return on plan assets
    
    
    (0
    )
    
    
    (1
    )
    
    
    (13
    )
    
    
    (15
    )Net amortization
    
    
    (1
    )
    
    
    (1
    )
    
    
    2
    
    
    
    3Employee contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    
    14
    
    
    
    13
    
    
    
    14
    
    
    
    14Special adjustments:SFAS No. 88 events
    
    
    
    
    
    
    (6
    )
    
    
    (11
    )
    
    
    (2
    )Other adjustment
    
    
    4
    
    
    
    
    
    
    
    7
    
    
    
    Grand total net periodic benefit cost
    
    
    18
    
    
    
    7
    
    
    
    10
    
    
    
    12
  Pension and post-Pension benefits, domestic
    
    retirement benefits, foreign2004
    
    2005
    
    2004
    
    2005( in millions)
    
    ( in millions)Change in benefit obligationBenefit obligation at beginning of year
    
    
    102
    
    
    
    104
    
    
    
    335
    
    
    
    335Service cost
    
    
    9
    
    
    
    10
    
    
    
    6
    
    
    
    6Interest cost
    
    
    6
    
    
    
    5
    
    
    
    19
    
    
    
    20SFAS No. 88 events
    
    
    
    
    
    
    (5
    )
    
    
    (12
    )
    
    
    (2
    )Participant contributions
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Amendments
    
    
    (7
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    0Special termination benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Increase in coverage
    
    
    11
    
    
    
    
    
    
    
    6
    
    
    
    6Acquisitions
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    Actuarial loss (gain)
    
    
    (12
    )
    
    
    (38
    )
    
    
    14
    
    
    
    35Benefits paid
    
    
    (5
    )
    
    
    (4
    )
    
    
    (20
    )
    
    
    (20
    )Currency effect
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    35Benefit obligation at end of year
    
    
    104
    
    
    
    69
    
    
    
    335
    
    
    
    416
 F-83




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Pension and post-retirementPension benefits, domestic
    
    benefits, foreign2004
    
    2005
    
    2004
    
    2005( in millions)
    
    ( in millions)Change in plan assetsFair value of plan assets at beginning of year
    
    
    0
    
    
    
    10
    
    
    
    167
    
    
    
    169Actuarial return on plan assets
    
    
    1
    
    
    
    (2
    )
    
    
    16
    
    
    
    20Company contribution
    
    
    7
    
    
    
    4
    
    
    
    13
    
    
    
    22FAS 88 events
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Participant contribution
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Other adjustment
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Benefits paid
    
    
    (5
    )
    
    
    (4
    )
    
    
    (20
    )
    
    
    (20
    )Increase in coverage
    
    
    7
    
    
    
    
    
    
    
    1
    
    
    
    7Currency effect
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    25Fair value of plan assets at end of year
    
    
    10
    
    
    
    8
    
    
    
    169
    
    
    
    224Funded status reconciliationFunded status
    
    
    (94
    )
    
    
    (61
    )
    
    
    (165
    )
    
    
    (192
    )Unrecognized transitional obligations (asset)
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0Unrecognized prior service cost
    
    
    (12
    )
    
    
    (13
    )
    
    
    3
    
    
    
    3Unrecognized actuarial (gain) loss
    
    
    1
    
    
    
    (34
    )
    
    
    45
    
    
    
    79Prepaid (accrued) benefit cost
    
    
    (105
    )
    
    
    (108
    )
    
    
    (117
    )
    
    
    (110
    )
  
  Pension and post-retirementPension benefits, domestic
    
    benefits, foreign2004
    
    2005
    
    2004
    
    2005( in millions)
    
    ( in millions)Accrued employee benefit liability
    
    
    (105
    )
    
    
    (108
    )
    
    
    (157
    )
    
    
    (175
    )Prepaid benefit cost
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    7Intangible asset
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    5Accumulated other comprehensive income
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    53Net amount recognized
    
    
    (105
    )
    
    
    (108
    )
    
    
    (117
    )
    
    
    (110
    )For plans where ABO exceeds assets:ABO
    
    
    81
    
    
    
    56
    
    
    
    260
    
    
    
    324PBO
    
    
    97
    
    
    
    68
    
    
    
    311
    
    
    
    342Fair value of assets
    
    
    4
    
    
    
    8
    
    
    
    143
    
    
    
    193
  Pension and post-retirementPension benefits, domestic
    
    benefits, foreign2004
    
    2005
    
    2004
    
    2005Discount rate
    
    
    5.25
    %
    
    
    5.00
    %
    
    
    6.02
    %
    
    
    5.71
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.22
    %
    
    
    3.55
    %
    
    
    3.68
    %Rate of pension increase
    
    
    
    
    
    
    2.30
    %
    
    
    
    
    
    
    0.91
    %Expected return on plan assets
    
        
    
    
    
    5.40
    %
    
    
    8.04
    %
    
    
    7.64
    %
 F-84




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
   Pension and post-retirementPension benefits, domestic
    
    benefits, foreign2004
    
    2005
    
    2004
    
    2005Discount rate
    
    
    5.00
    %
    
    
    4.50
    %
    
    
    5.71
    %
    
    
    5.05
    %Rate of compensation increase
    
    
    3.22
    %
    
    
    3.77
    %
    
    
    3.68
    %
    
    
    3.39
    %Rate of pension increase
    
    
    2.30
    %
    
    
    2.10
    %
    
    
    0.91
    %
    
    
    0.89
    %
    
   
   
  Asset category
    
    2004
    
    2005Equity securities
    
    
    52
    %
    
    
    50
    %Bonds
    
    
    45
    %
    
    
    45
    %Other
    
    
    3
    %
    
    
    5
    %
   Pensionplans
    
    Other plansYear
    
    ( in millions)2006
    
    
    18
    
    
    
    32007
    
    
    18
    
    
    
    42008
    
    
    19
    
    
    
    42009
    
    
    19
    
    
    
    32010
    
    
    20
    
    
    
    420112015
    
    
    108
    
    
    
    18
 F-85




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 g) Restructuring costs
 2003 Restructuring program
 
   ( in millions)Metso Paper
    
    
    30Metso Minerals
    
    
    52Metso Automation
    
    
    6Metso Ventures
    
    
    5Total cost of the program
    
    
    93
 2004 Restructuring program
 
 Cost accruals under U.S. GAAP for restructuring plans
  As of December 31,2004
    
    2005( in millions)Balance as at January 1
    
    
    30
    
    
    
    27Translation difference
    
    
    (1
    )
    
    
    1Additions to current year reserves
    
    
    52
    
    
    
    4Adjustments to prior year reserves
    
    
    (0
    )
    
    
    (1
    )Amounts paid / charged to the reserve
    
    
    (54
    )
    
    
    (16
    )Balance as at December 31
    
    
    27
    
    
    
    15
  
 F-86




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 h) Net investment hedge
   
  i) Fees on bond exchange
     
  
     
  j) Goodwill impairment
  F-87




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
    
 k) Amortization of goodwill
    Paper
    
    Automation
    
    Minerals
    
    Ventures
    
    Discontinued
    
    Total( in millions)2004:As of January 1, 2004
    
    
    73
    
    
    
    24
    
    
    
    319
    
    
    
    8
    
    
    
    143
    
    
    
    567Translation difference
    
    
    (3
    )
    
    
    (1
    )
    
    
    (6
    )
    
    
    1
    
    
    
    
    
    
    
    (9
    )Increases
    
    
    1
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Decreases
    
    
    
    
    
    
    (0
    )
    
    
    (4
    )
    
    
    
    
    
    
    (135
    )
    
    
    (139
    )As of December 31, 2004
    
    
    71
    
    
    
    23
    
    
    
    309
    
    
    
    9
    
    
    
    8
    
    
    
    4202005:Translation difference
    
    
    8
    
    
    
    1
    
    
    
    19
    
    
    
    0
    
    
    
    
    
    
    
    28Increases
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    4Decreases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )As of December 31, 2005
    
    
    80
    
    
    
    25
    
    
    
    330
    
    
    
    9
    
    
    
    
    
    
    
    444
 F-88




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 l) Treasury stock
  
 m) Investments
  
  Gross
    
    GrossU.S. GAAP
    
    unrealized
    
    unrealized
    
    Marketcost(1)
    
    holding gains
    
    holding losses
    
    value( in millions)December 31, 2004(2)
    
    
    64
    
    
    
    2
    
    
    
    (0
    )
    
    
    66December 31, 2005
    
    
    179
    
    
    
    2
    
    
    
    (0
    )
    
    
    181
 
 (1)
    
    U.S. GAAP cost is comprised of the historical acquisition price.(2)
    
    Amounts previously classified as short-term investments have been reclassified to
available-for-sale items in accordance with the classification applied under IFRS.  
  n) Translation difference
   F-89




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 As of December 31,2004
    
    2005( in millions)Goodwill
    
    
    (50
    )
    
    
    (30
    )Brand names
    
    
    (2
    )
    
    
    (1
    )Customer value
    
    
    (4
    )
    
    
    (1
    )Patents
    
    
    (0
    )
    
    
    (0
    )Land and water areas
    
    
    (1
    )
    
    
    (1
    )Buildings
    
    
    (1
    )
    
    
    (0
    )Other tangible assets
    
    
    (1
    )
    
    
    (0
    )Deferred taxes
    
    
    3
    
    
    
    1Total
    
    
    (56
    )
    
    
    (32
    )
 o) Discontinued operations
      Year ended December 31,2004
    
    2005( in millions)Net sales
    
    
    394
    
    
    
    26Operating profit
    
    
    24
    
    
    
    1Net income
    
    
    17
    
    
    
    1
 F-90




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  ( in millions)Fixed assets and long-term investments
    
    
    65Inventories
    
    
    24Other current assets
    
    
    29Total assets
    
    
    118Shareholders equity
    
    
    16Long-term liabilities
    
    
    35Short-term liabilities
    
    
    67Shareholders equity and liabilities
    
    
    118
 p) Miscellaneous items
  q) Stock compensation
  
  Year ended December 31,2004
    
    2005( in millions)Net incomeas reported
    
    
    2
    
    
    
    197Stock based compensation cost included
in the determination of net income, net
of taxes
    
    
    
    
    
    
    1Stock based compensation cost that
would have been included in the
determination of net income if the fair
value method was used, net of taxes
    
    
    (0
    )
    
    
    (0
    )Pro forma
    
    
    2
    
    
    
    198Basic and diluted earnings (loss) per shareas reported
    
    
    0.01
    
    
    
    1.42Pro forma
    
    
    0.01
    
    
    
    1.42
 F-91




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  
  2003A
    
    2003CNumber of stock options
    
    200,000
    
    100,000Subscription period
    
    April 1, 2006  April 30, 2009
    
    April 1, 2008  April 30, 2011Share subscription price per stock option
    
    The trade volume weighted average quotation of the Metso share on the Helsinki Exchanges between January 1 and March 31, 2004 adjusted by dividends payable after January 1, 2004 but before the date of the share subscription. The subscription price as of December 31, 2005 was 10.10. The exercise price cannot be below par value.
    
    The trade volume weighted average quotation of the Metso share on the Helsinki Exchanges between January 1 and March 31, 2006 adjusted by dividends payable after January 1, 2006 but before the date of the share subscription. The exercise price cannot be below par value.Subscription
    
    One stock option gives the right to subscribe one share.
  Share ownership plan for 2006-2008
    F-92




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  
   r) Additional disclosures
 Consolidated statement of comprehensive income
  Year ended December 31,2004
    
    2005( in millions)Comprehensive incomeNet income under IFRS
    
    
    144
    
    
    
    237Other comprehensive incomeForeign currency translation adjustments
    
    
    2
    
    
    
    60Hedging of net investment denominated in foreign currency,
net of tax cost of 3million and tax benefit of 9 million,
respectively
    
    
    0
    
    
    
    (21
    )Available-for-sale investments, net of tax cost of 1 million
    
    
    
    
    
    
    0Cash flow hedge reserve, net of tax benefit of 5 million
    
    
    
    
    
    
    (11
    )Other comprehensive income
    
    
    2
    
    
    
    28Comprehensive income
    
    
    146
    
    
    
    265
 Deferred taxes
   F-93




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 As of December 31,2004
    
    2005( in millions)Non-current assetsTax losses carried forward
    
    
    210
    
    
    
    172Other
    
    
    38
    
    
    
    79Valuation allowance
    
    
    (106
    )
    
    
    (91
    )142
    
    
    
    160Current assetsInventory
    
    
    19
    
    
    
    24Reserves
    
    
    31
    
    
    
    30Accruals
    
    
    32
    
    
    
    30Medical benefits
    
    
    2
    
    
    
    7Other
    
    
    3
    
    
    
    4Valuation allowance
    
    
    (49
    )
    
    
    (46
    )38
    
    
    
    49Current liabilitiesInventory
    
    
    (0
    )
    
    
    (5
    )Inventory
    
    
    0
    
    
    
    0
    
    
    
    (5
    )Non-current liabilitiesFixed assets
    
    
    (4
    )
    
    
    (5
    )Purchase price adjustments
    
    
    (40
    )
    
    
    (57
    )Tax allocation reserve
    
    
    (0
    )
    
    
    (0
    )Other
    
    
    (0
    )
    
    
    (2
    )(44
    )
    
    
    (64
    )Deferred tax asset, net
    
    
    136
    
    
    
    140
 Intangible assets
   F-94




---



##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  OtherBrand
    
    Customer
    
    intangibleNames
    
    Value
    
    assets
    
    Total( in millions)2004:As of January 1, 2004
    
    
    39
    
    
    
    63
    
    
    
    166
    
    
    
    268Translation difference
    
    
    4
    
    
    
    (0
    )
    
    
    (1
    )
    
    
    3Additions
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    32Decreases
    
    
    (29
    )
    
    
    (6
    )
    
    
    (32
    )
    
    
    (67
    )Accumulated
amortization expense
    
    
    
    
    
    
    (30
    )
    
    
    (80
    )
    
    
    (110
    )As of December 31, 2004
    
    
    14
    
    
    
    27
    
    
    
    85
    (1,2)
    
    
    1262005:As of January 1, 2005
    
    
    14
    
    
    
    57
    
    
    
    165
    
    
    
    236Translation difference
    
    
    0
    
    
    
    3
    
    
    
    1
    
    
    
    4Additions
    
    
    2
    
    
    
    
    
    
    
    20
    
    
    
    22Decreases
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )Accumulated
amortization expense
    
    
    
    
    
    
    (39
    )
    
    
    (87
    )
    
    
    (126
    )As of December 31, 2005
    
    
    16
    
    
    
    21
    
    
    
    82
    (1)
    
    
    119
 
 (1)
    
    Includes patents and licenses for a net book value of 40 million and 40 million for the
years ended December 31, 2004 and December 31, 2005, respectively(2)
    
    Includes reclassification between other intangibles assets and assets under construction of
7 million for the year ended December 31, 2004.       
 Securitization
    
 Customer tooling
  
 F-95




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 Service revenues
  s) Classification differences
 Presentation of unamortized transaction costs for debt
   t) Valuation and qualifying accounts
  Balance at
    
    Charged to
    
    
    
    
    
    
    
    
    
    Balance atbeginning
    
    cost and
    
    
    
    
    
    
    
    
    
    endof year
    
    expenses
    
    Deductions
    
    Other(1)
    
    of year( in millions)2004
    
    
    34
    
    
    
    12
    
    
    
    (4
    )
    
    
    (5
    )
    
    
    372005
    
    
    37
    
    
    
    1
    
    
    
    (9
    )
    
    
    6
    
    
    
    35
 
 (1)
    
    Includes foreign currency translation effects.  Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atbeginning
    
    
    
    
    
    
    
    
    
    
    
    
    
    endof year
    
    Additions
    
    Deductions
    
    Other(2)
    
    of year( in millions)2004
    
    
    67
    
    
    
    10
    (1)
    
    
    (18
    )
    
    
    (2
    )
    
    
    572005
    
    
    57
    
    
    
    6
    
    
    
    (11
    )
    
    
    1
    
    
    
    53
 
 (1)
    
    Excludes amounts recorded as direct write-off of inventories of 6 million for the year
ended December 31, 2004.(2)
    
    Includes foreign currency translation effects. F-96




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
  Balance atbeginning of
    
    
    
    
    
    
    
    
    
    Balance atyear
    
    Deduction
    
    Increase
    
    end of year( in millions)2004Valuation allowance
    
    
    161
    
    
    
    (28
    )
    
    
    22
    
    
    
    1552005Valuation allowance
    
    
    155
    
    
    
    (34
    )
    
    
    16
    
    
    
    137
 F-97




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##### Table of Contents



METSO
 Notes to Consolidated Financial Statements  (Continued)
 u) New accounting standards
 Share Based Payment
 Accounting for
Conditional Asset Retirement Obligations
 Accounting changes and error corrections Accounting changes Reporting Accounting
Changes in Interim Financial Statements
  F-98