##### Table of Contents



As filed with the
Securities and Exchange Commission on October 17, 2005.
   SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 20-F/A(Amendment No. 1) o    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR þ    ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the year ended December 31, 2004 OR o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 OR o    SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report 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
FIN-00101 Helsinki
Finland
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: 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.
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Number of shares, nominal value 1.70 each, outstanding on December 31, 2004: 136,250,545 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorted period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
    
    No
o
 Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o
    
    Item 18 þ
  o Yes
    
    þ No




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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
    
    
    3Risk Factors
    
    
    4Item 4.
    
    Information on the Company
    
    
    8Organization
    
    
    8History and Development of the Company
    
    
    8Strategy
    
    
    9Corporate Structure
    
    
    9Business Summary
    
    
    11Discontinued Operations
    
    
    24Raw Materials
    
    
    25Seasonality
    
    
    25Dependence on Intellectual Property
    
    
    25Governmental Regulation and Environmental Matters
    
    
    25Property, Plants and Equipment
    
    
    28Significant Subsidiaries
    
    
    30Associated companies
    
    
    30Item 5.
    
    Operating and Financial Review and Prospects
    
    
    30Business Overview
    
    
    31Key Management Issues
    
    
    32Recent Acquisitions and Divestments
    
    
    33Critical Accounting Policies
    
    
    34Results of Operations
    
    
    38Principal Differences between Finnish GAAP and U.S. GAAP
    
    
    44Liquidity and Capital Resources
    
    
    45Capital Expenditure
    
    
    47Research and Development
    
    
    48Foreign Currency Fluctuations
    
    
    49Inflation
    
    
    50Adoption of International Financial Reporting Standards
    
    
    50New Accounting Standards
    
    
    51Off-Balance Sheet Arrangements
    
    
    51Item 6.
    
    Directors, Senior Management and Employees
    
    
    52Board of Directors
    
    
    52Chief Executive Officer and Corporate Executive Team
    
    
    53Compensation of Directors and Officers
    
    
    54Audit Committee and Compensation Committee
    
    
    55Home Country Practices
    
    
    55Employees
    
    
    56Share Ownership
    
    
    56Authorizations for Board of Directors
    
    
    57
 (i)




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PageItem 7.
    
    Major Shareholders and Related Party Transactions
    
    
    58Major Shareholders
    
    
    58Related Party Transactions
    
    
    58Item 8.
    
    Financial Information
    
    
    59Consolidated Financial Statements
    
    
    59Export Sales
    
    
    59Legal Proceedings
    
    
    59Dividend Policy
    
    
    60Significant Changes
    
    
    60Item 9.
    
    The Offer and Listing
    
    
    61Nature of Trading Market
    
    
    61Trading and Settlement on the Helsinki Stock Exchange
    
    
    62Regulation of the Finnish Securities Market
    
    
    62The Finnish Book-Entry Securities System
    
    
    63Item 10.
    
    Additional Information
    
    
    64Articles of Association
    
    
    64Material Contracts
    
    
    67Exchange Controls
    
    
    67Control of Foreign Ownership
    
    
    67Taxation
    
    
    67Documents on Display
    
    
    71Item 11.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    72Exchange Rates and Foreign Currency Exposure
    
    
    72Interest Rate Risk
    
    
    73Equity Price Risk
    
    
    73Commodity Price Risk
    
    
    73Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    74PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    75Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    75Item 15.
    
    Controls and Procedures
    
    
    75Item 16.
    
    [Reserved]
    
    
    76Item 16A.
    
    Audit Committee Financial Expert
    
    
    76Item 16B.
    
    Code of Ethics
    
    
    76Item 16C.
    
    Principal Accountant Fees and Services
    
    
    76Item 16D.
    
    Exemptions from the Listing Standards for Audit Committee
    
    
    77Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    77PART IIIItem 17.
    
    Financial Statements
    
    
    77Item 18.
    
    Financial Statements
    
    
    77Item 19.
    
    Exhibits
    
    
    78EX-12.1EX-12.2EX-13.1EX-13.2
  (ii)




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INTRODUCTION In this annual report, the Company, Metso Corporation, Metso, Group, we, us
and our refer to Metso Corporation or Metso Corporation and its consolidated subsidiaries, as the
context may require. As used herein, the term Finnish State refers to the Republic of Finland. CURRENCY PRESENTATION We have published our consolidated financial statements in euro for periods beginning on or
after January 1, 1999. As used in this annual report:  
    euro or  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. Unless otherwise stated, euro amounts have been translated into U.S. dollars at the noon
buying rate in New York City for cable transfer in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York (the noon buying rate) on December 31, 2004,
which was
1.00 =
U.S.$1.3538 (U.S.$1.00 = 0.7387). On March 29, 2005, the noon buying rate for
the euro was
1.00 =
U.S.$1.2913 (U.S.$1.00 =
0.7744). FINANCIAL AND OTHER INFORMATION Our consolidated financial statements are prepared in accordance with generally accepted
accounting principles in Finland (Finnish GAAP), which differ in certain significant respects
from generally accepted accounting principles in the United States (U.S. GAAP). For a discussion
of the principal differences between Finnish GAAP and U.S. GAAP, see Note 30 to our audited
consolidated financial statements as of and for the years ended December 31, 2003 and 2004, and
income statement data for each of the years in the three-year period ended December 31, 2004,
included elsewhere in this annual report. See also Item 5. Operating and Financial Review and
ProspectsPrincipal Differences between Finnish GAAP and U.S. GAAP. The financial information set forth in a number of tables herein has been rounded to the
nearest whole number. Accordingly, in certain instances, the sum of the numbers in a column may not
conform exactly to the total figure given for that column. As used herein, Nordic Countries refers to Denmark, Finland, Iceland, Norway and Sweden. As
used herein, North America refers to the United States and Canada. As used herein, South
America refers to all countries in the American continents excluding the United States and Canada. We own or otherwise have rights to a substantial number of trademarks that we use in
conjunction with our business. Some of these trademarks are referred to in this annual report. (iii)




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FORWARD-LOOKING STATEMENTS Certain statements in this annual report, including but not limited to certain statements set
forth under the captions Item 3. Key Information, Item 4. Information on the Company, Item 5.
Operating and Financial Review and Prospects, Item 8. Financial Information and Item 11.
Quantitative and Qualitative Disclosures about Market Risk and elsewhere are based upon the
beliefs of our management as well as assumptions made by and information currently available to our
management, and such statements may constitute forward-looking statements within the meaning of
the Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S.
Securities Exchange Act of 1934, as amended (the Exchange Act). Potential investors should note
that many factors, some of which are discussed elsewhere in this annual report, could affect our
future operations and future financial results and could cause future operations and future
financial results to differ materially from those expressed in such forward-looking statements.
Some of these factors are:  
    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. Should one or more of these factors materialize, or should any assumptions of the management
underlying such forward-looking statements prove to be incorrect, our actual operating results or
financial condition and prospects could differ materially from those described herein as
anticipated, believed, estimated or expected. (iv)




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PART I 
 Item 1.  Identity of Directors, Senior Management and Advisers. Not applicable. 
 Item 2.  Offer Statistics and Expected Timetable. Not applicable. 
 Item 3.  Key Information. 
 Selected Financial Data Our consolidated financial statements are prepared in accordance with Finnish GAAP, which
differs in certain significant respects from U.S. GAAP. A reconciliation to U.S. GAAP is set forth
in Note 30 to our consolidated financial statements. For a discussion of the principal differences
between Finnish GAAP and U.S. GAAP, see also Item 5. Operating and Financial Review and
ProspectsPrincipal Differences between Finnish GAAP and U.S. GAAP. Our shares are traded on the
New York Stock Exchange in the form of American Depository Shares (ADSs). Each ADS represents one
of our shares. Per share data has been translated into U.S. dollars per ADS where appropriate. The selected financial data set forth below as of and for the years ended December 31, 2000,
2001, 2002, 2003 and 2004 is a summary derived from our consolidated financial statements and
should be read together with our consolidated financial statements and the notes thereto. For the year ended December 31,2000
    
    
    2001(1)
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    (in millions, except per share data)INCOME STATEMENT DATAAmounts in Accordance with Finnish GAAPNet sales
    
    
    3,891
    
    
    
    4,343
    
    
    
    4,691
    
    
    
    4,250
    
    
    
    3,976Operating profit (loss)(2)
    
    
    200
    
    
    
    246
    
    
    
    167
    
    
    
    (229
    )
    
    
    111Financial income and expenses, net
    
    
    (20
    )
    
    
    (24
    )
    
    
    (74
    )
    
    
    (74
    )
    
    
    (62
    )Share of profits of associated companies
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Income (loss) before extraordinary items and income taxes
    
    
    180
    
    
    
    222
    
    
    
    93
    
    
    
    (303
    )
    
    
    49Extraordinary income and expenses, net
    
    
    268
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    448
    
    
    
    214
    
    
    
    93
    
    
    
    (303
    )
    
    
    49Income taxes
    
    
    (59
    )
    
    
    (72
    )
    
    
    (26
    )
    
    
    44
    
    
    
    21Minority interests
    
    
    0
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    1
    
    
    
    (1
    )Net income (loss)
    
    
    389
    
    
    
    141
    
    
    
    65
    
    
    
    (258
    )
    
    
    69Earnings (loss) per share(3)(4)
    
    
    0.90
    
    
    
    1.09
    
    
    
    0.48
    
    
    
    (1.89
    )
    
    
    0.51BALANCE SHEET DATAAmounts in Accordance with Finnish GAAPTotal assets
    
    
    3,564
    
    
    
    5,042
    
    
    
    4,399
    
    
    
    3,823
    
    
    
    3,578Cash and cash equivalents
    
    
    485
    
    
    
    212
    
    
    
    190
    
    
    
    130
    
    
    
    419Net interest bearing liabilities
    
    
    (53
    )
    
    
    1,251
    
    
    
    1,118
    
    
    
    1,109
    
    
    
    529Shareholders equity
    
    
    1,425
    
    
    
    1,469
    
    
    
    1,379
    
    
    
    1,024
    
    
    
    1,052CASH FLOW DATAAmounts in Accordance with Finnish GAAPNet cash provided by (used in) operating activities
    
    
    300
    
    
    
    235
    
    
    
    252
    
    
    
    146
    
    
    
    262Net cash provided by (used in) investing activities
    
    
    309
    
    
    
    (943
    )
    
    
    (14
    )
    
    
    (80
    )
    
    
    359Net cash provided by (used in) financing activities
    
    
    (284
    )
    
    
    433
    
    
    
    (233
    )
    
    
    (121
    )
    
    
    (333
    )Capital expenditures on fixed assets(5)
    
    
    111
    
    
    
    154
    
    
    
    191
    
    
    
    128
    
    
    
    89Cash dividends declared and paid per share ()(6)
    
    
    0.60
    
    
    
    0.60
    
    
    
    0.60
    
    
    
    0.20
    
    
    
    0.35Cash dividends declared and paid per share (U.S.$)(6)(7)
    
    
    0.56
    
    
    
    0.53
    
    
    
    0.63
    
    
    
    0.25
    
    
    
    0.47
 1




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As of and for the year ended December 31,2000
    
    
    2001(1)
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    (in millions, except per share data)(restated)
    
    
    (restated)
    
    
    (restated)INCOME STATEMENT DATAAmounts in Accordance with U.S. GAAPIncome (loss) from continuing operations(9)
    
    
    75
    
    
    
    127
    
    
    
    3
    
    
    
    (196
    )
    
    
    66Income (loss) from Discontinued Operations(9)
    
    
    6
    
    
    
    0
    
    
    
    19
    
    
    
    (39
    )
    
    
    8Gain (loss) on disposal of Discontinued Operations
    
    
    326
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )Net income (loss)(8)(9)
    
    
    407
    
    
    
    127
    
    
    
    22
    
    
    
    (235
    )
    
    
    2Basic and diluted earnings (loss) per share from
continuing operations(9)
    
    
    0.56
    
    
    
    0.93
    
    
    
    0.02
    
    
    
    (1.44
    )
    
    
    0.48Basic and diluted earnings (loss) per share from
Discontinued Operations(9)
    
    
    2.45
    
    
    
    0.00
    
    
    
    0.14
    
    
    
    (0.29
    )
    
    
    (0.47
    )BALANCE SHEET DATAAmounts in Accordance with U.S. GAAPTotal assets(9)
    
    
    3,799
    
    
    
    5,275
    
    
    
    4,520
    
    
    
    3,996
    
    
    
    3,697Long-term liabilities(9)
    
    
    656
    
    
    
    1,553
    
    
    
    1,334
    
    
    
    1,256
    
    
    
    1,231Shareholders equity(9)
    
    
    1,499
    
    
    
    1,503
    
    
    
    1,326
    
    
    
    998
    
    
    
    978
   (1)
    
    Effective September 2001, Metso acquired all of the outstanding shares of Svedala AB for a
total acquisition price of 943 million. Svedala has been consolidated in our financial
statements as of the fourth quarter of 2001.(2)
    
    The operating loss for 2003 includes a goodwill impairment of 205 million and restructuring
expenses of 103 million related to the efficiency improvement program launched during the
year.(3)
    
    Under Finnish GAAP, the earnings per share calculation excludes extraordinary items. For a
discussion of the calculation of earnings (loss) per share, see Note 10 to our consolidated
financial statements. Under U.S. GAAP, these items would either be included in the earnings
(loss) per share from continuing operations or in earnings (loss) per share from Discontinued
Operations. See Note 30 to our consolidated financial statements.(4)
    
    The average numbers of shares used in calculating this amount were as follows: Year ended December 31,
    
    Number of Shares2000
    
    
    135,363,5372001
    
    
    136,135,2232002
    
    
    136,189,7042003
    
    
    136,189,7042004
    
    
    136,189,704
  (5)
    
    Excluding business acquisitions.(6)
    
    Dividends are 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 2004 is the proposal of
Metsos board of directors to the annual general meeting to be held on April 4, 2005.(7)
    
    Solely for the readers convenience, amounts in euro have been converted into U.S. dollars at
the noon buying rate on December 31, of the respective year.(8)
    
    As of January 1, 2002, for purposes of U.S. GAAP, Metso adopted SFAS 142, which ceased
amortization of goodwill and indefinite-lived intangible assets. Amortization expense on
goodwill and indefinite-lived intangible assets on a U.S. GAAP basis for the years ended
December 31, 2000 and 2001 was 9 million and 12 million, respectively.(9)
    
    Our 2001, 2002 and 2003 financial statements in accordance with U.S. GAAP have been restated
to reflect the impact of adjustments made to our pension liabilities recorded in conjunction
with our acquisition in 2001. In order to correctly record this pension liability in
accordance with U.S. GAAP, the balance sheet at the time of acquisition would have reflected
an additional pension liability and a corresponding increase to goodwill, net of the tax
impact of the additional pension liability. After consideration of this additional goodwill,
our impairment charge in 2003 would have been increased. As a result, our U.S. GAAP income
statement reflects an additional loss of 18 million in 2003 (0.13 additional loss per
share).Our 2002 and 2003 accounts have been restated to reflect the impact of adjustments made to our
deferred tax asset valuation allowances recorded in 2002 and 2003. These adjustments would
result in substantially a full valuation allowance in relation to our US operations for both
periods. In addition, the 2003 results would also include the release of a previously recorded
valuation allowance related to our German operations. In order to correctly record the
valuation allowance in accordance with U.S. GAAP, an additional valuation allowance of 91
million has been recorded as of December 31, 2002 with a corresponding increase to deferred
income tax expense. In 2003, the consolidated balance sheet would still reflect substantially
a full valuation allowance for our US deferred tax assets; however, the amounts previously
recognized in 2003 to increase this valuation allowance would have been recorded in the
previous year as noted above. In addition, the amount previously recognized as a valuation
allowance related to our German operations has been reversed in 2003. As such, the 2003 income
statement reflects a decrease in deferred tax expense of 28 million, net of translation
difference of 15 million. As a result of these adjustments, the income statement under U.S.
GAAP net income reflects additional expense of 91 million (0.67 per share) in 2002 and
additional income in 2003 of 28 million (0.21 per share). 2




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Exchange Rates We present our financial statements in euro. A portion of our revenues and expenses is
denominated in euro and a portion is denominated in currencies other than the euro. The first table
below sets forth, for the periods and dates indicated, the average, high, low and period-end noon
buying rates for the euro expressed in euro per U.S. dollar. The second table below sets forth, for
the periods and dates indicated, the average, high, low and period-end noon buying rates for the
U.S. dollar expressed in U.S. dollars per euro. The average noon buying rates have been calculated based on the noon buying rate for the last
business day of each month or portion of a month during the relevant period. We are providing this
information solely for the readers convenience. These are not necessarily the rates we used in the
preparation of the financial statements and we make no representation that euros could have been
converted into U.S. dollars at the rates shown or at any other rate for such periods or at such
dates. The following tables set forth the noon buying rate for the euro for each of the previous five
years, the period from the beginning of the year 2005 until the latest practicable date and for
each of the last six months (expressed in euro per one U.S. dollar): Euro per U.S. Dollar Year
    
    Average
    
    
    High
    
    
    Low
    
    
    Period End2000
    
    
    1.0860
    
    
    
    1.2090
    
    
    
    0.9675
    
    
    
    1.06502001
    
    
    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
(through March 29)
    
    
    0.7646
    
    
    
    0.7829
    
    
    
    0.7421
    
    
    
    0.7744
 Calendar Period
    
    Low
    
    
    High2004September
    
    
    0.8053
    
    
    
    0.8297October
    
    
    0.7823
    
    
    
    0.8149November
    
    
    0.7526
    
    
    
    0.7872December
    
    
    0.7339
    
    
    
    0.75622005January
    
    
    0.7421
    
    
    
    0.7720February
    
    
    0.7534
    
    
    
    0.7829March
(through March 29)
    
    
        0.7744
    
    
    
    0.7427
 3




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The following tables set forth the noon buying rate for the U.S. dollar for each of the
previous five years, and the period from the beginning of the year 2005 until the latest
practicable date and for each of the last six months (expressed in U.S. dollars per one euro). U.S. Dollars per Euro Year
    
    Average
    
    
    High
    
    
    Low
    
    
    Period End2000
    
    
    0.9207
    
    
    
    1.0335
    
    
    
    0.8270
    
    
    
    0.93882001
    
    
    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
(through March 29)
    
    
    1.3079
    
    
    
    1.3476
    
    
    
    1.2773
    
    
    
    1.2913
 Calendar Period
    
    High
    
    
    Low2004September
    
    
    1.2417
    
    
    
    1.2052October
    
    
    1.2783
    
    
    
    1.2271November
    
    
    1.3288
    
    
    
    1.2703December
    
    
    1.3625
    
    
    
    1.32242005January
    
    
    1.3476
    
    
    
    1.2954February
    
    
    1.3274
    
    
    
    1.2773March
(through March 29)
    
    
    1.3465
    
    
    
    1.2913
 Since July 1, 1999, our shares have been traded on the Helsinki Stock Exchange in euro.
Fluctuations in the exchange rate between the euro and the U.S. dollar affect the U.S. dollar
equivalent of the euro price of the shares on the Helsinki Stock Exchange and, as a result, are
likely to affect the market price of our ADSs, which are traded on the New York Stock Exchange. We
declare cash dividends in euro and then convert this amount to U.S. dollars for ADS holders.
Therefore, exchange rate fluctuations will affect the U.S. dollar amounts that ADS holders receive. For a discussion of the effects of exchange rate movements on our operations, see Item 5.
Operating and Financial Review and ProspectsForeign Currency Fluctuations. Our foreign exchange risk management policy is focused on hedging foreign currency exposures
related to firm sale and purchase commitments as well as net investments in foreign subsidiaries to
the extent practicable. We have, to a large extent, hedged our foreign currency denominated net
assets of foreign subsidiaries through borrowings, currency derivatives and, to some extent,
through receivables. Apart from forward foreign exchange contracts, options and currency swaps, as
of December 31, 2004, we were not a party to any other derivative foreign currency instruments. For
a discussion of our foreign exchange risk management policy, see Item 11. Quantitative and
Qualitative Disclosures about Market RiskExchange Rates and Foreign Currency Exposure. 
 Risk Factors Business Cycles in the Global Economy and Customer Industries Business cycles in the global economy and our customer industries influence the demand for our
products, our financial condition and results of operations, especially in the short-term. Metso
Paper and Metso Automation are affected by the business cycles of the pulp and paper industry. In
addition, Metso Automation is also affected by the business cycles of the power, oil and gas
industries. Metso Minerals operations are dependent on the development of the mining, construction
and civil engineering industries. Within the construction and civil engineering industries, the
level of infrastructure investments is most significant for Metso Minerals. Management believes
that, in the long-term, the effects of business cycles are reduced by the geographical diversity of
our operations and the various customer industries served. Also, new equipment orders tend to be
more affected by business cycles than the demand for rebuilds and process improvements as well as 4




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aftermarket operations, for which our large global installed base offers a strong platform.
Although we have striven actively to reduce the risks of business cycles by growing our product
life cycle related operations and long-term partnerships with our customers, as well as increasing
the flexibility of our cost base through outsourcing and focusing on the manufacture and assembly
of core components, there can be no assurance that business cycles will not continue to
significantly affect the demand for our products, our business, financial condition or results of
operations. See Item 5. Operating and Financial Review and
ProspectsBusiness Overview. Competition Our competitors vary by business area and product. We aim to differentiate ourselves from
competitors through quality, reliability, service and availability, as well as through our high
level of technological know-how and long-term commitment to our customers. We aim for competitive
advantage through continuous product development based on research and technology development
(RTD) investments and cooperation with our customers. In addition, we seek to operate flexibly
and cost-efficiently in an effort to ensure our competitiveness. While management believes that our
product and service range will keep pace with developing technologies and changing customer needs,
there can be no assurance that new or enhanced products and technologies developed by current or
future competitors will not reduce the competitiveness of our products, which could have a material
adverse effect on our business, financial condition or results of operations. See Item 4.
Information on the CompanyBusiness Summary for a description of our significant competitors in
each of our business areas. Project Activity Our operations consist partly of large project deliveries to the pulp and paper industry and
the mining industry. These deliveries can involve project-specific risks concerning delivery
schedules as well as equipment start-up, capacity and end-product quality. In some cases,
project-specific risks may also arise from new technology included in the deliveries. Although the
risks of individual projects are generally not significant compared to the magnitude of our
business and we seek to reduce project-specific risks by exact sales contract terms, there can be
no assurance that such risks, if materialized, will not have a material adverse effect on our
business, financial condition or results of operations. Raw Materials, Suppliers and Subcontractors Developments in the global economy or abrupt problems with deliveries by raw material
producers can influence the prices and availability of raw materials that we use for our products.
This may, in turn, affect our business by increasing our purchasing costs and/or lengthening
delivery lead-times. Among key raw materials used by us are steel and scrap iron, the prices and
availability of which may fluctuate and have an adverse effect on our operations. The global
coverage of our businesses and suppliers is expected to reduce the effect of any local
disturbances. We prefer long-term supply contracts in order to reduce the effects of short-term
price volatility or availability issues. In addition, when possible, we seek to identify
replacement suppliers in order to manage risks related to a single supplier. However, there are
limitations to the availability of such actions. For example, a raw material used by Metso Minerals
in manufacturing wear parts for crushers, virgin manganese, has its supply limited mainly to South
Africa. Delivery problems facing local producers or political or legislative changes in South
Africa can affect the availability of manganese, which could have an adverse effect on our Metso
Minerals wear parts business. We seek to manage this risk by maximizing the use of recycled
manganese. Changes in the prices of electricity, oil and metals may indirectly have a material
adverse effect on our business, financial condition or results of operations, if these variations
decrease the willingness of our customer industries to invest. See Item 4. Information on the
CompanyRaw Materials. Generally, our risks related to the purchase of raw materials have decreased because we have
increasingly focused on manufacturing and assembling core components only. On the other hand,
outsourcing increases the importance of, and risks related to, our suppliers and subcontractors. We
purchase the majority of product components from our suppliers, for whom it is not necessarily
possible to find alternative suppliers at short notice. Delivery problems of our subcontractors may
also adversely affect our customer relationships and business. Although we have continued to build
a global supplier network and signed long-term contracts with our major raw material suppliers and
subcontractors in an attempt to limit the purchasing risks related to availability and pricing of
product components, there can be no assurance that such risks, if materialized, will not have a
material adverse effect on our business, financial condition or results of operations. 5




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Political, Economic and Legislative Changes in Developing Countries Both our operations and the operations of our customers are geographically widespread. We have
our own manufacturing and suppliers based in many developing countries. Also, the demand for our
new machinery and equipment is increasingly coming from countries in Asia and South America. Sudden
political, economic and/or legislative changes in these countries could have a material adverse
effect on our business, financial condition or results of operations. For example, China currently
represents a significant portion of our business and, hence, any sudden adverse political, economic
or legislative changes in China could, especially in the short-term, have a material adverse effect
on our business, financial condition or results of operations. Management believes that the risks
related to these developing countries are reduced by our wide geographical and industry coverage as
well as our more stable aftermarket operations in Europe and North America. Product Liability We are occasionally involved in product liability claims typical for companies in comparable
industries. These claims are covered by our insurance policy with coverage of up to 100 million
(U.S.$135 million) per year, subject to applicable insurance conditions. As part of the global
coverage, our North American subsidiaries carry local general and product liability policies, which
cover claims up to an annual aggregate of 4 million (U.S.$5 million). We also seek to reduce
product liability risks by improving product safety through RTD investments, automation and
customer training as well as by applicable sales contract terms. Although management believes that
our insurance coverage is currently adequate to cover the liability risks, we may be held
responsible for damages beyond the scope of our insurance coverage, which could have a material
adverse effect on our business, financial condition or results of operations. Environmental Regulation Procedures to ensure compliance with applicable environmental protection laws and regulations
as well as ISO 14001 compliant environmental systems are key tools in our environmental management.
Although our management is not aware of any current environmental matters that could reasonably be
expected to have a material adverse effect on our business, financial condition or results of
operations, there can be no assurance that continued compliance with the existing or future
environmental laws, and the costs associated therewith, will not have a material adverse effect on
our business, financial condition or results of operations. See Item 4. Information on the
CompanyGovernmental Regulation and Environmental Matters. Property and Liability Risks We manage our exposure to property, business interruption, transport and liability risks
(general liability, product liability and management liability) through global insurance schemes.
The insurance coverage consists of property, business interruption, transport and liability
insurance schemes and their local applications. Our total risk bearing capacity is taken into
consideration when setting the amount of deductibles. Our captive insurance company will bear risks
to the extent that is financially sustainable. Although management believes that our insurance
coverage is currently adequate to cover the liability risks, we may be held responsible for damages
beyond the scope of our insurance coverage, which could have a material adverse effect on our
business, financial condition or results of operations. Liquidity Cash and committed revolving credit facilities are used to protect our short-term liquidity.
We manage our liquidity by balancing the proportion of short-term and long-term loans as well as
the average remaining maturity of long-term loans. We also manage risks in the availability of
funds and pricing in the long-term by diversifying funding between money and capital markets and
banks. Credit rating agencies assess our business and publish credit ratings. A lowering of credit
ratings could raise the financing costs of possible new loans taken, which could have a material
adverse effect on our business, financial condition or results of operations. See Item 5.
Operating and Financial Review and ProspectsLiquidity and Capital Resources for a discussion of
the possible impact of credit ratings downgrades. Interest Rate Risks Changes in market interest rates and interest margins may influence our financing costs,
returns on financial investments and valuation of derivative contracts. We manage interest rate
risks through the ratio of 6




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floating-rate to fixed-rate loans and the average length of interest rate periods.
Additionally, we may use interest rate swaps and other derivative contracts. Although management
believes that the measures we have taken to limit our exposure to interest rate risks are currently
adequate, there can be no assurance that interest rate fluctuations will not have a material
adverse effect on our business, financial condition or results of operations. See Item 11.
Quantitative and Qualitative Disclosures about Market RiskExchange Rates and Foreign Currency
Exposure. Currency Risks Exchange rate changes affect our business, although the geographical diversity of our
operations decreases the significance of any individual currency. Exchange rate variations can have
a direct effect on the prices of raw materials and production commodities purchased in non-domestic
currencies and in the prices of end products for export, in which the invoicing currency is
different from the currency of the manufacturing costs (transaction effect). More than one-half of
our net sales originate from outside the euro zone. Alongside the euro, the most important
currencies used in invoicing are the U.S. dollar and the Swedish krona. When the net sales and
results of our subsidiaries outside the euro zone are translated into euro, they may increase or
decrease because of exchange rate changes, even though no real change in such net sales or results
has occurred (translation effect). Exchange rate movements may also affect our competitive position
by weakening the cost competitiveness of our products as against those of our competitors products
manufactured in another currency area. In accordance with our treasury policy, our operating units are required to hedge in full the
currency exposures that arise from firm delivery and purchase agreements. In addition, the units
can hedge anticipated foreign currency denominated cash flows by taking into account the
significance of such cash flows, the competitive situation and other opportunities to adapt. We
have operations in countries in which currency regulation affects hedging risks. The most important
of these are Brazil and China. We conduct hedging operations in a centralized fashion through our
corporate treasury. We have set upper limits on the open currency exposures of the corporate
treasury, calculated on the basis of their potential profit impact. These limits cover net
exposures from transfers between units and items arising from financing activities. Future cash
flows are hedged for periods, which do not normally exceed two years. Accordingly, the majority of
future cash flows related to the order backlog are hedged. The equity of subsidiaries outside the euro zone is affected by exchange rate risks, which may
lead to translation differences in our consolidated equity. We hedge these risks with respect to
essential currencies in accordance with our treasury policy by using non-euro denominated loans and
forward exchange agreements. Although management believes that the measures we have taken to hedge
our exposure to exchange rate fluctuations are currently adequate, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on our business, financial
condition or results of operations. For a discussion of our foreign exchange risk management
policy, see Item 11. Quantitative and Qualitative Disclosures about Market RiskExchange Rates and
Foreign Currency Exposure. In addition, a non-euro investors base currency return on an investment in our shares may be
negatively affected by any depreciation of the euro against the investors functional currency. The
value of dividends and other distributions paid in euro, and the value of the shares quoted on the
Helsinki Stock Exchange in euro could decline as a result. Credit Risks and Other Counterparty Risks Our operating units are primarily responsible for credit risks pertaining to sales activities.
Our business areas determine the guidelines for delivery and payment terms granted to customers,
their supervision and enforcement, which are then implemented at the business line and operating
unit level. Our corporate treasury provides centralized services related to customer financing and
seeks to ensure that the principles of our treasury policy are adhered to with respect to terms of
payment and required collateral. When investing cash assets and making derivative contracts, our corporate treasury only
accepts counterparties that fulfill the credit rating criteria defined in our treasury policy, or
parties separately approved in advance by our board of directors. With respect to investments,
derivative contracts and borrowing, we have set counterparty-specific limits to avoid risk
concentrations. We have agreed on extended payment terms with selected customers in our businesses. In
establishing credit arrangements, management is required to assess the creditworthiness of the
customer and the timing of 7




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cash flows expected to be received under the arrangement. However, should the actual financial
position of our customers or general economic conditions differ from our assumptions, we may be
required to re-assess the ultimate collectibility of such trade credits, which could result in a
write-off of these balances in future periods and could have a material adverse effect on our
business, financial condition or results of operations. Our ability to manage our trade credit exposure, customer financing, risk concentrations and
financial counterparty related risks depends on a number of factors, including our capital
structure, market conditions affecting our counterparties and our ability to mitigate exposure on
acceptable terms. Although the risks related to individual customers or other counterparties are
generally not significant compared to the magnitude of our business and we seek to reduce customer
risks by exact sales contract and payment terms and collaterals, there can be no assurance that we
will be successful in managing the risks connected with our trade credit exposure, customer
financing, risk concentrations and financial counterparties that we may from time to time have,
which could have a material adverse effect on our business, financial condition or results of
operations. Major Shareholders May Exercise Their Influence to Detriment of Other Shareholders See Item 7. Major Shareholders and Related Party TransactionsMajor Shareholders for a
discussion of the impact of the ownership interest of the Finnish State in the Company. 
 Item 4.  Information
on the Company. 
 Organization Metso Corporation is a stock corporation organized in the Republic of Finland under the
Finnish Companies Act. Metso Corporations registered office is located at Fabianinkatu 9A, P.O.
Box 1220, 00101 Helsinki, Finland; telephone +358-20-484-100. Our agent for the U.S. federal
securities law purposes is Metso USA, Inc., located at 3100 Medlock, Bridge Road, Suite 250,
Norcross, Georgia 30071. 
 History and Development of the Company Metso was created as the result of the merger of Valmet and Rauma in July 1999. The new
combined company was initially given the name Valmet-Rauma Corporation. The name was changed to
Metso Corporation in August 1999. Valmet traces its origins back to the industrial plants established in the 1920s and 1930s to
meet the needs of the Finnish Armed Forces. These industrial plants were joined to form a
conglomerate, which was formally incorporated as a limited liability company in 1950, and during
the 1950s began to broaden its product range to accommodate the demands of a market economy. Valmet
delivered its first paper machine in 1953. From its establishment in 1950 until its initial public
offering in 1988, Valmet was wholly owned by the Finnish State and other Finnish State entities. As
of March 24, 2005, the Finnish State owned 11.5 percent of the outstanding share capital of Metso
Corporation. Raumas business groups were formed from a number of companies with long operating histories
brought together as a result of a series of strategic acquisitions by a Finnish engineering group
Rauma-Repola Oy. In 1990, Rauma-Repola merged with United Paper Mills, a Finnish forest products
company. The new company was called Repola Oy and was one of the largest industrial conglomerates
in Finland. Its engineering division was organized as Rauma and its forest products division was
organized as UPM. In 1996, Repola and Kymmene Corporation, a Finnish forest products company,
merged to create a new company called UPM-Kymmene. As a result, Rauma became a majority owned
subsidiary of UPM-Kymmene. In 1997, following a secondary offering of Rauma shares, distribution of
shares as dividends, and the redemption of shares by Rauma, UPM-Kymmenes ownership in Rauma was
reduced to 34.5 percent. In March 2005, UPM-Kymmene sold the remainder of the shares of Metso
Corporation held by it. In September 2001, Metso Corporation acquired Svedala, a global supplier of products and
services for the rock and mineral processing industry based in Sweden. Svedala was integrated in
the Metso Minerals business area. A public offer to acquire all the shares in Svedala was made in
June 2000 and the acquisition was completed on September 14, 2001 after the competition authorities
of the European Union and the United States gave their approval to the acquisition. 8




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For a discussion of recent developments, see Item 5. Operating and Financial Review and
ProspectsRecent Acquisitions and Divestments. 
 Strategy Our vision is to grow from a machine supplier into a provider of competitiveness for our
customers. We aim to be a profitably growing and globally leading developer and provider of
equipment, solutions and services for our customer industries. Our goal is to assist our customers
in improving the productivity and competitiveness of their industrial processes throughout their
life cycles. Our operations are based on process know-how in the pulp and paper industry and rock and
minerals processing industries, on the extensive installed base of machinery and equipment and on
automation knowledge. These cornerstones have helped us to become the worlds leading supplier for
the pulp and paper industry and rock and minerals processing industries. Our products and services
combine control technology, process automation and advanced information and communications
technology solutions with process know-how. Our customers are industrial companies that require their machine and equipment suppliers to
show long-term commitment and assume increasing responsibility for delivered processes. Our
customers investments are typically large and have long life cycles. These investments require
sufficient returns, which can be enhanced by cooperation with the customer covering the entire life
cycle of the process. Additionally, many of our customers operate in different parts of the world
and expect their suppliers to be located close to them. Our strong global network enables us to
serve our customers in all continents. Profitability is a requirement for all business areas to enable the development of the Company
and utilization of the market potential. To achieve this goal, extensive efficiency improvement
measures have been implemented within the Company in recent years. Our business areas are in
different stages of development. In determining the strategic focus and profitability targets for
each business area for 2005, the market situation, customer needs and profitability have been taken
into consideration. Our overall financial targets for 2005 have been determined as an operating
profit margin of six percent of net sales and return on capital employed of 12 percent. Metso Paper is renewing its business concept to correspond with customer needs. The
flexibility required by fluctuating demand is being increased by adapting internal capacity and
extending manufacturing cooperation with outside partners. Metso Papers financial target for 2005
is an operating profit margin of five percent of net sales. Metso Minerals is seeking to utilize
the growth potential of its market and to further improve its organizational efficiency and
product-specific profitability, and targets an operating profit margin of seven percent of net
sales for 2005. Metso Automation is refocusing on achieving growth by launching new products and
strengthening its market position in growing markets while targeting an operating profit margin of
eight percent of net sales for 2005. All of Metso Ventures businesses are focusing on
strengthening their competitiveness to achieve an operating profit margin of six percent of net
sales for 2005. 
 Corporate Structure We are a global engineering company headquartered in Helsinki, Finland, and serve our
customers in selected areas within the process industry. Our business areas are global in scope
with operations in over 50 countries. Our principal production plants are located in Finland,
Sweden, France, Italy, Germany, the United Kingdom, Canada, the United States, China, South Africa
and Brazil. As of December 31, 2004, approximately 40 percent of our employees were based in
Finland. Our operations are currently organized into the following four business areas:  
    Metso Paperdesigns, develops and delivers pulp and paper machinery and equipment
and complete production lines for the pulp and paper industry. Metso Paper also has
substantial aftermarket operations. It operates under four business lines: Paper,
Board, Tissue and Fiber.  
    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 & Screening, Minerals Processing, Wear Protection &
Conveying and Recycling. 9




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
    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 operations in North America and Mexico are conducted by a separate 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 Venturesis comprised of Metso Panelboard, Metso Drives, Foundries, Metso
Powdermet and Valmet Automotive. Metso Panelboard develops and supplies complete
production lines for the panelboard industry. Metso Drives develops and manufactures
paper machine drives and other industrial gears as well as wind turbine gears.
Foundries manufacture castings for various engineering industry needs. Metso Powdermet
develops materials technology and component solutions for Metsos customer industries.
Valmet Automotive is an independent contract manufacturer of specialty cars. The chart below depicts the current structure consisting of the four business areas described
above: (METSO BUSINESS AREAS) The current structure is a result of the restructurings described below: The earlier Metso Paper business area consisted also of Metso Panelboard before it was
transferred to the Metso Ventures business area in March 2002. In November 2002, the Converting
business, previously part of Metso Paper, was transferred to be reported under Discontinued
Operations after a memorandum of understanding regarding its sale was signed. The divestment was
completed in January 2004. In February 2003, Metso Papers operations were reorganized to include
five business lines: Paper, Board, Tissue, Chemical Pulping and Mechanical Pulping. In October
2003, Metso Papers foundries located in Jyväskylä, Finland and Karlstad, Sweden were transferred
to the Metso Ventures business area. In March 2004, Metso Paper combined the Chemical Pulping and
Mechanical Pulping business lines into one Fiber business line. Since August 2002, the Metso Automation business area has consisted of two business lines:
Process Automation Systems and Field Systems, which are supported by a North American business
unit. Process Automation Systems combines two former business divisions, Paper Automation and
Energy & Process Automation. After Svedala was acquired and integrated in 2001, Metso Minerals business area has consisted
of four business lines: Crushing & Screening, Minerals Processing, Compaction & Paving, and Wear
Protection, Service & Parts. In October 2002, a fifth business line called Recycling was created.
In September 2003, Metso Minerals operations were divided into six business lines: Crushing &
Screening, Minerals Processing, Wear Protection & Conveying, Compaction & Paving, Recycling, and
Drilling. In June 2004, we divested the 10




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Compaction & Paving business and, in December 2004, the Drilling business. As a result, Metso
Minerals currently consists of four business lines. Prior to the transfer of Metso Panelboard into Metso Ventures in 2002, the business area was
comprised of Metso Engineering and Valmet Automotive. Since the transfer, the business area was
reconstructured to comprise of four businesses: Metso Panelboard, Metso Drives, Metso Powdermet and
Valmet Automotive. Metso Drives and Metso Powdermet were formerly part of Metso Engineering,
similarly to Metso Works and Metso Hydraulics, which have now been sold. In October 2003, three
foundries, two of which were formerly part of Metso Paper and one of Metso Minerals, were
transferred to the Metso Ventures business area, creating a fifth business within the business
area, called Foundries. On March 4, 2005, we announced the signing of an agreement to sell Metso
Drives to the funds managed by private equity investor CapMan of Finland. Metso Drives Oy will be
transferred to the ownership of the CapMan funds after the relevant regulatory approvals. The financial information as of and for the years ended December 31, 2002 and 2003 discussed
in this annual report has been restated to reflect the changes in our structure described above.
The Converting business has been reported as a separate segment under Discontinued Operations since
November 2002 until its final divestment to Bobst Group SA of Switzerland in January 2004. We
completed the divestiture of our Compaction & Paving business to Altor, a Nordic private equity
investor in June 2004 and our Drilling business to Terex Corporation from the United States in
December 2004. These divested businesses are also reported under Discontinued Operations. 
 Business Summary Net Sales by Geographic Area In 2004, we had total net sales of 3,976 million (U.S.$5,383 million), of which approximately
88 percent were accounted for by exports from Finland and sales by international operations, and an
operating profit of 111 million (U.S.$150 million). As of December 31, 2004, our total assets
amounted to 3,578 million (U.S.$4,844 million), and we had 22,802 employees worldwide. The following table sets forth our total net sales by geographic area for the three most
recent years: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Finland
    
    
    382
    
    
    
    357
    
    
    
    332Nordic Countries (excluding Finland)
    
    
    453
    
    
    
    310
    
    
    
    337Europe (excluding Nordic Countries).
    
    
    1,363
    
    
    
    1,272
    
    
    
    1,017North America
    
    
    1,199
    
    
    
    989
    
    
    
    837South America
    
    
    417
    
    
    
    264
    
    
    
    298Asia-Pacific
    
    
    652
    
    
    
    824
    
    
    
    909Rest of the World
    
    
    225
    
    
    
    234
    
    
    
    246Total
    
    
    4,691
    
    
    
    4,250
    
    
    
    3,976
 Metso Paper As a result of our restructurings described under Corporate Structure above, the divested
Converting business, or Metso Panelboard, and the operations of the two foundries that were
transferred to Metso Ventures are no longer included in the Metso Paper business area. 11




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The following table sets forth certain financial data regarding Metso Paper for the three
most recent years: As of and for the year ended December 31,2002
    
    
    2003
    
    
    2004( in millions, except personnel data)Net sales(1)
    
    
    1,778
    
    
    
    1,651
    
    
    
    1,559Operating profit
    
    
    115
    
    
    
    25
    
    
    
    11Capital employed
    
    
    498
    
    
    
    538
    
    
    
    356Capital expenditures
    
    
    72
    
    
    
    54
    
    
    
    33Research and development
    
    
    72
    
    
    
    56
    
    
    
    50Order backlog
    
    
    735
    
    
    
    784
    
    
    
    946Personnel
    
    
    9,357
    
    
    
    9,085
    
    
    
    8,660
   (1)
    
    Includes net sales to other Metsos business areas of 4 million, 6 million and 9 million
in 2002, 2003 and 2004, respectively. The following table sets forth the breakdown of Metso Papers net sales by geographic
area for the three most recent years: Year ended December 31,2002
    
    
    2003
    
    
    2004(Percent of total net sales)Finland
    
    
    10
    
    
    
    11
    
    
    
    12Nordic Countries (excluding Finland)
    
    
    10
    
    
    
    7
    
    
    
    10Europe (excluding Nordic Countries)
    
    
    26
    
    
    
    25
    
    
    
    17North America
    
    
    28
    
    
    
    28
    
    
    
    19South America
    
    
    9
    
    
    
    3
    
    
    
    5Asia-Pacific
    
    
    15
    
    
    
    24
    
    
    
    32Rest of the world
    
    
    2
    
    
    
    2
    
    
    
    5Total
    
    
    100
    
    
    
    100
    
    
    
    100
 Metso Paper is one of the worlds leading suppliers of equipment and machinery for the pulp
and paper industry. Metso Paper provides machines for the production of paper of all printing
grades, board and tissue. We develop and deliver, rebuild and service paper, board and tissue
machines, paper finishing machines and related air systems. We also develop and deliver equipment
and designs plants for the production of chemical and mechanical pulp and recycled fiber as well as
provide service to the plants. Spare and wear parts supply, process improvements and optimization
are central to our aftermarket activities. Process improvements are expected to be an increasingly
important source of revenue as pulp and paper mills strive to enhance process efficiency and meet
higher environmental standards. Our customer service activities include start-up assistance;
training; corrective, preventive and predictive maintenance programs as well as operations support. Products and Services Paper.Metso Paper delivers new paper machines and production equipment as well as offers
machine rebuilds and service. The product lines also include new machines, machine rebuilds and
service for coating, calendering, winding and roll handling, and chemical handling equipment for
paper mills. Coaters and calenders are used to give base papers certain properties, such as gloss
or matt finishes and opacity. Winders are used to cut large paper rolls to smaller sizes to fit
printing machines. Roll handling machines consist of roll wrapping and conveyor systems. Metso
Papers paper machines are among the largest and fastest in the world. A typical paper machine
costs between 50 million and 100 million and produces from 200,000 to more than 400,000 tons of
paper per year. These machines are designed to meet specific customer needs and are used to produce
fine paper (for office stationery), newsprint, supercalendered and coated paper (for magazines and
similar publications) and coated base papers (for brochures and art purposes). Board.Metso Paper delivers new board machines and production equipment as well as offers
machine rebuilds and service. Metso Paper supplies machines for all board and packaging grades, the
most important grades being corrugated board, linerboard, folding boxboard and liquid packaging
board. A typical board machine costs between 30 million and 100 million and produces from 200,000
to more than 600,000 tons of board per year. 12




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##### Table of Contents



Tissue.Metso Paper delivers new tissue machines and production equipment as well as offers
machine rebuilds and service. Metso Paper produces machines for manufacturing various types of
tissue papers and continues to be a leading supplier of Thru-Air  technology for tissue
production. A typical tissue machine costs between 10 million and 35 million and produces from
10,000 to more than 70,000 tons of tissue per year. Fiber.Metso Paper delivers fiber lines, processes and production equipment as well as related
aftermarket activities for both the chemical and mechanical pulping technologies. Chemical pulp is
used for high quality paper products primarily due to its strength, printability and ability to
maintain brightness. Mechanical pulp is used primarily for newsprint and magazine papers and
certain paperboard grades. Metso Paper has the complete capability and product offering for
utilization of all different kind of recycled fibers for paper, board or tissue making. Metso
Papers fiber business line includes all process equipment and service necessary for complete fiber
plants. Metso Paper offers fiber producers technology that significantly reduces the environmental
impact of their operations. Markets and Customers Metso Papers products and services are sold to the pulp and paper industry throughout the
world. Sales worldwide are handled through a network of sales companies, offices and local
representatives. Orders typically require substantial down payments, with the balance paid in
installments. Project delivery times depend on the size and nature of the project but may be as
long as two years. Customers are located in a number of countries, primarily in Europe, North America and Asia.
Metso Paper has major production facilities in Finland and Sweden, and a joint venture in China.
Our internal production processes have been reorganized by creating a network of plants
specializing in designated product areas and manufacturing processes in order to focus on
development of specific technologies and expertise. As a major supplier to the pulp and paper industry, Metso Paper has most of the significant
pulp and paper producers as customers. Customers include large North American-based international
groups, such as Georgia-Pacific, International Paper, Kimberly-Clark, Procter & Gamble and
Weyerhaeuser; European producers, such as M-real Corporation, Norske Skog, SCA, Stora Enso and
UPM-Kymmene; and South American producers, such as Arauco and Suzano; as well as various companies
located in Asia, such as April, Asian Pulp and Paper, Daishowa Paper, Hansol Oji, Shandong Chenming
Paper Holding, Shandong Huatai Paper and Sun Paper Industry Group. Marketing Customer agreements for Metso Paper products are generally the result of extensive negotiation
and coordination with our customers. Service and component sales are made on a continuous basis by
regional service locations. Metso Paper has an extensive network of sales companies and sales
representatives in the Nordic Countries, Western Europe, North America, South America, Asia and
Australia. In addition, a marketing and sales team supports sales activities and develops marketing
strategies in line with our customers needs. Competition In the paper machine industry, machinery is designed to meet specific customer needs. Paper,
board and tissue machines are sold on the basis of machine technology, availability of reference
machines for comparative purposes, delivery time, price and service ability. Metso Paper competes
for machine sales based on these five factors. Management believes that, based upon aggregate
production capacity of paper machines sold, Metso Paper has been the worlds leading producer of
large paper machines in the past three years. Management also believes that we occupy a strong
position in the large paper machine rebuild markets as a result of our large installed base,
advanced technologies and leading position in the new paper machine market. Metso Papers principal
competitor in large paper machines is the other major producer, Voith Paper Group of Germany.
Mitsubishi of Japan is also a competitor in paper machines. Metso Papers principal competitor in
board making machine lines is Voith Paper Group. In tissue machines, the competitors include
Andritz Corporation of Austria and Voith Paper Group, as well as Overmechanica, Recard, Toschi and
Celli of Italy. Metso Papers principal competitors in the pulping industry are Andritz Corporation of Austria
and Kvaerner Pulping of Norway. Competition within the pulping industry focuses on fiber quality
and energy efficiency. In addition, environmental concerns affect competition as principal
suppliers attempt to meet the 13




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##### Table of Contents



increasing demand for environmentally friendly fiber. Within chemical pulping, the
environmental focus is on totally chlorine-free and elemental chlorine-free production processes
whereas in mechanical pulping focus is on recycled fiber production processes. Market leaders in
the area of recycled fiber pulping include Voith Paper Group of Germany and Black Clawson of the
United States. Competition in the aftermarket operations comes mainly from the principal global competitors
mentioned above and from numerous smaller local or regional service providers. Customers also
partly employ their own personnel to take care of the activities. Service, for example spare parts,
is also often sold in conjunction with new paper and board machines or major rebuilds. Management
believes that Metso Papers service operations benefit from synergies with Metso Paper products. Recent Developments In December 2004, Metso Paper concluded an agreement to sell its production operations in
Karhula, Finland, to Mesera Works Oy. According to the agreement, 105 workers transferred as
existing employees to Mesera Works on January 1, 2005. In September 2004, Metso Paper completed the outsourcing process of its Jyväskylä plate
fabrication. Metso Paper and Konepaja Häkkinen Oy of Finland signed a contract according to which
the operation of the plate fabrication shop was transferred to a new company, Rautpohjan Konepaja
Oy, a subsidiary of Konepaja Häkkinen Oy. According to the agreement, all 124 workers transferred
as existing employees to Rautpohjan Konepaja on October 1, 2004. For a description of recent acquisitions and divestments, see Item 5. Operating and Financial
Review and ProspectsRecent Acquisitions and Divestments. Metso Minerals As a result of our restructurings described under Corporate Structure and the acquisition
of Svedala and its consequent integration with Metso Minerals, Metso Minerals operations are
divided into four business lines: Crushing & Screening, Minerals Processing, Wear Protection &
Conveying, and Recycling. Metso Minerals is globally a leading supplier in rock and minerals processing and in recycling
systems for metals and construction materials. Aftermarket operations form an important part of
Metso Minerals business, inasmuch as crushing and processing rock and minerals require spare and
wear parts continuously. In addition, we provide different types of aftermarket activities for the
life cycle of the equipment. Products are sold either through Metso Minerals own global sales
organization or, in some product lines, through their own distributor network. Currently, the principal production plants of Metso Minerals are located in Finland, Sweden,
the United States, Germany, South Africa, France and Brazil. The following table sets forth certain financial data regarding Metso Minerals (excluding the
Compaction & Paving business and Drilling business divested during 2004) for the three most recent
years: As of and for the year ended December 31,2002
    
    
    2003
    
    
    2004( in millions, except personnel data)Net sales(1)
    
    
    1,406
    
    
    
    1,253
    
    
    
    1,343Operating profit (loss)
    
    
    28
    
    
    
    (189
    )
    
    
    84Capital employed
    
    
    996
    
    
    
    741
    
    
    
    729Capital expenditures
    
    
    39
    
    
    
    27
    
    
    
    24Research and development
    
    
    10
    
    
    
    10
    
    
    
    9Order backlog
    
    
    413
    
    
    
    347
    
    
    
    560Personnel
    
    
    8,479
    
    
    
    8,284
    
    
    
    8,048
   (1)
    
    Includes net sales to other Metsos business areas of 5 million, 7 million and 1
million in 2002, 2003 and 2004, respectively. 14




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##### Table of Contents



Products and Services Metso Minerals offers total solutions for customers in the aggregates, mining, minerals
processing, civil engineering, cement, metal recycling, bulk materials handling industries as well
as related aftermarket activities through its four business lines. The product offering includes a
wide variety of products with a large number of variations, types and models. Crushing & Screening.Metso Minerals Crushing and Screening business line offers equipment
and solutions used in rock and minerals crushing and classifying. It specializes in the design of
entire crushing and screening plants, supplying not only stationary plants but also an increasing
number of track and wheel-mounted mobile units. In addition, it supplies individual crushers,
screens, feeders and conveyors as well as wear and spare parts. Furthermore, its offering includes
complete, stationary recycling plants that are mostly focused on retreating demolition and building
debris, as well as old concrete and other pavement materials. Within the aggregates industry,
quarries and contract crushing are among its key customer groups. Minerals Processing.The Minerals Processing business line offers production processes for the
mining industry and industrial minerals as well as related products, such as grinding mills,
enrichment and pyro processing equipment and slurry pumps. The business line also offers equipment
for bulk materials handling, such as stackers and reclaimers, and other products needed in loading
and unloading barges, ships and railcars. Furthermore, its offering includes aftermarket services,
such as expertise in optimizing existing plants through automation, plant audits, plant upgrades,
replacement parts and maintenance. Wear Protection & Conveying.Products in the Wear Protection and Conveying business line
include grinding mill linings, screening media and other wear, impact, dust and noise protection
products as well as conveyer belts and components. Recycling.The Recycling business line covers equipment and solutions needed for the
recycling, crushing and sorting mainly of metals, such as metal shredders, shears, scrap shears and
scrap baling presses. Markets and Customers The following table sets forth the breakdown of Metso Minerals net sales (excluding the
Compaction & Paving business and Drilling business divested during 2004) by geographic area for the
three most recent years: Year ended December 31,2002
    
    
    2003
    
    
    2004(Percent of total net sales)Finland
    
    
    4
    
    
    
    3
    
    
    
    3Nordic Countries (excluding Finland)
    
    
    7
    
    
    
    7
    
    
    
    7Europe (excluding Nordic Countries)
    
    
    31
    
    
    
    31
    
    
    
    29North America
    
    
    23
    
    
    
    21
    
    
    
    23South America
    
    
    14
    
    
    
    13
    
    
    
    13Asia-Pacific
    
    
    12
    
    
    
    15
    
    
    
    15Rest of the world
    
    
    9
    
    
    
    10
    
    
    
    10Total
    
    
    100
    
    
    
    100
    
    
    
    100
 Customers include quarries, contract crushers, civil engineering companies and the mining and
cement industries. Recycle crushing represents a new and growing sector due to the worldwide
increase of legislation regulating the disposal of construction debris. The price of rock crushing
plants typically ranges from 1 million to 5 million, although it may be as high as 15 million.
The price of individual rock crushers ranges from 15,000 to 1 million. The price of a typical
complete minerals processing plant delivery to mining industry ranges from 30 million to 100
million. Marketing In order to service its local markets and customers, Metso Minerals marketing is subdivided
into six market areas: Europe, Southern Africa, North and Central America, South America,
Asia-Pacific and China. Metso Minerals has a number of sales companies in Europe, South America,
Southern Africa, Asia and Australia. Metso Minerals sales network offers the full range of
products to the relevant industries. Metso 15




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Minerals supports its sales operations in North America through its own distribution and a
network of local distributors. Competition Competition in Metso Minerals industries is fragmented, with few global manufacturers and
numerous small, regional and local manufacturers. We believe that our competitive advantages
include our global operations network, which allows us to meet the increasingly global needs of our
customers, and the wide product range we offer. In crushing and screening, our major competitors
are Astec, Extec, Komatsu, Sandvik and Terex. In mining and minerals processing, our major
competitors include Baker Process, Dorr-Oliver, Heyl&Patterson, FFE, Krupp-Polysius, Larox,
Mann-Takraf and Outokumpu, depending on the product line and particular industry segment. In wear
protection products and conveyor belts, our major competitors include Bridgestone, Goodyear, Rubber
Engineering, Steinhaus/Isenmann, TipTor and Tyler/Polydeck. In recycling, our major competitors
include Henschel and Newell-Riverside. Recent Developments On December 31, 2004, the Drilling business line, which operated under the Reedrill name, was
divested and transferred to Terex Corporation from the United States. The business had only limited
strategic connections with other businesses of Metso Minerals. On June 30, 2004, we divested the Compaction & Paving business line to Altor, a Nordic private
equity investor. Our construction and paving equipment business operated as an independent business
under the Dynapac name and had relatively limited synergies with the other businesses within Metso
Minerals. In 2003, we announced several restructuring initiatives as part of our corporate wide
efficiency improvement program. Some of these actions were completed during the year 2004. These
included the closure of our crusher manufacturing site at Milwaukee, Wisconsin, in June 2004, the
closure of our screen manufacturing unit in Ketsch, Germany in May 2004, and the closure of our
pump manufacturing unit in Colorado Springs, Colorado, in May 2004. The decision to close our
Keokuk, Iowa plant has also been made as one of the final initiatives of the program and is
scheduled to be completed during the first half of 2005. For a description of the recent acquisitions and divestments, see Item 5. Operating and
Financial Review and ProspectsRecent Acquisitions and
Divestments. Metso Automation Following the restructuring of our operations in August 2002, our Metso Automation business
area operates through two business lines: Process Automation Systems and Field Systems. See
Corporate Structure for a further explanation of our corporate restructuring. Metso Automation designs, develops, manufactures and maintains a wide range of technologically
advanced field devices and analyzers, as well as process automation and information management
applications and solutions. Metso Automations products are used to measure, monitor and control
industrial processes, such as the pulp and paper as well as power, energy, and oil and gas
industries. Metso Automation also specializes in several industry-specific automation applications
and provides system integration services. Metso Automation is also one of the worlds leading
manufacturers and suppliers of control and automated valves for the process industries in a large
and fragmented global market. Metso Automations devices, applications, solutions and services are
designed to improve customer process performance and profitability by increasing productivity,
quality, process availability and eco-efficiency. Metso Automation has production plants in Finland, the United States and Mexico, as well as a
manufacturing joint venture in China. Metso Automations global sales operations are handled
through a worldwide distribution network including local distributors and Metso Automation sales
companies in 36 countries. 16




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##### Table of Contents



The following table sets forth certain financial data regarding Metso Automation for the three
most recent years: As of and for the year ended December 31,2002
    
    
    2003
    
    
    2004( in millions, except personnel data)Net sales(1)
    
    
    622
    
    
    
    531
    
    
    
    535Operating profit
    
    
    16
    
    
    
    28
    
    
    
    53Capital employed
    
    
    207
    
    
    
    150
    
    
    
    136Capital expenditures
    
    
    13
    
    
    
    8
    
    
    
    6Research and development
    
    
    44
    
    
    
    33
    
    
    
    31Order backlog
    
    
    185
    
    
    
    145
    
    
    
    176Personnel
    
    
    4,150
    
    
    
    3,314
    
    
    
    3,267
   (1)
    
    Includes net sales to other Metsos business areas of 43 million, 51 million and 42
million in 2002, 2003 and 2004, respectively. Products and Services Metso Automations Process Automation Systems provides automation and information management
application networks and systems and supporting life cycle services. Field Systems provides various
industries with flow control solutions, automated and manual control valves and positioners, as
well as specialty analyzers. Process Automation Systems The Process Automation Systems business line develops and maintains process automation
technology for the pulp and paper industry as well as the power, energy, and oil and gas
industries. The business lines principal product is metsoDNA, or Dynamic Network of Applications.
The metsoDNA solution offers flexible scalability and easy integration and compatibility with a
plants other systems. MetsoDNA is based on the free networking of knowledge and information,
control automation and embedded field control applications. The concept was first introduced in
1999, and it is constantly being developed by adding new industry and user-specific applications.
The most recent innovation is DNAuse, a new metsoDNA user environment for more efficient
decision-making. DNAuse integrates information and knowledge as one efficient framework containing
process information, history, reports, supporting knowledge and team experiences. In addition, key products of the Process Automation Systems business line are Sensodec systems
for paper machine runnability and condition monitoring, and the PaperIQ and PaperLab systems for
paper quality management as well as IQInsight for paper machine wet end moisture measurement and
DNAforesight for web break management system. In 2004, Metso Automation expanded its line of
advanced profilers to cover new lines and rebuilds of paper, tissue and board machines. Field Systems The Field Systems business line develops field systems for various industries, including pulp
and paper, power, oil and gas, as well as smart, embedded measurement and control solutions,
sensors and analyzers for special applications. The product offering of the Field Systems business line in the area of flow control valves
covers a range of valves, including simple shut-off valves to complex control and automated valves
and intelligent valve controllers. The business line also supplies industrial ball valves,
butterfly valves and actuators, serving the process industries, commercial heating, ventilation and
air conditioning, and original equipment manufacturer markets. The product names used for our
valves are Neles and Jamesbury. The Field Systems business line also develops and manufactures
positioners and actuators. A positioner transmits information to an actuator, which in turn
operates a valve. Positioners and actuators are key components of control valves, and Metso
Automation typically sells these components with their associated valves as a single unit. Field Systems product offering for the pulp and paper industry includes Kajaani analyzers,
sensors and sampling devices for sophisticated fiber and stock property measurements, and a wide
selection of shear force, microwave and optical transmitters and sampling devices for pulp
consistency measurements. Metso Automation is a leading global supplier of pulp and paper specialty
analyzers, consistency transmitters and control valves. 17




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##### Table of Contents



Customer Support Services Metso Automation has customer service units in 36 countries. These units, together with local
representatives, form an extensive global service network that is also supplemented with remote
control solutions. Integration of customers systems through communication networks with Metsos
global online service systems enables operations in accordance with our life cycle business
concept. The Expert center in Tampere, Finland, which was opened in 2001, can monitor online the
performance of customers pulp and paper mills. In addition to fast diagnosis and problem solving,
the service is designed to improve process availability and performance, resulting in higher
efficiency and product quality. In 2002, the second Expert center was opened in Atlanta, Georgia.
The third Expert center for power and process industry customers was opened in Tampere, Finland, in
2003. Markets and Customers The following table sets forth the breakdown of Metso Automations net sales by geographic
area for the three most recent years: Year ended December 31,2002
    
    
    2003
    
    
    2004(Percent of total net sales)Finland
    
    
    20
    
    
    
    23
    
    
    
    19Nordic Countries (excluding Finland)
    
    
    4
    
    
    
    4
    
    
    
    4Europe (excluding Nordic Countries)
    
    
    21
    
    
    
    26
    
    
    
    27North America
    
    
    36
    
    
    
    29
    
    
    
    28South America
    
    
    5
    
    
    
    4
    
    
    
    4Asia-Pacific
    
    
    11
    
    
    
    11
    
    
    
    14Rest of the world
    
    
    3
    
    
    
    3
    
    
    
    4Total
    
    
    100
    
    
    
    100
    
    
    
    100
 The principal customers of the Process Automation Systems business line and the Field Systems
business line are in the pulp and paper industry as well as in the power, energy, and oil and gas
industries. In the pulp and paper industry the customers of the Metso Automation business area and
the Metso Paper business area are, in many cases, the same pulp and paper companies and mills. Marketing Metso Automations devices, applications and solutions are sold individually, as upgrades and
add-ons to existing systems, as integrated systems, and as parts of the new machinery or process
equipment installations. Automation applications and solutions are primarily sold by Metso
Automations own worldwide sales organization. Metso Automation also markets conventional valve
technology through distributors in North America. Management believes that the Metso Automation business area is well positioned to develop
innovative, technologically advanced and competitively priced products for customers within the
pulp and paper industry through its coordinated operations with Metso Paper. In certain cases,
particularly when customers purchase complete pulp or paper machine lines, Metso Automations
systems are sold jointly with Metso Paper. However, in many cases, pulp and paper machinery
customers purchase automation systems, measurement devices and control valves separately. Competition The process automation industry is highly competitive throughout the world. The principal
competitors of Metso Automation are process automation and control companies, many of which are
divisions of large multinational companies, such as ABB Automation, Emerson Process Management,
Honeywell Automation and Control Solutions, Invensys, Siemens A&D, Voith Paper Automation and
Yokogawa. The principal factors affecting competition include device and system reliability and
availability, application expertise, technological advancement, ease of configuration and
customization, engineering support, price, customer support availability, reputation and
references. Management believes that Metso Automation is among the leading suppliers worldwide of
special measurement and automation systems for the pulp and paper industry. 18




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##### Table of Contents



Competition in the field systems area, especially in valve industry, is characterized by a
large number of participants, many of which specialize in limited niche areas. Key competitors
include Emerson, Flowserve and Spectris. Management believes that Metso Automation has a leading
position in the supply of control valves to the pulp and paper industry worldwide. Recent Developments In December 2004, Metso Automation decided to close its valve production factory in Chihuahua,
Mexico. The closure is scheduled to take place by the end of August 2005. For a description of the recent acquisitions and divestments, see Item 5. Operating and
Financial Review and ProspectsRecent Acquisitions and
Divestments. Metso Ventures The Metso Ventures business area comprises five business lines: Metso Panelboard, Metso
Drives, Foundries, Metso Powdermet and Valmet Automotive. Metso Panelboard, formerly part of Metso
Paper, was transferred to the Metso Ventures business area in March 2002. The Foundries business
line was created in October 2003, when two foundries that were formerly part of Metso Paper and one
foundry formerly part of Metso Minerals were transferred to the Metso Ventures business area. See
Corporate Structure for a further explanation of our corporate restructuring. Metso Panelboard Metso Panelboard designs and supplies globally entire production lines and individual
equipment for the panelboard industry for manufacturing fiberboard, particleboard and oriented
strand board. It also provides start-up, optimization, spare part and maintenance services for
these lines. Products are developed to use a wide mixture of wood and fiber raw materials. The
industry trend is to increasingly use low cost industrial wood residues, such as sawdust and
recycled wood, as the main raw material source and, in some cases, non-wood natural fibers can
replace wood fibers. The following table sets forth certain financial data regarding Metso Panelboard for the three
most recent years: As of and for the year ended December 31,2002
    
    
    2003
    
    
    2004( in millions, except personnel data)Net sales(1)
    
    
    66
    
    
    
    93
    
    
    
    104Operating profit (loss)
    
    
    (21
    )
    
    
    (3
    )
    
    
    0Capital employed
    
    
    2
    
    
    
    10
    
    
    
    (10
    )Capital expenditures
    
    
    2
    
    
    
    1
    
    
    
    1Research and
Development
    
    
    4
    
    
    
    3
    
    
    
    3Order backlog
    
    
    76
    
    
    
    87
    
    
    
    32Personnel
    
    
    334
    
    
    
    283
    
    
    
    264
   (1)
    
    Includes net sales to other Metsos business areas of 1 million, 1 million and 1 million
in 2002, 2003 and 2004, respectively. Competition Metso Panelboards main competitors in complete production lines are G. Siempelkamp Group and
Dieffenbacher-Group. Significant competitors in equipment supplies are Andritz Group and Pallmann. Markets and Customers Metso Panelboard has its main operations in Finland, Sweden and Germany and sells its products
globally. The main markets are Europe and Asia-Pacific, followed by South America and North
America. Customers are producers of wood-based panels. Some of the main customers are Finsa Group,
Georgia Pacific, Ikea, International Paper, Kronospan Group, Masisa Group, Pfleiderer Group and
Sonae Group. 19




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##### Table of Contents



The following table sets forth the breakdown of Metso Panelboards net sales by geographic
area for the most recent three years: Year ended December 31,2002
    
    
    2003
    
    
    2004(Percent of total net sales)Finland
    
    
    1
    
    
    
    0
    
    
    
    0Nordic Countries (excluding Finland)
    
    
    21
    
    
    
    10
    
    
    
    2Europe (excluding Nordic Countries)
    
    
    24
    
    
    
    24
    
    
    
    35North America
    
    
    6
    
    
    
    5
    
    
    
    4South America
    
    
    9
    
    
    
    4
    
    
    
    5Asia-Pacific
    
    
    39
    
    
    
    37
    
    
    
    51Rest of the world
    
    
    0
    
    
    
    20
    
    
    
    3Total
    
    
    100
    
    
    
    100
    
    
    
    100
 Marketing Products are marketed globally through Metso Panelboards sales network and sales agents.
Management believes that the ability to supply complete lines and large installed base of machinery
provide an advantage in the wood-based panel industry. Recent Developments During the summer of 2004, Metso Panelboard combined the operations of its German units in
Willich and Hannover. This restructuring was part of our corporate wide efficiency improvement
program initiated in 2003. As a result, the number of employees was reduced by one-third. Metso Drives Metso Drives designs, manufactures and sells gears and related aftermarket services for the
pulp and paper industry, power generation and rock and minerals processing. The following table sets forth certain financial data regarding Metso Drives for the three
most recent years: As of and for the year ended December 31,2002(2)
    
    
    2003(2)
    
    
    2004( in millions, except personnel data)Net sales(1)
    
    
    143
    
    
    
    128
    
    
    
    157Operating profit
    
    
    8
    
    
    
    2
    
    
    
    11Capital employed
    
    
    91
    
    
    
    88
    
    
    
    80Capital expenditures
    
    
    25
    
    
    
    4
    
    
    
    2Research and development
    
    
    3
    
    
    
    3
    
    
    
    2Order backlog
    
    
    49
    
    
    
    60
    
    
    
    53Personnel
    
    
    887
    
    
    
    869
    
    
    
    897
   (1)
    
    Includes net sales to other Metsos business areas of 31 million, 27 million and 27
million in 2002, 2003 and 2004, respectively.(2)
    
    The figures for 2002 and 2003 are presented excluding Metso Works and Metso Hydraulics, which
have been divested. Products and Services Metso Drives manufactures and sells special and modular gear units for process and power
generation industries. Examples include paper machine drives, grinding mill drives and wind turbine
gears. Metso Drives also provides comprehensive service for the entire life cycle of gears. Markets and Customers Metso Drives has operations in Finland, Sweden, Germany, Canada and the United States, with
Europe being the principal market area for Metso Drives. Its key customers are in the pulp and
paper industry worldwide and the energy production industry in Europe and North America. Major
customers also include 20




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Metso Paper and Metso Minerals. Customers within Metso accounted for approximately one-fifth
of Metso Drives net sales in 2004. The following table sets forth the breakdown of Metso Drives net sales by geographic area for
the most recent three years: Year ended December 31,2002
    
    
    2003
    
    
    2004(Percent of total net sales)Finland
    
    
    28
    
    
    
    27
    
    
    
    25Nordic Countries (excluding Finland)
    
    
    32
    
    
    
    27
    
    
    
    30Europe (excluding Nordic Countries)
    
    
    25
    
    
    
    27
    
    
    
    24North America
    
    
    10
    
    
    
    11
    
    
    
    9South America
    
    
    1
    
    
    
    1
    
    
    
    1Asia-Pacific
    
    
    4
    
    
    
    6
    
    
    
    11Rest of the world
    
    
    0
    
    
    
    1
    
    
    
    0Total
    
    
    100
    
    
    
    100
    
    
    
    100
 Marketing Mechanical drives for the process and power generation industries, as well as related
services, are sold individually through the sales network of Metso Drives. In industrial gears,
Metso Drives has a global sales and marketing agreement with the German-based SEW Eurodrive GmbH. Competition The demand for Metso Drives products is dependent on process industry investments and the
construction of new wind power plants. Metso Drives market position varies according to the
industry served. Flender in Germany is the market leader in wind turbine gears. Other key
competitors in the industry are Lohmann in Germany and Hansen in Belgium. Recent Developments On March 4, 2005, we announced the signing of an agreement to sell Metso Drives to funds
managed by a Finnish private equity investor, CapMan. The debt-free price for the divestment is
estimated to be approximately 98 million. Metso Drives Oy and its foreign subsidiaries are
expected to be transferred to the ownership of the CapMan funds after the relevant regulatory
approvals. Foundries Foundries within Metso Ventures consist of three foundries. Two iron foundries, located in
Jyväskylä, Finland and Karlstad, Sweden, were previously part of Metso Paper and one steel foundry,
located in Tampere, Finland, was part of Metso Minerals. Foundries manufacture castings for
customers in several engineering industry segments. The following table sets forth certain financial data regarding Foundries for the three most
recent years: As of and for the year ended December 31,2002
    
    
    2003
    
    
    2004( in millions, except personnel data)Net sales(1)
    
    
    72
    
    
    
    69
    
    
    
    75Operating profit (loss)
    
    
    5
    
    
    
    0
    
    
    
    4Capital employed
    
    
    27
    
    
    
    26
    
    
    
    25Capital expenditures
    
    
    3
    
    
    
    5
    
    
    
    3Research and development
    
    
    
    
    
    
    0
    
    
    
    0Order backlog
    
    
    15
    
    
    
    20
    
    
    
    28Personnel
    
    
    593
    
    
    
    580
    
    
    
    587
   (1)
    
    Includes net sales to other Metsos business areas of 24 million, 30 million and 34
million in 2002, 2003 and 2004, respectively. 21




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##### Table of Contents



Products and Services Foundries manufacture and sell both steel and iron industrial castings such as steel castings
for rock crushers, paper machine rolls, crusher frames, crusher wear parts, hydro turbines and
other engineering industry components. The combined annual capacity of Foundries is approximately
50,000 tons of steel and iron castings. Markets and Customers Foundries have operations in Finland and Sweden where their principal market is. The key
customers are various engineering companies as well as wind and hydro turbine manufacturers. Major
customers also include Metso Paper and Metso Minerals. Approximately two-fifths of Foundries sales
are derived from customers within Metso. The following table sets forth the breakdown of Foundries net sales by geographic area for
the most recent three years: Year ended December 31,2002
    
    
    2003
    
    
    2004(Percent of total net sales)Finland
    
    
    67
    
    
    
    68
    
    
    
    70Nordic Countries (excluding Finland)
    
    
    24
    
    
    
    24
    
    
    
    16Europe (excluding Nordic Countries)
    
    
    5
    
    
    
    4
    
    
    
    7North America
    
    
    4
    
    
    
    4
    
    
    
    4South America
    
    
    
    
    
    
    
    
    
    
    1Asia-Pacific
    
    
    
    
    
    
    0
    
    
    
    2Rest of the world
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    100
    
    
    
    100
    
    
    
    100
 Marketing Industrial castings are sold both by our own sales people and sales agents. Competition The demand for the products of Foundries is dependent on equipment sales of its customers for
which the castings are used. There is a wide range of competing foundries both in the Nordic
countries and Central Europe. Competition also comes from foundries located elsewhere in the world,
increasingly in lower-cost countries. As a result, Foundries are increasingly focusing on
technologically more demanding castings. Valmet Automotive Valmet Automotive is an independent contract manufacturer of high quality specialty cars with
production facilities in Uusikaupunki, Finland. The production facilities consist of a body shop,
paint shop, assembly shop and product development center. The production is done on a consignment
basis, and Valmet Automotive is compensated for the assembly of each vehicle. Valmet Automotive is
not required to purchase inventory, and its customers are billed partially in advance so as to
limit Valmet Automotives working capital requirements. Management estimates that the Uusikaupunki
facilities have the capacity, given certain modifications and increased manpower, to assemble up to
100,000 cars per year. The following table sets forth certain financial data regarding Valmet Automotive for the
three most recent years: 22




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##### Table of Contents



As of and for the year ended December 31,2002
    
    
    2003
    
    
    2004( in millions, except personnel and vehicle data)Net sales
    
    
    128
    
    
    
    70
    
    
    
    40Operating profit (loss)
    
    
    23
    
    
    
    (8
    )
    
    
    (23
    )Capital employed
    
    
    42
    
    
    
    31
    
    
    
    25Capital expenditures
    
    
    8
    
    
    
    14
    
    
    
    12Research and development
    
    
    4
    
    
    
    3
    
    
    
    2Approximate number of vehicles assembled
    
    
    41,066
    
    
    
    19,226
    
    
    
    10,051Personnel
    
    
    1,496
    
    
    
    716
    
    
    
    763
 Products and Services Valmet Automotive produces and develops demanding specialty cars and can supply total niche
car projects to OEMs (original equipment manufacturers). Markets and Customers Valmet Automotives current products are the Porsche Boxster and the Porsche Boxster S cars
for Dr. Ing.h.c.F.Porsche AG. Valmet Automotives current contract with Dr. Ing.h.c.F.Porsche AG is
based on a cooperation agreement signed on October 24, 2001, with car production expected to
continue until 2011. Valmet Automotive continuously seeks a new car model to add to its production
line to improve the capacity utilization of the plant. Competition Specialty cars of the type produced by Valmet Automotive are designed for very limited
customer segments and production is to an increasing extent subcontracted to external
manufacturers. Valmet Automotive is one of the principal manufacturers of convertibles and contract
manufacturers of specialty cars in Europe. Valmet Automotives principal competitors are Karmann in
Germany, Magna Steyr in Austria, and Bertone and Pininfarina in Italy. Management believes that Valmet Automotives principal competitive advantages are its high
quality and cost-efficiency, the competence of its personnel and its good readiness to manufacture
new products. In December 2003, Valmet Automotive was granted one of the first ISO/TS 16949 quality
certificates in the car industry. Recent Developments Due to the expiration of an agreement with Saab Automobile in April 2003 that provided for a
second car model to be produced at the factory, Valmet Automotive does not currently have a
sufficient order backlog to employ its entire personnel. Manufacture of new generation of Porsche
Boxster cars commenced in the third quarter of 2004. As a result, car-making volumes started to
increase in the fourth quarter of 2004. Some of the personnel previously laid off were called back
to work. At the end of the year 2004, slightly more than 750 persons were working and approximately
400 continued to be temporarily laid off. In November 2001, ThyssenKrupp Automotive AG of Germany acquired a ten percent minority
holding in Valmet Automotive with an option to acquire the remaining 90 percent by the end of 2003.
In December 2003, ThyssenKrupp Automotive informed us that it would not use its option. In June
2004, ThyssenKrupp Automotive AG further informed that it would not acquire additional shares of
Valmet Automotive, and that it would also give up its ten percent minority shareholding in the car
manufacturer. On December 15, 2004, we reacquired ThyssenKrupps ten percent minority shareholding. Metso Powdermet Metso Powdermet designs, subcontracts the manufacture of and delivers machine parts based on
powder metallurgy and other corresponding manufacturing techniques. It also advises our other
businesses in issues related to materials technology. Metso Powdermets current main external
project involves supplying powder metallurgy parts for the particle accelerator of the European
Organization for Nuclear Research, or CERN, located in Switzerland. This project will continue
until 2005. 23




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Metso Powdermets net sales totaled 7 million, 10 million and 11 million in 2002, 2003 and
2004, respectively. As of December 31, 2004, Metso Powdermet had 23 employees. 
 Discontinued Operations On June 30, 2004, after approval of the competition authorities, Metso completed the
divestiture of its Compaction & Paving business, Dynapac, to Altor, a Nordic private equity
investor. Dynapac was excluded from Metso Minerals results from July 1, 2004 and is reported as a
separate entity under Discontinued Operations for the years 2002 and 2003 and in 2004 until its
sale. On December 31, 2004, the Drilling business of Metso Minerals, Reedrill, was divested and
transferred to Terex Corporation from the United States. The business line was excluded from Metso
Minerals and is reported as a separate entity under Discontinued Operations for all three years
reported. In November 2002, we signed a memorandum of understanding with Bobst Group SA of Switzerland
concerning the divestment of our Converting business. After the required competition authority
approvals were received, the sale was completed on January 30, 2004. Based on this development,
Converting business was excluded from Metso Paper in 2002 and is reported as a separate entity
under Discontinued Operations for the years 2002 and 2003 and in 2004 until its sale. See
Corporate Structure for a further discussion of our corporate restructuring. The following table sets forth certain financial data regarding Discontinued Operations for
the three most recent years: As of and for the year ended December 31,2002
    
    
    2003
    
    
    2004( in millions, except personnel data)Net sales
    
    
    558
    
    
    
    567
    
    
    
    267Operating profit (loss)
    
    
    13
    
    
    
    (50
    )
    
    
    (8
    )Capital employed
    
    
    452
    
    
    
    370
    
    
    
    Capital expenditures
    
    
    12
    
    
    
    12
    
    
    
    4Research and development
    
    
    13
    
    
    
    16
    
    
    
    7Order backlog
    
    
    157
    
    
    
    109
    
    
    
    Personnel
    
    
    2,903
    
    
    
    2,852
    
    
    
    
 Dynapac The products in the Compaction & Paving business, under the Dynapac product brand, included
pavers, planers, rollers, light compaction equipment and concrete machinery. In addition to new
equipment, the business also provided expertise through services, such as spare and wear parts as
well as maintenance. Drilling The Drilling business, under the Reedrill and Texoma product brands, offered equipment and
services for drilling. The offering included track- and wheel-mounted drills and rotary drills for
surface mining and excavation, multi-boom jumbo-drills for underground excavation and soil drilling
equipment. Converting Converting consisted of operations of Italian Valmet Rotomec (Rotomec) and U.K. based Atlas
Converting plc (Atlas). Converting offered a wide range of machines for the packaging and
printing industries. Rotomec specialized in rotogravure and flexo printing machines and special coating and
laminating machines for packaging. Rotomec produced packaging industry machines for various
materials, such as paper, board, aluminum, and plastic sheets. Rotomec also produced printing
machines for the production of wallpaper and interior furnishing materials. Atlas specialized in
slitter rewinders and vacuum-metallizing equipment for the treatment of paper, film and aluminum
foil for the converting industry. Its products were mainly used in the film and packaging
industries. 24




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Raw Materials Each of our business areas procures the raw materials and subcomponents required for its
operations from a network of multiple subcontractors and suppliers. We typically have long-term
relationships with our network of suppliers, even if long-term supply agreements are typically only
used for certain key raw materials. No business area is dependent on a single supplier, and we
emphasize the need to identify and monitor replacement suppliers in the event that a particular
supplier is unable to meet our requirements. We manufacture internally many core components that
are required for our operations. The types of raw materials and subcomponents that we use vary widely within each of our
business areas. The most important include various mechanical and electrical components,
subassemblies for Metso Paper and Metso Minerals, as well as hardware, software and computer
applications for Metso Automation. In addition, steel and other metals and minerals are required
for Metso Papers and Metso Minerals operations. We have long-term supply agreements for these key
materials, with pricing terms following the prevailing market prices. However, we are not dependent
on any single supplier and may procure these raw materials and subcomponents from multiple sources,
including the open market. In addition, certain of our business areas require special raw
materials. For example, Metso Paper requires rubber, polyurethane, composite and hard coatings in
the production of paper machines, including roll covers. Also, Metso Minerals requires manganese,
which is a mineral of limited global supply, in the production of castings for various wear parts.
Also, Foundries within Metso Ventures requires scrap iron. No individual supplier or supply
agreement is material. See Item 3. Key InformationRisk Factors for a discussion of the risks associated with our
reliance on suppliers and subcontractors to procure raw materials and subcomponents. 
 Seasonality Seasonal variations affect, to a relatively limited extent, our net sales. This limited
impact is mainly due to seasonality in our customers operations. Due to the timing and purchasing
decisions in certain of our customer segments, deliveries and sales to such customer segments are
typically higher in the fourth quarter than during the other quarters of the year. This applies to
all of our business areas. However, large projects, which for us are pulp and paper or mining
related, tend to have long delivery timetables and are recognized as sales each quarter based on
the percentage of completion. Weather conditions provide an additional reason for some seasonality
especially in our Metso Minerals Crushing & Screening business line. As customers in the northern
hemisphere make required machinery investments to construct roads in the regions summer months,
this typically increases deliveries in the second quarter of the year. 
 Dependence on Intellectual Property We aim to create value through our ownership of intellectual property rights, which
include Metso brand, patents, utility models, design protections, trademarks, copyrights and domain
names. We emphasize our systematic intellectual property management and harmonized, corporate-wide
practices. Attention is also paid to avoid infringements of the intellectual property rights of
others. We seek to manage our intellectual property rights portfolios in a way that supports both
competitiveness and technology leadership in our businesses. For example, our patent portfolio,
including 8,500 patents and 3,500 pending applications, is regularly evaluated, screened and
developed with current and future business needs and possibilities in mind to raise the value/cost
ratio of the portfolio. In 2004, our employees filed approximately 620 invention disclosures. We sought protection in
the form of patents for approximately 220 new inventions relating to the products and services of
all our business areas. 
 Governmental Regulation and Environmental Matters Our operations are subject to various local laws of the countries in which we operate,
including the United States federal, state and local environmental laws and regulations. Under
various environmental laws, including the U.S. Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (CERCLA), an owner or operator of property may become
liable for the costs of remediation or removal of certain hazardous substances on its property,
regardless of whether the owner or operator knew of, or was responsible for, the release of such
substances. In addition, a generator of hazardous substances may be 25




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responsible for all or a portion of remedial and investigation costs at offsite disposal
locations. There are currently no CERCLA claims pending against us. In addition to the specific
matters described below, Metso Minerals Industries, Inc., previously Nordberg Inc., a company
belonging to the Metso Minerals business area, has certain environmental concerns typically
associated with old industrial facilities, such as potential asbestos in building materials, lead
paint, and storing of oil, solvents and paint. Metso Minerals Industries Inc. has been named, together with a number of other parties, as a
potentially responsible party (PRP) for the remediation of two Wisconsin landfills (Hunt and
Muskego), which have been designated as superfund sites under CERCLA. As a PRP, Metso Minerals
Industries Inc. is jointly and severally liable for the clean-up costs of such sites. With respect
to Hunt landfill site, Metso Minerals Industries Inc., together with the other named PRPs, has
entered into a consent decree with the U.S. government pursuant to which Metso Minerals and such
other parties have agreed to cover the clean-up costs of the Hunt site, which had been estimated to
be in the range of U.S.$13 million to U.S.$22 million. Metso Minerals Industries Inc. has a 6.3
percent share of the clean-up costs and is also covered by an indemnification agreement with a
previous owner of Nordberg. Construction at the Hunt site was completed in 1996 and Metso Minerals
has paid a total of approximately U.S.$0.4 million for the clean-up costs. Additional work at the
Hunt site may be required at an estimated cost to Metso Minerals Industries, Inc. of approximately
U.S.$0.2 million. Efforts are ongoing to contact appropriate regulatory agencies to determine the
extent, if any, of additional work required. With respect to the Muskego site, there is an
administrative order in place, with a total estimate of U.S.$15 million for design and clean-up
costs, of which the share of the previous owner and Metso Minerals is expected to be at the level
of the already paid U.S.$125,000. No activities at the Muskego site have occurred since 1996.
Management estimates that Metso Minerals maximum remaining liability with respect to the Hunt and
Muskego sites will not exceed the currently established reserve of U.S.$267,000, and that the
reserve for the remediation costs of the two landfill sites will be sufficient for any remaining
liability due to above reasons and the fact that no activity on these sites has occurred for
several years. In furtherance of the planned closure and sale of the Metso Minerals Milwaukee, Wisconsin,
manufacturing facility, a Phase II Environmental Assessment (ESA) was commenced in early 2004 and
completed in April of that year. The ESA indicated the existence of soil and groundwater
contamination at the facility, the existence of which was communicated to the Wisconsin Department
of Natural Resources (WDNR) in May 2004. The WDNR notified Metso Minerals Industries Inc. by
letter dated May 10, 2004 of its investigation and cleanup responsibilities under applicable law.
In October 2004, Metso Minerals Industries Inc. entered into a contract with an environmental
consulting and remediation firm to clean up the property for all identified matters in accordance
with applicable law for a fixed price. Metso Minerals Industries Inc. also purchased environmental
insurance consisting of remediation cost cap insurance in the amount of U.S.$3.3 million and a
10-year, U.S. $10 million in third party pollution legal liability coverage for unknown matters,
subject to standard exclusions. The cost of the basic remediation of U.S.$1.1 million has been
fully funded. The entire insurance premium of approximately U.S.$425,000 has also been paid by
Metso Minerals Industries Inc. On January 31, 2005, this property was sold with the purchaser
accepting assignment of the remediation contract, including the potential responsibility for any
additional payments thereunder as well as Metso Minerals Industries Inc.s insured status under the
insurance policy. Formal assignment of the insurance policies is expected in the first quarter of
this year. Notwithstanding assignment, Metso Minerals Industries Inc. will remain an additional
insured party under the third party pollution legal liability portion of the insurance policy and
shares the responsibility for up to one-half of the U.S.$250,000 deductible should there be any
claims. As a result of the acquisition of Svedala, Metso Minerals has two sites with certain
environmental concerns. The first is a former manufacturing site in Mt. Olive, New Jersey, which
Svedala acquired in 1992. The company acquired by Svedala operated this site from 1955 to 1987.
With the closing of manufacturing operations in 1987, the New Jersey Industrial Site Recovery Act
triggered an environmental assessment. Both soil and groundwater contamination was identified. The
source of most of the contamination was traced back to prior owners and operators of the property,
which had been an industrial site since the early 1900s. All known contaminated soil has been
removed and the State of New Jersey Department of Environmental Protection (NJDEP) has issued a
No Further Action letter regarding the soil contamination. Metso Minerals has sold the site in
Mt. Olive in December 2003. However, liabilities for ground water contamination issues were
retained by Metso Minerals. In addition to the prior remediation activities at the site, Metso
Minerals conducted a baseline ecological evaluation of the property as required by the NJDEP. The
basic purpose of such evaluation was to determine whether site-related contamination presents a
risk to or has impacted environmentally sensitive areas within or adjacent to the property. Such
evaluation, together with a recommendation that no further ecological evaluation or testing be
conducted at the site, was submitted to the NJDEP by an environmental consultant retained by us.
There can be no assurance that the NJDEP agrees with such recommendation. However, taking into
account (i) that we have purchased a pollution legal liability insurance policy for the site, 26




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which generally covers, subject to standard exclusions, clean-up costs, bodily injury and
property damage for pre-existing and unknown pollution conditions, and (ii) that extensive prior
remediation activities at the site have already been conducted, we do not anticipate any liability
arising out of the final evaluation to be material. The estimated reserve required for the
remediation measures relating to the ground water contamination and the completion of the baseline
evaluation is U.S.$620,000. The second site with environmental concerns is a former manufacturing property in Danville,
Pennsylvania. Both soil and groundwater are contaminated with oil from the manufacturing process.
In conjunction with the state of Pennsylvania, an approved remediation plan has being developed.
Some soil remediation has already been completed. Two additional areas of concern are being
investigated and possibly remediated. An U.S.$1.2 million reserve is our best estimate of potential
remediation costs at this time. Metso Minerals, through its Reedrill business that was divested on December 31, 2004, was
earlier identified as a PRP in two CERCLA sites. At one of the sites, liability has been assumed by
a predecessor company. Regarding the other site, Metso Minerals (Svedala) has responded in March
2000 to a request for information and identified predecessor companies as the potentially
responsible parties. To date, no response by the U.S. Environmental Protection Agency (EPA) has
been received. Metso Minerals Industries Inc. may become subject to remedial costs relating to an old
industrial facility in Colorado Springs, Colorado, which was used in foundry and test laboratory
operation. The site is for sale. Phase I level evaluations do not suggest any environmental
conditions of any major concern. However, in mid-2004, an area of stained soil identified in the
Phase I was evaluated and determined to be contaminated with hazardous materials and, thereafter,
excavated and disposed of in accordance with applicable regulations. Additional Phase II level
evaluations are likely depending on the requirements of potential purchasers. A reserve of
approximately U.S.$420,000 exists to account for the anticipated Phase II costs and the purchase of
environmental insurance. Since 1992, Metso Minerals Industries Inc. has been monitoring the groundwater at its Keokuk,
Iowa facility after the removal of contaminated soil and pursuant to a plan of natural attenuation
of affected groundwater, under the direction of the Iowa Department of Natural Resources (IDNR).
In November 2004, the IDNR advised that monitoring requirements for most of the compounds being
tested for were eliminated. However, IDNR also stated that there had been insufficient attenuation
of certain chlorinated compounds and directed Metso Minerals Industries Inc. to prepare a work plan
that would enhance the degradation of these compounds. Metso Minerals Industries Inc. accepted a
bid for the investigation, delineation and preparation of a work plan. A reserve of U.S.$100,000
was established for estimated costs associated with near-term compliance with IDNR investigation
requirements. In October 2004, the Kansas Department of Health and Environment (KDHE) advised Metso
Minerals Industries Inc. that an alleged predecessor, McNally Pittsburg Manufacturing Corporation,
had disposed of foundry sand at a location where the soil now contains lead and chromium. The KDHE
has invited participation in a voluntary cleanup program, failing which administrative action will
be taken. Metso Minerals Industries Inc. has retained local legal counsel to investigate the scope
of potential liability, if any, and has reserved U.S. $100,000 for estimated legal fees and
investigation costs. Metso Panelboard, part of the Metso Ventures business area, has previously owned a site with
certain environmental concerns. The site, located in Belgium, was owned by Constructiewerkhuizen De
Mets N.V., a company divested in 2001. Pursuant to the sale agreement, we are required to provide
the purchaser with an environmental certificate by the Belgian authorities, to the effect that the
soil at the site has not been contaminated. Consequently, a third party conducted environmental
studies and assessed the site. The completed report of the results was sent to OVAM (Belgian
environmental authority) for acceptance during the fall of 2004. The studies indicate that
groundwater has been polluted by chlorinated hydrocarbons but that soil has not been polluted. The
use of the chemicals in the groundwater ended at site in 1989. The precautionary measures to
prevent the spreading of this historical pollution started in January 2005. A cleaning plan can be
presented for acceptance to OVAM after the completed report has been accepted. In accordance with
the conditions of the sale agreement, we have estimated that our remaining responsibility for
remediation costs will be limited to the currently established reserve of 0.8 million. Environmental awareness and environmentally focused technology solutions are an essential part
of our competitiveness. We develop solutions that improve eco-efficiency of our customers
industrial core processes. Our objective is to reduce the environmental impact of products and
processes throughout their life cycle. 27




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In June 2000, we signed the International Chamber of Commerce (ICC) Business Charter
for sustainable development, which compliments the environmental management principles of our own
environmental policy. We expect that our most significant production sites will comply with
ISO14001 environmental management systems in the future. In 2004, the ISO14001 certification was
granted to three Metso sites, and the current amount of sites with the certification is 33. By the
end of 2004, the ISO14001 systems covered 59 percent of our production activity. When systems
currently under development will be certified, 78 percent of our production activity will be
covered. In 2004, we were selected for the sixth time as a component in Dow Jones Sustainability
Index World (DJSI) for the period 2004-2005. We also feature in the European sustainability
index, DJSI STOXX. We have also been reselected for FTSE4Good corporate social responsibility
index. In addition, we have been included in several smaller sustainability indices. We are committed to full compliance with all applicable national and international laws,
regulations and generally accepted practices. Our environmental reporting procedure covers
operating sites with significant environmental impacts. To our best knowledge, overall compliance
with site-level permit conditions was proper in 2004. No major non-compliance situations were
observed. Minor clean up, monitoring or investigation activities are being carried out at several
sites as indicated above. However, we anticipate that these cases do not result in material
financial consequences for us. Management is not aware of any other current environmental matters
that could reasonably be expected to have a material adverse effect on our financial condition or
results of operations. 
 Property, Plants and Equipment Our principal executive offices are located at Fabianinkatu 9 A, Helsinki, Finland. As of December 31, 2004, our principal manufacturing facilities included the following: Owned orLocation of Facility
    
    Leased
    
    
    Size (sq.ft)
    
    
    Principal ActivitiesMetso CorporationHelsinki, Finland
    
    Owned
    
    
    86,920
    
    
    Corporate head officeMetso PaperJyväskylä, Finland
    
    Owned
    
    
    1,239,034
    
    
    Large-sized Paper MachinesJärvenpää, Finland
    
    Owned
    
    
    624,242
    
    
    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 CenterKotka, Finland
    
    Owned
    
    
    295,039
    
    
    Medium-sized Paper Machines, Pulp DryersValkeakoski, Finland
    
    Owned
    
    
    231,351
    
    
    Mechanical Pulping, Refiner Segments, Stock Preparation Equipment and SystemsComo, Italy
    
    Leased
    
    
    226,974
    
    
    Paper and Board Machine RebuildsAppleton, Wisconsin, United States
    
    Owned
    
    
    166,000
    
    
    Finishing Products, Roll ServiceTurku, Finland
    
    Leased
    
    
    155,506
    
    
    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 CoveringTampere, 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 Handling
 28




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Owned orLocation of Facility
    
    Leased
    
    
    Size (sq.ft)
    
    
    Principal ActivitiesHagfors, Sweden
    
    Owned
    
    
    70,865
    
    
    Refiner SegmentsJärvenpää, Finland
    
    Leased
    
    
    68,049
    
    
    Paper Finishing MachinesFederal Way, Washington, United States
    
    Owned
    
    
    62,683
    
    
    Roll CoveringThunder Bay, Canada
    
    Leased
    
    
    50,908
    
    
    Air Drying SystemsWuxi, China
    
    Owned
    
    
    50,388
    
    
    Service CenterMelbourne, Australia
    
    Owned
    
    
    49,998
    
    
    Service CenterMontreal, Canada
    
    Leased
    
    
    45,000
    
    
    Service Center, ComponentsShanghai, P.R. China
    
    Leased
    
    
    43,670
    
    
    Logistics CenterPfungstadt, Germany
    
    Owned
    
    
    40,458
    
    
    Service CenterFlorence, Alabama, United States
    
    Owned
    
    
    40,000
    
    
    WoodhandlingSorocaba, São Paulo, Brazil
    
    Owned
    
    
    39,288
    
    
    Service CenterMetso MineralsSorocaba, São Paulo, Brazil
    
    Owned
    
    
    898,910
    
    
    Rock Crushers, Vibrating Equipment, Rollers, CastingsIsithebe, South Africa
    
    Leased
    
    
    602,140
    
    
    Manganese Spare 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 EquipmentDüsseldorf, Germany
    
    Owned
    
    
    420,223
    
    
    Metal Recycling MachinesVereeniging, South Africa
    
    Owned
    
    
    330,386
    
    
    Rock CrushersAhmedabad, India
    
    Owned
    
    
    350,076
    
    
    Castings and Parts for Rock Crushers and PumpsBawal, India
    
    Owned
    
    
    302,571
    
    
    Rock Crushers, Vibrating Equipment and PumpsSala, Sweden
    
    Owned
    
    
    247,570
    
    
    Slurry Pumps and Process EquipmentTrelleborg, Sweden
    
    Leased
    
    
    242,100
    
    
    Rubber ManufacturingGastonia, North Carolina, United States
    
    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 BeltsKeokuk, Iowa, United States(2)
    
    Owned
    
    
    98,000
    
    
    Rubber ManufacturingTampere, 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 BeltsMetso 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
    
    
    129,000
    
    
    Valve ManufacturingChihuahua, Mexico(3)
    
    Leased
    
    
    98,800
    
    
    Valve ManufacturingLansdale, Pennsylvania, United States
    
    Leased
    
    
    84,700
    
    
    Office, Control Systems Manufacturing
 29




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Owned orLocation of Facility
    
    Leased
    
    
    Size (sq.ft)
    
    
    Principal ActivitiesKajaani, Finland
    
    Leased
    
    
    77,600
    
    
    Office, Specialty Analyzers Manufacturing and TestingMetso VenturesUusikaupunki, Finland
    
    Owned
    
    
    1,216,000
    
    
    Car AssemblyParkano, Finland
    
    Owned
    
    
    249,946
    
    
    Gears 50 percent and the rest hired to an external manufacturerJyväskylä, Finland
    
    Owned
    
    
    183,645
    
    
    Gear Manufacturing and ServiceKarkkila, Finland
    
    Owned
    
    
    126,000
    
    
    Gear Manufacturing and ServiceWuppertal, Germany
    
    Leased
    
    
    65,781
    
    
    GearsCambridge, Ontario, Canada
    
    Leased
    
    
    35,000
    
    
    GearsHannover, Germany
    
    Leased
    
    
    50,418
    
    
    Energy plants, dryersSundsvall, Sweden
    
    Leased
    
    
    38,736
    
    
    MDF line machinesNastola, Finland
    
    Leased
    
    
    35,572
    
    
    Particleboard and OSB line machinesJyväskylä, Finland
    
    Owned
    
    
    394,000
    
    
    FoundryTampere, Finland
    
    Owned
    
    
    288,020
    
    
    FoundryKarlstad, Sweden
    
    Owned
    
    
    195,000
    
    
    Foundry
  (1)
    
    Joint-venture, see Associated Companies below.(2)
    
    Scheduled to be closed during the first half of 2005.(3)
    
    Scheduled to be closed by the end of August 2005. Management believes that the production capacity of each of our production plants is adequate
and suitable for our current business needs and that suitable additional or alternative space would
be available in the future, if necessary, on commercially reasonable terms. 
 Significant Subsidiaries The majority of our operating assets in Finland and outside of Finland are held through
regional or divisional subsidiaries. During 2001, we changed a number of the names of our
subsidiaries by eliminating the reference to Valmet, Nordberg, Neles and other predecessor
entities, except for Valmet Automotive Oy and the subsidiaries that already contain the Metso name.
Our significant subsidiaries, as defined in Rule 1-02(w) of Regulation S-X, are as follows, each of
which is wholly-owned by Metso Corporation: Company Name
    
    Country of IncorporationMetso Paper Oy
    
    FinlandMetso Minerals Oy
    
    FinlandMetso Minerals Holding AB
    
    SwedenMetso USA Inc.
    
    United StatesMetso Svenska AB
    
    Sweden
 
 Associated Companies We currently own 35.8 percent of Allimand S.A., which, as of December 31, 2004, had an
equity value of approximately 5 million; 48.3 percent of Valmet-Xian Paper Machinery Co. Ltd.,
which had an equity value of approximately 7 million; 50.0 percent of Shanghai Neles-Jamesbury
Valve Co. Ltd., which had an equity value of approximately 3 million; and 48.2 percent of Avantone
Oy, which had an equity value of approximately 1 million. 
 Item 5.  Operating and Financial Review and Prospects. The following discussion and analysis by management concerning the financial condition
and the results of operations of Metso should be read together with the consolidated financial
statements included in this annual report. Our consolidated financial statements have been prepared
in accordance with Finnish GAAP, which differs in certain significant respects from U.S. GAAP. A
reconciliation of the amounts of net income and shareholders equity reported under Finnish GAAP to
the amounts determined under U.S. GAAP, and a 30




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discussion of the principal differences between Finnish and U.S. GAAP are set out in Note 30
to our consolidated financial statements, included elsewhere in this annual report. 
 Business Overview Our Customers Our main customer industries are pulp and paper, rock and minerals processing as well as
power, energy, oil and gas industries. Certain important trends apply to these industries, which
have an effect on our operations. Business driven by the installed base of machinery and equipment
has been growing especially in Europe and North America, where our customers have been focusing
more on efficiency improvements for their existing processes rather than investing on new machinery
or equipment. Demand for new machinery and equipment focuses on areas with strong economic growth
and/or good availability of raw materials required, which supports demand for pulp and paper as
well as rock and minerals processing investments. Such areas include Asia and South America.
Accordingly, we have adapted our own organization in Europe and North America by cutting new
machine related resources and strengthened aftermarket and process service related resources, while
in the growing markets of Asia and South America we have increased our new machine related
resources. Business Drivers Paper consumption growth is the key driver for pulp and paper investments. Shorter-term
capacity utilization rates and changes in paper prices impact the investment activity of Metso
Papers customers. Within the paper industry, new papermaking capacity has mostly been built in
Asia, mainly China, during the past few years. The demand in the Chinese market has been supported
by economic growth that, in turn, has increased paper consumption significantly. The equipment
demand has been increasing for high-grade paper products, which has increased the investments of
Metso Papers customers in high-speed and high-quality machinery and equipment. Provided that the
strong economic growth in China continues, we expect continued good investment activity in China by
our customers in the paper industry. South American customers have in the recent years been active
in investing in new pulping capacity due to the good availability of fast growing wood resources,
such as eucalyptus, in the region. Management expects this competitive advantage to continue to
support demand for pulp equipment in South America during the next several years as well. Our
customers in the European pulp and paper industry have in the past few years made only limited
investments in new capacity and, instead, they have focused on machine rebuilds and process
improvements. As demand for paper products in Europe is not expected to increase significantly, the
current investment level could continue for a few years. In North America, investment activity in
the pulp and paper industry has been low. Especially in the United States, there have been very few
new investments since the 1990s and the demand has been focused on smaller rebuilds and aftermarket
activities. Metso Minerals business environment reflects, on the one hand, demand from the aggregates
industry and, on the other, demand from the mining industry. Although the major aggregates
producers come from Europe and North America, the growth in demand for aggregates has been
moderate, and aggregates have been used mainly to maintain existing infrastructure. In developing
countries, such as China and India, infrastructure construction has been supported by higher
economic growth and is increasing strongly. Also, large multi-year government programs aimed to
improve the infrastructure in these countries have increased the demand for aggregates and
investments in new production machines and equipment provided by Metso Minerals. The focus in
mining operations has moved to the Southern Hemisphere. In recent years, the demand for new mining
equipment has increased in South America, Southern Africa, and Australia, while the emphasis in
mining operations in the Northern Hemisphere has been on aftermarket and service operations. Many
countries in the Southern Hemisphere have significant metal deposits attracting new investment.
Metals prices and the supply-demand balance are important demand drivers for the mining industry as
well as for their suppliers. As a result of growing demand for metals, metal prices continued to
rise during 2004. The mining industry has been increasing production to answer to the growing
demand, and this has improved the demand for both aftermarket services and new equipment provided
by Metso Minerals. Approximately one-half of Metso Automations sales are derived from the pulp and paper
industry, and the apparent trends in that industry affect the business environment of Metso
Automation. Most of the remaining sales are derived from the power, energy, oil and gas industries
where customer investment activity reflects both the demand for and price of energy. Recently, the
application of automation in industrial processes has been increasing after a few slower years. The
increased oil and gas prices raised demand from customers in those industries during last year.
Management expects the growth rate to accelerate in the future inasmuch as many 31




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process industries have systems that are obsolete by todays standards, and inasmuch as newer
technology enables developing solutions that improve the efficiency of equipment and processes.
Automation is increasingly embedded in machines and equipment, and more fully integrated in the
overall information systems of mills and processes. 
 Key Management Issues In 2004, the key issues in the management of the Company were improving the profitability
of our business areas and strengthening our balance sheet. We continued to implement the
corporate-wide cost restructuring program and launched a new, additional renewal program in Metso
Paper. During the year, we made a few important structural decisions that further concentrated our
operations around our future core by divesting three sizeable businesses. These divestments helped
us in reaching our target of reducing our debt level. We also strengthened our balance sheet by
concentrating on working capital management. After a couple of years of weak market conditions, the
market situation in two of our business areas started to improve during the year 2004. Metso
Minerals saw increased demand in the construction equipment business in North America and Asia
while mining industry investments also clearly picked up. For Metso Automation, the power, energy,
oil and gas segment saw a clear improvement. Going forward into 2005, we will continue our efforts to improve the profitability of our
Metso Paper business. We also intend to take actions to support growth in Metso Minerals and Metso
Automation. We have set clear financial targets for the Company and all of its business areas, and
management intends to focus strongly on achieving these targets. Metso Papers Business Concept Renewal Program of 2004 As the investment activity in the pulp and paper industry continued to be slow in 2004, we
continued actions to strengthen Metso Papers competitiveness by launching a program in June 2004
to renew the business concept and to streamline the cost structure of the business area. The
overall cost savings target is to reduce costs by 50 million annually. The decisions made under
the program in 2004 resulted in Metso Paper booking 26 million of nonrecurring expenses. These
decisions are expected to contribute to approximately 40 million annual cost savings. The
remainder of the cost savings target is intended to be covered by decisions to be made during 2005.
The measures left for 2005 are related to certain unfinished outsourcing plans in Finland and
Sweden and to the global re-engineering of our tissue business. The programs nonrecurring expenses
are estimated to total approximately 40 million, including the already recorded provision of 26
million. The decisions made in 2004 are expected to result in the reduction of approximately 670
Metso Paper employees, of which approximately 200 had left the Companys payroll by December 31,
2004. In all, the program is estimated to affect 1,100 - 1,300 employees, with one-half being
affected by reductions and the other half by participating in outsourcing and other production
arrangements. The full benefits of this program are expected to materialize in 2006. Efficiency Improvement Program of 2003 In 2003, our board of directors adopted an efficiency improvement program designed to cut
fixed costs. The efficiency improvement program was completed in all of our business areas during
2004. The decisions made are estimated to result in annual savings of slightly over 100 million,
in line with the original target. As a result of the efficiency improvement program, our personnel
has been reduced by approximately 1,900 persons, including a reduction of approximately 1,300
employees in 2004. According to the program and decisions already made, the number of personnel
will be reduced further by approximately 140 persons in 2005. Hence, management expects a further
positive contribution to the 2005 result from this restructuring. The costs of the program are
estimated to total 93 million, rather than the 103 million estimated at the end of 2003. Hence,
we were able to revise downwards the provision made at the end of 2003. In Metso Paper, the annual cost savings target through the efficiency improvement program is
somewhat above 30 million. The organization of Metso Paper was streamlined and Metso Papers
workforce was reduced in Finland, Sweden, Italy and North America. In addition, in-house
manufacturing capacity in Finland was outsourced. In Metso Minerals, the annual cost savings target through the efficiency improvement program
is just over 50 million. Operational efficiency was improved through the reduction of personnel in
factories as well as in the global sales and service network. As part of the program, we closed
down the production plant for mining crushers in Milwaukee, Wisconsin, a plant for mining industry
process equipment and pumps in Colorado 32




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Springs, Colorado, a foundry in Vereeniging, South Africa, and a plant for mining and crushing
screens in Ketsch, Germany. We also adjusted our wear protection business in two Swedish units
during 2004. The decision to close the Keokuk, Iowa, plant has also been made as one of the final
initiatives of the program. In Metso Automation, the annual cost savings target through the efficiency improvement program
is approximately 8 million. The organization was streamlined and the workforce was reduced in
Finland and North America and in the global sales network by mid-2004. As part of the program,
Metso Automation also divested CPS Electronics Inc., a contract manufacturer of electronics, in
September 2003. Smaller annual cost savings targets were set for Metso Ventures and the corporate head office
in Finland. Within Metso Ventures, two Metso Panelboard units in Germany were combined as part of
the program. At the corporate head office minor personnel reductions were made. Goodwill Impairment Due to the continued demanding market situation in Metso Minerals customer industries within
rock and minerals processing, an impairment charge of 205 million related to goodwill was recorded
in the 2003 figures of Metso Minerals and Discontinued Operations. This goodwill impairment, which
had no cash flow effect, decreased our annual amortization of goodwill by approximately 10 million
in 2004. There were no goodwill impairments in 2004. 
 Recent Acquisitions and Divestments The most significant development since the formation of Metso through the merger of
Valmet and Rauma was our acquisition of Svedala in 2001 in order to build ourselves into a globally
leading player in rock and minerals processing, alongside our similar position in the pulp and
paper industry. In 2003 and 2004 we have focused on developing the Company further by divesting
several businesses that were not considered integral parts of Metso. During this period we only
made limited small acquisitions. On March 4, 2005, we announced the signing of an agreement to sell Metso Drives to the funds
managed by private equity investor CapMan of Finland. The debt-free price of the divestment is
estimated to be approximately 98 million. Metso Drives Oy and its foreign subsidiaries will be
transferred to the ownership of the CapMan funds after the relevant regulatory approvals. On December 31, 2004, we sold our Drilling business to Terex Corporation from the United
States. Drilling had sales of 75 million in 2004 and approximately 280 employees. The divestment
value, which will be based on the net asset value at closing, will be approximately 28 million. On June 30, 2004, we divested our Compaction & Paving business that operated under the Dynapac
name to Altor, a Nordic private equity investor. Dynapac had sales of 322 million in 2003 and
approximately 1,800 employees. The transaction price was 291 million net of cash sold. In January 2004, we sold the Converting business to Bobst S.A. of Switzerland. Converting had
sales of 183 million in 2003 and approximately 800 employees. The final transaction price was 68
million net of cash sold. In September 2003, we sold CPS Electronics Inc., a subsidiary of Metso Automation, to Scanfil
Plc of Finland. CPS Electronics is a contract manufacturer of electronics, specializing in small
and medium-sized series production. The number of employees totaled approximately 130. In February 2003, we sold the Network Management Solutions companies (NMS), part of the
Metso Automation business area, to Telvent of Spain. NMS provides SCADA and information management
solutions. NMS employed over 400 people and had annual net sales of approximately 59 million in
2002. In January 2003, we sold our hydraulic power transmission unit, Metso Hydraulics, which was
part of the Metso Ventures business area to Sampo-Rosenlew Oy. Metso Hydraulics net sales in 2001
totaled 18 million and it employed 120 people. 33




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Critical Accounting Policies The preparation of our consolidated financial statements in accordance with Finnish GAAP
requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. We believe that our estimates and
assumptions are reasonable. However, actual results and the timing of the recognition of such
amounts could differ from those estimates. We have identified the following critical accounting
policies and estimates utilized by management in the preparation of our consolidated financial
statements. In some instances, accounting policies followed in accordance with U.S. GAAP (as reported in
Note 30 to the financial statements) differ from those policies followed in accordance with Finnish
GAAP. Where the difference in accounting policy is material and contains significant critical
estimates, we have included a separate discussion of those policies below. Accounts Receivable Our policy is to maintain an allowance for bad debts based on our best estimate of the amounts
that are potentially uncollectable at the balance sheet date. We base our estimate on a systematic,
on-going review and evaluation that we perform as part of our credit-risk evaluation process. As
part of this evaluation, we take into account our history of collections, the size and compositions
of the receivable balances, current economic events and conditions and other pertinent information. We believe that the accounting estimate related to the establishment of a reserve for credit
losses is a critical accounting estimate because: (1)  the evaluation is inherently judgmental, and requires the use of significant assumptions
about expected customer default amounts that may be susceptible to significant change; and (2)  changes in the estimates regarding the allowance for bad debts could have a significant
impact on our financial statements. Allowance for Slow-Moving and Obsolete Inventory Our policy is to maintain an allowance for slow moving and obsolete inventory based on our
best estimate of such amounts at the balance sheet date. We base our estimate on a systematic,
on-going review and evaluation of inventory balances. As part of this evaluation, we also consider
the average age of the inventory as compared to anticipated necessary levels for future periods. We
believe that the accounting estimate related to the establishment for inventory obsolescence
reserves is a critical accounting estimate because: (1)  the evaluation is inherently judgmental and requires the use of significant assumptions
about the expected future sales composition, which may be susceptible to significant change; and (2)  changes in the estimates regarding the allowance for inventory obsolescence could have a
material impact on our financial statements. Revenue Recognition We deliver complete installations to our customers, where the moment of signing a sales
contract (firm commitment) and the final reception of a delivery by the customer can take place in
different financial periods. In accordance with our accounting principles, we apply the percentage
of completion method (POC method) for recognition of such long-term delivery contracts. In year
2004, approximately 20 percent of our net sales were recognized under the POC method, which is
based on predetermined milestones and where the revenue is recognized based on the estimated
realized value added or on the cost-to-cost method. We use the POC method since reasonably
dependable estimates of the revenue and costs applicable to a contract can be established. A
projected loss on a firm commitment is recognized in income, when a contract becomes binding to us.
The estimated revenue, the costs and profit, including the planned delivery schedule, of the
projects are subject to regular revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income in the period in which the facts that give rise to the
revision become known. Although we have significant experience using the POC method, the total
costs estimated to be incurred on projects may change over time due to changes in the underlying
project costs structures, which may ultimately affect the revenue recognized. As the 34




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reliability of cost estimates is based on our experience in manufacturing and delivering paper
machines, pulp making lines and complete crushing installations, we do not apply the POC method for
sales where we consider that the final outcome of the project and related costs cannot be
pre-established reliably. Completed contract method may also be preferred to POC method when we
consider there to be an external risk factor, for example the country of destination. Accounting for Income Taxes As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions and countries in which we operate. This
process involves estimating the actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred revenue and cost
reserves, for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet. We assess the likelihood that
our deferred tax assets will be recovered from future taxable income, and to the extent we believe
that recovery is not likely, we establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance, we include an expense in the tax reserve in the
income statement. Significant management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities and any valuation allowance recorded. We have recorded net
deferred tax assets of 179 million as of December 31, 2004, net of a valuation allowance of 113
million as of December 31, 2004, due to uncertainties related to our ability to utilize some of our
deferred tax assets, primarily consisting of operating losses carried forward for certain foreign
subsidiaries before expiration and the final outcome of tax audits in some subsidiaries. The
valuation allowance is based on our estimates of taxable income by country in which we operate, and
the period over which our deferred tax assets will be recoverable based on estimated future taxable
income and planned tax strategies to utilize these assets. In the event that actual results differ
from these estimates or we adjust these estimates in future periods, we may need to establish an
additional valuation allowance, which we do not expect to have a material impact our financial
condition and results of operations. U.S. GAAP Under Finnish GAAP, deferred tax assets are reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Available evidence includes internal projections of future
earnings which are utilized to assess the probability that the deferred tax assets will not be
realized. Under U.S. GAAP, if there is objective negative evidence, such as cumulative losses for
recent years, the weight given to positive evidence would be commensurate with extent to which it
can be objectively verified. As a result, internal projections normally would not be assigned any
significant weight in assessing the need for a valuation allowance. In addition, in accordance with Finnish GAAP, the need for a valuation allowance is assessed
based only on the deferred tax assets which are expected to be
utilized over a reasonable time in
the future. In determining the need for a valuation allowance in accordance with U.S. GAAP, a
company is required to consider taxable income that will arise within the statutory period over
which the deferred tax asset may be utilized. Due to these items, differences may arise in regards to the determination of the valuation
allowance under Finnish GAAP versus U.S. GAAP. Allocation of Excess Purchase Price to Acquired Assets In accordance with our accounting principles, we have allocated excess purchase price to
acquired long-lived tangible and intangible assets and liabilities. Whenever feasible, we have used
as a basis for such allocations the readily available market values to determine the fair value
basis. However, when this has not been possible, as often is the case with long-lived intangible
assets and certain assets with no active markets or available price quotations, the valuation has
been based on past performance of such asset and its intended future use in our business. The
appraisals, which have been based on current replacement costs, discounted cash flows and estimated
selling prices depending on the underlying asset, require management to make estimates and
assumptions of the future use of these assets and their impact on our financial position. Any
change in our future business priorities and orientations may affect the planned outcome of initial
appraisals. 35




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Valuation of Long-Lived Assets and Intangible Assets and Goodwill We assess the carrying value of identifiable intangible assets, long-lived assets and goodwill
annually, or more frequently if events or changes in circumstances indicate that such carrying
value may not be recoverable. Triggering events for impairment reviews include the following:  
    
    material permanent deterioration in the economic or political environment of our
customers or our own activity;
    
    significant under-performance relative to expected historical or projected future
performance; and
    
    significant changes in our strategic orientations affecting our business plans and
previous investment policies. Our accounting policy related to the annual impairment test for goodwill and other
indefinite-lived intangibles is based on numerous estimates. We believe that the accounting
estimates related to the recoverability of the carrying value of goodwill and intangible assets are
critical accounting estimates because: (1)  The valuation is inherently judgmental and highly susceptible to change from period to
period because it requires us to make assumptions about future supply and demand related to our
individual business units, future sales prices and what cost savings will be achievable; (2)  The value of the benefits and savings that we expect to realize as a result of the
efficiency improvement program are inherently subjective; (3)  We determine the fair value of the reporting units using a weighted average cost of
capital as the rate to discount estimated future cash flows. This rate may not be indicative of
actual rates obtained in the market, if incremental borrowings are necessary; and (4)  The impact of an impairment charge could be material to our financial statements. If we fail to meet our forecasted sales levels, fail to achieve our anticipated cost
reductions, or if weak economic conditions prevail in our primary markets, the estimated fair
values of our reporting units may be adversely affected, resulting in impairment charges. As of September 30, 2003, upon completion of the annual impairment assessment, based on
approved updated forecasted plans, we recognized an impairment loss of 205 million related to the
Metso Minerals business area and Discontinued Operations. No impairment charge was recorded in
2004. U.S. GAAP Under U.S. GAAP, we have a significant amount of goodwill and brand names related to
acquisitions in prior years that, in accordance with SFAS 142, are no longer being amortized. The
goodwill is tested in a two-step process. The first step is performed annually or as necessary
based on the criteria and using the same methodology discussed above under Finnish GAAP. The second
step requires us to allocate the excess of the fair value determined in Step 1 to the assets and
liabilities of the reporting unit being tested. In order to complete this step, we must make
estimates regarding the valuation of our assets and liabilities. These estimates may not reflect
the eventual value recognized related to these items. The estimates are based upon assumptions
about replacement cost of specific items, our intended use for our assets and, in the case of
intangible assets, detailed calculations to estimate the fair value of such assets. These
calculations include significant estimates made by management including the same estimates as
described above regarding the valuation process for goodwill. As of December 31, 2003, under U.S.
GAAP we had 567 million of goodwill remaining after recording an impairment of 224 million (as
restated) relating to Metso Minerals businesses. In addition, an impairment charge on brand names
amounting to 13 million was recognized in 2003. Changes to these underlying assumptions could have
resulted in a significantly different amount of impairment recorded for U.S. GAAP. No impairment
charge was recorded in 2004. As of December 31, 2004, under U.S. GAAP, we had 420 million of
goodwill remaining. 36




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Our impairment charge includes the impact of a restatement related to our acquisition of
Svedala in 2001. As a result of this restatement, additional pension liabilities were recorded as
of the date of acquisition, with a corresponding increase to goodwill net of the related deferred
tax impact. This resulted in an additional goodwill of 26 million and a corresponding additional
impairment of 18 million. Reserve for Warranty Costs Our warranty reserve is based on the history of past warranty costs and claims for machines
and equipment under warranty. The typical warranty period is 12 months from the date of customer
acceptance of the delivered equipment. For larger projects, the average warranty period is two
years. For sales involving new technology and long-term delivery contracts, additional warranty
reserves can be established on a case by case basis to take into account the potentially increased
risk. While we believe that our warranty reserve is adequate and that the judgment applied is
conservative, the amounts estimated to become due and payable could differ materially from what
will actually transpire in the future. Actual costs of claims incurred or the number of
claims incurred could significantly differ from the amounts assumed to estimate this reserve. Restructuring Costs At times, we record restructuring provisions as a result of programs that are implemented
throughout our operations. These provisions are recorded in order for us to summarize the impacts
of the programs and separate these costs from our recurring operations. When the decisions are made
to undertake restructuring activities, management develops a formal plan and presents this to the
board of directors for approval. Once the plan is approved, management raises a valid expectation
in those affected that it will carry out the restructuring by starting to implement that plan or
announcing its main features to those affected by it. The costs included in a provision for
restructuring are only those costs that are either incremental and incurred as a direct result of
the plan, or are the result of a continuing contractual obligation with no continuing economic
benefit to us, or a penalty incurred to cancel the contractual obligation. These costs are
estimated based on numerous significant assumptions including, but not limited to, the following
assumptions: (1)  Estimated number of employees to be terminated in order to carry out managements plans; (2)  Estimated level of reduction of production capacity based on projected future production
levels; (3)  Approximate termination costs for specific contracts, leases, etc.; and (4)  Estimated write-downs of asset values based on revised future cash flow projections. We believe that the calculation of the amount recorded as a restructuring cost is a critical
accounting policy because:  

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
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.

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. Under U.S. GAAP, a liability for a cost associated with an exit or disposal activity is
recognized when the liability is incurred, and can be measured at fair value. These costs include,
but are not limited to, one-time benefits provided to current employees who are involuntary
terminated and costs to terminate contracts that are not capital leases. If employees are required
to render service until they are terminated in order to receive the termination benefits, the cost
under U.S. GAAP is recognized ratably over the future service period. 37




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Pensions In accordance with U.S. GAAP, we determine our pension benefit expense based on assumptions
that include the following: (1)  a weighted average expected return on plan assets. Actual return on plan assets may
differ significantly based on market activity. (2)  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. (3)  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. The actuarial experience that differs from our assumptions and changes in our assumptions can
result in gains and losses that are not yet recognized in our consolidated financial statements. We
recognize amortization of any unrecognized gain or loss as a component of our pension expense if,
as of the beginning of the year, such unrealized net gain or loss exceeds ten percent of the
greater of (1) the projected benefit obligation or (2) the market-related value of the plans
assets. In such case, the amount of amortization expense we recognize is the resulting excess,
divided by the average remaining service period of active employees expected to receive benefits
under such plan. Pension benefit expense was 40 million in 2004, 38 million in 2003 and 42
million in 2002. It is based on the expected return on plan assets of 8.0 percent for 2004, 7.9
percent for 2003 and 8.0 percent for 2002. A one percent increase in the expected return on plan
assets would have reduced pension benefit expense by approximately 1.6 million, and a one percent
decrease in the expected return on plan assets would have increased pension benefit expense by
approximately 1.6 million for the year ended December 31, 2004. Our pension liabilities for 2001, 2002 and 2003 in accordance with U.S. GAAP include the
impact of a restatement related to our acquisition of Svedala in 2001. 
 Results of Operations Our reportable segments are Metso Paper, Metso Minerals, Metso Automation and Metso
Ventures. In addition, we report three divested businesses under Discontinued Operations. In
January 2004, we sold the Converting business, previously part
of Metso Paper, in June 2004, we sold
the Compaction & Paving business, previously part of Metso Minerals and in December 2004, we sold
the Drilling business previously part of Metso Minerals. These three businesses are reported
separately under Discontinued Operations in this annual report. See Item 4. Information on the
CompanyCorporate Structure for a more detailed description of our corporate restructuring, which
is reflected in the financial information discussed below. The table below sets forth our net sales by business area for the three most recent years in
accordance with Finnish GAAP: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    1,778
    
    
    
    1,651
    
    
    
    1,559Metso Minerals
    
    
    1,406
    
    
    
    1,253
    
    
    
    1,343Metso Automation
    
    
    622
    
    
    
    531
    
    
    
    535Metso Ventures
    
    
    446
    
    
    
    370
    
    
    
    387Intra Metso Net Sales
    
    
    (119
    )
    
    
    (122
    )
    
    
    (115
    )Continuing Operations
    
    
    4,133
    
    
    
    3,683
    
    
    
    3,709Discontinued Operations(1)
    
    
    558
    
    
    
    567
    
    
    
    267Metso Total
    
    
    4,691
    
    
    
    4,250
    
    
    
    3,976
  (1)
    
    Discontinued Operations include three divested businesses: Converting, Compaction & Paving
and Drilling for the full years 2002 and 2003. For 2004, Converting is included until January 31,
2004; Compaction & Paving until June 30, 2004; and Drilling until December 31, 2004. 38




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The table below sets forth our operating profit (loss) by business area for the three
most recent years in accordance with Finnish GAAP: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    115
    
    
    
    25
    
    
    
    11Metso Minerals
    
    
    28
    
    
    
    (189
    )
    
    
    84Metso Automation
    
    
    16
    
    
    
    28
    
    
    
    53Metso Ventures
    
    
    20
    
    
    
    (9
    )
    
    
    (7
    )Corporate Office and other
    
    
    (25
    )
    
    
    (34
    )
    
    
    (22
    )Continuing Operations
    
    
    154
    
    
    
    (179
    )
    
    
    119Discontinued Operations(1)
    
    
    13
    
    
    
    (50
    )
    
    
    (8
    )Metso Total
    
    
    167
    
    
    
    (229
    )
    
    
    111
  (1)
    
    Discontinued Operations include three divested businesses: Converting, Compaction &
Paving and Drilling for the full years 2002 and 2003. For 2004, Converting is included until
January 31, 2004; Compaction & Paving until June 30, 2004; and Drilling until December 31, 2004. Results of Operations for the Year Ended December 31, 2004, compared to the Year Ended December 31, 2003 Net Sales for Continuing Operations The Group.In 2004, our total consolidated net sales were 3,976 million, compared to net
sales of 4,250 million in 2003, representing a decrease of 274 million, or 6.4 percent. The
decrease was due to the divestment of businesses inasmuch as sales from continuing operations were
at the previous years level. The depreciation of the U.S. dollar also had a negative impact on our
sales figure when translated into euro. Calculated with the exchange rates of 2003 the net sales
decrease would have been 4.4 percent. Metso Paper accounted for 38 percent, Metso Minerals 33
percent, Metso Automation 13 percent and Metso Ventures nine percent of our net sales in 2004.
Discontinued Operations accounted for seven percent of our net sales in 2004. In both 2004 and
2003, 88 percent of our net sales were derived from exports and international operations. Our order
intake in 2004 amounted to 4,374 million, representing an increase of 118 million, or 2.8
percent, from 4,256 million in 2003. However, the value of orders received by our continuing
operations increased by ten percent and totaled 4,110 million in 2004. Our three biggest business
areas, Metso Paper, Metso Minerals and Metso Automation, all saw their order backlog grow during
2004. Our order backlog as of December 31, 2004 was 1,745 million, representing an increase of
240 million, or 15.9 percent, from 1,505 million as of December 31, 2003. The order backlog at
the end of 2004 compared to that of continuing operations at the end of 2003 increased by 25
percent. Metso Paper.The demand for Metso Papers products in 2004 was satisfactory, as in the
previous year. The paper industrys market situation was reflected in cautious investment activity
by our customers, and few new paper machines were ordered in 2004. Investments in entire production
lines were pending mainly in Asia and, to some extent, also in Europe. In other market areas,
demand in 2004 focused on maintenance and process services and rebuilds. The markets for pulping
equipment and lines were good mainly in China and South America. The demand for aftermarket
services began to increase in the second half of the year 2004, as capacity utilization improved in
customer mills. In 2004, net sales of Metso Paper were 1,559 million, compared to net sales of
1,651 million in 2003, representing a decrease of 92 million, or 5.6 percent. Paper machine
deliveries were equivalent to those of the comparison year, but tissue machine deliveries were at a
clearly lower level than in 2003. Aftermarket activities accounted for 35 percent of Metso Papers
net sales in 2004, compared to 34 percent in 2003. Metso Papers order intake in 2004 amounted to
1,726 million, representing an increase of 16 million, or 0.9 percent, over 1,710 million in
2003. Metso Papers order backlog as of December 31, 2004 amounted to 946 million, representing an
increase of 162 million, or 20.7 percent, over 784 million as of December 31, 2003. Metso Minerals.The demand for Metso Minerals crushing and screening equipment for the civil
engineering industry in 2004 improved considerably in North America and Asia, but remained at the
previous years level in Europe. Due to the fact that metal prices have remained high for a
relatively long time, the demand for mining industry equipment was good in South America and in the
Asia-Pacific region in 2004. The demand for metals recycling equipment remained buoyant. The
markets for Metso Minerals aftermarket and 39




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service operations were good. In 2004, net sales of Metso Minerals were 1,343 million,
compared to net sales of 1,253 million in 2003, representing an increase of 90 million, or 7.2
percent. In particular, deliveries of crushers and metals recycling equipment to the civil
engineering industry clearly increased in 2004 from the previous year. Aftermarket activities
accounted for 52 percent of Metso Minerals net sales in 2004, compared to 51 percent in 2003.
Metso Minerals order intake in 2004 amounted to 1,566 million, representing an increase of 353
million, or 29.1 percent, from 1,213 million in 2003. Metso Minerals order backlog as of December
31, 2004 amounted to 560 million, representing an increase of 213 million, or 61.4 percent, from
347 million as of December 31, 2003. Metso Automation.The demand for Metso Automations field equipment increased significantly in
2004, although the demand for automation systems remained at the previous years level. In 2004,
pulp and paper industry demand was focused on solutions that enhance the production of existing
machinery and equipment. Increases in crude oil and gas prices boosted the demand for the power,
oil and gas industry systems and equipment to a clearly higher level than in the previous year. In
2004, net sales of Metso Automation were 535 million, compared to net sales of 531 million in
2003, representing an increase of 4 million, or 0.8 percent. Deliveries of field equipment for the
power, oil and gas industry increased from the previous year. Aftermarket activities accounted for
25 percent of Metso Automations net sales both in 2004 and in 2003. Metso Automations order
intake in 2004 amounted to 570 million, representing an increase of 39 million, or 7.3 percent,
from 531 million in 2003. Metso Automations order backlog as of December 31, 2004 amounted to
176 million, representing an increase of 31 million, or 21.4 percent, from 145 million as of
December 31, 2003. Metso Ventures.In 2004, net sales of Metso Ventures were 387 million, compared to net sales
of 370 million in 2003, representing an increase of 17 million, or 4.6 percent. Metso Panelboard,
Metso Drives and Foundries all increased their net sales due to higher delivery volumes, while
lower volumes reduced Valmet Automotives sales. Metso Ventures order intake in 2004 amounted to
361 million, representing a decrease of 37 million, or 9.3 percent, from 398 million in 2003.
Metso Ventures order backlog amounted to 118 million as of December 31, 2004, representing a
decrease of 57 million, or 32.6 percent, over 175 million as of December 31, 2003 due to the
weakened order backlog in our Metso Panelboard business. Net Sales for Discontinued Operations Discontinued Operations.Discontinued Operations include the Converting business, previously
part of Metso Paper, sold in January 2004; the Compaction & Paving business, previously part of
Metso Minerals, sold in June 2004; and the Drilling business, previously part of Metso Minerals,
sold in December 2004. In 2004, net sales of Discontinued Operations were 267 million, compared to
net sales of 567 million in 2003. The decrease was due to the timing of the divestments of the
Converting business and the Compaction & Paving business. Converting was only included in 2004
figures for one month and Compaction & Paving for the first half of 2004. Operating Profit/(Loss) for Continuing Operations The Group.In 2004, our consolidated operating profit was 111 million, compared to an
operating loss of 229 million in 2003, representing an improvement of 340 million. This positive
performance was due to the substantially improved profitability of Metso Minerals and Metso
Automation that resulted from efficiency improvement measures and increased net sales.
Additionally, we did not have a goodwill impairment in 2004 compared to the impairment of 205
million incurred in 2003 in relation to Metso Minerals and Discontinued Operations. Furthermore,
the 2003 operating loss included 103 million in restructuring expenses related to the efficiency
improvement program, whereas the 2004 result only included similar expenses of 26 million. In
2004, cost of goods sold amounted to 2,959 million (3,211 million in 2003), which represented
74.4 percent of net sales in 2004, compared to 75.6 percent in 2003. Our operating margin improved
to a positive 2.8 percent in 2004 from a negative 5.4 percent in 2003. Metso Paper.In 2004, the operating profit of Metso Paper was 11 million, compared to an
operating profit of 25 million in 2003, representing a decrease of 14 million, or 56.0 percent.
Metso Papers operating margin decreased to 0.7 percent in 2004 from 1.5 percent in 2003. In 2004,
Metso Papers operating profit was burdened by 15 million of costs booked for the delay and
possible cancellation of the Papiers Gaspésia project in Chandler, Quebec, Canada. The order, which
was received in 2002, was for a rebuild of an on-line printing and writing supercalandered coated
paper line that was originally expected to be completed by mid-2004. The project was put on hold
during 2004. It remains on hold pending additional financing arrangements by the customer. The 15
million costs booked are expected to fully cover our project-related exposure, even if the 40




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project is cancelled. The operating profit in 2004 was further burdened by nonrecurring
expenses of 26 million booked in relation to Metso Papers business concept renewal program
launched in June 2004. Metso Minerals.In 2004, the operating profit of Metso Minerals was 84 million, compared to
an operating loss of 189 million in 2003, representing an improvement of 273 million. The 2003
loss included a charge relating to the impairment of goodwill of 143 million with no corresponding
impairment in 2004. The remaining improvement in the 2004 operating profit was due to a more
streamlined cost structure reflecting the measures taken as part of the efficiency improvement
program launched in 2003 and due to increased net sales. All of Metso Minerals business lines
improved their profitability compared with the previous year. The effects of the efficiency
improvement program were visible particularly in the crushing and screening business line, which
showed substantial improvement. Metso Minerals operating margin increased to positive 6.3 percent
in 2004 from negative 15.1 percent in 2003. Metso Automation.In 2004, the operating profit of Metso Automation was 53 million, compared
to an operating profit of 28 million in 2003, representing an increase of 25 million, or 89.3
percent. The operating profit increased significantly in 2004 from the prior year due to the
positive impact of the efficiency improvement measures taken in 2003 and the increased sales volume
of field equipment. Metso Automations operating margin increased to 9.9 percent in 2004 from 5.3
percent in 2003. Metso Ventures.In 2004, the operating loss of Metso Ventures was 7 million, compared to an
operating loss of 9 million in 2003, representing a decrease of 2 million. Both Metso Drives and
Foundries improved their profitability, but due to the volume of cars delivered by Valmet
Automotive being clearly smaller than in the comparison year, Metso Ventures as a whole remained at
a loss. Metso Ventures operating margin was negative 1.8 percent in 2004 compared with negative
2.4 percent in 2003. Operating Loss for Discontinued Operations Discontinued Operations.In 2004, the operating loss of Discontinued Operations was 8 million
compared to an operating loss of 50 million in 2003. The decrease in operating loss was due to the
timing of the divestments of Converting business and Compaction & Paving business. Converting was
only included in the 2004 results for one month and Compaction & Paving was included for the first
half of 2004. Operating margin for Discontinued Operations was a negative 3.1 percent in 2004,
compared with a negative 8.7 percent in 2003. Income/(Loss) before Extraordinary Items and Income Taxes In 2004, our income before extraordinary items and income taxes was 49 million, compared to a
loss before extraordinary items and income taxes of 303 million in 2003. There were no
extraordinary items in 2004 or in 2003. Financial income for 2004 was 10 million, compared to 8 million for 2003, representing an
increase of 2 million. Financial expense for 2004 was 72 million compared to 82 million in 2003.
This decrease of 10 million was due to a decrease in net interest bearing liabilities during 2004.
Our net interest bearing liabilities amounted to 529 million as of December 31, 2004, compared to
1,109 million as of December 31, 2003. Net Income/(Loss) and Earnings per Share Income Taxes.Income tax benefits were 21 million in 2004, compared to income tax benefits of
44 million in 2003. In October 2004, we received a confirmation from the Finnish Tax Office for
Major Corporations that our write-downs of certain subsidiary shares were accepted as being
tax-deductible. As a result, we booked an additional tax benefit totaling 53 million for 2004. In
2003, we booked a tax benefit related to the goodwill impairment in Metso Minerals for 51 million. Net Income/(Loss).In 2004, we had a net income of 69 million, compared to a net loss of 258
million in 2003. In 2004, we had an earnings per share of 0.51, compared to loss per share of
1.89 in 2003. 41




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Results of Operations for the Year Ended December 31, 2003, compared to the Year Ended December 31, 2002 Net Sales for Continuing Operations The Group.In 2003, our total consolidated net sales were 4,250 million, compared to net
sales of 4,691 million in 2002, representing a decrease of 441 million, or 9.4 percent. The
weakening of the U.S. dollar against the euro reduced the competitiveness of our products made in
Europe, and the value of our sales and earnings in the United States was lower when converted into
the euro, our reporting currency. Calculated with the exchange rates of 2002 the net sales decrease
was smaller at four percent. Metso Paper accounted for 38 percent, Metso Minerals 28 percent, Metso
Automation 12 percent and Metso Ventures nine percent of our net sales. Discontinued Operations
accounted for 13 percent of our net sales in 2003. Aftermarket related activities accounted for 37
percent of our net sales in 2003. In 2003, 88 percent of our net sales, or 3,724 million, were
derived from exports and international operations, compared to 92 percent, or 4,320 million, in
2002. Our order intake in 2003 amounted to 4,256 million, representing a decrease of 390 million,
or 8.4 percent, from 4,646 million in 2002. Calculated with exchange rates in 2002, the value of
orders received decreased by three percent. Our order backlog as of December 31, 2003 was 1,505
million, representing a decrease of 84 million, or 5.3 percent, from 1,589 million as of December
31, 2002. Metso Paper.In 2003, Metso Papers market situation was satisfactory as a whole in 2003, but
customers willingness to commit to new pulp or paper machine investments continued to be at a low
level in Europe and North America. The SARS epidemic temporarily weakened the market situation in
China, mainly during the second quarter of 2003, but, in the second half of the year, demand
recovered to the good level of the first months of 2003. In 2003, net sales of Metso Paper were
1,651 million, compared to net sales of 1,778 million in 2002, representing a decrease of 127
million, or 7.1 percent. The decline was due to the unfavorable market situation, which affected
the sales volume. Aftermarket activities accounted for 34 percent of Metso Papers net sales in
2003, compared to 28 percent in 2002. The increase was mainly due to the redefined scope of
aftermarket in 2003. The figure now also includes process improvements. Metso Papers order intake
in 2003 amounted to 1,710 million, representing an increase of 99 million, or 6.1 percent, over
1,611 million in 2002. The increase reflects the good order intake in China. Metso Papers order
backlog as of December 31, 2003 amounted to 784 million, representing an increase of 49 million,
or 6.7 percent, over 735 million as of December 31, 2002. Metso Minerals.In 2003, the construction industry was also affected by the global economic
uncertainty. However, there were signs of an improvement in the U.S. market in the last quarter of
2003. In China, demand remained good in 2003. The prices of the most common base metals rose
steadily throughout 2003 and, towards the end of 2003, the number of mining project inquiries
increased in South America, South Africa and Australia. In 2003, net sales of Metso Minerals were
1,253 million, compared to net sales of 1,406 million in 2002, representing a decrease of 153
million, or 10.9 percent. The decline was primarily due to weak demand in the North American
markets and the lack of big mining projects. Also exchange rate changes, mainly the weakening U.S.
dollar had a negative impact on Metso Minerals business. Aftermarket activities accounted for 51
percent of Metso Minerals net sales in 2003, compared to 50 percent in 2002. Metso Minerals order
intake in 2003 amounted to 1,213 million, representing a decrease of 224 million, or 15.6
percent, from 1,437 million in 2002. Metso Minerals order backlog as of December 31, 2003
amounted to 347 million, representing a decrease of 66 million, or 16.0 percent, from 413
million as of December 31, 2002. Metso Automation.In 2003, the demand for Metso Automations products remained at the low
level of 2002 both in North America and in Europe. Generally in 2003, automation demand in the
power, energy, oil and gas industries was stronger than in 2002, whereas automation demand in the
pulp and paper industry was weaker. In 2003, net sales of Metso Automation were 531 million,
compared to net sales of 622 million in 2002, representing a decrease of 91 million, or 14.6
percent. The decrease was largely due to the divestitures of Network Management Solutions and CPS
Electronics that were completed during 2003. Aftermarket activities accounted for 25 percent of
Metso Automations net sales in 2003, compared to 23 percent in 2002. Metso Automations order
intake in 2003 amounted to 531 million, representing a decrease of 112 million, or 17.4 percent,
from 643 million in 2002. Metso Automations order backlog as of December 31, 2003 amounted to
145 million, representing a decrease of 40 million, or 21.6 percent, from 185 million as of
December 31, 2002. The decrease in order backlog was due to the two divestitures. Excluding the
order backlog of the divested companies as of December 31, 2002, Metso Automations order backlog
as of December 31, 2003 was approximately at the same level as the order backlog as of December 31,
2002. 42




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Metso Ventures.In 2003, net sales of Metso Ventures were 370 million, compared to net sales
of 446 million in 2002, representing a decrease of 76 million, or 17.0 percent. Metso Drives
volume decrease was mainly due to the low wind turbine gear deliveries in the first half of 2003.
Valmet Automotives sales decreased in 2003 as the manufacture of Saab cars ceased at the beginning
of May 2003, and the manufacturing of Porsche cars decreased in 2003 from the level of 2002. Sales
of Metso Panelboard increased significantly in 2003 from the level of 2002 due to the positive
sales development in Asia. Sales of Foundries in 2003 were almost at the 2002 level. Metso
Ventures order intake in 2003 amounted to 398 million, representing a decrease of 70 million, or
15.0 percent, from 468 million in 2002. Metso Ventures order backlog amounted to 175 million as
of December 31, 2003, representing an increase of 21 million, or 13.6 percent, over 154 million
as of December 31, 2002. Net Sales for Discontinued Operations Discontinued Operations.In 2003, net sales of Discontinued Operations were 567 million,
compared to net sales of 558 million in 2002, representing a marginal increase of 1.6 percent.
Order intake for Discontinued Operations amounted to 525 million in 2003, representing a decrease
of 82 million, or 13.5 percent, from 607 million in 2002. Order backlog for Discontinued
Operations amounted to 109 million as of December 31, 2003, representing a decrease of 48
million, or 30.6 percent, from 157 million as of December 31, 2002. Operating Profit/(Loss) for Continuing Operations The Group.In 2003, our consolidated operating loss was 229 million, compared to an operating
profit of 167 million in 2002, representing a decrease of 396 million. The operating loss
included goodwill impairment of 205 million in Metso Minerals and Discontinued Operations. It also
included 103 million in restructuring expenses related to the efficiency improvement program.
Other factors negatively affecting the operating performance were the lower sales volume, the
strengthening of the euro, the lower margins in Metso Papers large projects in 2003 compared to
2002, and the continued tight competition related to Metso Minerals crushing and screening
equipment market. In 2003, cost of goods sold amounted to 3,211 million (3,425 million in 2002),
which represented 75.6 percent of net sales in 2003, up from 73.0 percent in 2002. Our operating
margin decreased to negative 5.4 percent in 2003 from positive 3.6 percent in 2002. The operating
loss included net nonrecurring expenses of 106 million, which included 15 million in income from
divestitures and sales of shares, 103 million in restructuring expenses related to the efficiency
improvement program, and 18 million in other nonrecurring expenses. Furthermore, the operating
loss included a goodwill impairment of 205 million made in Metso Minerals and Discontinued
Operations. Metso Paper.In 2003, the operating profit of Metso Paper was 25 million, compared to an
operating profit of 115 million in 2002, representing a decrease of 90 million, or 78.3 percent.
Metso Papers operating margin decreased to 1.5 percent in 2003 from 6.5 percent in 2002.
Profitability was weakened by lower margins in large projects compared to 2002, under-utilization
of production capacity and the strengthening of the euro. The operating profit also includes 36
million of nonrecurring expenses due to the efficiency improvement program. Metso Minerals.In 2003, the operating loss of Metso Minerals was 189 million, compared to an
operating profit of 28 million in 2002, representing a decrease of 217 million. Metso Minerals
operating margin decreased to negative 15.1 percent in 2003 from positive 2.0 percent in 2002. The
operating loss included goodwill impairment of 143 million due to the continued weak market
situation in rock and minerals processing and unfavorable exchange rate movements. The positive
effects of the integration of Svedala into Metso Minerals were offset by the effect of exchange
rate changes and the weak market situation. In addition, profitability was weakened by the
strengthening of the euro and the weak market situation in crushing and screening, as well as in
minerals processing. The operating loss included nonrecurring expenses of 65 million of which 55
million relates to the efficiency improvement program. Metso Automation.In 2003, the operating profit of Metso Automation was 28 million, compared
to an operating profit of 16 million in 2002, representing an increase of 12 million, or 75.0
percent. Metso Automations operating margin increased to 5.3 percent in 2003 from 2.6 percent in
2002. This improvement was due to the measures taken to streamline the cost structure in 2002 and
2003. During 2003, process automation systems and the North American operations improved their
profitability. The operating profit included nonrecurring income of 11 million from divestitures
of Network Management Solutions in February 2003, and CPS Electronics in September 2003, and
nonrecurring expenses of 7 million from costs related to the efficiency improvement program. 43




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Metso Ventures.In 2003, the operating loss of Metso Ventures was 9 million, compared to an
operating profit of 20 million in 2002, representing a decrease of 29 million. Metso Ventures
operating margin decreased to negative 2.4 percent in 2003 from positive 4.5 percent in 2002. Metso
Panelboard improved its performance from 2002 but, due to the nonrecurring costs of 4 million
related to the combining of two units in Germany as part of the corporate-wide efficiency
improvement program, the year 2003 resulted in a loss. Metso Drives made an operating profit in
2003 but the operating profit was clearly lower than the operating profit in 2002 due to the low
volumes in early 2003 and the launching cost of new products. Foundries were at a break-even level
in 2003. Valmet Automotive made an operating loss in 2003, a significant weakening from 2002, due
to over 50 percent decrease in car delivery volumes as well as a 4 million reserve for possible
additional costs in 2004 due to the difficult employment situation. Approximately one-half of
Valmet Automotives personnel were laid off after the Saab manufacture ended in May 2003. Operating Loss for Discontinued Operations Discontinued Operations.In 2003, Discontinued Operations resulted in an operating loss of 50
million compared to an operating profit of 13 million in 2002. Operating margin for Discontinued
Operations decreased to a negative 8.7 percent in 2003 from a positive 2.2 percent in 2002. Income/(Loss) before Extraordinary Items and Income Taxes In 2003, our loss before extraordinary items and income taxes was 303 million, compared to an
income before extraordinary items and income taxes of 93 million in 2002. There were no
extraordinary items in 2003 and 2002. Financial income for 2003 was 8 million, compared to 17 million for 2002, representing a
decrease of 9 million. Financial expense for 2003 was 82 million compared to 91 million in 2002,
representing a decrease of 9 million. Our net interest bearing liabilities were slightly down at 1,109 million as of December 31,
2003, compared to 1,118 million as of December 31, 2002. Net Income/(Loss) and Earnings per Share Income Taxes.Income tax benefits were 44 million in 2003, compared to income tax expenses of
26 million in 2002. This was due to the booking of a 51 million tax benefit related to the
goodwill impairment in Metso Minerals and in Discontinued Operations. Most of the 205 million
goodwill impairment (i.e., 175 million) was accepted as tax-deductible, and the corresponding tax
benefit of 51 million reduced the effect of the impairment on the net result. Net Loss.In 2003, we had a net loss of 258 million, compared to a net income of 65 million
in 2002. In 2003, we had a loss per share of 1.89, compared to earnings per share of 0.48 in
2002. 
 Principal Differences between Finnish GAAP and U.S. GAAP Our consolidated financial statements are prepared in accordance with Finnish GAAP. Our net income in 2004 under Finnish GAAP was 69 million, compared to net loss of 258
million in 2003 and net income of 65 million in 2002. Under U.S. GAAP, Metso would have reported
net income of 2 million in 2004, compared to net loss 235 million (as restated) in 2003 and net
income 22 million (as restated) in 2002. The principal differences between Finnish GAAP and U.S. GAAP that affect our net loss, as well
as our shareholders equity, relate to the business combination of Valmet and Rauma, the
acquisition of Svedala, valuation of our deferred tax assets and the non-amortization of goodwill
under U.S. GAAP. Our 2001, 2002 and 2003 amounts recorded in accordance with U.S. GAAP have been
restated to reflect the impact of adjustments made to our pension liabilities recorded in
conjunction with our acquisition of Svedala in 2001. In order to correctly record the pension
liability in accordance with U.S. GAAP, the balance sheet at the time of the acquisition would have
reflected an additional pension liability and a corresponding increase to goodwill, net of the tax
impact of the additional pension liability. After consideration of this additional goodwill, our
impairment charge in 2003 would have been increased. As a result, net income under U.S. GAAP would
reflect an 44




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additional loss of 18 million in 2003 (0.13 per share). See Note 30 to our consolidated
financial statements included elsewhere in this annual report for a description of the principal
differences between Finnish GAAP and U.S. GAAP. Our 2002 and 2003 accounts have been restated to reflect the impact of adjustments made to our
deferred tax asset valuation allowances recorded in 2002 and 2003. These adjustments would result
in substantially a full valuation allowance in relation to our US operations for both periods. In
addition, the 2003 results would also include the release of a previously recorded valuation
allowance related to our German operations. In order to correctly record the valuation allowance in
accordance with U.S. GAAP, an additional valuation allowance of 91 million has been recorded as of
December 31, 2002 with a corresponding increase to deferred income tax expense. In 2003, the
consolidated balance sheet would still reflect substantially a full valuation allowance for our US
deferred tax assets; however, the amounts previously recognized in 2003 to increase this valuation
allowance would have been recorded in the previous year as noted above. In addition, the amount
previously recognized as a valuation allowance related to our German operations has been reversed
in 2003. As such, the 2003 income statement reflects a decrease in deferred tax expense of 28
million, net of translation difference of 15 million. As a result of these adjustments, the income
statement under U.S. GAAP net income reflects additional expense of 91 million (0.67 per share)
in 2002 and additional income in 2003 of 28 million (0.21 per share). 
 Liquidity and Capital Resources In 2004, net cash provided by operating activities amounted to 262 million, compared to
146 million and 252 million in 2003 and 2002, respectively. Improving cash flow was a key target
in management in 2004. Cash flow in 2004 was strengthened by both improved profitability and more
efficient utilization of working capital. Net cash provided by investing activities amounted to 359 million in 2004, compared to net
cash used in investing activities of 80 million and 14 million in 2003 and 2002, respectively.
The net cash used in investing activities in 2004 included capital expenditures of 99 million more
than offset by the proceeds from disposals of 463 million. Cash generated through divestitures
totaled 390 million, while cash from sale of other assets totaled 66 million. This high level of
cash generated through divestments is not expected to be repeated going forward. The net cash used
in investing activities in 2003 included gross capital expenditures of 130 million. The net cash
used in investing activities in 2002 consisted of gross capital expenditures of 194 million offset
by proceeds from the sale of assets amounting to 181 million (primarily divested shares and
divested businesses). Net cash used in financing activities amounted to 333 million in 2004, compared to 121
million in 2003 and 233 million in 2002. Dividends paid amounted to 27 million in 2004 and to 82
million in both 2003 and 2002. Our net interest bearing liabilities (interest bearing liabilities
less cash and cash equivalents, interest bearing loans receivable and interest bearing accounts
receivable) amounted to 529 million as of December 31, 2004, compared to 1,109 million and 1,118
million as of December 31, 2003 and 2002, respectively. The positive net cash provided by both
operating activities and investing activities helped to substantially reduce interest bearing
liabilities and, hence, strengthen our financial position. Our liquid assets (cash and cash equivalents) amounted to 419 million as of December 31,
2004, compared to liquid assets of 130 million as of December 31, 2003 and liquid assets of 190
million as of December 31, 2002. Our financing is mainly of a long-term nature and long-term debt accounted for 95 percent of
our total interest bearing debt at the end of 2004. The long-term debt, consisting primarily of
bonds and loans from financial and pension institutions, amounted to 920 million, 957 million and
1,020 million as of December 31, 2004, 2003 and 2002, respectively. The bonds consisted
principally of three bond loans with the principal amounts of U.S.$174 million (128 million), 156
million and 274 million. The U.S. dollar denominated bond was issued in the United States in
December 1997 and registered with the U.S. Securities and Exchange Commission (the SEC). It
matures in 2007 and bears a fixed annual interest rate of 6.875 percent. In December 2000, Metso
established a Euro Medium Term Note Program of 1 billion, under which initially a 500 million
bond loan was issued in December 2001. The bond loan matures in 2006 and carries a fixed interest
rate of 6.25 percent. In spring 2004, 88 million worth of the bonds were exchanged into bonds with
maturities of five to seven years through private placements. In November 2004, we completed an
offer to exchange the remaining bonds to new Euro-denominated bonds maturing in 2011. 256 million
of existing 45




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bonds were validly submitted and accepted for exchange, corresponding to 62 percent of the
total outstanding amount of existing bonds. 274 million of new bonds were issued and they carry a
fixed interest rate of 5.125 percent. As a result on December 31, 2004, the outstanding amount of
the bond loan maturing in 2006 totaled 156 million. Our loans from financial institutions consist of international bank borrowings with either
fixed or variable interest rates. The majority of the loans are either U.S. dollar or SEK
denominated. The interest rates vary from 2.4 percent to 10.5 percent, and the loans have
maturities ranging from 2005 to 2011. In June 2003, we entered into a new five-year revolving credit facility agreement of 450
million with a syndicate of 14 banks. It replaced two earlier revolving credit facilities: 230
million credit facility from 1998 and a 400 million credit facility from year 2000, while
extending the maturity of the credit commitments until 2008. As of December 31, 2004, the facility
was undrawn and, as of December 31, 2003, 66 million was drawn. In May 2004, we signed an 135 million ten-year research and development loan agreement with
the European Investment Bank (EIB). Under the loan facility, funds may be drawn within 18 months
from signing. The overall loan period will be ten years with installment payments starting three
years from each draw down. As of December 31, 2004, the facility was undrawn. As of December 31, 2004, the undrawn committed long-term credit facilities of Metso totaled
450 million and the undrawn committed short-term credit facilities amounted to 100 million. We have a short-term euro commercial paper program of 150 million and a domestic commercial
paper program amounting to 300 million with a group of Finnish and international banks in each
case. As of December 31, 2004, both facilities were undrawn. Management believes that our financial situation is stable, inasmuch as interest bearing debt
is mainly long-term debt and there are adequate long-term and short-term financing reserves and
facilities for our current scope of operations. Cash in bank and lines of credit are sufficient to
cover fluctuations in the cash flows of the businesses. The ratio of our net interest bearing liabilities to equity was 50.0 percent as of December
31, 2004, compared to 107.7 percent and 80.6 percent as of December 31, 2003 and 2002,
respectively. We made considerable progress in reducing our ratio of net interest bearing
liabilities to equity, which was an important target for 2004. This improvement was a result of
divestments and improved profitability in operations. As of December 31, 2004, the shareholders equity, distributable funds and total assets of the
parent company, Metso Corporation, amounted to 1,079 million, 543 million and 2,867 million,
respectively. As of December 31, 2004, the shareholders equity, distributable funds and total
assets of Metso Corporation and its consolidated subsidiaries amounted to 1,052 million, 572
million and 3,578 million, respectively. On March 3, 2004, Standard & Poors Ratings Services (S&P) downgraded our long-term
corporate credit rating to BB+ from BBB and considered the outlook on ratings to be stable.
Additionally, the ratings of Metsos outstanding bonds and EMTN program were lowered to BB. At the
same time, the short-term rating was lowered to B. On February 17, 2004, Moodys Investors Services
(Moodys) lowered our long-term ratings to Ba1 from Baa3 and considered the outlook on ratings
negative. On February 25, 2005, Moodys confirmed the Ba1 rating on our long-term corporate credit
while upgrading the outlook to stable. There are no prepayment covenants in our financial contracts
that would be triggered by changes in our credit ratings. 46




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Disclosure about Contractual Obligations and Commercial Commitments The table below sets forth aggregated information about our contractual obligations and
commercial commitments as of December 31, 2004. Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 years( in millions)Contractual ObligationsLong-term debt, incl. short-term
portion
    
    
    939
    
    
    
    19
    
    
    
    361
    
    
    
    125
    
    
    
    434Capital lease obligations
    
    
    23
    
    
    
    4
    
    
    
    9
    
    
    
    4
    
    
    
    6Operating leases
    
    
    142
    
    
    
    40
    
    
    
    49
    
    
    
    27
    
    
    
    26Total contractual cash obligations
    
    
    1,104
    
    
    
    63
    
    
    
    419
    
    
    
    156
    
    
    
    466
 Total
    
    
    Amount of Commitmentamounts
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    Overcommitted
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 years( in millions)Other Commercial CommitmentsGuarantees
    
    
    9
    
    
    
    9
    
    
    
    0
    
    
    
    0
    
    
    
    0Standby repurchase obligations
    
    
    10
    
    
    
    6
    
    
    
    2
    
    
    
    1
    
    
    
    1Purchase commitments
    
    
    304
    
    
    
    300
    
    
    
    4
    
    
    
    0
    
    
    
    0Other commitments
    
    
    32
    
    
    
    3
    
    
    
    3
    
    
    
    2
    
    
    
    24Total commercial commitments
    
    
    355
    
    
    
    318
    
    
    
    9
    
    
    
    3
    
    
    
    25
 We generally record the pension expense of our employees in accordance with local accounting
practices in the countries in which our employees are provided with such benefits. Under U.S. GAAP,
pension expense is recorded on a full accrual basis and reflected in the income statement over the
working lives of the employees provided with such benefits. The economic and demographic
assumptions used in calculating pension expense are to be reviewed and updated periodically to the
extent that local market economic conditions and demographics change. The companies within Metso have various pension schemes in accordance with the local
conditions and practices of the countries in which they operate. The schemes are generally funded
through payments to insurance companies or to trustee-administered funds. The pension payments
booked in our Finnish GAAP income statement amounted to approximately 112 million, 104 million
and 104 million for the years ended December 31, 2002, 2003, and 2004, respectively. We have also
recognized under Finnish GAAP an off-balance sheet liability of 13 million of unfunded pension
liabilities for foreign subsidiaries for the year ended December 31, 2003 and 24 million for the
year ended December 31, 2004. Under Finnish GAAP, we have not recognized the liability for the
Finnish defined pension benefit liability of the TEL-system. Under U.S. GAAP, the Finnish pension
liability is considered a defined benefit plan that is required to be recognized. The pension
benefit obligation amounted to 104 million as of December 31, 2004. 
 Capital Expenditure Our gross capital expenditures, excluding acquisitions, amounted to 97 million in 2004,
compared to 128 million and 193 million in 2003 and 2002, respectively. The gross capital
expenditure, including acquisitions, totaled 99 million in 2004. For the preceding three years,
our capital expenditures have consisted principally of maintenance, development and expansion of
existing production capacity, office and service facilities as well as information technology. In
2005, our capital expenditures are projected to be approximately 110 million, which will mainly be
related to improvements of existing capacity and facilities. We expect to finance the expenditure
with cash flow from operations. 47




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The table below summarizes our gross capital expenditures by region, excluding acquisitions,
for the periods indicated: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Finland
    
    
    119
    
    
    
    70
    
    
    
    54Other Nordic Countries
    
    
    23
    
    
    
    15
    
    
    
    10Europe (excluding Nordic Countries)
    
    
    23
    
    
    
    19
    
    
    
    11North America
    
    
    14
    
    
    
    10
    
    
    
    9South America
    
    
    5
    
    
    
    5
    
    
    
    8Asia-Pacific
    
    
    8
    
    
    
    7
    
    
    
    4Rest of the World
    
    
    1
    
    
    
    2
    
    
    
    1Total
    
    
    193
    
    
    
    128
    
    
    
    97
 Our capital expenditure in 2004 was mainly focused on maintenance due to the implementation of
various measures under our efficiency improvement program. 
 Research and Development Our research and technology development is focused, in line with our strategy, on
applications to improve the operational efficiency of our processes and strengthen our life cycle
business. Rather than just buying machines and equipment, customers are increasingly investing in
competitiveness based on processes that function optimally throughout their life cycle. Products
and services being developed for the process industry benefit, to a large extent, from the latest
information technology and automation solutions. We give high priority to research and development and invested 106 million in research and
development activities in 2004 (2.7 percent of 2004 net sales), compared to 129 million in 2003
(3.0 percent of 2003 net sales) and 156 million in 2002 (3.3 percent of 2002 net sales). This
decrease in the level of investment was due to our more focused approach in research and
development activities. At the end of 2004, we had a total of 953 employees working in the area of
research and development, representing a decrease of 22 percent from the end of 2003. Of those
employees, 48 percent, ten percent, 34 percent, and eight percent worked in Metso Paper, Metso
Minerals, Metso Automation and Metso Ventures, respectively. Geographically, our research and
development activities are concentrated in Finland and Sweden, although we have significant
research and development units in North America and Central Europe as well. Following is a summary of our significant research and development activities by business
area: Metso Paper Metso Papers research and development focuses on developing whole processes and supporting
aftermarket solutions for all the main paper, tissue, board and pulp grades. A key target is to
improve the competitiveness of customer processes through efficiency, quality, eco-efficiency and
optimized life cycle costs. In 2004, Metso Paper spent approximately 50 million on research and development, compared to
56 million in 2003 and 72 million in 2002. In line with our strategy, research and development
was more clearly focused in 2004 on the products and services needed in service, process
improvements and machine rebuilds. Products for modernization and rebuild were developed on the
basis, for example, of paper machine technology and related aftermarket operations acquired from
Beloit in 2000. Pilot runs were also made in cooperation with customers to develop new
machine concepts and tailored rebuild products. The CTMP (chemi-thermomechanical pulp) equipment
introduced at the Anjalankoski, Finland, pilot plant in 2003 was important to the support of sales
of mechanical pulping processes to China and the development of fiber processing and bleaching
methods for hardwood raw material. We have 12 technology centers that are located in Finland, Sweden, the United States and
Italy. Metso Minerals In 2004, product development at Metso Minerals focused on the development of a new generation
of stationary and track-mounted crushers and the shear product family used in metals recycling. In
2004, pilot use of a hybrid wear protection part developed at Metsos foundries began at a customer
plant. This part is much 48




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more durable than before and suited for demanding applications. Metso Minerals also introduced
a Chamber Optimi service for the tailoring of crusher wear parts, enabling Metso Minerals to
analyze its customers crushing processes and develop optimally cost-effective wear parts for each
application. Metso Minerals spent approximately 9 million on research and development in 2004, compared to
10 million in 2003 and 10 million in 2002. Technology centers of Metso Minerals are located in Brazil, Canada, Finland, France, Germany,
New Zealand, Sweden and the United States. Metso Automation Metso Automation develops automation and field system solutions for chosen process industry
needs. Among the most significant of the many new products introduced by Metso Automation in 2004
were the new metsoDNA features aimed at improving process performance and information security.
Metso Automation has also expanded its portfolio of advanced profilers for paper, tissue and board
machines. The product portfolio now includes IQProfilers for both new production lines and
production line rebuilds, as well as for stand-alone units. One of the main field solutions in 2004
was the Field Care field equipment configuration and condition-monitoring tool, which makes it
possible to use one system to monitor the condition of different manufacturers field equipment in
customer production processes. Metso Automation spent approximately 31 million on research and development in 2004, compared
to 33 million in 2003 and 44 million in 2002. Of the over 300 people working in Metso Automations research and development, the majority is
located in Finland while other locations are in Canada and the United States. Metso Ventures Metso Ventures consists of Metso Drives, Metso Panelboard, Foundries, Metso Powdermet and
Valmet Automotive. Metso Ventures spent approximately 8 million on research and development in
2004, compared to 10 million in 2003 and 12 million in 2002. Metso Drives research and development aims to create mechanical drive solutions, which
fulfill customer needs in terms of reliability, cost and eco-efficiency. The activities take place
in two locations in Finland in close co-operation with Metsos other business areas. Metso Panelboards research and development is focused on improving the competitiveness of its
machinery and systems for wood-based panel industries: medium-density fiberboard, particleboard and
oriented-strand board. Metso Powdermet focuses on developing new material solutions, since increased process speeds
and efficiencies are placing more stringent demands on the strength and durability of machine
parts. Additionally, new kinds of wear and spare parts solutions that are more durable and
cost-efficient are being developed for the needs of our service and aftermarket business. Valmet Automotives research and development activities focused on the development of a
prototype car equipped with a folding hard top to present its competence in automotive shows and at
various carmakers. 
 Foreign Currency Fluctuations Exchange rate movements generally affect us through the translation of foreign subsidiary
revenues, costs, profits and losses into our consolidated financial statements expressed in euro
and through their transaction impact on the amount of the net sales with respect to foreign
currency revenues from export sales of our various operations. Exchange rate movements also have
certain competitive effects on our sales. Both our production and sales activities are distributed throughout numerous geographic
regions creating exposure to various currency risks. The principal currencies that we are exposed
to are the U.S. dollar, the euro and the Swedish krona. In general, appreciation of the euro
relative to the U.S. dollar has an adverse effect on our sales and operating profit, while its
depreciation has a positive effect. A majority of our sales in the United States have been supplied
by our U.S. production and aftermarket facilities or sourced locally, which 49




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reduces the direct impact of euroU.S. dollar fluctuations on our profitability in that
market. However, Metso Paper, Metso Automation and Metso Minerals all have part of their U.S. sales
based on exports from Europe. Some of these sales face competitors with costs in a different
currency, typically U.S. based competitors. See Item 3. Key InformationExchange Rates. Our foreign currency risk management policy is focused on hedging the foreign currency
exposures arising from firm sales and purchase commitments and the net investments in foreign
subsidiaries to the extent practicable. See Item 11. Quantitative and Qualitative Disclosures
about Market RiskExchange Rates and Foreign Currency Exposure. We hedge our currency risks with
forward exchange contracts and options. In 2004, foreign exchange gains and losses resulted in a net gain of 8 million, compared to a
net loss of 3 million in 2003 and a net loss of 6 million in 2002. Of the total foreign exchange
gains and losses, a portion included in the operating profit or loss amounted to a net gain of 9
million in 2004, compared to a net gain of 1 million in 2003 and to a net loss of 3 million in
2002. The rest of the foreign exchange gains and losses have been included in the financial items. Exchange rate movements also impact our assets and liabilities denominated in currencies other
than the euro. We use loans and receivables, currency swaps, and forward exchange contracts to
hedge our equity investments denominated in non-euro currencies, with maturities ranging from less
than one year to seven years. We have also made long-term U.S. dollar and pound sterling
denominated loans to certain foreign subsidiaries. We hedge the associated currency risk through
cross-currency swaps and forward exchange contracts. Foreign exchange contracts are used to hedge
our foreign currency risk arising from the short-term borrowings. The principal currency for our
short-term borrowings is currently the euro. 
 Inflation Inflation in Finland as measured by the change in the consumer price index was 0.2
percent in 2004, 0.9 percent in 2003 and 1.6 percent in 2002. Inflation in Finland did not have a
significant impact on our operating results. However, a major portion of our operations, sales and
production is performed in countries with rates of inflation higher or lower of that in Finland.
Changes in exchange rates or interest rates may or may not reflect differences in inflation rates.
Quantifying the individual or combined effects of these factors on our reported income is therefore
not possible. 
 Adoption of International Financial Reporting Standards In compliance with regulations adopted by the European Commission in June 2002, we converted
our financial reporting at the beginning of 2005 from compliance with the Finnish Accounting
Standards (FAS) to compliance with the International Financial Reporting Standards (IFRS). The
transition date for calculating comparative data is January 1, 2004, from which date we will
prepare the opening balance sheet in accordance to IFRS principles. In terms of the income statement, the main difference between our Finnish and IFRS accounting
practices concerns goodwill. According to IFRS 3, goodwill is no longer amortized, but it becomes
subject to a yearly impairment test as required by IAS 36. In terms of the balance sheet, one of the most important differences between Finnish and IFRS
accounting practices concerns employee benefits, which are regulated by IAS 19. According to this
standard, we will record liabilities for future disability pensions related to Finlands employee
pension insurance system. The liability related to the future disability pensions of the employee
pension insurance system is recognized as a defined benefit plan in the opening balance sheet on
the transition date of January 1, 2004, and it will reduce the shareholders equity by
approximately 60 million (net of taxes). Due to the changes made in 2004 to the Finnish employee
pension insurance system, the disability pension will be treated in the future as
contribution-based, and the main portion of the liability will be reversed and recognized as income
in the last quarter of 2004 and, therefore, will no longer appear as a liability in the opening
balance sheet of January 1, 2005. In addition, we have in certain countries defined benefit pension
plans and other employee benefit arrangements, for which the liability has to be recognized in full
reducing thus the shareholders equity as of the transition date. IAS 12 on income taxes sets the criteria on the recognition of deferred tax assets arising
from the carryforward of unused tax losses and of deductible temporary differences. When an
entity has a history of recent losses, a deferred tax asset arising from unused tax losses can only
be recognized if there is convincing 50




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evidence that sufficient taxable profit will be available against which the unused tax losses
can be utilized. Under FAS, a deferred tax asset on unused tax losses can be recognized if the
management expects the entity to generate future taxable income. As of January 1, 2004, we will
recognize, as a reduction of our equity, a valuation allowance of 48 million arising from
temporary differences and unused tax losses carried forward by our operations in the United States. We will publish a release on the effects on financial information of the transfer to IFRS
accounting practice by the end of the first quarter of 2005. 
 New Accounting Standards In December 2003, the Medicare Prescription Drug, Improvements and Modernization Act of
2003 (the Medicare Act) was approved in the United States. The Medicare Act provides for two new
prescription drug benefit features under Medicare. Metso provides post-retirement benefits to some
of its U.S. employees so the benefits provided are impacted by the Medicare Act. SFAS 106,
Employers Accounting for Post-retirement Benefits Other Than Pensions, requires that enacted
changes in the law that take effect in future periods and that will affect the future level of
benefit coverage be considered in the current period measurements for benefits expected to be
provided in those future periods. Metso has determined that the Medicare Act had an immaterial
effect on the cost of medical benefits to be borne by Metso. In March 2004, the EITF reached consensus on Issue No. 03-01, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-01). EITF
03-01 provides guidance on other-than-temporary impairment models for marketable debt and equity
securities and non-marketable securities accounted for under the cost method. On September 30,
2004, the FASB issued FSP 03-01-1, Effective Date of Paragraphs 10-20 of EITF Issue 03-01, The
Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, delaying the
effective date for the recognition and measurement guidance in EITF 03-01, until certain
implementation issues are addressed and a final FSP is issued. The disclosure requirements in EITF
03-01 remain effective. Metso has complied with the disclosure requirements for the year ended
December 31, 2004. In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4, clarifying the existing requirements in ARB No. 43 regarding normal capacity,
spoilage costs and idle capacity costs. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The adoption of FAS 151 will not have an impact
on the Metsos consolidated results of operation or financial position, since the key elements are
already utilized in Metsos U.S. GAAP consolidated financial statements. In December 2004, the FASB published FASB Statement No. 123 (revised 2004). Share-Based
Payments. This provides guidance on how companies must recognize the compensation cost relating to
share-based payment transactions in their financial statements. It will require companies to
recognize a compensation cost for the value of options granted in exchange for employee services,
based on the grant date fair value of those instruments. FASB No. 123 (revised) is effective for
public entities as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005, however early application is possible. Metso intends to adopt this revised
standard from January 1, 2005. Metso is currently assessing what impact the pronouncement will have
on its consolidated financial statements. 
 Off-Balance Sheet Arrangements There are no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition (except those discussed in Item 11 in relation
to derivative instruments), changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is material to investors. 51




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Item 6.  Directors, Senior Management and Employees. Pursuant to the Finnish Companies Act and our articles of association, our control and
management is divided among our shareholders, board of directors, and president and chief executive
officer. In addition, we have a corporate executive team, which assists our president and chief
executive officer in the day-to-day management of the Company. Shareholders can contact the
Company, its management and board of directors through the Companys investor relations department. The business address for our directors and executive management is P.O. Box 1220, FIN-00101
Helsinki, Finland. 
 Board of Directors The board of directors of Metso Corporation has ultimate responsibility for the
management and proper arrangement of the operations of the Company, and for assuring good corporate
governance in compliance with applicable legislation. The board of directors decides upon matters,
which, considering the scope and size of the operations of the Company, are of major importance.
These include the acceptance of the goals of the Company and the main strategies for achieving
them, the acceptance of action plans, the definition and acceptance of control policies, the
acceptance of the organizational structure of the Company, and the nomination of the president and
chief executive officer, his deputy and the members of the corporate executive team and the
monitoring and evaluating of their performance. Our board of directors is composed of at least five and no more than eight members. Our board
of directors currently consists of seven members, each of whom was elected by the shareholders at
the annual general meeting of shareholders on April 6, 2004, for a term ending at the following
annual general meeting of shareholders. Our next annual general meeting will be held on April 4,
2005. Board members may be appointed or removed only by a shareholders resolution at a general
meeting. The following table lists the names of the members of our board of directors, possible
principal occupation or employment and their year of birth: Name
    
    Position
    
    Year of BirthMatti Kavetvuo
    
    Chairman of the board
    
    
    1944Jaakko Rauramo
    
    Vice chairman of the board
    
    
    1941Maija-Liisa Friman
    
    Director; president and chief executive officer of Aspocomp Group Oyj
    
    
    1952Risto Hautamäki
    
    Director; president and chief executive officer of Tamfelt Corporation
    
    
    1945Satu Huber
    
    Director; director of finance and head of finance division in the
Finnish State Treasury
    
    
    1958Juhani Kuusi
    
    Director
    
    
    1938Pentti Mäkinen
    
    Director; labor representative, Metso Corporation
    
    
    1952
 Matti Kavetvuohas been the chairman of our board of directors since 2003. He was president
and chief executive officer of Pohjola Insurance Group until 2001, when he retired. Previously, he
was president and chief executive officer of Valio Ltd. in 1992-1999, and president and chief
executive officer of Orion Corporation in 1985-1991. Mr. Kavetvuo was employed by Instrumentarium
Corporation in 1971-1984, where he served as president in 1979-1984. Mr. Kavetvuo is also chairman
of the boards of directors of Orion Corporation and Suominen Corporation. He is vice chairman of
the boards of directors at Alma Media Corporation and Kesko Corporation. He is also a member of the
boards of directors of KCI Konecranes Plc, Marimekko Corporation and Perlos Corporation. Mr.
Kavetvuo holds a Master of Science degree in Technology and a Master of Science degree in Economics
and Business Administration. Jaakko Rauramohas been a member of our board of directors since 1999 and vice chairman since
2004. He served as president and chief executive officer of SanomaWSOY in 1999-2001 and president
of Sanoma Corporation in 1984-1999. Mr. Rauramo is the chairman of the board of directors of
SanomaWSOY Corporation. He is also a member of the boards of directors of the Foundation of the
Confederation of Finnish Industry and Employers, European Publishers Council and Stiftelsen Svenska
Dagbladet. He is a member of the international council of the Museum of Television & Radio in New
York. He is a trustee of Reuters Founders Share Company Limited. Mr. Rauramo holds a Master of
Science degree in Technology. Maija-Liisa Frimanhas been a member of our board of directors since 2003. Ms. Friman is
president and chief executive officer of Aspocomp Group since April 2004. In 2000-2004, she was
managing director of Vattenfall Oy and, in 1993-2000, president of Gyproc Oy. Ms. Friman is a
member of the boards of directors of 52




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Sponda Plc, SYK Ltd and the Finnish Medical Foundation. Ms. Friman holds a Master of Science
degree in Technology. Risto Hautamäkihas been a member of our board of directors since 2004. Mr. Hautamäki has been
appointed president of Metso Paper and a member of Metso executive team as of April 1, 2005. Mr.
Hautamäki has served as president and chief executive officer of Tamfelt Corporation since 1995,
and will continue in this position until the end of March 2005. Previously, he was president and
chief executive officer of Valmet Paper Machinery Inc. in 1990-1994 and executive vice president
and chief operating officer in 1989-1990. Mr. Hautamäki is a member of the board of directors of
Wärtsilä Corporation. Mr. Hautamäki holds a Master of Science degree in Technology. Satu Huberhas been a member of our board of directors since 2004. Ms. Huber is director of finance
and head of finance division in the Finnish State Treasury since 1997. In 1995-1997, she was first
vice president in Merita Investment Banking, with her latest responsibilities being Global sales &
Scandinavian money and bond markets. Ms. Huber is a member of the boards of directors of Boliden Ab
and Ekonomiska Samfundet i Finland rf. Ms. Huber holds a Master of Science degree in Economics and
Business Administration. Juhani Kuusihas been a member of our board of directors since 2000. Mr. Kuusi previously
served as senior vice president, head of Nokia Research Center from 1995 to 2002. Prior to joining
Nokia, Mr. Kuusi was director general of the Technology Development Center for 12 years. Mr. Kuusi
holds a Doctorate degree in Technology. Pentti Mäkinenhas been a member of our board of directors since 2000 serving in the capacity
of a labor representative. Mr. Mäkinen has been employed by Metso since 1969 and serves as
coordinator of vocational competence development in Metso Paper, Jyväskylä, Finland. Previously, he
acted as the chief shop steward at the same location in 1999-2004. Mr. Mäkinen is a plate-welder by
education. On February 2, 2005, Metso Corporations nomination committee, consisting of representatives
of the four largest shareholders as of December 1, 2004 announced that they will propose to the
annual general meeting convening on April 4, 2005, that the number of members of our board of
directors be six and that the following members of the board of directors be re-elected for a term
of one year: Maija-Liisa Friman, Satu Huber, Matti Kavetvuo, Juhani Kuusi and Jaakko Rauramo. In
addition, the nomination committee will propose that Mr. Svante Adde, former chief financial
officer of Ahlstrom Corporation, be elected as a new member of the board of directors. Svante Adde
is a member of the boards of directors at KCI Konecranes and Sonoco-Alcore S.a.r.l. The nomination
committee will further propose that Matti Kavetvuo be re-elected as chairman and Jaakko Rauramo be
re-elected as vice chairman of the board of directors. 
 Chief Executive Officer and Corporate Executive Team Metsos executive officers, which form Metsos corporate executive team, include our
president and chief executive officer, our chief financial officer and our business area
presidents. The president and chief executive officer guides and supervises the operations of Metso
and our business areas. The president and chief executive officer prepares the matters on the
agenda of the board of directors and its committees and is responsible for implementing their
decisions. The president and chief executive officer also acts as chairman of the corporate
executive team and the business area boards. Our executive team assists the president and chief
executive officer in the preparation of matters such as our strategy, policies and other matters of
joint importance within our Company and its business areas. The following table lists the names of the current members of the corporate executive team,
their current responsibilities within our Company and their year of birth: Name
    
    Position
    
    Year of BirthJorma Eloranta
    
    President and chief executive officer
    
    1951Olli Vaartimo
    
    Executive vice president and chief financial officer, deputy to president and chief executive officer
    
    1950Vesa Kainu
    
    President, Metso Ventures
    
    1947Bertel Karlstedt
    
    President, Metso Paper
    
    1962Matti Kähkönen
    
    President, Metso Automation
    
    1956Bertel Langenskiöld
    
    President, Metso Minerals
    
    1950
 53




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Jorma Elorantahas been our president and chief executive officer since March 1, 2004. Prior
to such time, Mr. Eloranta was president and chief executive officer of Kvaerner Masa-Yards Inc. in
2001-2004. He has also served as president and chief executive officer of Patria Industries Group
in 1997-2001, as deputy chief executive of Finvest Group and Jaakko Pöyry Group in 1996-1997 and as
president of Finvest Ltd in 1985-1995. Mr. Eloranta is the chairman of the board of directors of Oy
Center-Inn Ab and a member of the supervisory board of Ilmarinen Mutual Pension Insurance Company.
He is also a member of the board of directors of Uponor Corporation. Mr. Eloranta holds a Master of
Science degree in Technology. Olli Vaartimohas been our executive vice president, chief financial officer, and deputy to
the president and chief executive officer since April 22, 2003. He served as interim president and
chief executive officer of Metso from September 25, 2003 to February 29, 2004. Mr. Vaartimo has
previously served as president of Metso Minerals in 1999-2003 and president and chief executive
officer of Nordberg in the Rauma Group in 1993-1999. From 1991 to 1998, he was also executive vice
president and chief financial officer of Rauma Corporation. Mr. Vaartimo joined Rauma in 1974. Mr.
Vaartimo holds a Master of Science degree in Economics and Business Administration. Vesa Kainuhas served as president of Metso Ventures since 2003. In 2001-2003, he served as
executive vice president of Metso Minerals, and in 1999-2001, he was president of Metso Paper
Service. Prior to that, he headed Valmets maintenance services business line from 1994. He joined
the Company in 1971. Mr. Kainu is a member of the board of directors of Exel Oyj. Mr. Kainu holds a
Bachelor of Science degree in Technology. Bertel Karlstedt,who has served as president of Metso Paper since 2003, will continue in this
position until March 31, 2005. Following the appointment of Risto Hautamäki as president of Metso
Paper and a member of Metso executive team as of April 1, 2005, Mr. Karlstedt will then become
executive vice president of Metso Paper. Previously, Mr. Karlstedt headed Metso Papers paper
making business line in 1999-2003, and Valmets pulp drying business unit from 1996. He joined
Valmet in 1988. Mr. Karlstedt holds a Master of Science degree in Technology. Matti Kähkönenhas served as president of Metso Automation since 2001. Prior to that, he
headed Metso Automation field systems division in 1999-2001, and served as division president of
Neles Controls in the Rauma Group from 1993. Mr. Kähkönen joined Rauma in 1980. Mr. Kähkönen holds
a Master of Science degree in Technology. Bertel Langenskiöldhas served as president of Metso Minerals since 2003. Previously, he was
president and chief executive officer of Fiskars Corporation in 2001-2003, and president of
Tampella Oy/Kvaerner Pulping Oy in 1994-2000. Mr. Langenskiöld is a member of the board of Wärtsilä
Corporation. Mr. Langenskiöld holds a Master of Science degree in Technology. 
 Compensation of Directors and Officers For the year ended December 31, 2004, fees totaling 315,258 (U.S.$426,796) were paid to
the members of the board of directors of Metso Corporation. This includes the seven current members
listed above and two previous members, Heikki Hakala and Mikko Kivimäki, who served on the board of
directors until the annual shareholders meeting held on April 6, 2004. The annual fees paid were
as follows: chairman of the board 60,000 (U.S.$81,228), vice chairman 40,000 (U.S.$54,152) and
other board members 30,000 (U.S.$40,614). In addition, a fee of 500 (U.S.$677) per meeting was
paid to all members of the board of directors for the meetings they attended. Compensation for
traveling expenses and daily allowances were paid in accordance with the general travel rules of
Metso. For the year ended December 31, 2004, salaries and bonuses totaling 1,880,476 were paid to
eight members of our corporate executive team for the actual period they were members of the
corporate executive team. Performance bonuses for the year 2003 accounted for 77,518, or 4.1
percent, of the total compensation paid. None of the members received benefits in 2004 exceeding
the lesser of 50,000 or ten percent of their total compensation. In addition to the current
members of the corporate executive team of Metso Corporation listed above, both the executive vice
president of Metso Paper Arto Aaltonen and senior vice president and general counsel Harri Luoto
were members of the corporate executive team between January 1 and May 1, 2004. The salaries of all
members of the corporate executive team comprise a fixed basic salary and/or a bonus based on the
result of the corporation or of the business area in question. The salary may also be based on
other development objectives central to our operations. 54




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We also pay premiums to a pension insurance company to provide for a supplemental group
pension insurance covering our corporate executive team and some senior executives, which enables a
retirement age of 60. In 2004, the amount of such pension insurance premium payments totaled
approximately 1.5 million. The annual salary of president and chief executive officer Jorma Eloranta for 2004 was
438,000. According to his service contract, Jorma Elorantas age of retirement is 60 years, and
his full pension equals 60 percent of the annual salary serving as the basis for the pension
calculation. If Mr. Eloranta terminates his contract for a reason for which Metso is responsible,
or if his contract is terminated by Metso, he is entitled to compensation corresponding to 24
months salary and benefits. As of December 31, 2004, there were no loans outstanding to any members of our board of
directors or our corporate executive team. 
 Audit Committee and Compensation Committee Audit Committee.The audit committee consists of a chairman and two members elected by
the board of directors from among its members. From April 28, 2004, the audit committee has
consisted of Maija-Liisa Friman (chairman), Satu Huber and Jaakko Rauramo. The audit committee
reviews the financial reporting, Metsos compliance with laws and regulations and Metsos
procedures, internal control, risk management and matters relating to auditing. The audit committee
also maintains procedures for the receipt, retention and treatment of complaints received by Metso
regarding accounting, internal controls, or auditing matters and for the confidential, anonymous
submission by our employees of concerns regarding accounting or auditing matters. Each year, the
audit committee draws up a working order for itself, subject to approval by the board of directors.
In 2004, the audit committee met thirteen times. Compensation Committee. The compensation committee consists of the chairman and vice chairman
of the board of directors and one member elected by the board from among its members. From April
29, 2004, the compensation committee has consisted of Matti Kavetvuo (chairman), Risto Hautamäki
and Juhani Kuusi. The compensation committee makes proposals to the board of directors concerning
the compensation of our management and the personnel compensation systems. Pursuant to the Finnish
Companies Act, the shareholders determine the amount of compensation for the board of directors at
the annual general meeting. In 2004, the compensation committee met six times. 
 Home Country Practices Foreign private issuers listed on the New York Stock Exchange must disclose any
significant ways in which their corporate governance practices differ from those followed by U.S.
domestic companies under the listing standards of the New York Stock Exchange (the NYSE listing
standards). As a result of a comparison of Metsos corporate governance practices to those requirements of
Section 303A of the NYSE listing standards that are currently applicable to U.S. domestic
companies, the following significant differences have been identified:  

The annual general meeting of our shareholders held on April 6, 2004 established a
nomination committee, which consists of the representatives of our four biggest
shareholders 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, 2005. 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 chief executive officer 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 55




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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 covered this requirement by comprehensive risk management and internal control
processes. 
 Employees Metsos employees numbered 22,802 at year-end 2004, as compared to 26,240 at year-end
2003, and 28,489 at year-end 2002. The reduction has been a result of the divestment of non-core
businesses and restructuring measures taken. We believe that we have good relations with our
employees and labor unions. The following table sets forth the number of employees by business area and by region as of
December 31, 2002, 2003 and 2004. The increase in the number of the Corporate Offices personnel in
2003 was due to the inclusion of the financial administration service centers employees in the
figures. As of December 31,Percentage of2002
    
    
    2003
    
    
    2004
    
    
    GroupEmployees by business areaMetso Paper
    
    
    9,357
    
    
    
    9,085
    
    
    
    8,660
    
    
    
    38Metso Minerals
    
    
    8,479
    
    
    
    8,284
    
    
    
    8,048
    
    
    
    35Metso Automation
    
    
    4,150
    
    
    
    3,314
    
    
    
    3,267
    
    
    
    15Metso Ventures
    
    
    3,466
    
    
    
    2,482
    
    
    
    2,544
    
    
    
    11Corporate Office and Other
    
    
    134
    
    
    
    223
    
    
    
    283
    
    
    
    1Continuing Operations
    
    
    25,586
    
    
    
    23,388
    
    
    
    22,802
    
    
    
    100Discontinued Operations
    
    
    2,903
    
    
    
    2,852
    
    
    
    
    
    
    
    Metso Total
    
    
    28,489
    
    
    
    26,240
    
    
    
    22,802
    
    
    
    100
 As of December 31,Percentage of2002
    
    
    2003
    
    
    2004
    
    
    GroupEmployees by geographic areaFinland
    
    
    10,566
    
    
    
    9,307
    
    
    
    9,089
    
    
    
    40Other Nordic Countries
    
    
    3,610
    
    
    
    3,446
    
    
    
    2,622
    
    
    
    11Other European countries
    
    
    4,802
    
    
    
    4,622
    
    
    
    2,902
    
    
    
    13North America
    
    
    4,794
    
    
    
    4,124
    
    
    
    3,557
    
    
    
    16South America
    
    
    1,883
    
    
    
    1,894
    
    
    
    1,950
    
    
    
    8Asia-Pacific
    
    
    1,341
    
    
    
    1,457
    
    
    
    1,366
    
    
    
    6Rest of the world
    
    
    1,493
    
    
    
    1,390
    
    
    
    1,316
    
    
    
    6Total
    
    
    28,489
    
    
    
    26,240
    
    
    
    22,802
    
    
    
    100
 
 Share Ownership As of March 24, 2005, the members of our board of directors and our corporate executive
team held in the aggregate a total of 21,329 shares of Metso Corporation for which they held sole
voting or investment power, representing less than one percent of our total issued and outstanding
share capital. As of March 24, 2005, members of our board of directors and corporate executive team
collectively held in the aggregate 114,900 options of the Company. The following table sets forth the total number of shares and options of Metso Corporation
beneficially held by each of our directors and members of our corporate executive team as of March
24, 2005: 56




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Number of
    
    
    Number of
    
    
    Number ofSole Voting
    
    
    Beneficially
    
    
    Series 2000
    
    
    Series 2001
    
    
    Series 2003or Investment
    
    
    Shared Voting
    
    
    A and B
    
    
    A and B
    
    
    APower
    
    
    Power
    
    
    options
    
    
    options
    
    
    optionsDirectorsMatti Kavetvuo(1)
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    Maija-Liisa Friman
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Risto Hautamäki
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Satu Huber
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Juhani Kuusi
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pentti Mäkinen
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jaakko Rauramo
    
    
    4,205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate Executive TeamJorma Eloranta
    
    
    1,800
    
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    100,000Olli Vaartimo
    
    
    1,144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vesa Kainu
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bertel Karlstedt
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Matti Kähkönen
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bertel Langenskiöld
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,400
    
    
    
    
  (1)
    
    Includes 94 shares held by Mr. Kavetvuos spouse. Metso Corporation currently has three option programs, launched in 2000, 2001 and 2003. The
programs are part of an incentive system for key personnel, and included 183 people at the end of
2004. Initially, the programs gave the right to subscribe for a maximum of 13,800,000 new shares.
Our board of directors decided on May 26, 2004 to reduce the size of the year 2003 option program,
after which the three programs together give the right to subscribe for a maximum of 8,900,000 new
shares. The year 2000 option program includes 5,000,000 options, which entitle their holders to
subscribe for a maximum of 5,000,000 shares. The year 2001 option program includes 1,000,000
options, which entitle their holders to subscribe for a maximum of 1,000,000 shares. The year 2000
A and B options and the year 2001 A and B options were combined as one series on April 1, 2003, and
the subscription period for these options will end on April 30, 2005. The share subscription price
was 13.60 on December 31, 2004. Annually paid dividends are deducted from the subscription price. Our board of directors decided on May 26, 2004 to reduce the number of options related to the
year 2003 option program to 2,900,000. Previously, 2,600,000 of the options were marked with the
symbol 2003A, 2,600,000 were marked with the symbol 2003B and 2,600,000 were marked with the symbol
2003C. However, our board of directors decided that it will not distribute 2,400,000 of the year
2003A and 2,500,000 of the year 2003C options, and that it will propose to the annual general
meeting to be held on April 4, 2005, that these options be canceled. With respect to the year 2003
option program, our board of directors reserved 100,000 of the year 2003A options and 100,000 of
the year 2003C options for future needs. Our board of directors decided that the maximum number of year 2003B options that could be
distributed would be 2,500,000. The minimum criteria for a partial distribution of options were a
2004 operating profit that is at least four percent of net sales, a return on capital employed of
at least eight percent and earnings per share of at least 0.40. As the minimum criteria were not
fulfilled, no 2003B options will be distributed from the program. The share subscription price for the 2003A options is 10.45, for the 2003B options the
trade-weighted average price of the Metso share on the Helsinki Stock Exchange during the period
January 1-March 31, 2005, and for the 2003C options the trade-weighted average price of the Metso
share on the Helsinki Stock Exchange during the period January 1-March 31, 2006. Annually paid
dividends are deducted from the subscription price. The share subscription period for the 2003A
options is April 1, 2006-April 30, 2009, for the 2003B
options April 1, 2007-April 30, 2010,
and for the 2003C options April 1, 2008-April 30, 2011. 
 Authorizations for Board of Directors The annual general meeting held on April 6, 2004, authorized our board of directors to
decide on raising the share capital of Metso Corporation by a rights offering, a convertible bonds
issue and/or an issue of share options. The authorization expires one year from the annual general
meeting. No more than 12,500,000 new shares with a nominal value of 1.70 may be subscribed for as
a result of the rights offering, convertible 57




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bond issue or issue of share options. The Corporations share capital may be raised in total
by no more than 21,250,000, which represents 9.17 percent of the share capital and votes. The authorization allows a deviation from the shareholders pre-emptive subscription rights,
provided that there are substantial financial grounds from the Companys perspective, such as
financing acquisitions, enabling joint operation arrangements or other development of the Companys
business operations. The board of directors had not exercised these authorizations by the date of
this annual report. A similar authorization to our board of directors for a one year period is
proposed to the annual general meeting to be held on April 4, 2005. 
 Item 7.  Major Shareholders and Related Party Transactions. 
 Major Shareholders The Finnish State currently owns 11.52 percent of our total shares and total votes. There
has been no change in the Finnish States ownership since 1999 when Metso Corporation was
established. On March 25, 2003, Harris Associates L.P. announced that certain funds under its
management held 5.07 percent of our total shares and total votes. On October 8, 2004, Marathon
Asset Management (Services) Ltd. held according to its announcement 5.04 percent of our total
shares. On March 9, 2005, Deutsche Bank AG and its subsidiary companies held according to their
announcement 9,801,820 Metso shares to which they had the dispositive rights. This holding amounts
to 7.19 percent of the total shares of Metso Corporation. As part of this holding on March 9, 2005,
Deutsche Bank AG and its subsidiary companies held 9,189,802 Metso shares to which they had voting
rights. This voting authority represents 6.74 percent of the total votes of Metso Corporation. Neither the Finnish State, Deutsche Bank AG, Harris Associates L.P., Marathon Asset Management
(Services) Ltd. nor any other shareholder has any special voting rights. However, the Finnish
State, Deutsche Bank AG, Harris Associates L.P. and Marathon Asset Management (Services) Ltd. may,
through their share ownership, continue to have substantial influence in deciding matters submitted
for a vote of shareholders, such as approval of the annual financial statements, declarations of
annual reserves and dividends, capital increases, amendments to our articles of association and the
election and removal of members of our board of directors. The following table lists, as of March 24, 2005, the total number of our shares owned by the
Finnish State, Deutsche Bank AG, Harris Associates L.P. and Marathon Asset Management (Services)
Ltd, the only persons or entities known to be the beneficial owner of more than five percent of our
shares, as well as shares owned by members of our board of directors: Title of Class
    
    Identity of Person or Group
    
    Number of Shares
    
    
    PercentShares, nominal value1.70 each
    
    The Finnish State
    
    
    15,695,287
    
    
    
    11.52Shares, nominal value1.70 each
    
    Deutsche Bank AG and its subsidiary companies
    
    
    9,801,820
    
    
    
    7.19Shares, nominal value1.70 each
    
    Funds managed by Harris Associates L.P.
    
    
    6,904,600
    
    
    
    5.07Shares, nominal value1.70 each
    
    Funds managed by Marathon Asset Management (Services) Ltd.
    
    
    6,866,335
    
    
    
    5.04Shares, nominal value1.70 each
    
    Members of our board of directors
    
    
    18,205
    
    
    
    0.01
 Ownership of Our Securities in the United States As of March 18, 2005, the most recent practicable date, approximately 8,966,068 shares, or 6.6
percent of the total number of our issued and outstanding shares were held by approximately 41
record holders with addresses in the United States. 
 Related Party Transactions There have been no material transactions during the last fiscal year or during the
current fiscal year up to the date of this annual report to which any director or executive officer
or any ten percent shareholder or any 58




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relative or spouse of any of them was a party. There is no significant outstanding
indebtedness owed to Metso by any director or executive officer or ten percent shareholder. There have been no material transactions during the last fiscal year or during the current
fiscal year up to the date of this annual report with enterprises controlling, controlled by or
under common control with Metso or an associate of Metso. 
 Item 8.  Financial Information. 
 Consolidated Financial Statements See Item 18. Financial Statements. 
 Export Sales The value of exports by Metso, including sales to unaffiliated customers and intra-Group
sales, from Finland by destination were as follows for the most recent three years: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Other Nordic Countries
    
    
    297
    
    
    
    195
    
    
    
    210Europe (excluding Nordic Countries)
    
    
    567
    
    
    
    523
    
    
    
    420North America
    
    
    183
    
    
    
    209
    
    
    
    141South America
    
    
    137
    
    
    
    38
    
    
    
    75Asia-Pacific
    
    
    248
    
    
    
    372
    
    
    
    526Rest of the World
    
    
    21
    
    
    
    15
    
    
    
    23Total
    
    
    1,453
    
    
    
    1,352
    
    
    
    1,395
 In 2004, without elimination of intra-Group sales, the value of goods exported from Finland,
Sweden, other European countries and the United States totaled approximately 1,395 million or 24
percent of our total sales, 506 million or nine percent of our total sales, 252 million or four
percent of our total sales, and 205 million or four percent of our total sales, respectively. 
 Legal Proceedings We have extensive worldwide operations and are involved in several legal proceedings in
the ordinary course of our business. While the results of these proceedings cannot be predicted
with certainty, we do not expect them to result in liabilities that have a material effect on our
financial position, results of operations or cash flows. Several actions raising product liability claims are pending against Metso in the United
States. However, we do not believe that the outcome of these actions, individually or in the
aggregate, will have a material adverse effect on our business, liquidity, financial condition or
results of operations. We further believe that the risks of legal disputes concerning deliveries
and the taxation of our export delivery projects are customary in our fields of operation and are
not material as a whole. As of January 31, 2005, there had been a total of 350 complaints alleging asbestos injuries
filed in the United States in which a Metso entity is one of the named defendants. Where a given
plaintiff has named more than one viable Metso unit as a defendant, the cases are counted by the
number of viable Metso defendants. Of these claims, 124 are still pending and 226 cases have been
closed. Of the closed cases, two were by summary judgment, 168 were dismissed, and 56 were settled.
For the 56 cases settled the average compensation has been U.S.$539 per case. The outcome of the
still pending cases is not expected to materially deviate from the outcome of the previous claims.
Hence, management believes that Metso has no material asbestos related liability in the United
States. See
Item 4. Information on the Company  Governmental Regulation and Environmental Matters for a discussion on certain
pending environmental issues with possible legal implications. 59




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Dividend Policy We pay annual dividends to our shareholders based on a longer-term outlook for our
consolidated profitability and financial position. The timing and amount of future dividend
payments, if any, will depend on our future earnings, financial condition, results of operations,
cash flows, working capital requirements and other factors that our board of directors considers
relevant. The objective of our dividend policy is to distribute an annual dividend equivalent to at
least one-third of the earnings per share. For companies domiciled in Finland and incorporated under the Finnish law, dividends on shares
are generally only paid annually after shareholder approval of both the companys financial results
and of the amount of dividend proposed by the board of directors. Under the Finnish law, the amount
of any dividend is limited to the amount of profits and other distributable equity available at the
end of the preceding fiscal year on a consolidated or unconsolidated basis, whichever is lower.
Subject to certain exceptions relating to the right of the minority shareholders to request
otherwise, the dividend may not exceed an amount recommended by the board of directors. As of
December 31, 2004, our parent companys distributable equity was 543 million (U.S.$735 million)
and our consolidated distributable equity was 572 million (U.S.$774 million). The difference
between our parent companys distributable equity of 543 million and our distributable equity
including our consolidated subsidiaries of 572 million is caused by earnings related to our parent
companys subsidiaries that are reflected in our consolidated accounts but not in the accounts of
our parent company. Dividends paid to holders of ADSs who are non-residents of Finland will generally be subject
to the Finnish withholding tax at a rate of 28 percent. Such ADS holders may, however, be subject
to a lower withholding tax rate and may be allowed an imputation tax credit to reduce the tax on
dividends where there is a double taxation treaty with Finland that contains appropriate
provisions. The current convention between the United States and Finland for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital
does not contain provisions that extend such imputation credits to U.S. holders of our shares or
ADSs. See Item 10. Additional InformationTaxation. Our board of directors will propose to the annual general meeting of our shareholders to be
held on April 4, 2005 that a dividend of 0.35 per share be paid for the fiscal year ended December
31, 2004. Any dividend decided upon by the annual general meeting will be paid on April 14, 2005 to
shareholders entered in the register of shareholders on April 7, 2005. We have paid a dividend of
0.20, 0.60, 0.60 and 0.60 per share for the fiscal years ended December 31, 2003, 2002, 2001
and 2000, respectively. 
 Significant Changes Except as otherwise disclosed in this annual report, no significant change has occurred
in our business or financial condition since December 31, 2004. 60




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Item 9.  The Offer and Listing. 
 Nature of Trading Market The principal trading market for our shares is the Helsinki Stock Exchange, where our
shares are traded under the symbol MEO1V. Since July 1, 1999, our shares have been traded in the
United States on the New York Stock Exchange under the symbol MX in the form of ADSs. Each ADS
represents one share. The depositary for the ADSs is the Bank of New York. The table below sets forth, for the periods indicated, the reported high and low quoted prices
for our shares on the Helsinki Stock Exchange based on its Daily Official List and the high and low
quoted prices for our ADSs as reported in the New York Stock Exchange  Composite Transactions: Helsinki Stock Exchange
    
    
    New York Stock ExchangePrice per Share
    
    
    Price per ADSHigh
    
    
    Low
    
    
    High
    
    
    Low()
    
    
    (U.S.$)Annual2000
    
    
    16.20
    
    
    
    8.61
    
    
    
    16.25
    
    
    
    7.752001
    
    
    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
(through March 29)
    
    
    14.90
    
    
    
    11.31
    
    
    
    19.70
    
    
    
    14.70Quarterly2003First Quarter
    
    
    11.41
    
    
    
    8.70
    
    
    
    12.02
    
    
    
    9.75Second Quarter
    
    
    10.10
    
    
    
    7.52
    
    
    
    11.15
    
    
    
    8.31Third Quarter
    
    
    10.31
    
    
    
    7.62
    
    
    
    11.10
    
    
    
    8.90Fourth Quarter
    
    
    10.34
    
    
    
    8.50
    
    
    
    12.77
    
    
    
    10.232004First 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 (through March 29)
   
    
    14.90
    
    
    
    11.31
    
    
    
    19.70
    
    
    
    14.70Monthly2004
    
    
    14.84
    
    
    
    11.31
    
    
    
    19.70
    
    
    
    14.70September
    
    
    10.79
    
    
    
    9.90
    
    
    
    13.07
    
    
    
    12.27October
    
    
    11.17
    
    
    
    10.27
    
    
    
    14.29
    
    
    
    12.72November
    
    
    12.89
    
    
    
    11.07
    
    
    
    16.49
    
    
    
    14.45December
    
    
    12.20
    
    
    
    11.38
    
    
    
    16.43
    
    
    
    15.222005January
    
    
    12.00
    
    
    
    11.31
    
    
    
    16.08
    
    
    
    14.70February
    
    
    14.37
    
    
    
    11.61
    
    
    
    18.99
    
    
    
    15.43March
(through March 29)
    
    
    14.90
    
    
    
    13.58
    
    
    
    19.70
    
    
    
    17.86
 61




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Trading and Settlement on the Helsinki Stock Exchange Trading in, and clearing of, securities on the Helsinki Stock Exchange, part of the OMX
Exchanges, takes place in euro, with the minimum tick size for trading quotations being one euro
cent. All price information is produced and published only in euro. The trading system of the Helsinki Stock Exchange is based on an electronic trading system
SAXESS (Saxess). Saxess is an order-based system in which orders are matched to trade when price
and volume match. Trading is conducted on the basis of trading lots, which are fixed separately for
each share series. The trading phases consist of a pre-trading session, continuous trading and a post-trading
session. For shares, pre-trading begins at 8:30 a.m. and ends at 9:45 a.m. at the prices
established during the previous trading day. Trading with calls and continuous trading takes place
from 9:45 a.m. to 6:30. p.m. Opening call begins at 9:45 a.m. and ends at 10:00 a.m. Round lot
orders entered during the pre-trading session and existing orders with several days validity are
automatically transferred into the opening call. Continuous trading begins sequentially after the
opening call ends at 10:00 a.m. when the first share is assigned its opening price and then becomes
subject to continuous trading. After approximately ten minutes, the opening prices for all the
shares have been established and trading continues at prices based on market demand until 6:20 p.m.
when the closing call is initiated. The closing call ends at approximately 6:30 p.m. when the
closing prices are determined. Post-trading, during which only contract transactions for shares can
be registered at the prices established during the trading day, takes place from 6:40 p.m. to 7:00
p.m. Trades are normally cleared in the Finnish Central Securities Depositorys (the FCSD)
automated clearing and settlement system on the third banking day after the trade date unless
otherwise agreed by the parties. 
 Regulation of the Finnish Securities Market The Finnish Financial Supervision Authority supervises the securities market in Finland.
The principal statute governing the securities market is the Finnish Securities Market Act of 1989,
which contains regulations with respect to company and shareholder disclosure obligations,
admission to listing and trading of listed securities and public tender offers and insider
obligations, among other things. The Finnish Financial Supervision Authority monitors compliance
with these regulations. The Finnish Securities Market Act specifies minimum disclosure requirements for Finnish
companies applying for listing on the Helsinki Stock Exchange or making a public offering of
securities in Finland. The information provided must be sufficient to enable investors to make a
sound evaluation of the securities being offered and the issuing company. Finnish listed companies
have a continuing obligation to publish regular financial information, and to inform the market of
any matters likely to have a material impact on the value of their securities. A shareholder is required, without undue delay, to notify a Finnish listed company and the
Finnish Financial Supervision Authority when its voting participation in, or its percentage
ownership of, the issued share capital of such Finnish listed company reaches, exceeds or falls
below five percent, ten percent, 15 percent, 20 percent, 25 percent, 331/
3 percent, 50 percent or 662/
3 percent, calculated in accordance with the
Finnish Securities Market Act, or when it enters into an agreement or other arrangement that, when
effective, has such consequence. If a Finnish listed company receives information indicating that a
voting interest or ownership interest has reached, exceeded or fallen below these thresholds, it
must disclose such information to the public and to the Helsinki Stock Exchange. Pursuant to the Finnish Securities Market Act, a shareholder whose holding in a Finnish listed
company increases above two-thirds of the total voting rights attached to the shares of the listed
company, calculated in accordance with the Finnish Securities Market Act, after the commencement of
a public quotation of such shares must offer to purchase the remaining shares and other securities
entitling their holders to shares of such company for fair market value. Under the Finnish
Companies Act, a shareholder holding shares representing more than 90 percent of all the share
capital in a company and more than 90 percent of the shares and the votes entitled to be cast at a
general meeting of shareholders has the right to require the minority shareholders to sell the
remaining shares of such company to such shareholder for fair market value. In addition, any
minority shareholder that possesses shares that may be so purchased by a majority shareholder is
entitled to 62




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require such majority shareholder to purchase its shares. Detailed rules apply for the
calculation of the above proportions of shares and votes. The Finnish Criminal Code also contains provisions relating to breach of disclosure
requirements, misuse of privileged or inside information and market manipulation. Breach of these
provisions constitutes a criminal offense. 
 The Finnish Book-Entry Securities System General Finland has made a gradual changeover from a certificated securities system to a book-entry
securities system since August 1, 1991, when the relevant legislation came into effect. Use of the
book-entry securities system is mandatory for shares listed on the Helsinki Stock Exchange. Our
shares were entered into the Finnish book-entry system on May 2, 1996. The Finnish book-entry securities system is centralized at the FCSD, which provides national
clearing and registration services for securities. The FCSD maintains a central book-entry
securities system for both equity and debt securities. The FCSD maintains a register of the shareholders of listed companies and book-entry accounts
for shareholders who do not wish to utilize the services of a commercial account operator. The
issuers participating in the Finnish book-entry securities system and the account operators pay for
the expenses incurred by the FCSD in connection with maintaining the central book-entry securities
system. The account operators, which consist of credit institutions, investment service companies
and other institutions licensed to act as account operators by the FCSD (each, an Account
Operator), are entitled to make entries in the book-entry register and administer the book-entry
accounts. Registration In order to effect entries in the Finnish book-entry securities system, a security holder or
its nominee must establish a book-entry account with the FCSD or an Account Operator or register
its securities through nominee registration. Finnish shareholders may not register their securities
through nominee registration. For shareholders who have not transferred their shares into
book-entries, a joint book-entry account shall be opened with the FCSD, the registered holder of
which shall be the issuing company. All transactions in securities registered with the Finnish
book-entry securities system are executed as computerized book-entry transfers. The Account
Operator confirms book-entry transfers by sending notifications of transactions to the holder of
the respective book-entry account. The account holders also receive an annual statement of their
holdings as of the end of each calendar year. Each book-entry account is required to contain specified information with respect to the
account holder or the custodian administering the assets of a nominee account. Such information
includes the type and number of book-entry securities registered and the rights and restrictions
pertaining to the account and to the book-entry securities registered in the account. A possible
nominee account is identified as such on the entry. The FCSD and the Account Operators are required
to observe strict confidentiality, although certain information (for example the name, nationality
and address of each account holder) contained in the register of shareholders maintained by the
FCSD must be made available to the public by the FCSD and the issuer, except in the case of nominee
registration. Each Account Operator is strictly liable for errors and omissions on the registers maintained
by it and for any unauthorized disclosure of information. However, if an account holder has
suffered a loss as a result of a faulty registration or an amendment to, or deletion of, rights
with respect to registered securities and the Account Operator is unable to compensate for such
loss, such account holder is entitled to receive compensation from the FCSD. To cover for this
contingency, the FCSD maintains a statutory registration fund. The capital of the fund must be at
least 0.000048 percent of the average of the total market value of the book-entries kept in the
Finnish book-entry securities system during the last five calendar years, and it must not be less
than 20 million. The compensation to be paid to one injured party shall be equal to the amount of
damages suffered by such injured party from a single Account Operator subject to a maximum amount
of 25,000. Furthermore, the liability of the registration fund is limited to 10 million per
incident. 63




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Custody of the Shares and Nominees A non-Finnish shareholder may appoint an account operator (or certain non-Finnish
organizations approved by the FCSD) to act as a custodial nominee account holder on its behalf. A
nominee shareholder is entitled to receive dividends and exercise all share subscription rights and
other financial and administrative rights attached to the shares, such as the right to attend and
vote at general meetings of the company. A beneficial owner wishing to attend and vote at a general
meeting must seek a temporary registration and be registered in the register of shareholders not
later than ten days prior to the relevant general meeting. A custodial nominee account holder is
required to disclose to the Finnish Financial Supervision Authority and the relevant company upon
request the name of the beneficial owner of any shares registered in the name of such custodial
nominee account holder, where the beneficial owner is known, as well as the number of shares owned
by such beneficial owner. If the name of the beneficial owner is not known, the custodial nominee
account holder is required to disclose said information on the representative acting on behalf of
the beneficial owner and to submit a written declaration to the effect that the beneficial owner of
the shares is not a Finnish natural person or legal entity. Finnish Depositories for both Clearstream Banking S.A., Luxembourg and Euroclear Bank,
S.A./N.V., as operator of the Euroclear System, have nominee accounts within the Finnish book-entry
securities system and, accordingly, non-Finnish shareholders may hold their shares through their
accounts with Clearstream Banking or Euroclear. Shareholders wishing to hold their shares in the Finnish book-entry securities system in their
name and who do not maintain a book-entry account in Finland are required to open a book-entry
account at an authorized account operator in Finland and a convertible euro account at a bank
operating in Finland. 
 Item 10.  Additional Information. 
 Articles of Association Organization and Register Metso Corporation is incorporated as a stock corporation (osakeyhtiö) and is organized under
the laws of the Republic of Finland. We are registered in the Trade Register maintained by the
National Board of Patents and Registration of Finland under the business identity code 1538032-5. Purpose and Object Pursuant to Section 2 of our articles of association, our object is to design, develop, sell
and manufacture products and systems for the engineering, mechanical, vehicle, electronics and
automation industries, as well as provide spare parts and maintenance services relating to these,
either directly or through our subsidiary or affiliate companies. As the parent company, we may
also attend to the organization, financing and purchases of the Group and to other joint tasks of
the same kind, and we may own real estate, shares and participations and carry on securities
trading and other investment business. Share Capital and Shares Pursuant to Section 3 of our articles of association, our share capital may not be less than
170 million nor more than 680 million. Within these limits, our share capital may be increased or
decreased without amending our articles of association. Pursuant to Section 4 of our articles of
association, the number of shares we issue may not be less than 100 million shares or exceed 400
million shares. The par value of each share is 1.70. Corporate Governance Our corporate governance is based on the Finnish Companies Act and on our articles of
association. The shares of Metso Corporation are listed on the Helsinki Stock Exchange and the New
York Stock Exchange. Metso Corporation complies with the regulations and guidelines concerning
listed companies issued by the Helsinki Stock Exchange and Finlands Financial Supervision
Authority. Our corporate governance system also observes the rules and corporate governance
recommendations of the New York Stock Exchange concerning listed companies that are foreign private
issuers, and the U.S. Sarbanes-Oxley Act of 2002. Our general 64




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operating principles and responsibility relationships are described in our corporate
governance principles. Metsos values and ethical principles create the foundation for corporate
governance, personnel and management actions and cooperation with key stakeholders. The board of directors of Metso Corporation has ultimate responsibility for the management and
proper arrangement of the operations of the Company, and for assuring good corporate governance in
compliance with applicable laws and regulations. The board of directors decides upon matters,
which, considering the scope and size of the operations of Metso Corporation, are of major
importance. These include the approval of the goals and strategy of Metso Corporation, the approval
of annual business and other major action plans, the definition and approval of corporate policies
in key management areas, the approval of the organizational structure of Metso Corporation, and the
nomination of the president and chief executive officer, his deputy and the members of the
corporate executive team and the monitoring and evaluating of their performance. The members of the
board of directors of Metso Corporation are elected by the annual general meeting for a term of one
year. In accordance with the articles of association, the board of directors consists of at least
five and no more than eight members. Pursuant to the Finnish Companies Act, members of our board of directors are prohibited from
participating in the negotiation or performance, or otherwise having an involvement in connection
with, a contract between themselves and Metso. This prohibition also includes contracts between
Metso and a third party if such director would receive a material benefit in conflict with the
interests of Metso. With certain limitations, the Finnish Companies Act permits members of our
board of directors to borrow money from Metso, so long as such loan is secured and is within the
limits of our distributable equity. For information relating to our board of directors and corporate executive team, see also
Item 6. Directors, Senior Management and Employees. Preemptive Rights Under Finnish law, existing shareholders of Finnish companies have preferential rights to
subscribe, in proportion to their shareholdings, in new shares of such companies as well as for
issues of subscription warrants or debt instruments convertible into shares or carrying warrants to
subscribe for shares, unless the corporate resolution approving such issue provides otherwise.
Under the Finnish Companies Act, a resolution waiving preemptive rights must be approved by at
least two-thirds of all votes cast and all shares represented at the general meeting of
shareholders. General Meeting of Shareholders Under the Finnish Companies Act, shareholders exercise their power to decide on corporate
matters at general meetings of shareholders. Our articles of association require that a general
meeting of shareholders be held annually before the end of June on a date decided by our board of
directors to decide upon the approval of the income statement and balance sheet and measures
warranted by the profit or loss, discharges from liability, emoluments for the members of our board
of directors and remuneration of auditors, number and the members of our board of directors and
auditors, as well as matters raised by individual shareholders. Extraordinary general meetings of
shareholders in respect of specific matters are held when considered necessary by the board of
directors, or when requested in writing by an auditor of the Company or by shareholders
representing at least one-tenth of all the issued shares. Under our articles of association, a shareholder must give notice to the Company of his or her
intention to attend a general meeting no later than the date and time specified by the board of
directors in the notice of the general meeting, which may not be earlier than ten days before the
general meeting. Under our articles of association, notices of general meetings must be given not
earlier than two months prior to, and not later than 17 days before, the meeting by publishing an
announcement of the meeting in at least two Finnish newspapers published regularly in the Helsinki
area designated by the board of directors at its discretion or by in some other verifiable way. Inasmuch as the shares have been transferred to the Finnish Book-Entry Securities System, in
order to have the right to attend and vote at a general meeting, a shareholder must be registered
not later than ten days prior to the relevant general meeting in the register of shareholders kept
by the Finnish Central Securities Depository in accordance with the Finnish Companies Act and the
Finnish Act on the Book-Entry Securities System. See Item 9. The Offer and ListingThe Finnish
Book-Entry Securities SystemRegistration. Voting rights may not be exercised by a shareholder if
such shareholders shares are registered in the name of a 65




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nominee. A beneficial owner wishing to exercise such rights should seek a temporary
registration in the register of shareholders not later than ten days prior to the relevant general
meeting. There are no quorum requirements for general meetings in the Finnish Companies Act or our
articles of association. Hence, it is possible that, depending on the attendance at any particular
shareholders meeting, a relatively limited number of shareholders may approve resolutions put
forward at such meetings. Voting A shareholder may attend and vote at a general meeting of shareholders in person or through an
authorized representative. Shareholders that have not transferred their shares to the Finnish
book-entry securities system may also attend and vote at general meetings if they were registered
in the share register maintained by the Company before the date on which the shares should have
been transferred to the book-entry securities system at the latest and provide evidence of their
ownership of shares on the date of the general meeting. Each share is entitled to one vote at a general meeting of shareholders. While resolutions are
usually passed by a majority of the votes cast, certain resolutions, such as a resolution to amend
our articles of association, a resolution to issue shares not subject to shareholders preferential
subscription rights and, in certain cases, a resolution regarding a merger or liquidation of the
Company, require a majority of at least two-thirds of the votes cast and the shares represented at
the general meeting of shareholders. Further, if an amendment of our articles of association would
diminish the rights of an entire class of shares, the resolution, in addition to the above majority
requirement, requires the consent of shareholders representing at least one-half of all the shares
of such class and a majority of two-thirds of the shares of such class represented at the general
meeting of shareholders. Any amendment to the purchase obligation provisions of our articles of
association (described below) requires at least three-fourths of the votes cast and the shares
represented at the meeting. Liquidation If the Company were to be liquidated, any liquidation proceeds remaining after all of its
liabilities were paid would be distributed to its shareholders in proportion to their
shareholdings. Purchase Obligations Our articles of association contain a clause according to which a shareholder or a group of
related shareholders who or which has acquired either 331/
3 percent or 50
percent of the total ordinary shares or of the total voting power of the Company, at the minimum,
is obligated to purchase the shares of all other shareholders who request such purchase. Our
articles of association specify that the purchase price of such shares shall be the higher of the
following: (a) The weighted average trading price of the ordinary shares of the Company on the
Helsinki Stock Exchange during the ten business days prior to the day on which the shareholder
obligated to purchase ordinary shares of the Company in accordance with this provision informed
the Company that the above-mentioned percentage of ownership of ordinary shares or votes has
been reached or exceeded or, in the event that no such notification is provided to the Company,
or such notification is provided after the expiration of the period of time set forth in our
articles of association, then during the ten business days prior to the day on which the
Companys board of directors is informed in any other manner; or (b) the weighted average price per share, which the shareholder obligated to purchase
ordinary shares of the Company in accordance with this provision has paid for the ordinary shares that he/she has procured or obtained in some other way over the 12 months preceding the
date defined in paragraph (a) above. In addition, such shareholder is also obligated to purchase any subscription rights, warrants
or convertible bonds issued by the Company if so requested by the holder or holders thereof. Pursuant to the Securities Market Act, a shareholder who acquires in excess of two-thirds of
the total voting rights of the shares of a company after the commencement of a public quotation of
the shares must offer to purchase the remaining shares. 66




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Material Contracts Neither Metso nor any of its consolidated subsidiaries has entered into any contracts in
the last two years outside of the ordinary course of business that have had or may reasonably be
expected to have a material effect on our business. 
 Exchange Controls Our share may be bought by non-residents of Finland on the Helsinki Stock Exchange
without any separate Finnish exchange control consent. Non-residents may receive dividends without
separate Finnish exchange control consent, the transfer out of Finland being subject to payment by
the Company of withholding taxes. Non-residents that have acquired our shares may receive shares
pursuant to a bonus issue or through participation in a new issue without a separate Finnish
exchange control consent. Shares may be sold in Finland by non-residents, and the proceeds of such
sale may be transferred out of Finland in any convertible currency. There are no Finnish exchange
control regulations applying to the sale of shares of the Company by non-residents to other
non-residents. 
 Control of Foreign Ownership Restrictions on foreign ownership of Finnish companies were abolished as of January 1,
1993. However, under the Act on the Control of Foreigners Acquisition of Finnish Companies of
1992, clearance by the Finnish Ministry of Trade and Industry would be required if a foreign person
or entity, other than a person or entity from another member state of the European Economic Area or
the Organization for Economic Cooperation and Development, or a Finnish entity controlled by one or
more such foreign persons or entities, were to acquire a holding of one-third or more of the voting
power of the Company. The Ministry of Trade and Industry could refuse clearance where the
acquisition would jeopardize important national interests, in which case the matter would be
referred to the government of Finland. 
 Taxation The following description is based on tax laws of Finland and the United States as in
effect on the date of this annual report and is subject to changes in the Finnish and U.S. law,
including changes that could have retroactive effect. Prospective investors should consult their
professional advisors as to the tax consequences of the purchase, ownership and disposition of
shares or ADSs, including, in particular, the effect of tax laws of any other jurisdiction. Finnish Taxation The following is a description of the material Finnish income tax consequences of the
purchase, ownership, and disposition of shares or ADSs by a holder who is not a resident of Finland
(a non-resident). It does not purport to be a complete analysis of all potential Finnish tax
consequences to holders of the shares and ADSs. Prospective investors should consult their own
advisers as to the consequences of the purchase, ownership, and disposition of shares or ADSs in
light of their particular circumstances, including the effect of any foreign, state, or local tax
laws. Statements regarding Finnish tax laws set forth below are based on the laws in force and as
interpreted by the relevant taxation authorities as of the date hereof and are subject to any
changes in Finnish law, or in the interpretation thereof by the relevant taxation authorities. A beneficial owner of an ADS should be treated as the owner of the underlying share for
purposes of the current Convention between the Government of the United States of America and the
Government of the Republic of Finland for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income and on Capital and for Finnish tax purposes.
Accordingly, the Finnish tax consequences to owners of shares discussed below apply also to
beneficial owners of ADSs. Companies Finnish companies are subject to national corporate income tax on their worldwide income. With
effect from January 1, 2005, the rate of such tax was 26 percent. 67




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Shareholders and Holders of ADSs Tax Credit on Dividends The Finnish avoir fiscalsystem has been abolished as of January 1, 2005. The taxation of
dividends distributed by a company listed on the Helsinki Stock Exchange varies depending on
whether a shareholder that is a resident in Finland is a company listed on the Helsinki Stock
Exchange, a privately held company or a natural person. When the shareholder is a company listed on
the Helsinki Stock Exchange, dividends received by such shareholder are 75 percent taxable in case
the underlying shares are included in the investment assets of the shareholder. If the dividend is
paid based on shares that are not included in the investment assets of the shareholder (listed
company), the dividend income is not taxable income. If the shareholder is a privately held
company, dividends received by such shareholder are 75 percent taxable in case the underlying
shares are included in the investment assets of the shareholder. If the shares are not part of the
investment assets of the respective shareholder, only 75 percent of the dividends received is
taxable income, provided that the respective shareholder does not directly own at least ten percent
of the share capital of the distributing company. If the ten percent ownership threshold is met,
the dividend income is not treated as taxable income of the respective shareholder (privately held
company). If the shareholder is a natural person, 70 percent of the dividends received by such
shareholder is taxable as capital income. The applicable tax rate is 28 percent. The rest of the dividend income received by such a
shareholder from a listed company is not treated as taxable income. Year 2005 serves as a
transition period and lower percentages than those described above shall be used in the taxation of
dividends. If the shareholder is a privately held company or if the underlying shares are included
in the investment assets of the shareholder, 60 percent (instead of 75 percent) of the dividends
received by such shareholder will be taxable income in such shareholders taxation in tax year
2005. Similarly, if the shareholder is a natural person, 57 percent (instead of 70 percent) of the
dividends received by such shareholder will be taxable as capital income in such shareholders
taxation of year 2005. Withholding Tax on Dividends Non-residents of Finland are subject to Finnish withholding tax on dividends paid by a Finnish
company. In the absence of any applicable treaty, the rate of withholding tax is 28 percent as from
January 1, 2005. Finland has entered into double taxation treaties with many countries pursuant to
which the withholding tax is reduced on dividends paid to persons entitled to the benefits under
such treaties, unless the shares from which such dividends derive are effectively connected with a
permanent establishment or a fixed base in Finland, in which case Finnish income taxes are levied
on the dividends so derived. In the case of the treaty with the United States, the withholding tax
rates are reduced to 15 percent. The Finnish company paying the dividend is responsible for
deducting any applicable Finnish withholding tax. A reduction of such withholding tax rate can be obtained at source upon the submission of a
Source Tax Card or the required information (name, date of birth and address) to the payer prior to
the payment of dividends. If such a Source Tax Card or such information is not submitted in a
timely manner, a refund of tax withheld in excess of the applicable treaty rate can be obtained
upon application to the local tax authority. The Bank of New York as Depositary for the ADSs has
agreed to use reasonable efforts to make and maintain arrangements enabling holders to receive tax
credits, reduction in Finnish withholding tax or other benefits (pursuant to treaty or otherwise)
relating to dividend payments on the ADSs at the time the dividend is paid. No withholding tax is levied under Finnish law on dividends paid to corporate entities that
reside in the EU and directly hold at least 20 percent of the capital of the distributing Finnish
company. In addition, due to the abolishment of the Finnish avoir fiscalsystem the requirement of
a minimum tax relating to avoir fiscal shall no longer apply. Finnish Transfer Tax There is no transfer tax payable in Finland on share transfers made on the Helsinki Stock
Exchange. If the transfer is not made on the Helsinki Stock Exchange, a transfer tax at the rate of
1.6 percent of the relevant sales price is payable by the buyer. However, if the buyer is neither a
resident of Finland nor a Finnish branch of a foreign credit institution nor a Finnish branch of a
foreign brokerage firm, the seller must collect the tax from the buyer. If neither the buyer nor
the seller is a resident of Finland or a Finnish branch of a foreign credit institution or a
Finnish branch of a foreign brokerage firm and it is not a question of transfer of shares in a 68




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housing or real estate company, the transfer of shares will be exempt from Finnish transfer
tax. No transfer tax is payable in connection with newly issued shares. Finnish Capital Gains and Other Taxes Shareholders who are not resident in Finland, and who do not engage in trade or business
through a permanent establishment or fixed base in Finland which could be regarded as the holder of
the relevant shares or ADSs, will normally not be subject to Finnish taxes on capital gains
realized on the transfer of shares. Transfers of shares by a non-resident of Finland by way of gift
or by reason of the death of the owner are subject to Finnish gift or inheritance tax respectively
if either the transferor or the transferee was a resident of Finland at the time of death or when
the gift was given, unless Finland has waived its rights in a tax treaty to impose tax. U.S. Federal Income Taxation General The following is a summary of the principal U.S. federal income tax consequences that may be
relevant with respect to the acquisition, ownership and disposition of shares or ADSs, which are
evidenced by American Depositary Receipts. This summary addresses only the U.S. federal income tax
considerations of holders that are initial purchasers of the shares or ADSs at the initial issue
price and that will hold shares or ADSs as capital assets. This summary does not address tax
considerations applicable to holders that may be subject to special tax rules, such as financial
institutions, insurance companies, real estate investment trusts, grantor trusts, regulated
investment companies, dealers or traders in securities or currencies, tax-exempt entities, persons
that received shares or ADSs as compensation for the performance of services, certain expatriates,
persons that will hold shares or ADSs as part of a hedging or conversion transaction or as a
position in a straddle for U.S. federal income tax purposes, persons that have a functional
currency other than the U.S. dollar or holders that own (or are deemed to own) ten percent or more
(by voting power or value) of the stock of the Company. This summary does not address any state,
local or foreign tax consequences of the acquisition, ownership and disposition of shares or ADSs. Moreover, this summary does not address the U.S. federal estate and gift or alternative
minimum tax consequences of the acquisition, ownership and disposition of shares or ADSs. This
summary is based (i) on the Internal Revenue Code of 1986, as amended (the Code), U.S. Treasury
Regulations and judicial and administrative interpretations thereof, in each case as in effect and
available on the date hereof, and (ii) in part, on the representations of the depositary and the
assumption that each obligation in the deposit agreement and any related agreement will be
performed in accordance with its terms. All of the foregoing are subject to change, which change
could apply retroactively and could affect the tax consequences described below. For purposes of this summary, a U.S. Holder is a beneficial owner of shares or ADSs that,
for U.S. federal income tax purposes, is: (i) a citizen or resident of the United States, (ii) a
partnership or corporation created or organized in or under the laws of the United States or any
state thereof (including the District of Columbia), (iii) an estate the income of which is subject
to U.S. federal income taxation regardless of its source, or (iv) a trust, if such trust validly
elects to be treated as a U.S. person for U.S. federal income tax purposes or if (A) a court within
the United States is able to exercise primary supervision over its administration and (B) one or
more U.S. persons have the authority to control all of the substantial decisions of such trust. A
Non-U.S. Holder is a beneficial owner of shares or ADSs that is not a U.S. holder. If a partnership (or any other entity treated as a partnership for U.S. federal income tax
purposes) holds shares or ADSs, the tax treatment of the partnership or a partner in such
partnership generally will depend on the status of the partner and the activities of the
partnership. Such partner or partnership should consult its own tax advisor as to its tax
consequences. Ownership of ADSs in General For U.S. federal income tax purposes, a holder of ADSs generally will be treated as the owner
of the shares represented by such ADSs. The U.S. Treasury Department has expressed concern that depositaries for American Depositary
Receipts, or other intermediaries between the holders of shares of an issuer and the issuer, may be
taking actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. holders
of such receipts or shares. 69




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Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for Finnish
taxes and sourcing rules described below could be affected by future actions that may be taken by
the U.S. Treasury Department. Distributions The gross amount of any distribution by the Company of cash or property (other than certain
distributions, if any, of shares or ADSs distributed pro ratato all shareholders of the Company
including holders of ADSs) with respect to shares or ADSs, before reduction for any Finnish taxes
withheld therefrom, will be includible in income by a U.S. Holder as dividend income to the extent
such distributions are paid out of the current or accumulated earnings and profits of the Company
as determined under U.S. federal income tax principles. Non-corporate U.S. Holders may be taxed on
such dividends at the lower rates applicable to long-term capital gains (i.e., generally, gains
from the sale or exchange of capital assets held for more than one year) for taxable years
beginning on or before December 31, 2008. A U.S. holders eligibility for such preferential rate
would be subject to certain holding period requirements and the non-existence of certain risk
reduction transactions with respect to the shares. However, such dividends will not be eligible for
the dividends received deduction generally allowed to corporate U.S. Holders. To the extent, if
any, that the amount of any distribution by the Company exceeds the Companys current and
accumulated earnings and profits as determined under U.S. federal income tax principles, it will be
treated first as a tax-free return of the U.S. Holders adjusted tax basis in the shares or ADSs
and thereafter as capital gain. The Company does not maintain calculations of its earnings and
profits under U.S. federal income tax principles. Any such dividend paid in euro (or any currency other than U.S. dollars) will be included in
the gross income of a U.S. Holder in an amount equal to the U.S. dollar value of the euro (or, if
not euro, the currency in which the dividend was paid) on the date of receipt, which in the case of
ADSs, is the date they are received by the depositary. The amount of any distribution of property
other than cash will be the fair market value of such property on the date of distribution. Any
gain or loss realized by a U.S. Holder that subsequently sells or otherwise disposes of euro (or,
any currency other than U.S. dollars) will be ordinary gain or loss. Dividends received by a U.S. Holder with respect to shares or ADSs will be treated as foreign
source income, which may be relevant in calculating such holders foreign tax credit limitation.
Subject to certain conditions and limitations, any Finnish tax withheld on dividends may be
deducted from taxable income or credited against a U.S. Holders U.S. federal income tax liability.
The limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by the Company generally will
constitute passive income, or, in the case of certain U.S. Holders, financial services income. U.S. holders should note that recently enacted legislation eliminates the financial services
income category with respect to taxable years beginning after December 31, 2006. Under the new
legislation, the foreign tax credit limitation categories would be limited to passive category
income and general category income. Subject to the discussion below under Backup Withholding Tax and Information Reporting
Requirements, a Non-U.S. Holder of shares or ADSs generally will not be subject to U.S. federal
income or withholding tax on dividends received on shares or ADSs, unless such income is
effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United
States. Sale or Exchange of Shares or ADSs A U.S. Holder generally will recognize gain or loss on the sale or exchange of shares or ADSs
equal to the difference between the amount realized on such sale or exchange and the U.S. Holders
adjusted tax basis in the shares or ADSs. Such gain or loss will be capital gain or loss. In the
case of a non-corporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable
to such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to
ordinary income (other than certain dividends) if such U.S. Holders holding period for such shares
or ADSs exceeds one year. Gain or loss, if any, recognized by a U.S. Holder generally will be
treated as U.S. source income or loss for U.S. foreign tax credit purposes. The deductibility of
capital losses is subject to limitations. The initial tax basis of shares or ADSs to a U.S. Holder will be the U.S. dollar value of the
euro denominated purchase price determined on the date of purchase. If the shares or ADSs are
treated as traded on an established securities market, a cash basis U.S. Holder (or, if it
elects, an accrual basis U.S. Holder) will determine the dollar value of the cost of such shares or
ADSs by translating the amount paid at the spot rate of 70




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exchange on the settlement date of the purchase. The conversion of U.S. dollars to euro and
the immediate use of that currency to purchase shares or ADSs generally will not result in taxable
gain or loss for a U.S. Holder. With respect to the sale or exchange of shares or ADSs, the amount realized generally will be
the U.S. dollar value of the payment received determined on (i) the date of receipt of payment in
the case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual
basis U.S. Holder. If the shares or ADSs are treated as traded on an established securities
market, a cash basis taxpayer (or, if it elects, an accrual basis taxpayer) will determine the
U.S. dollar value of the amount realized by translating the amount received at the spot rate of
exchange on the settlement date of the sale. Subject to the discussion below under Backup Withholding Tax and Information Reporting
Requirements, a Non-U.S. Holder of shares or ADSs generally will not be subject to U.S. federal
income or withholding tax on any gain realized on the sale or exchange of such shares or ADSs
unless (i) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade
or business in the United States or (ii) in the case of any gain realized by an individual Non-U.S.
Holder, such holder is present in the United States for 183 days or more in the taxable year of
such sale or exchange and certain other conditions are met. Backup Withholding Tax and Information Reporting Requirements U.S. backup withholding tax and information reporting requirements generally apply to certain
payments to certain noncorporate holders of stock. Information reporting generally will apply to
payments of dividends on, and to proceeds from the sale or redemption of, shares or ADSs made
within the United States, or by a U.S. payor or U.S. middleman, to a holder of shares or ADSs
(other than an exempt recipient, including a corporation, a payee that is not a U.S. person that
provides an appropriate certification and certain other persons). A payor will be required to
withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or
redemption of, shares or ADSs within the United States, or by a U.S. payor or U.S. middleman, to a
holder (other than an exempt recipient) if such holder fails to furnish its correct taxpayer
identification number or otherwise fails to comply with, or establish an exemption from, such
backup withholding tax requirements. The backup withholding tax rate is 28 percent through 2010. In the case of such payments made within the United States to a foreign simple trust, foreign
grantor trust or foreign partnership (other than a payment to a foreign simple trust, foreign
grantor trust or foreign partnership that qualifies as a withholding foreign trust or a
withholding foreign partnership within the meaning of the applicable U.S. Treasury Regulations
and a payment to a foreign simple trust, foreign grantor trust or foreign partnership that is
effectively connected with the conduct of a trade or business in the United States), the
beneficiaries of the foreign simple trust, the persons treated as the owners of the foreign grantor
trust or the partners of the foreign partnership, as the case may be, will be required to provide
the certification discussed above in order to establish an exemption from backup withholding tax
and information reporting requirements. Moreover, a payer may rely on a certification provided by a
payee that is not a U.S. person only if such payer does not have actual knowledge or a reason to
know that any information or certification stated in such certificate is incorrect. The above description is not intended to constitute a complete analysis of all tax
consequences relating to acquisition, ownership and disposition of shares or ADSs. You should
consult your own tax advisor concerning the tax consequences of your particular situation. 
 Documents on Display We are subject to the informational requirements of the Exchange Act. In accordance with
these requirements, we file reports and other information with the SEC. These materials, including
this annual report and the exhibits thereto, may be inspected and copied at the SECs Public
Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. The public may obtain information
on the operation of the SECs Public Reference Room by calling the SEC in the United States at
1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains any reports,
statements and other information that have been filed electronically with the SEC. We have made
electronic filings with the SEC since October 30, 2002. In addition, material submitted by us may
be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York
10005. 71




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Item 11. Quantitative and Qualitative Disclosures about Market Risk. The task of Metsos corporate treasury is to manage financial risks in accordance with
the treasury policy reviewed and approved by the board of directors of Metso Corporation, and to
safeguard the availability of equity and debt capital under competitive terms. The corporate
treasury functions as the counterparty to the operating units, centrally manages external funding
and is responsible for the management of financial assets and appropriate hedging measures. Our
financial operations are conducted to support business purposes and within the framework of
corporate operating policies and guidelines. Market risk refers to the risk of loss arising from adverse changes in exchange rates,
interest rates, and other relevant market prices, such as equity or commodity prices. In order to
manage our exposures to market risk, we continually assess our market exposures and attempt to
hedge such risks through financial operations to reduce the adverse effects on our profitability. Our business units seek to identify the financial risks connected with their business
operations and minimize their impact on Metsos financial results. To control financial risks
within limits, we use different derivative and non-derivative instruments, such as forward
contracts, currency and interest rate swaps, options and foreign currency denominated balance sheet
items. Derivatives are used only to support the underlying businesses (i.e., for hedging purposes
only). Currently, we do not hold derivatives for trading (speculative) purposes and we do not use
high-risk derivative instruments such as written options on a sole basis or leveraged instruments.
For additional information on the derivative financial instruments we use, see Note 26 to our
audited consolidated financial statements. Metso meets the criteria for hedge accounting under
Finnish GAAP but does not qualify for hedge accounting under U.S. GAAP. We do not anticipate any material adverse effect on our consolidated financial condition,
results of operations or cash flows, resulting from the use of derivative financial instruments. We use sensitivity analysis techniques to measure exchange rate, interest rate, equity price
and electricity price risk. The estimated amounts generated from the sensitivity analysis are
forward-looking statements of market risk, assuming certain adverse market conditions occur. Actual
results in the future may differ materially from the projected results. The method expresses the
potential change in future earnings, cash flows or fair values for a specified period resulting
from selected hypothetical variations in foreign currency exchange rates, interest rates, equity
prices or electricity prices. 
 Exchange Rates and Foreign Currency Exposure In accordance with our treasury policy, under the direction of our corporate treasury
department, the business units hedge in full the currency exposures that arise from firm delivery
and purchase agreements. In addition, the units can hedge anticipated foreign currency-denominated
cash flows by taking into account the significance of such cash flows, the competitive situation
and other opportunities to adapt. The business units hedging practices are monitored regularly by
our corporate treasury department. Hedging operations are centralized through Metsos treasury. Upper limits have been set on the
open currency exposures of the corporate treasury, calculated on the basis of their potential
profit impact. These limits cover net exposures from transfers between units and items arising from
financing activities. Future foreign currency net cash flows are hedged for periods, which do not
normally exceed two years. Accordingly, the majority of future cash flows related to the order
backlog are hedged. We have, to a large extent, hedged our foreign currency denominated net assets of foreign
subsidiaries through borrowings, currency derivatives, and to some extent through receivables. As
of December 31, 2004, apart from forward foreign exchange contracts, options and currency swaps, we
were not a party to any other derivative foreign currency instruments. We had hedged approximately 82 percent of our net foreign currency exposure at the end of
2004, arising primarily from long-term contracts, net of any expected matching foreign currency
payments. In addition, as of December 31, 2004, we had hedged net of tax effect 48 percent of our
Swedish krona, 86 percent of our U.S. dollar and 59 percent of our Canadian dollar denominated net
investments in subsidiaries by borrowings and forward exchange contracts. 72




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Our net gains and losses sustained from foreign currency exchange rate fluctuations were
approximately a net gain of 8 million for the year ended December 31, 2004, compared to a net loss
of 3 million and a net loss of 6 million for the years ended December 31, 2003 and 2002,
respectively. The basis for the sensitivity analysis to measure foreign exchange risk is an aggregate
corporate-level currency exposure, which is composed of future cash flows in foreign currencies.
The aggregate foreign exchange transaction exposure is composed of all assets and liabilities that
are denominated in foreign currencies, excluding those items which have been used to hedge net
investments, projected cash flows from firm commitments of both short- and long-term sales and
purchase contracts, hedged anticipated cash flows and derivative financial instruments hedging the
above items. The sensitivity analysis assumes an instantaneous ten percent change in foreign currency rates
against the euro from their level as of December 31, 2004, with all other variables held constant.
If the euro appreciates or depreciates ten percent against all other currencies, the impact on our
cash flows derived from the year-end 2004 net exposure is a corresponding decrease or increase of
less than 1 million during future years, compared to approximately 2 million as of December 31,
2003. These above assumptions are hypothetical and the actual results may differ substantially from
the projected figures. 
 Interest Rate Risk We are exposed to variations in interest rates primarily on euro and U.S. dollar
denominated debt and investments, which may cause changes in the values of interest bearing
liabilities and assets, which are already in the balance sheet (price risk) and also affect the
amounts of future interest income or expenses (reinvestment risk or cash flow risk). To manage
interest rate risk, we have set limits for the ratio of floating-rate to fixed-rate loans and the
average duration. Interest rate risks can also be managed by interest rate swaps and other
derivative contracts. We use sensitivity analysis techniques to measure and assess our interest rate risk. The basis
for the sensitivity analysis is an aggregate corporate level interest rate exposure, composed of
interest bearing investments, interest bearing debts and financial derivatives, such as interest
rate swaps, which are used to hedge the above items. The sensitivity analysis assumes a one percent (100 basis points) parallel move in interest
rates for all maturities from their levels as of December 31, 2004 with all other variables held
constant. A one percent move upwards or downwards in all interest rates would lead to a
corresponding decrease or increase of approximately 1 million on net interest expenses on the
outstanding balances as of December 31, 2004, compared to increase or decrease of 5 million as of
December 31, 2003. 
 Equity Price Risk The market value of the shares in publicly traded companies owned by us as of December
31, 2004, was 7 million. If the prices of the shares had decreased by ten percent, the market
value of the investments at the end of 2004 would have declined by 1 million in comparison to 2
million at the end of 2003. We have not used any derivative instruments to hedge our equity
investments. 
 Commodity Price Risk We are exposed to variations in prices of materials and supplies including energy. To
manage risks related to prices of electricity in certain regions, we have since August 2003 used
forward contracts to hedge part of these exposures. Hedging is focusing on the estimated energy
consumption for the next twelve-month period with some contracts extended to approximately three
years. We use sensitivity analysis techniques to measure and assess risk on electricity forward
contracts. The basis for the sensitivity analysis is the net aggregate amount of energy bought by
the forward contracts. The sensitivity analysis assumes a ten percent parallel move in electricity price for all
maturities from their levels as of December 31, 2004. A ten percent move upwards or downwards in
all prices would lead to a corresponding increase or decrease in net assets of approximately 1
million on fair values of electricity forward 73




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##### Table of Contents



contracts outstanding as of December 31, 2004, compared to approximately 1 million as of
December 31, 2003. Other commodity risks are not managed by using financial instruments. 
 Item 12.  Description of Securities Other than Equity Securities. Not applicable. 74




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##### Table of Contents



PART II 
 Item 13.  Defaults, Dividend Arrearages and Delinquencies. None. 
 Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds. None. 
 Item 15.  Controls and Procedures.     
    
    75




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Item 16.  [Reserved] 
 Item 16A.  Audit Committee Financial Expert. Our board of directors has determined that Ms. Satu Huber is an audit committee financial
expert as defined in the instructions to Item 16A of Form 20-F. Both other members of the audit
committee, Ms. Maija-Liisa Friman and Mr. Jaakko Rauramo, are independent directors as defined in
Section 303A.02 of the New York Stock Exchanges Listed Company Manual. 
 Item 16B.  Code of Ethics. In 2002, we adopted a code of ethics that applies to our president and chief executive
officer, our chief financial officer and our principal accounting officer. The code of ethics can
be viewed on our Internet pages at www.metso.com -> About us -> Values -> Ethical
Principles. 
 Item 16C.  Principal Accountant Fees and Services. Audit Fees PricewaterhouseCoopers Oy has served as Metsos independent public auditor for each of the
fiscal years in the three-year period ended December 31, 2004, for which audited financial
statements appear in this annual report on Form 20-F. The auditor is elected annually by the annual
general meeting of our shareholders. During the financial years ended December 31, 2003 and
December 31, 2004, we incurred aggregate expenses of 2.8 million and 3.1 million, respectively,
for services rendered by our principal auditor, PricewaterhouseCoopers for the audit of our annual
financial statements and services rendered in connection with statutory and regulatory filings
including the review of documents filed with the SEC. Audit-Related Fees During the financial years ended December 31, 2003 and December 31, 2004, we incurred
aggregate expenses of 1.3 million and 1.5 million, respectively, for services rendered by our
principal auditor, PricewaterhouseCoopers for assurance and related services. Audit-related fees
consist of fees incurred for assurance and related services that are reasonably related to the
performance of the audit or review of the Companys financial statements or that are traditionally
performed by the external auditor, and include consultations concerning financial accounting and
reporting standards; internal control reviews; advice and assistance in connection with local
statutory accounting requirements; due diligence reviews related to acquisitions; and employee
benefit plan audits and reviews; and miscellaneous reports in connection with grant applications. Tax Fees During the financial years ended December 31, 2003 and December 31, 2004, we incurred
aggregate expenses of 2.7 million and 1.5 million, respectively, for tax services rendered by our
principal auditor, PricewaterhouseCoopers. Tax fees include fees incurred for tax compliance
services, including the preparation of original and amended tax returns and claims for refund; tax
consultations, such as assistance in connection with tax audits, tax advice related to mergers and
acquisition, transfer pricing, and requests for rulings or technical advice from taxing
authorities; tax planning services; and expatriate tax compliance, consultation and planning
services. All Other Fees During the financial year ended December 31, 2004, we incurred aggregate expenses of 0.1
million for services rendered by our principal auditor, PricewaterhouseCoopers for occasional
training services. There were no such fees incurred in 2003. 76




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Audit Committee Pre-Approval Policies and Procedures The audit committee has adopted a policy requiring pre-approval of audit, audit-related, tax
and other non-audit services provided by our independent auditors. Under this policy, the audit
committee shall annually pre-approve an audit plan containing the types of services to be performed
by our principal auditor, including an estimate of fees grouped by the type of service, based on a
schedule prepared together by Metso and our principal auditor. The appendices to the policy set out
the services that have been pre-approved by the audit committee without specific advance
consideration, subject to an annual review. Any proposed engagement that does not fit within the definition of a pre-approved service may
be presented to the audit committee for consideration at its next meeting. The audit committee has
also delegated to the chair of the audit committee the authority to pre-approve audit-related and
non-audit services not prohibited by law to be performed by Companys independent auditors provided
that the chair shall report any decisions to pre-approve such services and fees to the full audit
committee at its next regular meeting. All of the services described in Audit-Related Fees, Tax Fees and All Other Fees, were
approved by the audit committee in accordance with the Companys formal policy on auditor
independence. 
 Item 16D.  Exemptions from the Listing Standards for Audit Committees. Not applicable. 
 Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers. No equity securities were purchased by the issuer or affiliated purchasers during 2004. 
 PART III 
 Item 17.  Financial Statements. Not applicable. 
 Item 18.  Financial Statements. See financial statements beginning on page F-1. 77




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Item 19.  Exhibits Documents filed as exhibits to this annual report:  1.1

Articles of Association of Metso.*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

List of Subsidiaries.****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.   *
    
    Incorporated by reference to our annual report on Form 20-F for the fiscal year ended
December 31, 2002, filed with the SEC on April 17, 2003.**
    
    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 fiscal year ended
December 31, 2003, filed with the SEC on March 25, 2004.****
    
    Incorporated by reference to our annual report on Form 20-F for the fiscal year ended
December 31, 2004, filed with the SEC on March 30, 2005. 78




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SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form
20-F and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf. Date:
October 17, 2005
    METSO CORPORATIONBy:
    /s/         JORMA ELORANTAName:
    Jorma ElorantaTitle:
    President and Chief Executive OfficerBy:
    /s/         OLLI VAARTIMOName:
    Olli VaartimoTitle:
    Executive Vice President and
Chief Financial Officer 79




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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, 2002, 2003 and 2004
    
    F-3Consolidated Balance Sheets as of December 31, 2003 and 2004
    
    F-4Consolidated Statements of Cash Flows for each of the years ended
December 31, 2002, 2003 and 2004
    
    F-7Consolidated Statements of Changes in Shareholders Equity as of
December 31, 2002, 2003 and 2004
    
    F-9Notes to the Consolidated Financial Statements
    
    F-10
 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: In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of cash flows and of changes in shareholders equity present fairly, in all
material respects, the financial position of Metso Corporation and its subsidiaries at December 31,
2004 and 2003, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004, in conformity with accounting principles generally accepted
in Finland. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and the standards generally accepted in Finland. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. Accounting principles generally accepted in Finland vary in certain significant respects from
accounting principles generally accepted in the United States of America. Information relating to
the nature and effect of such differences is presented in Note 30, as restated, to the consolidated
financial statements. Helsinki, Finland
March 30, 2005  PricewaterhouseCoopers Oy
Authorized Public Accountants F-2




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METSO Consolidated Statements of Income
(in millions, except for per share amounts) Year ended December 31,Note
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    
    
    
    Net sales
    
    
    
    
    
    
    4,691
    
    
    
    4,250
    
    
    
    3,976Cost of goods sold
    
    
    3,5
    
    
    
    (3,425
    )
    
    
    (3,211
    )
    
    
    (2,959
    )Gross profit
    
    
    
    
    
    
    1,266
    
    
    
    1,039
    
    
    
    1,017Selling, general and administrative expenses
    
    
    2,3,5
    
    
    
    (1,015
    )
    
    
    (906
    )
    
    
    (844
    )Nonrecurring operating income and expenses, net
    
    
    4, 9
    
    
    
    (27
    )
    
    
    (106
    )
    
    
    (25
    )Goodwill impairment
    
    
    11
    
    
    
    
    
    
    
    (205
    )
    
    
    Amortization of goodwill
    
    
    5,11
    
    
    
    (57
    )
    
    
    (51
    )
    
    
    (37
    )Operating profit (loss)
    
    
    
    
    
    
    167
    
    
    
    (229
    )
    
    
    111Financial income and expenses, net
    
    
    6
    
    
    
    (74
    )
    
    
    (74
    )
    
    
    (62
    )Share of profits of associated companies
    
    
    7
    
    
    
    0
    
    
    
    0
    
    
    
    0Income (loss) before extraordinary items and
income taxes
    
    
    
    
    
    
    93
    
    
    
    (303
    )
    
    
    49Extraordinary items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    
    
    
    
    93
    
    
    
    (303
    )
    
    
    49Income taxes
    
    
    8
    
    
    
    (26
    )
    
    
    44
    
    
    
    21Minority interests
    
    
    
    
    
    
    (2
    )
    
    
    1
    
    
    
    (1
    )Net income (loss)
    
    
    
    
    
    
    65
    
    
    
    (258
    )
    
    
    69Earnings (loss) per share
    
    
    10
    
    
    
    0.48
    
    
    
    (1.89
    )
    
    
    0.51
 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 of December 31,Note
    
    
    2003
    
    
    2004
    
    
    ASSETSFixed assets and financial assetsIntangible assets
    
    
    11Goodwill
    
    
    
    
    
    
    623
    
    
    
    458Other intangible assets
    
    
    
    
    
    
    137
    
    
    
    104760
    
    
    
    562Tangible assets
    
    
    11,12Land and water areas
    
    
    
    
    
    
    80
    
    
    
    65Buildings
    
    
    
    
    
    
    329
    
    
    
    257Machinery and equipment
    
    
    
    
    
    
    336
    
    
    
    283Other tangible assets
    
    
    
    
    
    
    28
    
    
    
    17Assets under construction
    
    
    
    
    
    
    37
    
    
    
    19810
    
    
    
    641Financial assetsShareholdings and other securities
    
    
    13
    
    
    
    44
    
    
    
    27Own shares
    
    
    13
    
    
    
    1
    
    
    
    1Loan and other receivables
    
    
    16
    
    
    
    37
    
    
    
    54Accounts receivable
    
    
    16
    
    
    
    2
    
    
    
    7Other long-term investments
    
    
    14,16
    
    
    
    10
    
    
    
    494
    
    
    
    93Total fixed and financial assets
    
    
    
    
    
    
    1,664
    
    
    
    1,296Current assetsInventoriesMaterials and supplies
    
    
    
    
    
    
    169
    
    
    
    150Work in process
    
    
    
    
    
    
    275
    
    
    
    316Finished products
    
    
    
    
    
    
    299
    
    
    
    221743
    
    
    
    687Receivables
    
    
    16Accounts receivable
    
    
    
    
    
    
    719
    
    
    
    651Costs and earnings of projects under
construction in excess of billings
    
    
    15
    
    
    
    269
    
    
    
    191Loans receivable
    
    
    
    
    
    
    5
    
    
    
    5Accrued income and prepaid expenses
    
    
    
    
    
    
    88
    
    
    
    86Deferred tax asset
    
    
    8
    
    
    
    145
    
    
    
    187Other receivables
    
    
    
    
    
    
    53
    
    
    
    52Other short-term investments
    
    
    
    
    
    
    7
    
    
    
    41,286
    
    
    
    1,176Cash and cash equivalents
    
    
    
    
    
    
    130
    
    
    
    419Total current assets
    
    
    
    
    
    
    2,159
    
    
    
    2,282Total assets
    
    
    
    
    
    
    3,823
    
    
    
    3,578
 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 3⁄4 Continued
(in millions) As of December 31,Note
    
    
    2003
    
    
    2004
    
    
    SHAREHOLDERS EQUITY AND
LIABILITIESShareholders equity
    
    
    17Share capital
    
    
    
    
    
    
    232
    
    
    
    232Share premium reserve
    
    
    
    
    
    
    14
    
    
    
    14Legal reserve
    
    
    
    
    
    
    228
    
    
    
    228Cumulative translation differences
    
    
    
    
    
    
    (76
    )
    
    
    (80
    )Reserve for own shares
    
    
    
    
    
    
    1
    
    
    
    1Other reserves
    
    
    
    
    
    
    202
    
    
    
    202Retained earnings
    
    
    
    
    
    
    681
    
    
    
    386Net income (loss) for the financial year
    
    
    
    
    
    
    (258
    )
    
    
    69Total shareholders equity
    
    
    
    
    
    
    1,024
    
    
    
    1,052Minority interests
    
    
    
    
    
    
    6
    
    
    
    5Mortgages and contingent liabilities
    
    
    23
    
    
    
    
    
    
    
    LiabilitiesLong-term debt
    
    
    18Bonds
    
    
    
    
    
    
    695
    
    
    
    746Loans from financial institutions
    
    
    
    
    
    
    183
    
    
    
    107Pension loans
    
    
    
    
    
    
    29
    
    
    
    5Other long-term debt
    
    
    
    
    
    
    50
    
    
    
    62957
    
    
    
    920Other long-term liabilitiesAccrued expenses
    
    
    19,22
    
    
    
    134
    
    
    
    122Deferred tax liability
    
    
    8
    
    
    
    22
    
    
    
    8Other long-term loans
    
    
    
    
    
    
    5
    
    
    
    6161
    
    
    
    136
 The accompanying Notes form an integral part of these consolidated financial statements. F-5




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##### Table of Contents



METSO Consolidated Balance Sheets 3⁄4 Continued
(in millions) As of December 31,Note
    
    
    2003
    
    
    2004
    
    
    Current liabilitiesCurrent portion of long-term debt
    
    
    
    
    
    
    17
    
    
    
    19Other interest bearing short-term debt
    
    
    20
    
    
    
    295
    
    
    
    31Advances received
    
    
    
    
    
    
    147
    
    
    
    219Accounts payable
    
    
    
    
    
    
    282
    
    
    
    296Billings in excess of costs and earnings
of projects under construction
    
    
    15
    
    
    
    41
    
    
    
    124Accrued expenses and deferred income
    
    
    21,22
    
    
    
    818
    
    
    
    719Other current liabilities
    
    
    
    
    
    
    75
    
    
    
    571,675
    
    
    
    1,465Total liabilities
    
    
    
    
    
    
    2,793
    
    
    
    2,521Total shareholders equity and liabilities
    
    
    
    
    
    
    3,823
    
    
    
    3,578
 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
(in millions) Year ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    
    
    
    Cash flows from operating activities:Net income (loss)
    
    
    65
    
    
    
    (258
    )
    
    
    69Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    197
    
    
    
    183
    
    
    
    155Efficiency improvement programs:Provisions, including usage of previous year provision
    
    
    
    
    
    
    60
    
    
    
    (31
    )Asset write-downs
    
    
    
    
    
    
    25
    
    
    
    10Impairment of goodwill
    
    
    
    
    
    
    205
    
    
    
    Gain on sale of fixed assets
    
    
    (7
    )
    
    
    0
    
    
    
    (13
    )(Gain) loss on sale of subsidiaries and associated companies
    
    
    (1
    )
    
    
    (12
    )
    
    
    18Gain on sale of marketable securities
    
    
    (7
    )
    
    
    (3
    )
    
    
    (9
    )Share of profits and losses of associated companies
    
    
    (1
    )
    
    
    (2
    )
    
    
    (4
    )Change in deferred taxes(1)
    
    
    27
    
    
    
    (65
    )
    
    
    (51
    )Other non-cash items(2)
    
    
    28
    
    
    
    23
    
    
    
    56Change in net working capital, net of effect from business
acquisitions and disposals(1)
    
    
    (49
    )
    
    
    (10
    )
    
    
    62Net cash provided by operating activities
    
    
    252
    
    
    
    146
    
    
    
    262Cash flows from investing activities:Capital expenditures on fixed assets
    
    
    (191
    )
    
    
    (128
    )
    
    
    (89
    )Proceeds from sale of fixed assets
    
    
    33
    
    
    
    14
    
    
    
    39Business acquisitions, net of cash acquired
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )Investments in associated companies
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Proceeds from sale of subsidiaries and associated companies,
net of cash sold
    
    
    38
    
    
    
    31
    
    
    
    390Proceeds from sale of shares and marketable securities
    
    
    110
    
    
    
    6
    
    
    
    34Investments in shares and marketable securities
    
    
    (2
    )
    
    
    (1
    )
    
    
    (7
    )Other items
    
    
    
    
    
    
    
    
    
    
    (5
    )Net cash provided by (used in) investing activities
    
    
    (14
    )
    
    
    (80
    )
    
    
    359Cash flows from financing activities:Dividends paid
    
    
    (82
    )
    
    
    (82
    )
    
    
    (27
    )Hedging of net investment in foreign subsidiaries
    
    
    
    
    
    
    12
    
    
    
    11Net borrowings (payments) on short-term debt
    
    
    (50
    )
    
    
    17
    
    
    
    (258
    )Proceeds from issuance of long-term debt
    
    
    200
    
    
    
    110
    
    
    
    180Principal payments of long-term debt
    
    
    (311
    )
    
    
    (171
    )
    
    
    (234
    )Notes receivable issued
    
    
    (4
    )
    
    
    (8
    )
    
    
    (5
    )Proceeds from payments on notes receivable
    
    
    14
    
    
    
    2
    
    
    
    6Other items
    
    
    0
    
    
    
    (1
    )
    
    
    (6
    )Net cash provided by (used in) financing activities
    
    
    (233
    )
    
    
    (121
    )
    
    
    (333
    )Effect of changes in exchange rates on cash and cash equivalents
    
    
    (27
    )
    
    
    (5
    )
    
    
    1Net increase (decrease) in cash and cash equivalents
    
    
    (22
    )
    
    
    (60
    )
    
    
    289Cash and cash equivalents at beginning of year
    
    
    212
    
    
    
    190
    
    
    
    130Cash and cash equivalents at end of year
    
    
    190
    
    
    
    130
    
    
    
    419
   (1)
    
    Prior year information has been reclassified to conform to current year presentation.(2)
    
    In the year ended December 31, 2004 Other non-cash items include 15 million of bad debt
expense related to Papiers Gaspésia. The accompanying Notes form an integral part of these consolidated financial statements. F-7




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METSO Consolidated Statements of Cash Flows  Continued
(in millions) Year ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    
    
    
    Change in net working capital, net of effect from business
acquisitions and disposals(1):(Increase) decrease in assets and increase (decrease) in liabilities:Inventory
    
    
    24
    
    
    
    23
    
    
    
    (129
    )Receivables
    
    
    183
    
    
    
    70
    
    
    
    (61
    )Other assets
    
    
    (25
    )
    
    
    86
    
    
    
    (26
    )Percentage of completion: recognized assets and liabilities, net
    
    
    (71
    )
    
    
    (140
    )
    
    
    113Accounts payable
    
    
    (46
    )
    
    
    (26
    )
    
    
    74Accrued liabilities
    
    
    (86
    )
    
    
    (34
    )
    
    
    17Other liabilities
    
    
    (28
    )
    
    
    11
    
    
    
    74Total
    
    
    (49
    )
    
    
    (10
    )
    
    
    62Supplemental cash flow informationAcquisition of businesses:Intangible assets
    
    
    0
    
    
    
    
    
    
    
    1Tangible assets
    
    
    1
    
    
    
    
    
    
    
    Goodwill
    
    
    4
    
    
    
    0
    
    
    
    1Current assets, other than cash
    
    
    2
    
    
    
    
    
    
    
    1Minority interests
    
    
    0
    
    
    
    2
    
    
    
    Liabilities assumed
    
    
    (6
    )
    
    
    
    
    
    
    (1
    )Total, net of cash acquired
    
    
    1
    
    
    
    2
    
    
    
    2Disposals of businesses:Intangible assets
    
    
    0
    
    
    
    1
    
    
    
    35Tangible assets
    
    
    13
    
    
    
    4
    
    
    
    67Goodwill
    
    
    15
    
    
    
    0
    
    
    
    120Current assets, other than cash
    
    
    28
    
    
    
    38
    
    
    
    334Minority interests
    
    
    
    
    
    
    
    
    
    
    (1
    )Liabilities sold
    
    
    (19
    )
    
    
    (24
    )
    
    
    (147
    )Gain (loss) on sale
    
    
    1
    
    
    
    12
    
    
    
    (18
    )Total, net of cash sold
    
    
    38
    
    
    
    31
    
    
    
    390Revolving credit facility activity:Borrowings
    
    
    1,409
    
    
    
    398
    
    
    
    50Payments
    
    
    1,513
    
    
    
    426
    
    
    
    116Cash paid (received) during the year for:Interest
    
    
    83
    
    
    
    69
    
    
    
    60Income taxes(2)
    
    
    57
    
    
    
    (6
    )
    
    
    31Non-cash exchange of bonds:New bonds issued
    
    
    
    
    
    
    
    
    
    
    274Bonds redeemed
    
    
    
    
    
    
    
    
    
    
    256
   (1)
    
    Prior year information has been reclassified to conform to current year presentation.(2)
    
    Includes cash receipt of 30 million related to income tax benefit realized for the goodwill
impairment for the year ended December 31, 2003. The accompanying Notes form an integral part of these consolidated financial statements. F-8




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##### Table of Contents



METSO Consolidated Statements of Changes in Shareholders Equity
(in millions, unless otherwise indicated) Number of
    
    
    
    
    
    
    Share
    
    
    
    
    
    
    Cumulative
    
    
    Reserveshares
    
    
    Share
    
    
    premium
    
    
    Legal
    
    
    translation
    
    
    for own
    
    
    Other
    
    
    Retained(thousands)
    
    
    capital
    
    
    reserve
    
    
    reserve
    
    
    differences
    
    
    shares
    
    
    reserves
    
    
    earnings
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31,
2001
    
    
    136,251
    
    
    
    232
    
    
    
    14
    
    
    
    221
    
    
    
    25
    
    
    
    1
    
    
    
    202
    
    
    
    774
    
    
    
    1,469Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82
    )
    
    
    (82
    )Translation differences
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    12Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    65Balance at December 31,
2002
    
    
    136,251
    
    
    
    232
    
    
    
    14
    
    
    
    227
    
    
    
    (60
    )
    
    
    1
    
    
    
    202
    
    
    
    763
    
    
    
    1,379Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82
    )
    
    
    (82
    )Translation differences
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    1Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )
    
    
    (258
    )Balance at December 31,
2003
    
    
    136,251
    
    
    
    232
    
    
    
    14
    
    
    
    228
    
    
    
    (76
    )
    
    
    1
    
    
    
    202
    
    
    
    423
    
    
    
    1,024Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27
    )
    
    
    (27
    )Translation differences
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Transfer of translation differences
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    0Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    69Balance at December 31,
2004
    
    
    136,251
    
    
    
    232
    
    
    
    14
    
    
    
    228
    
    
    
    (80
    )
    
    
    1
    
    
    
    202
    
    
    
    455
    
    
    
    1,052
 The accompanying Notes form an integral part of these consolidated financial statements. F-9




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements Note 1. Accounting Principles Description of businesses Metso is a multinational engineering company, which designs, develops and produces systems,
automation solutions, machinery and equipment for process industries. The main customer industries
are the pulp and paper, mining, construction and civil engineering as well as energy and chemical
industries. Metsos operations are divided into four business areas: Metso Paper, Metso Minerals,
Metso Automation and Metso Ventures. Metso Ventures is comprised of Metso Panelboard, Metso Drives,
Foundries, Metso Powdermet and Valmet Automotive. In January 2004, Metso divested its Converting group to a Swiss company, Bobst Group. In June
2004, Metso divested the Dynapac compaction and paving equipment group, previously part of Metso
Minerals, to Altor, a Nordic private equity investor. In December 2004, Metso divested the Reedrill
rock drilling equipment business, previously part of Metso Minerals, to the U.S. company Terex
Corporation. Divested businesses mentioned above have been transferred under Discontinued
Operations. Basis of presentation The consolidated financial statements, prepared in accordance with Finnish generally accepted
accounting principles (Finnish GAAP), include the financial statements of Metso Corporation (the
Parent Company) and its subsidiaries (together with the Parent Company, Metso or the
Company). Metso Corporation was formed in 1999 as a result of the merger of Rauma Corporation
(Rauma) and Valmet Corporation (Valmet). The merger was consummated on July 1, 1999 and is
accounted for by the pooling-of-interests method. The financial statements are presented in millions of euros (), except for share and per
share amounts. Use of estimates The preparation of financial statements, in conformity with Finnish GAAP, requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Accounting convention The financial statements are prepared under the historical cost convention. Principles of consolidation The consolidated financial statements include the accounts of the Parent Company and each of
those companies in which it owns, directly or indirectly through subsidiaries, over 50 percent of
the voting rights. The companies acquired during the financial period have been consolidated from
the date that Metso acquired control. Subsidiaries sold have been included up to their date of
disposal. All intercompany transactions are eliminated as part of the consolidation process. Minority
interests are presented separately before net income. They are also shown separately from
shareholders equity and liabilities on the consolidated balance sheets. Acquisitions of companies are accounted for using the purchase method. Goodwill represents the
excess of the purchase cost over the book value of the net assets of the acquired companies. A
portion of the goodwill is allocated to fixed assets, which are depreciated over their useful
lives. The remaining goodwill arising from acquisitions is amortized over a period not to exceed
twenty years. Deferred credit (negative goodwill) represents the excess of net assets of acquired
companies over the purchase cost. Deferred credit arising from acquisitions is allocated to reduce
the acquired fixed assets. The equity method of accounting is used for investments in associated companies in which the
investment provides Metso the ability to exercise significant influence over the operating and
financial policies of the investee company. Such influence is presumed to exist for investments in
companies in which Metsos F-10




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) direct or indirect ownership is between 20 and 50 percent. Under the equity method, the share
of profits and losses of associated companies is included in the consolidated statements of income.
The share of the result of associated companies, the activity of which is closely connected with
the business areas of Metso, is recorded in other income and expenses, net. Metsos share of
post-acquisition retained profits and losses of associated companies is reported as part of
investments in associated companies in the consolidated balance sheets. Other shareholdings and securities (voting rights less than 20 percent) are stated at cost and
dividends received are included in the statements of income; a write-down is made where it is
deemed necessary to reduce the cost to estimated net realizable value. Foreign currency translation Transactions in foreign currencies are recorded at the rates of exchange prevailing at the
date of the transactions. At the end of the accounting period, unsettled foreign currency
transaction balances are valued at the rates of exchange prevailing at the balance sheet date.
Trade flow related foreign currency exchange gains and losses are treated as adjustments to sales
and purchases. Foreign exchange gains and losses associated with financing are entered as a net
amount under financial income and expenses. The statements of income of foreign subsidiaries (i.e., outside the euro area) are translated
into euro at the average exchange rates for the financial year and the balance sheets are
translated at the exchange rate of the balance sheet date. The resulting translation differences
are recorded directly to equity. When Metso hedges the equity of its foreign subsidiaries with
foreign currency loans and with financial derivatives, the translation difference is adjusted by
the currency effect of hedging instruments and recorded in equity, net of taxes. Derivative financial instruments Metso uses a variety of derivative financial instruments, mainly forward exchange contracts,
and a limited number of interest rate, currency and cross-currency swaps as well as currency
options, interest rate futures and commodity contracts, as part of an overall risk management
policy. These instruments are used to reduce the foreign currency and interest rate risks relating
to existing assets, liabilities, firm commitments, forecasted sales and estimated consumption of
raw materials. Metso does not hold nor issue derivative financial instruments for trading purposes. Metso uses principally forward exchange contracts to hedge the currency risk on certain
commercial assets (receivables) and liabilities (payables) and firm commitments (orders). The
derivatives are designated at inception as a hedge with respect to the hedged item or group of
items with similar characteristics. If a derivative has been contracted to close or reduce net
exposure to a certain currency or group of currencies, it is fair valued quarterly and the arising
variation in fair values is recognized in the consolidated statements of income. Currency options are used to hedge forecasted sales. Options are recorded at fair value. Metso hedges its net foreign investments in certain currencies to reduce the effect of
exchange rate fluctuations. The hedging instruments are mainly foreign currency loans and forward
exchange contracts, and to some extent cross-currency swaps. Both realized and unrealized exchange
gains and losses measured on these instruments are recorded, net of taxes, in a separate component
of equity against the translation differences arising from consolidation to the extent that these
hedges are effective. Currency and cross-currency swaps are used to hedge foreign currency denominated loans. The
translation differences arising from the derivative instruments are recorded concurrently with the
translation difference of the underlying loans. Interest expense and income, net is recognized as
incurred. Metsos exposure to interest rate risk, arising from interest bearing receivables and loans,
is managed through interest rate swaps and interest rate futures. The net of interest payable and
receivable on the swaps is accrued and recorded in interest and other financial expenses to match
the interest income/expense on the related underlying hedged items. Realized gains and losses
occurring from early termination of contracts are recorded in income over the remaining period of
the original swap agreement. F-11




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) If the interest leg of a cross-currency swap or an interest swap has not been designated as a
hedge of an underlying item at its inception, the interest portion of the swaps is recorded at fair
value. Interest rate futures are fair valued quarterly and the change in fair value is recognized
in financial income and expenses, net. Metso has entered into electricity futures to reduce the effects of the volatility of the
electricity prices of its units located in Finland. The unrealized gains and losses of the
contracts are deferred and recognized concurrently with the underlying consumption at the maturity
date of the related contracts. Other long-term investments Marketable debt securities, e.g., bonds, commercial papers and time deposits are included in
other long-term investments when their maturity, at the time of their inception, exceeds one year.
The unrealized gains and losses on marketable securities are deferred and recognized in income when
realized either at disposal or at maturity. Capitalization of costs related to exchange of debt instruments Costs and fees arising from exchange of debt instruments are capitalized and amortized over
the remaining period of the modified liability provided the new conditions obtained through the
exchange do not substantially differ from those of the original debt. The assessment of whether the
conditions are substantially different is based on a comparison of the discounted present value of
the cash flows under the new terms and the present value of the remaining cash flows of the
original financial liability. Should the difference be less than ten percent, the conditions are
not considered to be substantially different and the costs and fees are capitalized. Revenue recognition Revenues from goods and services sold are recognized, net of sales taxes, discounts and
foreign exchange differences, when substantially all the risks and rewards of ownership are
transferred to the buyer, or when legal title of the goods and responsibility for shipment has
transferred to the buyer. The transfer of risk takes place either when the goods are shipped or
made available to the buyer for shipment, depending on the delivery clause of the contract. The
credit worthiness of the buyer is verified before engaging into a sale. However, should a risk of
non-payment arise after revenue recognition, a provision for non collectibility risk is
established. Percentage-of-completion method: Sales and anticipated profits under significant long-term
engineering and construction contracts are recorded on a percentage-of-completion basis. The
measurement is done either by units of delivery, which are based on predetermined milestones and on
the realized value added (contract value of the work performed to date) or by the cost-to-cost
method of accounting. Estimated contract profits are recorded in earnings in proportion to recorded
sales. In the cost-to-cost method, sales and profits are recorded after considering the ratio of
accumulated costs to estimated total costs to complete each contract. In certain cases,
subcontractor materials, labour and equipment, are included in sales and costs of goods sold when
management believes that Metso is responsible for the ultimate acceptability of the project.
Changes to total estimated contract costs and losses, if any, are recognized in the period in which
they are determined. Sales with repurchase commitments are recognized at the time of the delivery and the
commitment is included in contingent liabilities. Trade-ins: Sales, against which trade-ins are accepted, are recorded at contract price. Any
reduction between the agreed trade-in price and its recorded value in the inventory is recognized
in cost of goods sold concurrently with the sale. Shipping and handling costs The Company includes shipping fees billed to customers in revenues and shipping costs incurred
in cost of sales. Advertising costs Advertising costs are expensed as incurred. F-12




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Research and development Research and development costs are expensed as incurred. Research and development costs
comprise salaries, administration costs, depreciation and amortization of tangible and intangible
fixed assets. Maintenance, repair and renewals Maintenance, repairs and renewals are charged to expense as incurred. However, major
betterments are capitalized and depreciated over their expected useful lives. Pensions and coverage of pension liabilities The companies within Metso have various pension schemes in accordance with the local
conditions and practices in the countries in which they operate. The schemes are generally funded
through payments to insurance companies or to trustee-administered funds as determined by periodic
actuarial calculations. Metso has met local minimum funding requirements for the countries in which
it maintains pension schemes. Metsos contributions to defined contribution plans and to
multi-employer and insured plans are charged to the income statement concurrently with the payment
obligations. Fixed assets and long-term investments Intangible and tangible assets are stated at cost, less accumulated depreciation. Land and
water areas are not depreciated. Depreciation and amortization is calculated on a straight-line basis over the expected useful
lives of the assets as follows: Buildings
    
    15  40 yearsMachinery and equipment
    
    3  20 yearsOther tangible assets
    
    5  20 yearsIntangibles, other than goodwill and trade names
    
    3  12 yearsTrade names
    
    20 yearsGoodwill
    
    5  20 years
 Impairments of fixed assets and capital gains and losses on the disposal of fixed assets are
included in operating profit (loss) or in extraordinary items depending on the nature of the event. Goodwill arising from strategic business acquisitions is amortized over 20 years. The
acquisition of Svedala in 2001 has been classified as strategic and the goodwill arising from it is
being amortized over 20 years. Metso reviews long-lived assets and certain intangibles, other than goodwill, to be held and
used by the company for impairment whenever events and changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The carrying value of goodwill for each business area is reviewed annually or, more
frequently, if the facts and circumstances, such as declines in sales, operating profit or cash
flows or material adverse changes in the business climate, suggest that its carrying value may not
be recoverable. The testing is performed at the reporting unit level, which in Metso is one level
below the segment level. The annual testing may be waived if there has not been significant changes
to the assets and liabilities of the reporting unit, if in the previous testing the fair value
clearly exceeded the carrying values tested, and if the likelihood that the current fair value
would be less than the current carrying value of the reporting unit is remote. Metso uses
discounted cash flow analysis to assess the fair value of goodwill. Capitalization of interest expenses The interest expenses of self-constructed investments are capitalized in Metsos financial
statements. The capitalized interest expense is amortized over the estimated useful life of the
underlying asset. F-13




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Revaluation of fixed assets Fixed assets are stated at historical acquisition price reduced by accumulated depreciation.
Revaluations are not permitted. Leasing Rental expenses for operating leases are expensed as incurred. Acquisitions of property and
equipment under capital lease arrangements are recorded in fixed assets and depreciated over their
expected useful lives. Own shares (treasury stock) Own shares held by Metso are valued at reacquisition price in a separate caption under
financial assets. Own shares have been deducted from the number of shares outstanding and the share
capital for the calculation of per share and other performance related indicators. Cash and cash equivalents Cash and cash equivalents consist of cash in banks and other liquid investments with a
maturity of ninety days or less. Inventories Inventories are stated at the lower of historical cost calculated on an average cost basis
or net realizable value. Historical costs include purchase costs as well as transportation and
processing costs. The costs of finished goods include direct materials, wages and salaries plus
social costs, subcontracting and other direct costs. In addition, production costs include an
allocable portion of production and project administration overheads. Net realizable value is the
estimated amount that can be realized from the sale of the asset in the normal course of business
after allowing for the costs of realization. Inventories are shown net of a reserve for obsolete and slow-moving inventories. A reserve is
established and a corresponding charge is taken to income in the period in which the loss occurs
based upon an assessment of technological obsolescence, turnover and related factors. Trade-in equipment received is recorded as inventory at the lower of cost or net realizable
value. Accounts receivable and securitization Accounts receivable are recognized at original invoice amount to customers net of allowance
for doubtful receivables. The allowance is recorded on the basis of periodic reviews of potential
non-recovery of receivables by taking into consideration individual customer credit risk, economic
trends in customer industries and changes in payment terms. Bad debts are written off when official
announcement of receivership, liquidation or bankruptcy is received confirming that the receivable
will not be honoured. If extended payment terms, exceeding two years, are offered to customers, the
invoice amount is discounted to its present value and interest income is recognized over the credit
term. Metso sells certain receivables through arrangements with third party financial institutions.
If specific criteria are met, including legal isolation from the Company, these receivables are
removed from Metsos books, and a gain or loss on sale of the receivables is recorded. Nonrecurring operating income and expenses Nonrecurring operating income and expenses include restructuring and reorganization costs
which have either been realized or planned and to which the management is committed, and other
major one-time operating income and expenses. Extraordinary items Extraordinary items, net of taxes, include significant unusual income and expenses not
resulting from the ordinary course of business operations. F-14




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Equity share of untaxed reserves In Finland and certain other countries, companies are permitted to reduce or increase taxable
income by adjustments to untaxed reserve accounts, provided that such amounts are reflected in the
companys financial statements. Such amounts are included, net of taxes, in other shareholders
equity in the consolidated accounts. Warranty An accrual is made for expected warranty costs. The adequacy of this accrual is reviewed
periodically based on an analysis of historical experience and anticipated probable warranty
liabilities. Restructuring costs A provision for restructuring is recognized only after management has developed and approved a
formal plan to which it has committed. The costs included in a provision for restructuring are
those costs that are either incremental and incurred as a direct result of the plan or are the
result of a continuing contractual obligation with no continuing economic benefit to Metso or a
penalty incurred to cancel the contractual obligation. Restructuring costs also include other costs
incurred as a result of the plan, which are recorded separately under nonrecurring income and
expenses, such as asset write-downs, environmental liabilities and costs to transfer operations to
new locations. Environmental remediation costs Metso accrues for losses associated with environmental remediation obligations when such
losses are probable and reasonably estimable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the remedial
feasibility study. Such accruals are adjusted as further information develops or circumstances
change. Costs of future expenditures for environmental remediation obligations are not discounted
to their present value. Recoveries of environmental remediation costs from other parties are
recorded as assets when their receipt is deemed probable. Income taxes Income taxes presented in the income statement consist of current and deferred taxes. Current
taxes include estimated taxes corresponding to the results for the financial year of the companies,
and adjustments of taxes for previous years. A deferred tax liability or asset has been determined for all temporary differences between
the tax bases of assets and liabilities and their amounts in financial reporting, using the enacted
tax rates effective for the future years. The deferred tax liabilities are recognized in the
balance sheet in full, and the deferred tax assets at their estimated realizable amounts. Deferred
tax assets are reduced by a valuation allowance if, based on the weight of available evidence
including internal projections of future earnings, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. No deferred tax liability has been recognized for undistributed earnings of domestic
subsidiaries (i.e., Finnish) since such earnings can be transferred to the Parent Company without
tax consequences. Metso does not provide deferred income taxes on undistributed earnings of foreign
subsidiaries, except in situations where Metso has elected to distribute earnings of foreign
subsidiaries. Earnings per share Earnings per share is based on income before extraordinary items and income taxes adjusted for
minority interests and taxes related to normal business operations. The amount is divided by the
weighted average number of shares outstanding during each period. The average number of own shares
has been deducted from the number of outstanding shares. The diluted earnings per share have been computed by applying the treasury stock method,
under which earnings per share data is computed as if the warrants and options were exercised at
the beginning of the period, or on the issuance of, if later, and as if the funds obtained thereby
were used to purchase common stock at the average market price during the period. In addition to
the weighted average number of shares outstanding, F-15




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) the denominator includes the incremental shares obtained through the assumed exercise of the
warrants and options. The assumption of exercise is not reflected in earnings per share when the exercise price of
the warrants and options exceeds the average market price of the common stock during the period.
The warrants and options have a dilutive effect only when the average market price of the common
stock during the period exceeds the exercise price of the warrants and options. Note 2. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of the following: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Marketing and selling expenses
    
    
    548
    
    
    
    492
    
    
    
    481Research and development expenses, net(1)
    
    
    146
    
    
    
    126
    
    
    
    103Administrative expenses
    
    
    341
    
    
    
    299
    
    
    
    278Other income
    
    
    (26
    )
    
    
    (17
    )
    
    
    (25
    )Other expenses
    
    
    6
    
    
    
    6
    
    
    
    7Total
    
    
    1,015
    
    
    
    906
    
    
    
    844
   (1)
    
    Research and development expenses are presented net of grants received of 8 million, 7
million and 8 million and net of capitalized investments of 13 million, 7 million and 4
million and include depreciation of 11 million, 11 million and 10 million for the years
ended December 31, 2002, 2003 and 2004, respectively. F-16




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 3. Personnel Expenses and Number of Personnel Information regarding personnel expenses and number of personnel is as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Salaries to the members of Boards of
Directors and Managing Directors of
group companies
    
    
    14
    
    
    
    13
    
    
    
    10Other wages and salaries
    
    
    1,062
    
    
    
    951
    
    
    
    871Pension costs
    
    
    112
    
    
    
    104
    
    
    
    104Other indirect employee costs
    
    
    183
    
    
    
    173
    
    
    
    152Total
    
    
    1,371
    
    
    
    1,241
    
    
    
    1,137
 Year ended December 31,2002
    
    
    2003
    
    
    2004Number of personnel:Personnel, average
    
    
    29,258
    
    
    
    27,400
    
    
    
    24,363Personnel, at end of year
    
    
    28,489
    
    
    
    26,240
    
    
    
    22,802
 Note 4. Nonrecurring Operating Income and Expenses Nonrecurring operating income and expenses consist of the following: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Gain on sale of businesses
    
    
    
    
    
    
    12
    
    
    
    2Gain on sale of listed and other shares
    
    
    8
    
    
    
    3
    
    
    
    7Other income
    
    
    
    
    
    
    
    
    
    
    3Nonrecurring operating income, total
    
    
    8
    
    
    
    15
    
    
    
    12Restructuring expenses(1)
    
    
    (28
    )
    
    
    (108
    )
    
    
    (17
    )Loss on sale of businesses
    
    
    
    
    
    
    
    
    
    
    (20
    )Other expenses
    
    
    (7
    )
    
    
    (13
    )
    
    
    (0
    )Nonrecurring operating expenses, total
    
    
    (35
    )
    
    
    (121
    )
    
    
    (37
    )Nonrecurring operating income and expenses, net
    
    
    (27
    )
    
    
    (106
    )
    
    
    (25
    )
   (1)
    
    For additional information on restructuring expenses, see also Note 9. F-17




---



##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 5. Depreciation and Amortization Depreciation and amortization expenses consist of the following: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Intangible assetsGoodwill
    
    
    57
    
    
    
    51
    
    
    
    37Other intangible assets
    
    
    19
    
    
    
    16
    
    
    
    16Tangible assetsBuildings
    
    
    26
    
    
    
    25
    
    
    
    24Machinery and equipment
    
    
    87
    
    
    
    84
    
    
    
    72Other tangible assets
    
    
    8
    
    
    
    7
    
    
    
    6Total
    
    
    197
    
    
    
    183
    
    
    
    155
 Depreciation and amortization charged against operations by activity are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Cost of goods sold
    
    
    83
    
    
    
    82
    
    
    
    71Marketing, selling and administrative expensesMarketing and selling
    
    
    12
    
    
    
    8
    
    
    
    8Research and development
    
    
    11
    
    
    
    11
    
    
    
    10Administrative
    
    
    34
    
    
    
    31
    
    
    
    29Goodwill
    
    
    57
    
    
    
    51
    
    
    
    37Total
    
    
    197
    
    
    
    183
    
    
    
    155
 Note 6. Financial Income and Expenses, net The following table provides a summary of financial income and expenses: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Financial incomeDividends received
    
    
    7
    
    
    
    4
    
    
    
    3Interest income
    
    
    11
    
    
    
    7
    
    
    
    8Other financial income
    
    
    3
    
    
    
    1
    
    
    
    1Net gain (loss) from foreign exchange
    
    
    (4
    )
    
    
    (4
    )
    
    
    (2
    )Financial income total
    
    
    17
    
    
    
    8
    
    
    
    10Financial expensesInterest expenses
    
    
    (87
    )
    
    
    (73
    )
    
    
    (63
    )Other financial expenses
    
    
    (4
    )
    
    
    (9
    )
    
    
    (9
    )Financial expenses total
    
    
    (91
    )
    
    
    (82
    )
    
    
    (72
    )Financial income and expenses, net
    
    
    (74
    )
    
    
    (74
    )
    
    
    (62
    )
 F-18




---



##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 7. Investments in Associated Companies In addition to information provided below for investments in associated companies, see also
Note 13. Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Dividends received
    
    
    0
    
    
    
    0
    
    
    
    0Share of profits or losses in associated companies
    
    
    1
    
    
    
    2
    
    
    
    4Equity value of investments in associated companies
    
    
    14
    
    
    
    15
    
    
    
    17
 Note 8. Income Taxes The domestic and foreign components of income (loss) before extraordinary items and income
taxes are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Finland
    
    
    103
    
    
    
    (48
    )
    
    
    (8
    )Other countries
    
    
    (10
    )
    
    
    (255
    )
    
    
    57Total
    
    
    93
    
    
    
    (303
    )
    
    
    49
 The components of income tax expense (benefit) are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Current taxesFinland
    
    
    (18
    )
    
    
    (12
    )
    
    
    (6
    )Other countries
    
    
    17
    
    
    
    33
    
    
    
    35(1
    )
    
    
    21
    
    
    
    29Deferred taxesFinland
    
    
    22
    
    
    
    (53
    )
    
    
    (44
    )Other countries
    
    
    5
    
    
    
    (12
    )
    
    
    (6
    )27
    
    
    
    (65
    )
    
    
    (50
    )Income tax expense (benefit)
    
    
    26
    
    
    
    (44
    )
    
    
    (21
    )
 F-19




---



##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) The Finnish corporate income tax rate was 29% for the years ended December 31, 2002, 2003 and
2004, respectively. As of January 1, 2005, the enacted rate was reduced to 26%, thus impacting the
deferred tax amounts presented in below table for the year ended December 31, 2004. The differences
between income tax expense (benefit) computed at Finnish statutory rates and income tax expense
(benefit) provided on earnings are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Income tax expense (benefit) at Finnish statutory rate
    
    
    27
    
    
    
    (88
    )
    
    
    14Income tax for prior years
    
    
    (9
    )
    
    
    (3
    )
    
    
    (4
    )Write-down of subsidiary shares(1)
    
    
    (29
    )
    
    
    (53
    )
    
    
    (53
    )Temporary differences for which no deferred tax has been provided
    
    
    2
    
    
    
    (3
    )
    
    
    0Benefit of operating loss carryforwards
    
    
    (3
    )
    
    
    (12
    )
    
    
    (10
    )Amortization and impairment of goodwill
    
    
    16
    
    
    
    74
    
    
    
    11Nondeductible expenses
    
    
    1
    
    
    
    1
    
    
    
    1Taxes on foreign subsidiaries net income in excess of income
taxes at Finnish statutory rates
    
    
    4
    
    
    
    8
    
    
    
    6Operating losses with no current tax benefit(2)
    
    
    16
    
    
    
    26
    
    
    
    4Change in Finnish statutory rate as of January 1, 2005
    
    
    
    
    
    
    
    
    
    
    3Other
    
    
    1
    
    
    
    6
    
    
    
    7Income tax expense (benefit)
    
    
    26
    
    
    
    (44
    )
    
    
    (21
    )
   (1)
    
    Write-down of subsidiary shares includes, for the year ended December 31, 2003, the impact
of a realized tax benefit of 51 million related to a write-down of subsidiary shares recorded
in 2002 , which was not recognized until 2003. Correspondingly, 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. The components of net deferred tax asset (liability) consist of the following: As at December 31,2003
    
    
    2004( in millions)Non-current assetsTax losses carried forward
    
    
    171
    
    
    
    210Provisions
    
    
    21
    
    
    
    33Other
    
    
    0
    
    
    
    0Valuation allowance
    
    
    (111
    )
    
    
    (113
    )81
    
    
    
    130Current assetsIntercompany profit in inventory
    
    
    8
    
    
    
    7Provisions
    
    
    116
    
    
    
    80Valuation allowance
    
    
    (3
    )
    
    
    0121
    
    
    
    87Current liabilitiesInventories and other
    
    
    (6
    )
    
    
    (1
    )Non-current liabilitiesAccelerated depreciation and other untaxed reserves
    
    
    (22
    )
    
    
    (8
    )Other
    
    
    (51
    )
    
    
    (29
    )(73
    )
    
    
    (37
    )Deferred tax asset (liability), net
    
    
    123
    
    
    
    179
 F-20




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) As at December 31, 2004, Metso had 672 million of losses carried forward, primarily
attributable to foreign subsidiaries. New losses for the year ended December 31, 2004, amounting to
87 million, increased the deferred tax asset on loss carry-forward by 17 million. Approximately
25 percent of the accumulated loss carry-forwards at December 31, 2004 have no expiration date, 45
percent expires between years 2005-2014 and the remaining 30 percent between years 2015-2024. The valuation allowance for the deferred tax asset has been as follows: Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    
    
    
    
    
    
    
    
    Endof Year
    
    
    Deduction
    
    
    Increase
    
    
    of Year( in millions)2003Losses carried forward
    
    
    110
    
    
    
    (49
    )
    
    
    50
    
    
    
    111Other
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    3Total
    
    
    110
    
    
    
    (49
    )
    
    
    53
    
    
    
    1142004Losses carried forward
    
    
    111
    
    
    
    (20
    )
    
    
    22
    
    
    
    113Other
    
    
    3
    
    
    
    (3
    )
    
    
    0
    
    
    
    0Total
    
    
    114
    
    
    
    (23
    )
    
    
    22
    
    
    
    113
 Note 9. Restructuring costs 2003 Program In June 2003, Metso launched its group-wide efficiency improvement program aiming to reach
substantial cost savings. The plan included streamlining of sales and administrative organizations
and closing down of sites both in the United States and in Europe. As a result of the efficiency
improvement program, Metsos personnel has been reduced by some 1,900 persons. Based on decisions
already made, the number of personnel will be reduced further by some 140 persons in 2005. For the year ended December 31, 2003, the costs recognized under the program amounted to the
following: Year endedDecember 31,2003( in millions)Pensions and postretirement benefits
    
    
    21Employee termination and exit cost
    
    
    42Write-down of fixed assets and inventory
    
    
    25Restructuring expenses
    
    
    7Other expenses
    
    
    82003 program, total
    
    
    103
 During the year ended December 31, 2004, the 2003 program cost was reduced by 10 million due
to receiving the results of a final soil contamination analysis, finding more favourable solutions
to certain termination plans and reducing certain personnel costs. In addition, gains on the sale
of fixed assets and business activities of 2 million, and increases in the program cost of 2
million, were recorded under nonrecurring items. No further costs are expected under the 2003 efficiency improvement program. F-21




---



##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) The accrued liabilities related to the 2003 program are the following: Year ended December 31,2003
    
    
    2004( in millions)Pensions and postretirement benefits(1)
    
    
    12
    
    
    
    7Employee termination and exit cost
    
    
    33
    
    
    
    7Restructuring expenses
    
    
    7
    
    
    
    3Other expenses
    
    
    25
    
    
    
    1Accrued liabilities at end of year
    
    
    77
    
    
    
    18
   (1)
    
    As at December 31, 2004, accrued pensions comprised 6 million of long-term liabilities. 2004 Program In June 2004, Metso announced a program for the renewal of Metso Papers business concept,
which targets to streamline cost structure. The main locations affected by the measures are in the
Finnish, Swedish and North American operations. The measures comprise personnel reductions in
certain administrative and production functions, disposal of non-core sites and global
reorganization of the tissue business line. The costs related to the program are not expected to
exceed 40 million. For the year ended December 31, 2004, the costs recognized under the program amounted to the
following: Year endedDecember 31,2004( in millions)Pensions and postretirement benefits
    
    
    6Employee termination and exit cost
    
    
    8Write-down of fixed assets
    
    
    10Other expenses
    
    
    22004 program, total
    
    
    26
 For the year ended December 31, 2004, the accrued liabilities related to the 2004 program
amounted to the following: Year endedDecember 31,2004( in millions)Pensions and postretirement benefits(1)
    
    
    4Employee termination and exit cost
    
    
    7Other expenses
    
    
    1Accrued liabilities at end of year
    
    
    12
   (1)
    
    4 million of pension liabilities recognized under the program are long-term liabilities
payable after 2006. F-22




---



##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Other Restructuring Programs Other restructuring programs refer to restructuring programs other than 2003 program or 2004
program. During 2003 and 2004, other restructuring program costs charged to expense amounted to 5
million and 6 million, respectively. The 6 million charged in 2004 primarily relates to site
closures within Metsos business areas. During 2004, 3 million of prior year reserves were
reversed. The change in accruals related to restructuring programs have been recognized as follows
during the financial year 2004: Impact
    
    
    Additions
    
    
    Adjustments
    
    
    AmountsBalance at
    
    
    of
    
    
    charged
    
    
    to
    
    
    paid/
    
    
    Balancebeginning
    
    
    exchange
    
    
    to
    
    
    prior year
    
    
    charged
    
    
    at end ofof year
    
    
    rates
    
    
    expense
    
    
    reserves
    
    
    to reserve
    
    
    year( in millions)2003 and 2004 programs:Pension liabilities for
personnel with
terminated contracts
    
    
    12
    
    
    
    0
    
    
    
    6
    
    
    
    (2
    )
    
    
    (5
    )
    
    
    11Employee termination
and exit costs
    
    
    33
    
    
    
    0
    
    
    
    10
    
    
    
    (3
    )
    
    
    (26
    )
    
    
    14Accrued restructuring
expenses
    
    
    7
    
    
    
    0
    
    
    
    1
    
    
    
    (1
    )
    
    
    (4
    )
    
    
    3Other
    
    
    25
    
    
    
    (1
    )
    
    
    1
    
    
    
    (4
    )
    
    
    (19
    )
    
    
    2Other restructuring programs
    
    
    23
    
    
    
    0
    
    
    
    6
    
    
    
    (3
    )
    
    
    (10
    )
    
    
    16Total
    
    
    100
    
    
    
    (1
    )
    
    
    24
    
    
    
    (13
    )
    
    
    (64
    )
    
    
    46
 The total expense, net of reversals, by restructuring programs has been recognized as follows
in the consolidated income statement: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)2003 Program
    
    
    
    
    
    
    (103
    )
    
    
    102004 Program
    
    
    
    
    
    
    
    
    
    
    (26
    )Other restructuring programs
    
    
    (28
    )
    
    
    (5
    )
    
    
    (1
    )Total
    
    
    (28
    )
    
    
    (108
    )
    
    
    (17
    )
 F-23




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 10. Earnings (Loss) per Share Earnings (loss) per share are calculated as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions, except for pershare amounts)Income (loss) before extraordinary items and income taxes
    
    
    93
    
    
    
    (303
    )
    
    
    49Minority interests
    
    
    (2
    )
    
    
    1
    
    
    
    (1
    )Taxes on normal business operations
    
    
    (26
    )
    
    
    44
    
    
    
    2165
    
    
    
    (258
    )
    
    
    69Weighted average number of shares issued and outstanding
(in thousands)
    
    
    136,190
    
    
    
    136,190
    
    
    
    136,190Earnings (loss) per share, 
    
    
    0.48
    
    
    
    (1.89
    )
    
    
    0.51Weighted average number of diluted shares issued and outstanding
(in thousands)
    
    
    136,190
    
    
    
    136,190
    
    
    
    136,192Diluted earnings (loss) per share, 
    
    
    0.48
    
    
    
    (1.89
    )
    
    
    0.51
 The diluted earnings (loss) per share have been computed by applying the treasury stock
method, under which earnings per share data is computed as if the warrants and options were
exercised at the beginning of the period, or on the issuance of the warrants or options, if that
occurs later during the period, and as if the funds obtained thereby were used to purchase common
stock at the average market price during the period. In addition to the weighted average number of
shares outstanding, the denominator includes the incremental shares obtained through the assumed
exercise of the warrants and options. The warrants and options have a dilutive effect only when the
average market price of the common stock during the period exceeds the exercise price of the
warrants and options. Note 11. Intangible and Tangible Assets Intangible and tangible assets consist of the following: Year ended December 31,2003
    
    
    2004( in millions)GoodwillAcquisition cost at beginning of year
    
    
    1,137
    
    
    
    888Increases
    
    
    1
    
    
    
    1Decreases
    
    
    (13
    )
    
    
    (204
    )Impairment
    
    
    (205
    )
    
    
    Translation differences
    
    
    (32
    )
    
    
    (7
    )Accumulated depreciation at end of year
    
    
    (265
    )
    
    
    (220
    )Net book value at end of year
    
    
    623
    
    
    
    458Other intangible assets(1)Acquisition cost at beginning of year
    
    
    202
    
    
    
    233Increases(2)
    
    
    41
    
    
    
    29Decreases
    
    
    (8
    )
    
    
    (66
    )Translation differences
    
    
    (2
    )
    
    
    (1
    )Accumulated depreciation at end of year
    
    
    (96
    )
    
    
    (91
    )Net book value at end of year
    
    
    137
    
    
    
    104
 F-24




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Year ended December 31,2003
    
    
    2004( in millions)Land and water areasAcquisition cost at beginning of year
    
    
    85
    
    
    
    80Increases
    
    
    1
    
    
    
    0Decreases
    
    
    (4
    )
    
    
    (14
    )Translation differences
    
    
    (2
    )
    
    
    (1
    )Net book value at end of year
    
    
    80
    
    
    
    65BuildingsAcquisition cost at beginning of year
    
    
    599
    
    
    
    582Increases
    
    
    43
    
    
    
    10Decreases
    
    
    (38
    )
    
    
    (80
    )Translation differences
    
    
    (22
    )
    
    
    (6
    )Accumulated depreciation at end of year
    
    
    (253
    )
    
    
    (249
    )Net book value at end of year
    
    
    329
    
    
    
    257Machinery and equipmentAcquisition cost at beginning of year
    
    
    1,293
    
    
    
    1,308Increases
    
    
    101
    
    
    
    68Decreases
    
    
    (51
    )
    
    
    (171
    )Translation differences
    
    
    (35
    )
    
    
    (11
    )Accumulated depreciation at end of year
    
    
    (972
    )
    
    
    (911
    )Net book value at end of year
    
    
    336
    
    
    
    283Other tangible assetsAcquisition cost at beginning of year
    
    
    93
    
    
    
    90Increases
    
    
    9
    
    
    
    4Decreases
    
    
    (8
    )
    
    
    (14
    )Translation differences
    
    
    (4
    )
    
    
    (2
    )Accumulated depreciation at end of year
    
    
    (62
    )
    
    
    (61
    )Net book value at end of year
    
    
    28
    
    
    
    17Assets under constructionAcquisition cost at beginning of year
    
    
    82
    
    
    
    37Increases
    
    
    25
    
    
    
    11Decreases(2)
    
    
    (70
    )
    
    
    (29
    )Translation differences
    
    
    0
    
    
    
    0Net book value at end of year
    
    
    37
    
    
    
    19
   (1)
    
    Includes patents and licenses for a net book value of 32 million and 40 million for the
years ended December 31, 2003 and December 31, 2004, respectively.(2)
    
    Includes reclassifications between Other intangible assets and Assets under construction of
20 million and 10 million for the years ended December 31, 2003 and December 31, 2004,
respectively. Goodwill impairment Metso assesses the value of the goodwill for impairment annually or more frequently, if facts
and circumstances indicate the need, using fair value measurement techniques, such as the
discounted cash flow methodology. The testing is performed on the reporting unit level, i.e., one
level below reportable segment. In the discounted cash flow method, Metso discounts forecasted
performance plans to their present value. The discount rate is the weighted average cost of capital
for the reporting unit, calculated as the opportunity cost to all capital providers weighted by
their relative contribution to the reporting units total capital and the risk associated with the
cash flow and the timing of the cash flow. The comparison methods and other estimation techniques
are utilized to verify the reasonableness of the value derived from the discounted cash flow. F-25




---



##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) In the year ended December 31, 2003, Metso Minerals had to face tightened competition, reduced
demand in certain market areas and unfavourable exchange rate development, especially the impact of
the weakened U.S. Dollar, and its operating profits were lower than expected for the year. As of
September 30, 2003, upon completion of the annual impairment assessment, based on updated
forecasted plans approved by the Board of Directors, it was determined that Metso should recognize
an impairment loss of 205 million related to the Metso Minerals and Discontinued Operations. A summary of changes in Metsos goodwill during the years ended December 31, 2003 and 2004 by
business segments is as follows: TranslationBalance at
    
    
    
    
    
    
    differencebeginning
    
    
    
    
    
    
    and other
    
    
    Impairment
    
    
    Balance atof year
    
    
    Amortization
    
    
    changes
    
    
    loss
    
    
    end of year( in millions)2003Metso Paper
    
    
    96
    
    
    
    (8
    )
    
    
    (10
    )
    
    
    
    
    
    
    78Metso Minerals
    
    
    562
    
    
    
    (29
    )
    
    
    (4
    )
    
    
    (143
    )
    
    
    386Metso Automation
    
    
    25
    
    
    
    (3
    )
    
    
    (1
    )
    
    
    
    
    
    
    21Metso Ventures
    
    
    16
    
    
    
    (1
    )
    
    
    0
    
    
    
    
    
    
    
    15Discontinued
Operations
    
    
    196
    
    
    
    (10
    )
    
    
    (1
    )
    
    
    (62
    )
    
    
    123Total
    
    
    895
    
    
    
    (51
    )
    
    
    (16
    )
    
    
    (205
    )
    
    
    6232004Metso Paper
    
    
    78
    
    
    
    (7
    )
    
    
    (4
    )
    
    
    
    
    
    
    67Metso Minerals
    
    
    386
    
    
    
    (21
    )
    
    
    (4
    )
    
    
    
    
    
    
    361Metso Automation
    
    
    21
    
    
    
    (4
    )
    
    
    0
    
    
    
    
    
    
    
    17Metso Ventures
    
    
    15
    
    
    
    (2
    )
    
    
    0
    
    
    
    
    
    
    
    13Discontinued
Operations
    
    
    123
    
    
    
    (3
    )
    
    
    (120
    )
    
    
    
    
    
    
    Total
    
    
    623
    
    
    
    (37
    )
    
    
    (128
    )
    
    
    
    
    
    
    458
 Note 12. Capitalization of Interest Expenses The capitalized interest expenses consist of the following: Year ended December 31,2003
    
    
    2004( in millions)Net capitalized interest, beginning of year
    
    
    3
    
    
    
    2Amortization of capitalized interest expense
    
    
    (1
    )
    
    
    (1
    )Net capitalized interest, end of year
    
    
    2
    
    
    
    1
 F-26




---



##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 13. Shareholdings and Other Securities Investments in associated companies are as follows: Year ended December 31,2003
    
    
    
    
    
    
    
    
    
    
    2004%
    
    
    Equity
    
    
    
    
    
    
    
    
    
    
    %
    
    
    Equityownership
    
    
    value
    
    
    
    
    
    
    
    
    
    
    ownership
    
    
    value( in millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( in millions)Allimand S.A.
    
    
    
    
    
    
    35.8
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    35.8
    
    
    
    5Valmet-Xian Paper Machinery Co. Ltd.
    
    
    
    
    
    
    48.3
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    48.3
    
    
    
    7Shanghai Neles-Jamesbury Valve Co. Ltd.
    
    
    
    
    
    
    50.0
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    50.0
    
    
    
    3Avantone Oy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48.2
    
    
    
    1Others
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total investments in associated companies
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Investments in shareholdings and other securities consist of the following:Year ended December 31,2003
    
    
    2004Number
    
    
    %
    
    
    Book
    
    
    Fair
    
    
    Number
    
    
    %
    
    
    Book
    
    
    Fairof shares
    
    
    ownership
    
    
    value
    
    
    value
    
    
    of shares
    
    
    ownership
    
    
    value
    
    
    value( in millions)
    
    
    
    
    
    
    
    
    
    
    ( in millions)Tamfelt Corporation, Finland(1)
    
    
    484,200
    
    
    
    2.7
    
    
    
    4
    
    
    
    7
    
    
    
    726,300
    
    
    
    2.7
    
    
    
    4
    
    
    
    6Sato Corporation Plc, Finland
    
    
    239,555
    
    
    
    10.9
    
    
    
    12
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exel Plc, Finland
    
    
    650,000
    
    
    
    12.2
    
    
    
    5
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other shares and securities
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Total investments in shares and other
securities
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    12Total shareholdings and other
securities
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
   (1)
    
    Bonus Issue in 2004: 1 new share for each two shares held. Investments in own shares are as follows: Year ended December 31,2003
    
    
    2004Number
    
    
    %
    
    
    Book
    
    
    Fair
    
    
    Number
    
    
    %
    
    
    Book
    
    
    Fairof shares
    
    
    ownership
    
    
    value
    
    
    value
    
    
    of shares
    
    
    ownership
    
    
    value
    
    
    value( in millions)
    
    
    
    
    
    
    
    
    
    
    ( in millions)Own shares held by
Metso Corporation
    
    
    60,841
    
    
    
    0.0
    
    
    
    1
    
    
    
    1
    
    
    
    60,841
    
    
    
    0.0
    
    
    
    1
    
    
    
    1
 F-27




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 14. Other Long-term Investments Other long-term investments consist of certificates of deposits, bonds and other securities
with a maturity of greater than one year at the time of acquisition. Other long-term investments
amounted to 10 million at December 31, 2003 and to 4 million at December 31, 2004. Other
long-term investments are recorded at the lower of cost or market value. Information regarding other long-term investments is as follows: As at December 31,2003
    
    
    2004Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    
    
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    gains
    
    
    losses
    
    
    value
    
    
    Cost
    
    
    gains
    
    
    losses
    
    
    value( in millions)
    
    
    ( in millions)Debt
SecuritiesBonds and Treasury
bills
    
    
    5
    
    
    
    0
    
    
    
    
    
    
    
    5
    
    
    
    2
    
    
    
    0
    
    
    
    
    
    
    
    2Other securities
    
    
    5
    
    
    
    0
    
    
    
    
    
    
    
    5
    
    
    
    2
    
    
    
    0
    
    
    
    
    
    
    
    2Total
    
    
    10
    
    
    
    0
    
    
    
    
    
    
    
    10
    
    
    
    4
    
    
    
    0
    
    
    
    
    
    
    
    4
 Note 15. Costs and Earnings of Projects under Construction in Excess of Billings/Billings in Excess
of Costs and Earnings of Projects under Construction Information on balance sheet items of uncompleted contracts at December 31, 2003 and 2004 is
as follows: Costs andearnings ofuncompleted
    
    
    Billings ofprojects
    
    
    projects
    
    
    Net( in millions)2003Projects where costs and earnings exceed billings
    
    
    600
    
    
    
    331
    
    
    
    269Projects where billings exceed costs and earnings
    
    
    420
    
    
    
    461
    
    
    
    412004Projects where costs and earnings exceed billings
    
    
    576
    
    
    
    385
    
    
    
    191Projects where billings exceed costs and earnings
    
    
    428
    
    
    
    552
    
    
    
    124
 F-28




---



##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 16. Interest bearing and Non-interest bearing Assets Interest bearing and non-interest bearing assets are as follows: As at December 31,2003
    
    
    2004Non-
    
    
    
    
    
    
    
    
    
    
    Non-Interest
    
    
    interest
    
    
    
    
    
    
    Interest
    
    
    interestbearing
    
    
    bearing
    
    
    Total
    
    
    bearing
    
    
    bearing
    
    
    Total( in millions)
    
    
    ( in millions)Financial assetsLoan and
other receivables(1)
    
    
    9
    
    
    
    28
    
    
    
    37
    
    
    
    6
    
    
    
    48
    
    
    
    54Accounts receivable
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    6
    
    
    
    1
    
    
    
    7Other long-term investments
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    4
    
    
    
    
    
    
    
    4Total
    
    
    20
    
    
    
    29
    
    
    
    49
    
    
    
    16
    
    
    
    49
    
    
    
    65ReceivablesAccounts receivable
    
    
    0
    
    
    
    719
    
    
    
    719
    
    
    
    0
    
    
    
    651
    
    
    
    651Costs and earnings of projects
under construction in excess of
billings
    
    
    
    
    
    
    269
    
    
    
    269
    
    
    
    
    
    
    
    191
    
    
    
    191Loans receivable
    
    
    3
    
    
    
    2
    
    
    
    5
    
    
    
    3
    
    
    
    2
    
    
    
    5Prepaid expenses and accrued income
    
    
    
    
    
    
    88
    
    
    
    88
    
    
    
    
    
    
    
    86
    
    
    
    86Deferred tax asset
    
    
    
    
    
    
    145
    
    
    
    145
    
    
    
    
    
    
    
    187
    
    
    
    187Other receivables
    
    
    
    
    
    
    53
    
    
    
    53
    
    
    
    
    
    
    
    52
    
    
    
    52Other short-term investments
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    4
    
    
    
    
    
    
    
    4Total
    
    
    10
    
    
    
    1,276
    
    
    
    1,286
    
    
    
    7
    
    
    
    1,169
    
    
    
    1,176
   (1)
    
    Non-interest bearing loan and other receivables include 18 million and 19 million of
prepayments to foreign pension plans and of pension insurance premiums at December 31, 2003
and 2004, respectively. At December 31, 2004, the non-interest bearing portion also includes
21 million of capitalized costs related to the exchange and issuance of bonds. Note 17. Shareholders Equity At December 31, 2004, Metso had 136,250,545 issued shares with a par value of 1.70 per share,
the share capital being 232 million. Under its Articles of Association, Metso Corporations
authorized share capital may not be less than 170 million nor more than 680 million. At December 31, 2004, Metso held 60,841 of its own shares. The reacquisition price of 1
million has been recorded in the reserve of own shares at cost. In the shareholders meeting held
on April 6, 2004, the shareholders of Metso renewed the authorization for the Board of Directors to
reacquire treasury stock in the limit of five percent of the nominal value of outstanding shares at
the time of purchase. Treasury stock can be utilized for business acquisitions, for major
investments and for incentive plans of key personnel. Calculation of distributable funds is as follows: As atDecember 31,2004( in millions)Other reserves
    
    
    202Retained earnings
    
    
    386Result for the financial year
    
    
    69Equity share of accelerated depreciation and other untaxed reserves
    
    
    (5
    )Translation differences
    
    
    (80
    )Total distributable funds
    
    
    572
 F-29




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) The Parent Companys distributable funds at December 31, 2004 were 543 million. The
distribution of dividends to shareholders is limited to the lower of consolidated distributable
funds or distributable funds held by the Parent Company. During the year ended December 31, 2004, the Parent Company paid a dividend of 27 million to
shareholders, or 0.20 per common share. During the year ended December 31, 2003 dividends paid
amounted to 82 million, or 0.60 per common share. Foreign currency translation adjustment included in the shareholders equity consists of the
following: Year ended December 31,2003
    
    
    2004( in millions)Cumulative translation adjustment at beginning of year
    
    
    (60
    )
    
    
    (76
    )Change in foreign currency translation
    
    
    (55
    )
    
    
    (12
    )(1)Hedging of net investment denominated in foreign
currency, net of tax expense of 16 million and 3
million, respectively
    
    
    39
    
    
    
    0
    (1)Transfer of translation differences
    
    
    
    
    
    
    8Cumulative translation adjustment at end of year
    
    
    (76
    )
    
    
    (80
    )
   (1)
    
    Net of effect of translation differences and respective net investment hedge related
to disposed businesses. Note 18. Long-term Debt Long-term debt consists of the following: As at December 31,2003
    
    
    2004( in millions)Bonds
    
    
    697
    
    
    
    746Loans from financial institutions
    
    
    187
    
    
    
    114Loans from pension institutions
    
    
    38
    
    
    
    13Other long-term debt
    
    
    52
    
    
    
    66974
    
    
    
    939Less current maturities
    
    
    17
    
    
    
    19Total
    
    
    957
    
    
    
    920
 Bonds The bonds consist principally of three loans: a USD 174 million (128 million) bond, a 156
million bond and a 274 million bond. The USD denominated bond was issued in the United States in
December 1997 and registered with the Securities Exchange Commission (SEC). It matures in 2007 and
bears a fixed annual interest rate of 6.875%. A portion of the bond has been converted through a
currency swap agreement of GBP 45 million (64 million) into British pound sterling with a fixed
annual rate of 7.51%. The currency swap agreement matures concurrently with the bond. In December 2000, Metso established a Euro Medium Term Note Program of 1 billion, under which
originally a 500 million bond was issued in December 2001. The bond matures in 2006 and carries a
fixed interest of 6.25%. As at December 31, 2004, the outstanding amount of this bond totaled 156
million after the impact of the bond exchange described below. In November 2004, Metso completed
its offer to exchange bonds to new Euro-denominated bonds maturing in 2011. 256 million of
existing notes were validly submitted and accepted for exchange, corresponding to 62% of the total
outstanding amount of existing notes. 274 million of new bonds were issued and they carry a fixed
interest of 5.125%. F-30




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) 21 million of costs related to the exchange offering and bond issuings have been included in
long-term receivables and 4 million in short-term receivables. These costs are expensed over the
maturities of the bonds. Loans from financial institutions Loans from financial institutions consist of international bank borrowings with either fixed
or variable interest rates. A major share of loans is either USD or SEK denominated. The interest
rates vary from 2.4% (USD) to 10.5% (ZAR). The loans are payable from year 2005 to 2011. In June 2003, Metso signed a five-year 450 million revolving credit facility agreement with a
syndicate of 14 international banks. Of the current revolving facility 66 million was utilized as
at December 31, 2003. As at December 31,2004, the facility was undrawn. As at December 31, 2004, the undrawn committed long-term facilities of Metso totaled 450
million. In the end of May 2004, Metso signed a ten-year 135 million loan agreement with the European
Investment Bank (EIB). Funds may be drawn within 18 months from signing. As at December 31, 2004,
the facility was undrawn. Loans from pension institutions Pension loans consist of Finnish pension insurance reborrowing loans amounting to 8 million
and of 5 million foreign pension loans. Other long-term debt As at December 31, 2003, other long-term debt comprised 29 million pension liabilities, 16
million obligations under finance leases and 7 million other liabilities. As at December 31, 2004,
other long-term debt comprised 30 million pension liabilities, 24 million obligations under
finance leases and 12 million other liabilities. Maturities of long-term debt as at December 31, 2004 are as follows: Loans from
    
    
    Loans from
    
    
    Otherfinancial
    
    
    Pension
    
    
    long-termBonds
    
    
    institutions
    
    
    Institutions
    
    
    debt
    
    
    Total( in millions)Year2005
    
    
    0
    
    
    
    7
    
    
    
    8
    
    
    
    4
    
    
    
    192006
    
    
    156
    
    
    
    45
    
    
    
    0
    
    
    
    7
    
    
    
    2082007
    
    
    128
    
    
    
    11
    
    
    
    1
    
    
    
    13
    
    
    
    1532008
    
    
    0
    
    
    
    25
    
    
    
    0
    
    
    
    3
    
    
    
    282009
    
    
    83
    
    
    
    11
    
    
    
    0
    
    
    
    3
    
    
    
    972010 and after
    
    
    379
    
    
    
    15
    
    
    
    4
    
    
    
    36
    
    
    
    434Total
    
    
    746
    
    
    
    114
    
    
    
    13
    
    
    
    66
    
    
    
    939
 F-31




---



##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 19. Other Long-term Liabilities  Accrued Expenses Long-term accrued liabilities consist of the following: As at December 31,2003(1)
    
    
    2004( in millions)Pension liabilities and other postretirement benefits
    
    
    95
    
    
    
    91Warranty and guarantee liabilities
    
    
    12
    
    
    
    8Accrued restructuring expenses(2)
    
    
    13
    
    
    
    14Other long-term provisions and accruals(3)
    
    
    14
    
    
    
    9Total
    
    
    134
    
    
    
    122
   (1)
    
    Prior year information has been reclassified to conform to current year presentation.(2)
    
    For additional information on restructuring expenses, see also Note 9.(3)
    
    Includes various amounts, which are individually insignificant. Note 20. Other Interest Bearing Short-term Debt Other interest bearing short-term debt consists of the following: As at December 31,2003
    
    
    2004( in millions)Loans from financial institutions
    
    
    25
    
    
    
    17Domestic commercial paper financing
    
    
    262
    
    
    
    Other
    
    
    8
    
    
    
    14Total
    
    
    295
    
    
    
    31
 The weighted average interest rate applicable to short-term borrowing at December 31, 2003 and
2004 was 2.4 percent and 3.8 percent, respectively. Metso had undrawn committed short-term credit facilities with banks totaling 100 million at
December 31, 2004. Metso has established a short-term Euro Commercial Paper Program of 150 million and a
domestic commercial paper program amounting to 300 million. Both facilities were undrawn as of
December 31, 2004. F-32




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Note 21. Accrued Expenses and Deferred Income Accrued expenses and deferred income consist of the following: As at December 31,2003(1)
    
    
    2004( in millions)Accrued restructuring expenses(2)
    
    
    87
    
    
    
    32Accrued interest expenses
    
    
    6
    
    
    
    7Accrued personnel expenses
    
    
    156
    
    
    
    165Accrued project costs
    
    
    322
    
    
    
    300Environmental and product liabilities
    
    
    4
    
    
    
    3Taxes currently payable
    
    
    51
    
    
    
    32Warranty and guarantee liabilities
    
    
    127
    
    
    
    112Other(3)
    
    
    65
    
    
    
    68Total
    
    
    818
    
    
    
    719
   (1)
    
    Prior year information has been reclassified to conform to current year presentation.(2)
    
    For additional information on restructuring expenses, see also Note 9.(3)
    
    Includes various amounts, which are individually insignificant. Note 22. Changes in cost accruals The cost accruals, including both long- and short-term portions, have changed as follows
during the financial year 2004: Balance at
    
    
    Impact of
    
    
    Additions
    
    
    Deductions/beginning of
    
    
    exchange
    
    
    charged to
    
    
    other
    
    
    Balance atyear(1)
    
    
    rates
    
    
    expense
    
    
    additions
    
    
    end of year( in millions)Allowance for doubtful notes and
receivables
    
    
    34
    
    
    
    (1
    )
    
    
    2
    
    
    
    2
    
    
    
    37Allowance for inventory
    
    
    67
    
    
    
    (2
    )
    
    
    5
    
    
    
    (13
    )
    
    
    57Environmental and product
liabilities
    
    
    4
    
    
    
    0
    
    
    
    0
    
    
    
    (1
    )
    
    
    3Accrued restructuring expenses(2)
    
    
    100
    
    
    
    (1
    )
    
    
    11
    
    
    
    (64
    )
    
    
    46Total
    
    
    205
    
    
    
    (4
    )
    
    
    18
    
    
    
    (76
    )
    
    
    143
   (1)
    
    Prior year information has been reclassified to conform to current year presentation.(2)
    
    For additional information on restructuring expenses, see also Note 9. The cost accruals for warranty and guarantee liabilities have changed as follows during
the financial year 2004: Impact
    
    
    Increase for
    
    
    Increase forBalance at
    
    
    of
    
    
    current
    
    
    previousbeginning of
    
    
    exchange
    
    
    year's
    
    
    years'
    
    
    
    
    
    
    Balance at endyear
    
    
    rates
    
    
    deliveries
    
    
    deliveries
    
    
    Deductions(1)
    
    
    of year( in millions)Warranty and
guarantee
liabilities
    
    
    139
    
    
    
    (2
    )
    
    
    52
    
    
    
    17
    
    
    
    (86
    )
    
    
    120
   (1)
    
    Includes reversals of 20 million related to expired warranty and guarantee liabilities. F-33




---



##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Metso issues various types of contractual product warranties under which it generally
guarantees the performance levels agreed in the sales contract, the performance of products
delivered during the agreed warranty period and services rendered for a certain period or term. The
warranty liability is based on historical realized warranty costs for deliveries of standard
products and services. The usual warranty is 12 months from the date of customer acceptance of the
delivered equipment. For larger projects, the average warranty period is two years. For more
complex contracts, including long-term projects sold by Metso Paper and Metso Minerals, the
warranty reserve is calculated contract by contract and updated regularly to take into
consideration any changes in the potential warranty liability. Metso is subject to potential liability under certain government regulations and various
claims and legal actions that are pending or may be asserted against Metso concerning environmental
matters. The maximum potential future obligation related to certain environmental guarantees cannot
be estimated due to numerous uncertainties, including the enactment of new laws and regulations,
the development and application of new technologies, the identification of new sites for which
Metso may have remediation responsibility and the apportionment and collectibility of remediation
costs when other parties are involved. When circumstances indicate that a payment obligation becomes probable, a liability is
recognized in the consolidated balance sheet with an offsetting amount recorded as an expense. Note 23. Mortgages and contingent liabilities Mortgages and contingent liabilities consist of the following: As at December 31,2003
    
    
    2004( in millions)Mortgages on corporate debt
    
    
    1
    
    
    
    2Other pledges and contingenciesMortgages
    
    
    2
    
    
    
    2Pledged assets
    
    
    4
    
    
    
    4Guarantees on behalf of associated company obligations
    
    
    
    
    
    
    Other guarantees
    
    
    7
    
    
    
    913
    
    
    
    15Repurchase and other commitments
    
    
    48
    
    
    
    42
 The mortgage amount on corporate debt has been calculated as the amount of corresponding
loans. The nominal value of the mortgages at December 31, 2004 was 0.2 million higher than the
amount of the corresponding loans. Other guarantees include 6 million guarantees given on behalf of sold businesses. The
respective buyers have indemnified Metso and have committed themselves to release Metso from its
guarantee obligations within agreed time periods. The repurchase commitments, amounting to 20 million and 10 million for the years ended
December 31, 2003 and 2004, respectively, represent engagements whereby Metso guarantees specified
trade-in values for products sold to customers and third parties. The amounts in the above schedule
comprise the agreed value in full of each repurchase commitment. Other commitments include 13 and 24 million of unfunded pension liabilities for foreign
subsidiaries for the years ended December 31, 2003 and 2004, respectively. F-34




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METSONotes to Consolidated Financial Statements  (Continued) Note 24. Lawsuits and Claims Several lawsuits, including product liability suits in the United States, are pending against
Metso Corporation. However, management does not believe that the outcome of these actions,
individually or in the aggregate, will have a material adverse effect on Metsos business,
liquidity, results of operations or financial condition. The normal risks of legal disputes
concerning deliveries cannot either be regarded as material in terms of Metsos total business
activities. Pending asbestos litigation As of December 31, 2004, there had been a total of 349 complaints alleging asbestos injuries
filed in the United States in which a Metso entity is one of the named defendants. Where a given
plaintiff has named more than one viable Metso unit as a defendant, the cases are counted by the
number of viable Metso defendants. Of these claims, 134 are still pending and 215 cases have been
closed. Of the closed cases, 160 were dismissed and 55 were settled. For the 55 cases settled the
average compensation has been USD 540 per case. The outcome of the still pending cases is not
expected to materially deviate from the outcome of the previous claims. Hence, management believes
that Metso has no material asbestos related liability in the United States. Pending environmental litigation Metso Minerals Industries Inc. has been named, together with a number of other parties, as a
potentially responsible party (PRP) for the remediation of two Wisconsin landfills (Hunt and
Muskego), which have been designated as superfund sites under CERCLA. As a PRP, Metso Minerals
Industries Inc. is jointly and severally liable for the clean-up costs of such sites. With respect
to Hunt landfill site, Metso Minerals Industries Inc., together with the other named PRPs, has
entered into a consent decree with the U.S. government pursuant to which Metso Minerals and such
other parties have agreed to cover the clean-up costs of the Hunt site, which had been estimated to
be in the range of U.S.$13 million to U.S.$22 million. Metso Minerals Industries Inc. has a 6.3
percent share of the clean-up costs and is also covered by an indemnification agreement with a
previous owner of Nordberg. Construction at the Hunt site was completed in 1996 and Metso Minerals
has paid a total of approximately U.S.$0.4 million for the clean-up costs. Additional work at the
Hunt site may be required at an estimated cost to Metso Minerals Industries, Inc. of approximately
U.S.$0.2 million. Efforts are ongoing to contact appropriate regulatory agencies to determine the
extent, if any, of additional work required. With respect to the Muskego site, there is an
administrative order in place, with a total estimate of U.S.$15 million for design and clean-up
costs, of which the share of the previous owner and Metso Minerals is expected to be at the level
of the already paid U.S.$125,000. No activities at the Muskego site have occurred since 1996.
Management estimates that Metso Minerals maximum remaining liability with respect to the Hunt and
Muskego sites will not exceed the currently established reserve of U.S.$267,000, and that the
reserve for the remediation costs of the two landfill sites will be sufficient for any remaining
liability due to above reasons and the fact that no activity on these sites has occurred for
several years. In furtherance of the planned closure and sale of the Metso Minerals Milwaukee, Wisconsin,
manufacturing facility, a Phase II Environmental Assessment (ESA) was commenced in early 2004 and
completed in April of that year. The ESA indicated the existence of soil and groundwater
contamination at the facility, the existence of which was communicated to the Wisconsin Department
of Natural Resources (WDNR) in May 2004. The WDNR notified Metso Minerals Industries Inc. by
letter dated May 10, 2004 of its investigation and cleanup responsibilities under applicable law.
In October 2004, Metso Minerals Industries Inc. entered into a contract with an environmental
consulting and remediation firm to clean up the property for all identified matters in accordance
with applicable law for a fixed price. Metso Minerals Industries Inc. also purchased environmental
insurance consisting of remediation cost cap insurance in the amount of U.S.$3.3 million and a
10-year, U.S. $10 million in third party pollution legal liability coverage for unknown matters,
subject to standard exclusions. The cost of the basic remediation of U.S.$1.1 million has been
fully funded. The entire insurance premium of approximately U.S.$425,000 has also been paid by
Metso Minerals Industries Inc. On January 31, 2005, this property was sold with the purchaser
accepting assignment of the remediation contract, including the potential responsibility for any
additional payments thereunder as well as Metso Minerals Industries Inc.s insured status under the
insurance policy. Formal assignment of the insurance policies is expected in the first quarter of
this year. Notwithstanding assignment, Metso Minerals Industries Inc. will remain an additional
insured party under the third party pollution legal liability portion of the insurance policy and
shares the responsibility for up to one-half of the U.S.$250,000 deductible should there be any
claims. F-35




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) As a result of the acquisition of Svedala, Metso Minerals has two sites with certain
environmental concerns. The first is a former manufacturing site in Mt. Olive, New Jersey, which
Svedala acquired in 1992. The company acquired by Svedala operated this site from 1955 to 1987.
With the closing of manufacturing operations in 1987, the New Jersey Industrial Site Recovery Act
triggered an environmental assessment. Both soil and groundwater contamination was identified. The
source of most of the contamination was traced back to prior owners and operators of the property,
which had been an industrial site since the early 1900s. All known contaminated soil has been
removed and the State of New Jersey Department of Environmental Protection (NJDEP) has issued a
No Further Action letter regarding the soil contamination. Metso Minerals has sold the site in
Mt. Olive in December 2003. However, liabilities for ground water contamination issues were
retained by Metso Minerals. In addition to the prior remediation activities at the site, Metso
Minerals conducted a baseline ecological evaluation of the property as required by the NJDEP. The
basic purpose of such evaluation was to determine whether site-related contamination presents a
risk to or has impacted environmentally sensitive areas within or adjacent to the property. Such
evaluation, together with a recommendation that no further ecological evaluation or testing be
conducted at the site, was submitted to the NJDEP by an environmental consultant retained by Metso.
There can be no assurance that the NJDEP agrees with such recommendation. However, taking into
account (i) that Metso has purchased a pollution legal liability insurance policy for the site,
which generally covers, subject to standard exclusions, clean-up costs, bodily injury and property
damage for pre-existing and unknown pollution conditions, and (ii) that extensive prior remediation
activities at the site have already been conducted, Metso does not anticipate any liability arising
out of the final evaluation to be material. The estimated reserve required for the remediation
measures relating to the ground water contamination and the completion of the baseline evaluation
is U.S.$620,000. The second site with environmental concerns is a former manufacturing property in Danville,
Pennsylvania. Both soil and groundwater are contaminated with oil from the manufacturing process.
In conjunction with the state of Pennsylvania, an approved remediation plan has being developed.
Some soil remediation has already been completed. Two additional areas of concern are being
investigated and possibly remediated. An U.S.$1.2 million reserve is the best estimate of potential
remediation costs at this time. Metso Minerals, through its Reedrill business that was divested on December 31, 2004, was
earlier identified as a PRP in two CERCLA sites. At one of the sites, liability has been assumed by
a predecessor company. Regarding the other site, Metso Minerals (Svedala) has responded in March
2000 to a request for information and identified predecessor companies as the potentially
responsible parties. To date, no response by the U.S. Environmental Protection Agency (EPA) has
been received. Metso Minerals Industries Inc. may become subject to remedial costs relating to an old
industrial facility in Colorado Springs, Colorado, which was used in foundry and test laboratory
operation. The site is for sale. Phase I level evaluations do not suggest any environmental
conditions of any major concern. However, in mid-2004, an area of stained soil identified in the
Phase I was evaluated and determined to be contaminated with hazardous materials and, thereafter,
excavated and disposed of in accordance with applicable regulations. Additional Phase II level
evaluations are likely depending on the requirements of potential purchasers. A reserve of
approximately U.S.$420,000 exists to account for the anticipated Phase II costs and the purchase of
environmental insurance. Since 1992, Metso Minerals Industries Inc. has been monitoring the groundwater at its Keokuk,
Iowa facility after the removal of contaminated soil and pursuant to a plan of natural attenuation
of affected groundwater, under the direction of the Iowa Department of Natural Resources (IDNR).
In November 2004, the IDNR advised that monitoring requirements for most of the compounds being
tested for were eliminated. However, IDNR also stated that there had been insufficient attenuation
of certain chlorinated compounds and directed Metso Minerals Industries Inc. to prepare a work plan
that would enhance the degradation of these compounds. Metso Minerals Industries Inc. accepted a
bid for the investigation, delineation and preparation of a work plan. A reserve of U.S.$100,000
was established for estimated costs associated with near-term compliance with IDNR investigation
requirements. In October 2004, the Kansas Department of Health and Environment (KDHE) advised Metso
Minerals Industries Inc. that an alleged predecessor, McNally Pittsburg Manufacturing Corporation,
had disposed of foundry sand at a location where the soil now contains lead and chromium. The KDHE
has invited participation in a voluntary cleanup program, failing which administrative action will
be taken. Metso Minerals Industries Inc. has retained local legal counsel to investigate the scope
of potential liability, if any, and has reserved U.S. $100,000 for estimated legal fees and
investigation costs. F-36




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Metso Panelboard, part of the Metso Ventures business area, has previously owned a site with
certain environmental concerns. The site, located in Belgium, was owned by Constructiewerkhuizen De
Mets N.V., a company divested in 2001. Pursuant to the sale agreement, Metso is required to provide
the purchaser with an environmental certificate by the Belgian authorities, to the effect that the
soil at the site has not been contaminated. Consequently, a third party conducted environmental
studies and assessed the site. The completed report of the results was sent to OVAM (Belgian
environmental authority) for acceptance during the fall of 2004. The studies indicate that
groundwater has been polluted by chlorinated hydrocarbons but that soil has not been polluted. The
use of the chemicals in the groundwater ended at site in 1989. The precautionary measures to
prevent the spreading of this historical pollution started in January 2005. A cleaning plan can be
presented for acceptance to OVAM after the completed report has been accepted. In accordance with
the conditions of the sale agreement, it has been estimated that Metsos remaining responsibility
for remediation costs will be limited to the currently established reserve of 0.8 million. Note 25. Lease Contracts Metso leases offices, manufacturing and warehouse space under various non-cancellable leases.
Certain contracts contain renewal options for various periods of time. As of December 31, 2004, the
capitalized value of leased buildings and machines amounted to 27 million. The related debt,
totaling 24 million, has been reported under other long-term debt for an amount of 20 million,
the remaining portion being under current portion of long-term debt. Minimum annual rentals for operating and capital leases in effect at December 31, 2004 are as
follows: Operating
    
    
    Capitalleases
    
    
    leases( in millions)Fiscal year2005
    
    
    40
    
    
    
    42006
    
    
    28
    
    
    
    52007
    
    
    21
    
    
    
    42008
    
    
    15
    
    
    
    22009
    
    
    12
    
    
    
    22010 and later
    
    
    26
    
    
    
    6Total minimum lease payments
    
    
    142
    
    
    
    23
 Total rental expense amounted to 41 million, 39 million and 42 million for the years ended
December 31, 2002, 2003 and 2004, respectively. Future lease payments for empty premises Due to reorganization of production and sales activities, Metso has, from time to time, empty
leased premises with non-cancellable rental engagements. A cost reserve for the remaining lease
period is made when it is probable that economically realistic sub-lease or early termination
arrangements cannot be negotiated. The cost accrual is based on discounted future lease payments.
Metso has recognized an accrual for duplicate lease costs, and the remaining reserve amounted to 5
million and 4 million as of December 31, 2003 and 2004, respectively. Note 26. Financial Instruments Foreign currency risk management Both the production and sales activities of Metso are geographically widely spread creating
exposure to various currency risks, the main currencies being USD, EUR, SEK and CAD. F-37




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Foreign exchange gains and losses, reported in the operating profit resulted in a net loss of
3 million in 2002 and a net gain of 1 million in 2003 and a net gain of 9 million in 2004. Trade flow related derivatives The trade flow related currency exposures are hedged with forward exchange contracts. The
Corporate Treasury monitors the global currency risk and enters into forwards with third parties to
reverse the currency exposures created through internal derivative transactions with the
subsidiaries. External forwards contracted by the Corporate Treasury are fair valued quarterly.
External currency forwards entered into directly by the subsidiaries are designated at inception as
hedges of an underlying transaction. The currency leg of such forwards is fair valued and the
interest component is recognized upfront concurrently with the respective underlying. Foreign currency denominated equity Metso hedges its USD, SEK and, to some extent, CAD denominated net investments to reduce the
effect of exchange rate fluctuations. As of December 31, 2004, the hedging instruments were foreign
currency loans and forward exchange contracts. Both realized and unrealized exchange gains and
losses measured on these instruments are recorded, net of taxes, in a separate component of equity
against the translation differences arising from consolidation. The forwards are designated as
hedges of net investments at inception and their effectiveness is measured quarterly. The interest
component of forwards is fair valued and the change in fair value is recognized in the income
statement. Foreign currency denominated loans Metso has made medium-term, mainly USD denominated, loans to its foreign subsidiaries. The
resulting currency risk has been hedged with cross-currency swaps and forward exchange contracts. Short-term funding and liquidity management Forward exchange contracts are used to mitigate foreign currency risk arising from short-term
borrowing and liquidity management. Such forwards are fair valued quarterly. Metso also enters into
call and put options to allow more flexible control of the net currency exposures. The options have
maturities not exceeding twelve months and they are fair valued quarterly. Metso measures and monitors foreign currency risk using sensitivity analysis. The consolidated
net exposures in different currencies are continuously controlled and the risk is mitigated through
different financial instruments, including derivatives, as required by the Corporate Treasury
Policy. The financial derivatives for other than trade flow related currency risks are all entered
into by the Corporate Treasury. Interest rate management Metso uses both interest rate and cross-currency swaps and interest rate futures contracts to
mitigate the risks arising from interest bearing receivables and debt. The notional amount of
interest rate swaps outstanding at December 31, 2003 and 2004 was 60 million and 188 million,
respectively. The notional amount of interest rate futures contracts at December 31, 2003 and 2004
amounted to 15 million and 10 million, respectively. The interest rate risk is measured using
sensitivity analysis and controlled by the Corporate Treasury. Commodity risks In 2003, Metso extended its risk management policy to include the volatility in electricity
prices and authorized its affiliates located in Finland, together with the Corporate Treasury, to
enter into electricity forward contracts. The commodity risk is measured using sensitivity
analysis. F-38




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) The utilization of financial derivatives (expressed as notional amounts) is divided as
follows: At December 31,2003
    
    
    2004( in millions)Trade flow related currency derivativesFair valued derivatives
    
    
    654
    
    
    
    275Ear-marked with underlying item
    
    
    3
    
    
    
    234Foreign currency denominated equity
    
    
    481
    
    
    
    445Foreign currency denominated loans
    
    
    84
    
    
    
    75Short-term funding and liquidity management
    
    
    405
    
    
    
    421Currency risk management
    
    
    71
    
    
    
    421Interest risk management
    
    
    75
    
    
    
    198Total notional amount of derivative instruments
    
    
    1,773
    
    
    
    2,069
 The following table presents the notional amounts, carrying amounts and fair values of
derivative financial instruments: At December 31,2003
    
    
    2004Notional
    
    
    Carrying
    
    
    Fair
    
    
    Notional
    
    
    Carrying
    
    
    FairAmount
    
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    Amount
    
    
    Value( in millions)
    
    
    ( in millions)Forward exchange contracts
    
    
    1,567
    
    
    
    20
    
    
    
    36
    
    
    
    1,770
    
    
    
    3
    
    
    
    18Cross-currency swaps
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    0
    
    
    
    0Currency swaps
    
    
    81
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    73
    
    
    
    (8
    )
    
    
    (8
    )Interest rate swaps
    
    
    60
    
    
    
    (1
    )
    
    
    0
    
    
    
    188
    
    
    
    (1
    )
    
    
    (4
    )Interest rate futures contracts
    
    
    15
    
    
    
    0
    
    
    
    0
    
    
    
    10
    
    
    
    0
    
    
    
    0Option agreementsBought
    
    
    13
    
    
    
    0
    
    
    
    0
    
    
    
    10
    
    
    
    0
    
    
    
    0Sold
    
    
    34
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    16
    
    
    
    0
    
    
    
    0Electricity forward contracts(1)
    
    
    344
    
    
    
    0
    
    
    
    (1
    )
    
    
    329
    
    
    
    0
    
    
    
    (1
    )
   (1)
    
    Notional amount GWh Carrying amounts noted in the table above are included in the balance sheet. The notional
amounts indicate the volumes in the use of derivatives, they do not indicate the exposure to risk.
The fair value reflects the estimated amounts, that Metso would receive or pay to terminate the
contracts at the reporting date, thereby taking into account the current unrealized gains or losses
of open contracts. F-39




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) At December 31, 2004, the maturities of the financial derivatives are as follows (expressed as
notional amounts): 20092005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    and after( in millions)Forward exchange contracts
    
    
    1,659
    
    
    
    73
    
    
    
    38
    
    
    
    
    
    
    
    Cross-currency swaps
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Currency swaps
    
    
    7
    
    
    
    
    
    
    
    64
    
    
    
    2
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    148Interest rate futures contracts
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Option agreementsBought
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sold
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Electricity forward contracts(1)
    
    
    188
    
    
    
    105
    
    
    
    36
    
    
    
    
    
    
    
    
   (1)
    
    Notional amount GWh Fair value of financial instruments U.S. FASB Statement No. 107, Disclosures about Fair Values of Financial Instruments,
requires the disclosure of estimated fair values for all financial instruments, both on- and
off-balance-sheet, for which it is practicable to estimate fair value. Metso has used a variety of
methods and assumptions, which were based on market conditions and risks existing at the time to
estimate the fair value of the Groups financial instruments at December 31, 2003 and 2004. For
certain instruments, including cash and cash equivalents, accounts payable, accruals and short-term
debt, it was assumed that the carrying amount approximated fair value due to the short maturity of
those instruments. Quoted market prices or dealer quotes for the same or similar financial
instruments were used to estimate the fair value for marketable securities and long-term
investments. Other techniques, such as estimated discounted cash flows or replacement cost have
been used to determine fair value for the remaining financial instruments. Year ended December 31,2003
    
    
    2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value( in millions)
    
    
    ( in millions)AssetsShareholdings and other securities (excluding
shares in associated companies)
    
    
    29
    
    
    
    35
    
    
    
    10
    
    
    
    12Own shares
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Loan and other receivables, long-term
    
    
    37
    
    
    
    37
    
    
    
    54
    
    
    
    54Accounts receivable, long-term
    
    
    2
    
    
    
    2
    
    
    
    7
    
    
    
    7Other interest bearing long-term investments
    
    
    10
    
    
    
    10
    
    
    
    4
    
    
    
    4Accounts receivable, short-term
    
    
    719
    
    
    
    719
    
    
    
    651
    
    
    
    651Loans receivable, short-term
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Short-term investments
    
    
    7
    
    
    
    7
    
    
    
    4
    
    
    
    4Cash and cash equivalents
    
    
    130
    
    
    
    130
    
    
    
    419
    
    
    
    419LiabilitiesBonds
    
    
    695
    
    
    
    731
    
    
    
    746
    
    
    
    774Loans from financial institutions
    
    
    183
    
    
    
    187
    
    
    
    107
    
    
    
    109Loans from pension institutions
    
    
    29
    
    
    
    29
    
    
    
    5
    
    
    
    5Other long-term debt
    
    
    50
    
    
    
    50
    
    
    
    62
    
    
    
    62Current portion of long-term loans
    
    
    17
    
    
    
    17
    
    
    
    19
    
    
    
    19Other interest bearing short-term debt
    
    
    295
    
    
    
    295
    
    
    
    31
    
    
    
    31
 F-40




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METSO
Notes to Consolidated Financial Statements  (Continued) Note 27. Concentrations of Credit Risk Metso is exposed to credit risk primarily in relation to project deliveries, trade receivables
and the use of financial instruments. The companies within Metso conduct diverse business
activities with a large number of customers and suppliers. The receivables are well diversified
and, where appropriate, secured by various trade finance instruments such as letters of credit,
export guarantees or by withheld security interest in products sold under extended credit terms. In
the use of financial instruments, Metso minimizes credit and counterparty risk by dealing only with
major local or international banks and financial institutions or companies with investment grade
credit ratings. Management believes that no significant unmanaged concentration of credit risk with any
individual customer, counterparty or geographical region exists for Metso. Note 28. Principal Subsidiaries Listed below are the principal subsidiaries of Metso Corporation: PercentageCountry
    
    of OwnershipMetso PaperMetso Paper Oy
    
    Finland
    
    
    100.0Metso Paper USA Inc.
    
    United States
    
    
    100.0Metso Paper Sundsvall AB
    
    Sweden
    
    
    100.0Metso Paper Valkeakoski Oy
    
    Finland
    
    
    100.0Metso Paper Ltd
    
    Canada
    
    
    100.0Metso Paper Pori Oy
    
    Finland
    
    
    100.0Metso MineralsMetso Minerals Industries Inc.
    
    United States
    
    
    100.0Metso Minerals (Tampere) Oy
    
    Finland
    
    
    100.0Metso Minerals (France) S.A.
    
    France
    
    
    100.0Metso Minerals (Australia) Ltd
    
    Australia
    
    
    100.0Metso Brazil Indústria e Comércio Ltda
    
    Brazil
    
    
    100.0Metso AutomationMetso Automation Oy
    
    Finland
    
    
    100.0Metso Automation USA Inc.
    
    United States
    
    
    100.0Metso VenturesMetso Drives Oy
    
    Finland
    
    
    100.0
 F-41




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 29. Business and Geographic Information Metsos reportable segments are comprised of strategic business areas that offer different
products and services. They are further divided into subsegments or business groups. Each business
area is managed separately because each segment requires different technology and marketing
strategies. At December 31, 2004, the main reportable segments are Metso Paper, Metso Minerals,
Metso Automation and Metso Ventures. Metso Paper:Metso Paper develops, designs and manufactures pulp and paper industry machinery
and equipment, complete production lines for pulp and papermaking, and machinery and equipment for
the packing and converting industries. In November 2002, Metso announced a formal plan to dispose
of its Converting equipment business. The business was sold to the Swiss company, Bobst Group SA,
on January 30, 2004. In the following segment schedules, Converting equipment is presented separate
from Metso Paper under Discontinued Operations. Metso Minerals.Metso Minerals covers the production and marketing of rock and mineral
processing solutions for quarries, mines and civil engineering contractors and also production and
marketing of metal recycling equipment. On June 30, 2004, the compaction and paving group (Dynapac)
was sold to the Nordic private equity investor, Altor. In the following segment schedules, Dynapac
is presented separate from Metso Minerals under Discontinued Operations. On December 31, 2004, the
Reedrill rock drilling equipment business was sold to an U.S. company, Terex Corporation, and in
the following segment schedules it has been transferred from Metso Minerals to Discontinued
Operations. Metso Automation.Metso Automation develops, designs and supplies application networks and
systems and field solutions for automation and information management in the process industry. Metso Ventures:In October 2003, the foundry operations in Finland and Sweden, formerly part
of Metso Paper and of Metso Minerals, were transferred to the Metso Ventures business area and all
prior year data has been restated to conform to the new structure. The other subsegments of Metso
Ventures are Metso Panelboard, Metso Drives, Metso Powdermet and Valmet Automotive. Metso Ventures
covers gears for industries, machinery and equipment for manufacturing panelboards, and assembly of
specialty cars. The presentation below is prepared according to the current structure to assess the
performance of the various business segments. The accounting policies of the reportable segments and their subsegments are the same as those
described in Note 1 to the Consolidated Financial Statements. All intersegment sales are market
based. Metso evaluates the performance of its operating segments and allocates resources to them
based on the operating profit (loss). No single customer represents more than ten percent of
Metsos net sales. Information about Metsos reportable segments as of and for the years ended December 31, 2002,
2003 and 2004 is shown in the following tables. F-42




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Net sales by business area Net sales by business area for the three years ended December 31, 2002, 2003 and 2004 are as
follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    1,778
    
    
    
    1,651
    
    
    
    1,559Metso Minerals
    
    
    1,406
    
    
    
    1,253
    
    
    
    1,343Metso Automation
    
    
    622
    
    
    
    531
    
    
    
    535Metso Ventures
    
    
    446
    
    
    
    370
    
    
    
    387Intra Metso net sales
    
    
    (119
    )
    
    
    (122
    )
    
    
    (115
    )Continuing operations
    
    
    4,133
    
    
    
    3,683
    
    
    
    3,709Discontinued Operations
    
    
    558
    
    
    
    567
    
    
    
    267Metso total
    
    
    4,691
    
    
    
    4,250
    
    
    
    3,976
 Operating profit (loss), nonrecurring items and amortization of goodwill by business area Operating profit (loss) before nonrecurring operating items and amortization of goodwill by
business area for the three years ended December 31, 2002, 2003 and 2004 are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    129
    
    
    
    69
    
    
    
    37Metso Minerals
    
    
    74
    
    
    
    48
    
    
    
    100Metso Automation
    
    
    22
    
    
    
    32
    
    
    
    58Metso Ventures
    
    
    29
    
    
    
    (3
    )
    
    
    (6
    )Corporate Office and other
    
    
    (32
    )
    
    
    (36
    )
    
    
    (29
    )Continuing operations
    
    
    222
    
    
    
    110
    
    
    
    160Discontinued Operations
    
    
    29
    
    
    
    23
    
    
    
    13Metso total
    
    
    251
    
    
    
    133
    
    
    
    173
 Nonrecurring operating items by business area for the three years ended December 31, 2002,
2003 and 2004 are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    (6
    )
    
    
    (36
    )
    
    
    (19
    )Metso Minerals
    
    
    (13
    )
    
    
    (65
    )
    
    
    5Metso Automation
    
    
    (3
    )
    
    
    (1
    )
    
    
    (1
    )Metso Ventures
    
    
    (7
    )
    
    
    (5
    )
    
    
    1Corporate Office and other
    
    
    7
    
    
    
    2
    
    
    
    7Continuing operations
    
    
    (22
    )
    
    
    (105
    )
    
    
    (7
    )Discontinued Operations
    
    
    (5
    )
    
    
    (1
    )
    
    
    (18
    )Metso total
    
    
    (27
    )
    
    
    (106
    )
    
    
    (25
    )
 F-43




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Amortization of goodwill by business area for the three years ended December 31, 2002, 2003
and 2004 is as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    (8
    )
    
    
    (8
    )
    
    
    (7
    )Metso Minerals
    
    
    (33
    )
    
    
    (29
    )
    
    
    (21
    )Metso Automation
    
    
    (3
    )
    
    
    (3
    )
    
    
    (4
    )Metso Ventures
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )Corporate Office and other
    
    
    
    
    
    
    
    
    
    
    Continuing operations
    
    
    (46
    )
    
    
    (41
    )
    
    
    (34
    )Discontinued Operations
    
    
    (11
    )
    
    
    (10
    )
    
    
    (3
    )Metso total
    
    
    (57
    )
    
    
    (51
    )
    
    
    (37
    )
 Operating profit (loss) by business area for the three years ended December 31, 2002, 2003 and
2004 are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    115
    
    
    
    25
    
    
    
    11Metso Minerals
    
    
    28
    
    
    
    (189
    )(1)
    
    
    84Metso Automation
    
    
    16
    
    
    
    28
    
    
    
    53Metso Ventures
    
    
    20
    
    
    
    (9
    )
    
    
    (7
    )Corporate Office and other
    
    
    (25
    )
    
    
    (34
    )
    
    
    (22
    )Continuing operations
    
    
    154
    
    
    
    (179
    )
    
    
    119Discontinued Operations
    
    
    13
    
    
    
    (50
    )(1)
    
    
    (8
    )Metso total
    
    
    167
    
    
    
    (229
    )
    
    
    111
   (1)
    
    The operating losses of Metso Minerals and Discontinued Operations include a goodwill
impairment charge of 205 million recorded in September 2003. Capital employed by business area Capital employed by business area as of December 31, 2002, 2003 and 2004 is as follows: At December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    498
    
    
    
    538
    
    
    
    356Metso Minerals
    
    
    996
    
    
    
    741
    
    
    
    729Metso Automation
    
    
    207
    
    
    
    150
    
    
    
    136Metso Ventures
    
    
    172
    
    
    
    160
    
    
    
    126Corporate Office and other
    
    
    417
    
    
    
    340
    
    
    
    682Continuing operations
    
    
    2,290
    
    
    
    1,929
    
    
    
    2,029Discontinued Operations
    
    
    452
    
    
    
    370
    
    
    
    Metso total
    
    
    2,742
    
    
    
    2,299
    
    
    
    2,029
 F-44




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Gross capital expenditures by business area Gross capital expenditures (including business acquisitions) by business area for the three
years ended December 31, 2002, 2003 and 2004 are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    72
    
    
    
    54
    
    
    
    33Metso Minerals
    
    
    39
    
    
    
    27
    
    
    
    24Metso Automation
    
    
    13
    
    
    
    8
    
    
    
    6Metso Ventures
    
    
    40
    
    
    
    24
    
    
    
    18Corporate Office and other
    
    
    18
    
    
    
    5
    
    
    
    14Continuing operations
    
    
    182
    
    
    
    118
    
    
    
    95Discontinued Operations
    
    
    12
    
    
    
    12
    
    
    
    4Metso total
    
    
    194
    
    
    
    130
    
    
    
    99
 Depreciation and amortization by business area Depreciation and amortization by business area for the three years ended December 31, 2002,
2003 and 2004 are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    62
    
    
    
    60
    
    
    
    60Metso Minerals
    
    
    72
    
    
    
    62
    
    
    
    47Metso Automation
    
    
    18
    
    
    
    15
    
    
    
    14Metso Ventures
    
    
    22
    
    
    
    22
    
    
    
    21Corporate Office and other
    
    
    3
    
    
    
    4
    
    
    
    4Continuing operations
    
    
    177
    
    
    
    163
    
    
    
    146Discontinued Operations
    
    
    20
    
    
    
    20
    
    
    
    9Metso total
    
    
    197
    
    
    
    183
    
    
    
    155
 F-45




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Orders received by business area Orders received by business area for the three years ended December 31, 2002, 2003 and 2004
are as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    1,611
    
    
    
    1,710
    
    
    
    1,726Metso Minerals
    
    
    1,437
    
    
    
    1,213
    
    
    
    1,566Metso Automation
    
    
    643
    
    
    
    531
    
    
    
    570Metso Ventures
    
    
    468
    
    
    
    398
    
    
    
    361Intra Metso orders received
    
    
    (120
    )
    
    
    (121
    )
    
    
    (113
    )Continuing operations
    
    
    4,039
    
    
    
    3,731
    
    
    
    4,110Discontinued Operations
    
    
    607
    
    
    
    525
    
    
    
    264Metso total
    
    
    4,646
    
    
    
    4,256
    
    
    
    4,374
 Order backlog by business area Order backlog by business area as of December 31, 2002, 2003 and 2004 is as follows: At December 31,2002
    
    
    2003
    
    
    2004( in millions)Metso Paper
    
    
    735
    
    
    
    784
    
    
    
    946Metso Minerals
    
    
    413
    
    
    
    347
    
    
    
    560Metso Automation
    
    
    185
    
    
    
    145
    
    
    
    176Metso Ventures
    
    
    154
    
    
    
    175
    
    
    
    118Intra Metso order backlog
    
    
    (55
    )
    
    
    (55
    )
    
    
    (55
    )Continuing operations
    
    
    1,432
    
    
    
    1,396
    
    
    
    1,745Discontinued Operations
    
    
    157
    
    
    
    109
    
    
    
    Metso total
    
    
    1,589
    
    
    
    1,505
    
    
    
    1,745
 F-46




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Information about Metsos operations in different geographical areas as at and for the years
ended December 31, 2002, 2003 and 2004 is as follows: Net sales to unaffiliated customers by destination: Other
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    RestNordic
    
    
    European
    
    
    North
    
    
    South
    
    
    Asia-
    
    
    of the
    
    
    
    
    
    MetsoYear
    
    Finland
    
    
    Countries
    
    
    Countries
    
    
    America
    
    
    America
    
    
    Pacific
    
    
    World
    
    
    Eliminations
    
    
    Total( in millions)2002
    
    
    382
    
    
    
    453
    
    
    
    1,363
    
    
    
    1,199
    
    
    
    417
    
    
    
    652
    
    
    
    225
    
    
    
    
    
    
    
    4,6912003
    
    
    357
    
    
    
    310
    
    
    
    1,272
    
    
    
    989
    
    
    
    264
    
    
    
    824
    
    
    
    234
    
    
    
    
    
    
    
    4,2502004
    
    
    332
    
    
    
    337
    
    
    
    1,017
    
    
    
    837
    
    
    
    298
    
    
    
    909
    
    
    
    246
    
    
    
    
    
    
    
    3,976
 In 2004, 20 percent of net sales was recognized under the percentage of completion method. The
percentage was highest in the Metso Paper business area, where it accounted for 40 percent of net
sales. Metsos exports, including sales to unaffiliated customers and intragroup sales from Finland,
by destination for the years ended December 31, 2002, 2003 and 2004 are as follows: Other
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rest ofNordic
    
    
    European
    
    
    North
    
    
    South
    
    
    Asia-
    
    
    TheYear
    
    Countries
    
    
    Countries
    
    
    America
    
    
    America
    
    
    Pacific
    
    
    World
    
    
    Total( in millions)2002
    
    
    297
    
    
    
    567
    
    
    
    183
    
    
    
    137
    
    
    
    248
    
    
    
    21
    
    
    
    1,4532003
    
    
    195
    
    
    
    523
    
    
    
    209
    
    
    
    38
    
    
    
    372
    
    
    
    15
    
    
    
    1,3522004
    
    
    210
    
    
    
    420
    
    
    
    141
    
    
    
    75
    
    
    
    526
    
    
    
    23
    
    
    
    1,395
 Fixed assets and financial assets by location as of December 31, 2002, 2003 and 2004 are as
follows: Other
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    RestNordic
    
    
    European
    
    
    North
    
    
    South
    
    
    Asia-
    
    
    of the
    
    
    
    
    
    
    MetsoYear
    
    Finland
    
    
    Countries
    
    
    Countries
    
    
    America
    
    
    America
    
    
    Pacific
    
    
    World
    
    
    Eliminations
    
    
    Total( in millions)2002
    
    
    514
    
    
    
    935
    
    
    
    108
    
    
    
    357
    
    
    
    24
    
    
    
    57
    
    
    
    10
    
    
    
    
    
    
    
    2,0052003
    
    
    504
    
    
    
    746
    
    
    
    96
    
    
    
    233
    
    
    
    23
    
    
    
    52
    
    
    
    10
    
    
    
    
    
    
    
    1,6642004
    
    
    481
    
    
    
    499
    
    
    
    47
    
    
    
    190
    
    
    
    25
    
    
    
    45
    
    
    
    9
    
    
    
    
    
    
    
    1,296
 Fixed and financial assets include goodwill, other intangible assets, tangible assets, shares
and other long-term interest bearing and non-interest bearing receivables. Gross capital expenditure (excluding business acquisitions) by region for the years ended
December 31, 2002, 2003 and 2004 are as follows: Other
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    RestNordic
    
    
    European
    
    
    North
    
    
    South
    
    
    Asia-
    
    
    of the
    
    
    
    
    
    
    MetsoYear
    
    Finland
    
    
    Countries
    
    
    Countries
    
    
    America
    
    
    America
    
    
    Pacific
    
    
    World
    
    
    Eliminations
    
    
    Total( in millions)2002
    
    
    119
    
    
    
    23
    
    
    
    23
    
    
    
    14
    
    
    
    5
    
    
    
    8
    
    
    
    1
    
    
    
    
    
    
    
    1932003
    
    
    70
    
    
    
    15
    
    
    
    19
    
    
    
    10
    
    
    
    5
    
    
    
    7
    
    
    
    2
    
    
    
    
    
    
    
    1282004
    
    
    54
    
    
    
    10
    
    
    
    11
    
    
    
    9
    
    
    
    8
    
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    97
 F-47




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Note 30. Differences between Generally Accepted Accounting Principles in Finland and the United States Metsos consolidated financial statements are prepared in accordance with Finnish GAAP, which
differ in certain respects from the accounting principles generally accepted in the United States
(U.S. GAAP). The principal differences between Finnish GAAP and U.S. GAAP are presented and
described below, together with explanations of the adjustments that affect consolidated net income
(loss) and total shareholders equity as of and for the periods indicated. The financial statements
in accordance with U.S. GAAP have been restated for 2002 and 2003. See Notes 30 d) and q) for
additional information related to these restatements. As detailed further below, the significant
business combination of Valmet and Rauma is accounted for as the pooling of interests under Finnish
GAAP, but is accounted for using the purchase method under U.S. GAAP. This difference impacts the
valuation of a number of financial statement accounts at the date of the combination. For
presentation purposes in the following reconciliation, the Business combination, net item solely
includes the impact of differences that arose using the purchase method under U.S. GAAP. The other
items reflect the post-combination differences between Finnish GAAP and U.S. GAAP. Certain amounts
have been reclassified to conform to the current year presentation. Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)(restated)
    
    
    (restated)Reconciliation of net incomeNet income in accordance with Finnish GAAP
    
    
    65
    
    
    
    (258
    )
    
    
    69U.S. GAAP adjustments:a) Business combination, net
    
    
    (8
    )
    
    
    (6
    )
    
    
    (19
    )b) Purchase accounting, net
    
    
    (21
    )
    
    
    (6
    )
    
    
    (5
    )c) Amortization of goodwill
    
    
    52
    
    
    
    47
    
    
    
    34d) Impairment of goodwill
    
    
    
    
    
    
    (30
    )
    
    
    e) Impairment of brand names
    
    
    
    
    
    
    (13
    )
    
    
    f) Fair value of financial derivatives
    
    
    35
    
    
    
    (24
    )
    
    
    3g) Pension surplus refund
    
    
    2
    
    
    
    1
    
    
    
    h) Employee benefit plans
    
    
    (4
    )
    
    
    (2
    )
    
    
    (15
    )i) Restructuring costs
    
    
    (5
    )
    
    
    30
    
    
    
    (31
    )j) Written put option on subsidiary shares
    
    
    
    
    
    
    (5
    )
    
    
    5l) Net investment hedge
    
    
    7
    
    
    
    (4
    )
    
    
    1m) Repurchase commitments
    
    
    
    
    
    
    (3
    )
    
    
    2p) Fees on bond exchange
    
    
    
    
    
    
    
    
    
    
    (2
    )q) Valuation allowances for deferred tax assets
    
    
    (91
    )
    
    
    28
    
    
    
    1r) Discontinued Operations
    
    
    
    
    
    
    2
    
    
    
    (44
    )Deferred tax effect of U.S. GAAP adjustments
    
    
    (10
    )
    
    
    8
    
    
    
    3Net income (loss) in accordance with U.S. GAAP
    
    
    22
    
    
    
    (235
    )
    
    
    2Income (loss) from continuing operations
    
    
    3
    
    
    
    (196
    )
    
    
    66Discontinued Operations:Income (loss) from Discontinued Operations,
net of income tax expense of 2 million, tax
benefit of 2 million and tax expense of 4
million, respectively
    
    
    19
    
    
    
    (39
    )
    
    
    8(Loss) on disposal of Discontinued Operations,
net of income tax expense of 9
    
    
    
    
    
    
    
    
    
    
    (72
    )Net income (loss) on Discontinued Operations
    
    
    19
    
    
    
    (39
    )
    
    
    (64
    )Net income (loss) in accordance with U.S. GAAP
    
    
    22
    
    
    
    (235
    )
    
    
    2Basic and diluted earnings (loss) per share:Continuing operations
    
    
    0.02
    
    
    
    (1.44
    )
    
    
    0.48Discontinued Operations
    
    
    0.14
    
    
    
    (0.29
    )
    
    
    (0.47
    )Total basic and diluted earnings (loss) per share
    
    
    0.16
    
    
    
    (1.73
    )
    
    
    0.01Weighted average number of common shares
outstanding under U.S. GAAP (in thousands):Basic
    
    
    136,190
    
    
    
    136,190
    
    
    
    136,190Diluted
    
    
    136,190
    
    
    
    136,190
    
    
    
    136,192
 F-48




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) As of December 31,2003
    
    
    2004( in millions)(restated)Reconciliation
of shareholders equityShareholders equity in accordance with Finnish GAAP
    
    
    1,024
    
    
    
    1,052U.S. GAAP adjustments:a) Business combination, net
    
    
    75
    
    
    
    55b) Purchase accounting, net
    
    
    (41
    )
    
    
    (47
    )c) Amortization of goodwill
    
    
    110
    
    
    
    116d) Impairment of goodwill
    
    
    (30
    )
    
    
    (44
    )e) Impairment of brand names
    
    
    (13
    )
    
    
    f) Fair value of financial derivatives
    
    
    3
    
    
    
    2g) Pension surplus refund
    
    
    (0
    )
    
    
    h) Employee benefit plans
    
    
    (52
    )
    
    
    (77
    )i) Restructuring costs
    
    
    30
    
    
    
    (1
    )j) Written put option on subsidiary shares
    
    
    (5
    )
    
    
    k) Investments
    
    
    6
    
    
    
    2m) Repurchase commitments
    
    
    (3
    )
    
    
    0n) Treasury stock
    
    
    (1
    )
    
    
    (1
    )o) Translation difference
    
    
    (72
    )
    
    
    (56
    )p) Fees for bond exchange
    
    
    
    
    
    
    (2
    )q) Valuation allowances for deferred tax assets
    
    
    (48
    )
    
    
    (42
    )r) Discontinued Operations
    
    
    2
    
    
    
    Deferred tax effect of U.S. GAAP adjustments
    
    
    13
    
    
    
    21Shareholders equity in accordance with U.S. GAAP
    
    
    998
    
    
    
    978
 The financial statements in accordance with U.S. GAAP have been restated for 2002 and 2003. The
below table summarizes the changes made, due to the restatements, in the reconciliation of net
income and equity as previously presented. See Notes 30 d) and q) for additional information
related to these restatements. Year ended December 31,2002
    
    2003As previously
    
    Impact of
    
    As
    
    As previously
    
    Impact of
    
    Asreported
    
    Restatement
    
    restated
    
    reported
    
    Restatement
    
    restated( in millions)Reconciliation of net incomeNet income (loss) in accordance with
Finnish GAAP
    
    
    65
    
    
    
    
    
    
    
    65
    
    
    
    (258
    )
    
    
    
    
    
    
    (258
    )U.S. GAAP adjustments:a) Business combination, net
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )b) Purchase accounting, net
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )c) Amortization of goodwill
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    47
    
    
    
    
    
    
    
    47d) Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (18
    )
    
    
    (30
    )e) Impairment of brand names
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )f) Fair value of financial derivatives
    
    
    35
    
    
    
    
    
    
    
    35
    
    
    
    (24
    )
    
    
    
    
    
    
    (24
    )g) Pension surplus refund
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    1h) Employee benefit plans
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )i) Restructuring costs
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )
    
    
    30
    
    
    
    
    
    
    
    30j) Written put option on subsidiary
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )l) Net investment hedge
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )m) Repurchase commitments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )p) Fees on bond exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    q) Valuation allowances for deferred
tax assets
    
    
    
    
    
    
    (91
    )
    
    
    (91
    )
    
    
    
    
    
    
    28
    
    
    
    28r) Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Deferred tax effect of U.S. GAAP
adjustments
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )
    
    
    8
    
    
    
    
    
    
    
    8Net income (loss) in accordance with
U.S. GAAP
    
    
    113
    
    
    
    (91
    )
    
    
    22
    
    
    
    (245
    )
    
    
    10
    
    
    
    (235
    )Income (loss) from continuing
operations
    
    
    94
    
    
    
    (91
    )
    
    
    3
    
    
    
    (206
    )
    
    
    10
    
    
    
    (196
    )Discontinued Operations:Income (loss) from Discontinued
Operations, net of income tax
expense of 2 million in 2002 and
tax benefit of 2 million in 2003
    
    
    19
    
    
    
    
    
    
    
    19
    
    
    
    (39
    )
    
    
    
    
    
    
    (39
    )(Loss) on disposal of Discontinued
expense of 9 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) on Discontinued
Operations
    
    
    19
    
    
    
    
    
    
    
    19
    
    
    
    (39
    )
    
    
    
    
    
    
    (39
    )Net income (loss) in accordance with
U.S. GAAP
    
    
    113
    
    
    
    (91
    )
    
    
    22
    
    
    
    (245
    )
    
    
    10
    
    
    
    (235
    )Basic and diluted earnings (loss) per
share:Continuing operations
    
    
    0.69
    
    
    
    (0.67
    )
    
    
    0.02
    
    
    
    (1.51
    )
    
    
    0.07
    
    
    
    (1.44
    )Discontinued Operations
    
    
    0.14
    
    
    
    
    
    
    
    0.14
    
    
    
    (0.29
    )
    
    
    
    
    
    
    (0.29
    )Total basic and diluted earnings
(loss) per share
    
    
    0.83
    
    
    
    (0.67
    )
    
    
    0.16
    
    
    
    (1.80
    )
    
    
    0.07
    
    
    
    (1.73
    )Weighted average number of common
shares outstanding under U.S. GAAP
(in thousands):Basic
    
    
    136,190
    
    
    
    
    
    
    
    136,190
    
    
    
    136,190
    
    
    
    
    
    
    
    136,190Diluted
    
    
    136,190
    
    
    
    
    
    
    
    136,190
    
    
    
    136,190
    
    
    
    
    
    
    
    136,190Reconciliation of shareholders equityShareholders equity in accordance
with Finnish GAAP
    
    
    1,379
    
    
    
    
    
    
    
    1,379
    
    
    
    1,024
    
    
    
    
    
    
    
    1,024U.S. GAAP adjustments:a) Business combination, net
    
    
    81
    
    
    
    
    
    
    
    81
    
    
    
    75
    
    
    
    
    
    
    
    75b) Purchase accounting, net
    
    
    (35
    )
    
    
    
    
    
    
    (35
    )
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )c) Amortization of goodwill
    
    
    63
    
    
    
    
    
    
    
    63
    
    
    
    110
    
    
    
    
    
    
    
    110d) Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (18
    )
    
    
    (30
    )e) Impairment of brand names
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )f) Fair value of financial derivatives
    
    
    27
    
    
    
    
    
    
    
    27
    
    
    
    3
    
    
    
    
    
    
    
    3g) Pension surplus refund
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (0
    )
    
    
    
    
    
    
    (0
    )h) Employee benefit plans
    
    
    (59
    )
    
    
    
    
    
    
    (59
    )
    
    
    (52
    )
    
    
    
    
    
    
    (52
    )i) Restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    30j) Written put option on subsidiary
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )k) Investments
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    6
    
    
    
    
    
    
    
    6m) Repurchase commitments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )n) Treasury stock
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )o) Translation difference
    
    
    (47
    )
    
    
    
    
    
    
    (47
    )
    
    
    (70
    )
    
    
    (2
    )
    
    
    (72
    )p) Fees for bond exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    q) Valuation allowances for deferred
tax assets
    
    
    
    
    
    
    (91
    )
    
    
    (91
    )
    
    
    
    
    
    
    (48
    )
    
    
    (48
    )r) Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Deferred tax effect of U.S. GAAP
adjustments
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    13
    
    
    
    
    
    
    
    13Shareholders equity in accordance
with U.S. GAAP
    
    
    1,419
    
    
    
    (91
    )
    
    
    1,328
    
    
    
    1,066
    
    
    
    (68
    )
    
    
    998
 a) Business combination The merger of Rauma and Valmet, which, under Finnish GAAP, was accounted for by the pooling of
interests method, was consummated on July 1, 1999. The net income and shareholders equity of
Rauma, existing prior to the consummation date, was pooled with the shareholders equity of Valmet. Under U.S. GAAP, the merger was accounted for as a purchase, with Valmet as the accounting
acquirer. The total purchase consideration of Rauma was determined on the basis of the fair value
of the transaction when the combination was announced on November 17, 1998. The impact of the adjustments on the reconciliation of net income and of the shareholders
equity is as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Net incomeAmortization of goodwill
    
    
    5
    
    
    
    4
    
    
    
    3Impairment of goodwill
    
    
    
    
    
    
    11
    
    
    
    Depreciation of buildings and structures
    
    
    (3
    )
    
    
    (3
    )
    
    
    (6
    )Depreciation of other tangible assets
    
    
    (10
    )
    
    
    (9
    )
    
    
    (19
    )Write down of fixed assets
    
    
    
    
    
    
    (11
    )
    
    
    (10
    )Disposal of fixed assets
    
    
    (5
    )
    
    
    (6
    )
    
    
    3Deferred taxes
    
    
    5
    
    
    
    8
    
    
    
    10Total
    
    
    (8
    )
    
    
    (6
    )
    
    
    (19
    )
 F-49




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) As of December 31,2003
    
    
    2004( in millions)Shareholders equityHistorical goodwill of Rauma
    
    
    (19
    )
    
    
    (13
    )Land and water areas
    
    
    1
    
    
    
    1Buildings and structures
    
    
    83
    
    
    
    67Machinery and equipment
    
    
    91
    
    
    
    72Employee benefits
    
    
    (33
    )
    
    
    (33
    )Current liabilities
    
    
    (12
    )
    
    
    (12
    )Deferred taxes
    
    
    (36
    )
    
    
    (27
    )Total
    
    
    75
    
    
    
    55
 The following table presents the change in U.S. GAAP purchase accounting adjustments for the
years ended December 31, 2003 and December 31, 2004, respectively: Opening
    
    
    
    
    
    
    Accumulated
    
    
    Closingbalance
    
    
    Decreases
    
    
    amortization
    
    
    balance( in millions)Year 2003:Land and water areas
    
    
    2
    
    
    
    (1
    )
    
    
    
    
    
    
    1Buildings
    
    
    96
    
    
    
    (4
    )
    
    
    (9
    )
    
    
    83Machinery and equipment
    
    
    155
    
    
    
    (29
    )
    
    
    (35
    )
    
    
    91Total
    
    
    253
    
    
    
    (34
    )
    
    
    (44
    )
    
    
    175Year 2004:Land and water areas
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Buildings
    
    
    92
    
    
    
    (10
    )
    
    
    (15
    )
    
    
    67Machinery and equipment
    
    
    126
    
    
    
    
    
    
    
    (54
    )
    
    
    72Total
    
    
    219
    
    
    
    (10
    )
    
    
    (69
    )
    
    
    140
 In the year ended December 31, 2004, Metso reviewed the remaining economic life of certain
fixed assets, which were acquired in the business combination in 1999. Because of the accelerated
of changes in the production technology and of Metsos refocus from its own production to higher
reliance on outsourced production, the remaining economic life for buildings has been reduced from
30 years down to a maximum of 15 years, and that of other tangible assets down to 5 years. F-50




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) b) Purchase accounting, net During the year ended December 31, 2001, Metso acquired Svedala Industri AB, a Swedish
industrial group. The following table reflects the U.S. GAAP purchase accounting adjustments:  in millions(restated)Goodwill
    
    
    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
 The following table presents the change in U.S. GAAP purchase accounting adjustments,
excluding goodwill, during the financial year 2004: Purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchaseaccounting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    accountingadjustments at
    
    
    Decreases/
    
    
    Accumulated
    
    
    Translation
    
    
    adjustments atbeginning of year
    
    
    Increases
    
    
    amortization
    
    
    differences
    
    
    end of year( in millions)(restated)Brand names(1)
    
    
    39
    
    
    
    (29
    )
    
    
    
    
    
    
    4
    
    
    
    14Customer value
    
    
    63
    
    
    
    (6
    )
    
    
    (30
    )
    
    
    0
    
    
    
    27Patents(1)
    
    
    7
    
    
    
    (0
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    4Land and water areas(1)
    
    
    11
    
    
    
    (1
    )
    
    
    
    
    
    
    0
    
    
    
    10Buildings(1)
    
    
    17
    
    
    
    (6
    )
    
    
    (2
    )
    
    
    0
    
    
    
    9Other tangible assets(1)
    
    
    14
    
    
    
    (5
    )
    
    
    (4
    )
    
    
    0
    
    
    
    5Liability for pensions under FAS87
and FAS 106
    
    
    (28
    )
    
    
    (0
    )
    
    
    
    
    
    
    
    
    
    
    (28
    )Deferred taxes
    
    
    (36
    )
    
    
    14
    
    
    
    11
    
    
    
    (1
    )
    
    
    (12
    )Total
    
    
    87
    
    
    
    (33
    )
    
    
    (27
    )
    
    
    2
    
    
    
    29
   (1)
    
    In the year of acquisition, Metso recorded following purchase accounting adjustments under
Finnish GAAP (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. The amortization periods of assets assigned from the excess of purchase consideration
are: 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-51




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) The impact of these adjustments on the reconciliation of net income and shareholders equity,
excluding the impact of result on Discontinued Operations, translation difference and impairment
loss on intangible assets, between Finnish GAAP and U.S. GAAP for the Svedala acquisition are as
follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Difference between net income under Finnish GAAP and U.S. GAAPReversal of amortization of brand names
    
    
    4
    
    
    
    3
    
    
    
    2Amortization of customer value under U.S. GAAP
    
    
    (11
    )
    
    
    (11
    )
    
    
    (10
    )Difference between amortization of other intangible assets
    
    
    0
    
    
    
    0
    
    
    
    0Difference between depreciation of tangible assets
    
    
    1
    
    
    
    
    
    
    
    0Amortization of order backlog under U.S. GAAP
    
    
    (16
    )
    
    
    
    
    
    
    Inventory: amortization of difference between the fair value
and net book value under U.S. GAAP
    
    
    (8
    )
    
    
    
    
    
    
    Deferred taxes
    
    
    9
    
    
    
    2
    
    
    
    3Total difference between net income for continuing
operations under Finnish GAAP and U.S. GAAP
    
    
    (21
    )
    
    
    (6
    )
    
    
    (5
    )Effect of disposals to the cumulative difference in
shareholders equity
    
    
    
    
    
    
    
    
    
    
    (1
    )Difference of cumulative effect on shareholders equity between
Finnish GAAP and U.S. GAAP after disposals
    
    
    (35
    )
    
    
    (41
    )
    
    
    (47
    )
 c) Amortization of goodwill Under Finnish GAAP, goodwill is amortized over its estimated useful life. Under U.S. GAAP,
goodwill and certain intangible assets having indefinite lives are no longer subject to
amortization. For the years ended December 31, 2002, 2003 and 2004, respectively, the impact on net income
between Finnish and U.S. GAAP is as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Difference between net income under
Finnish GAAP and U.S. GAAPGoodwill amortization under Finnish GAAP
    
    
    57
    
    
    
    51
    
    
    
    37Amortization of goodwill existing in
Rauma prior to the merger of Valmet and
Rauma in 1999, adjusted in Note a)
    
    
    (5
    )
    
    
    (4
    )
    
    
    (3
    )Remaining U.S. GAAP net income adjustment.
    
    
    52
    
    
    
    47
    
    
    
    34
 In the year ended December 31, 2004, 28 million of goodwill amortization, reversed under U.S.
GAAP related to disposed businesses. d) Impairment of goodwill Under U.S. GAAP, as a result of the adoption of SFAS 141 and SFAS 142, goodwill and certain
intangible assets having indefinite lives are no longer subject to amortization. Their book
values are tested annually for impairment, or more frequently, if facts and circumstances
indicate the need. Fair value measurement techniques, such as the discounted cash flow
methodology, are utilized to assess potential impairments. The testing is performed on the
reporting unit level, which can F-52




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) be either a reportable segment or one level below reportable segment. In the discounted cash
flow method, Metso discounts forecasted performance plans to their present value. The
discount rate utilized is the weighted average cost of capital for the reporting unit,
calculated as the opportunity cost to all capital providers weighted by their relative
contribution to the reporting units total capital and the risk associated with the cash
flows and the timing of the cash flows. Comparison methods (e.g., peer comparables) and
other estimation techniques are used to verify the reasonableness of the fair values derived
from the discounted cash flow assessments. Upon adoption of SFAS 142 as of January 1, 2002, Metso completed the transitional impairment
test and concluded that there was no impairment of goodwill or identifiable intangibles with
indefinite lives. Metso also completed this annual impairment test as of September 30, 2002
and no impairment in the carrying value was recorded as a result of those tests. In 2003, as
a result of tightened competition, reduced demand in certain market areas and the
development of exchange rates, especially the impact of the weakened U.S. dollar, the
operating profits of Metso Minerals operations were lower than expected. As of September 30,
2003, upon completion of the first step of the annual impairment assessment, based on
updated forecasted plans approved by the Board of Directors, it was determined that a
potential risk of impairment existed, since the carrying values exceeded the fair values of
certain Metso Minerals reporting units. The second step of the impairment test compared the
implied fair value of these reporting units goodwill to the corresponding carrying value of
goodwill. The outcome of the second step was that the carrying value of goodwill of such
reporting units exceeded the implied fair value of the goodwill by 224 million (as
restated, see below). Accordingly, an impairment loss of this amount was recognized. Concurrently, Metso performed an impairment assessment of its goodwill under Finnish GAAP,
which resulted in an impairment loss of 205 million, see Note 11. The difference in the
amount of the goodwill impairment under Finnish GAAP versus U.S. GAAP, adjusted for goodwill
reversed in the business combination under U.S.GAAP, has been reported in the reconciliation
of income statement and shareholders equity of Note 30. The business combination has been
explained in Note 30 (a). In conjunction with the transition to IFRS, in 2004, the Company undertook a complete review
of the defined pension benefit liability under IAS 19. In the course of this review, an
error was detected in the purchase accounting related to the U.S. GAAP pension liability
recorded in the acquisition of Svedala in 2001 (see note b) on purchase accounting). In
order to correctly record this pension liability in accordance with U.S. GAAP, the balance
sheet at the time of acquisition would have reflected an additional pension liability of 20
million, net of tax effect of 8 million, instead of a pension asset of 6 million, net of
tax effect of 2 million, as reported prior to the restatement. The corresponding increase
to goodwill would have been 26 million, which would have been allocated to the underlying
reporting units in accordance with SFAS 142. The 2002 and 2003 financial statements, in
accordance with U.S. GAAP, have been restated to reflect the impact of adjustments made to
the pension assets and liabilities combined with the increase in goodwill from the Svedala
acquisition in 2001. In 2003, the Company recorded an impairment charge on its goodwill. After consideration of
this additional goodwill, the impairment charge in 2003, under U.S. GAAP, would have been
increased as a result of this additional goodwill. As a result, the restated U.S. GAAP
income statement reflects an additional impairment loss of 18 million in 2003. The impact
of this restatement on the U.S. GAAP financial statements has been summarised in Note 30
(see Note 30). In the year ended December 31, 2004, Metso performed its annual impairment test and
concluded that there were no indications of impairment. F-53




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) An analysis of goodwill by reporting segment under U.S. GAAP, as restated is given below: Paper
    
    Automation
    
    Minerals
    
    Ventures
    
    Discontinued
    
    Total( in millions)2003:As of January 1, 2003
    
    
    84
    
    
    
    25
    
    
    
    512
    
    
    
    16
    
    
    
    190
    
    
    
    827Translation difference
    
    
    (11
    )
    
    
    (1
    )
    
    
    (18
    )
    
    
    0
    
    
    
    (6
    )
    
    
    (36
    )Increases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment
    
    
    
    
    
    
    
    
    
    
    (175
    )
    
    
    
    
    
    
    (49
    )
    
    
    (224
    )Decreases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    As of December 31, 2003
    
    
    73
    
    
    
    24
    
    
    
    319
    
    
    
    16
    
    
    
    135
    
    
    
    5672004:Translation difference
    
    
    (3
    )
    
    
    (1
    )
    
    
    (6
    )
    
    
    1
    
    
    
    
    
    
    
    (9
    )Increases
    
    
    1
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Decreases
    
    
    
    
    
    
    (0
    )
    
    
    (4
    )
    
    
    
    
    
    
    (135
    )
    
    
    (139
    )As of December 31, 2004
    
    
    71
    
    
    
    23
    
    
    
    309
    
    
    
    17
    
    
    
    
    
    
    
    420
 An analysis of identifiable intangible assets under U.S. GAAP is given below:
 Order
    
    Other intangibleBrand Names
    
    Customer Value
    
    Backlog
    
    assets
    
    Total( in millions)2003:As of January 1, 2003
    
    
    55
    
    
    
    64
    
    
    
    30
    
    
    
    133
    
    
    
    282Translation difference
    
    
    (3
    )
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )
    
    
    (7
    )Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    39Decreases
    
    
    (13
    )(1)
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (16
    )Accumulated
amortization expense
    
    
    
    
    
    
    (24
    )
    
    
    (30
    )
    
    
    (84
    )
    
    
    (138
    )As of December 31, 2003
    
    
    39
    
    
    
    39
    
    
    
    
    
    
    
    82
    (2)
    
    
    1602004:As of January 1, 2004
    
    
    39
    
    
    
    63
    
    
    
    
    
    
    
    166
    
    
    
    268Translation difference
    
    
    4
    
    
    
    (0
    )
    
    
    
    
    
    
    (1
    )
    
    
    3Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    25Decreases
    
    
    (29
    )
    
    
    (6
    )
    
    
    
    
    
    
    (32
    )
    
    
    (67
    )Accumulated
amortization expense
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (80
    )
    
    
    (110
    )As of December 31, 2004
    
    
    14
    
    
    
    27
    
    
    
    
    
    
    
    78
    (2)
    
    
    119
 
 (1)
    
    Impairment loss on brand names (see adjustment e) impairment of brand names).(2)
    
    Includes patents and licenses for a net book value of 32 million and 39 million for the
years ended December 31, 2003 and December 31, 2004, respectively. Brand names have been designated as intangible assets with an indefinite life under
U.S. GAAP and, as such, have not been amortized. Under Finnish GAAP,
brands continue to be amortized, for the reversal of amortization cost, see note b) on purchase
accounting.
 For the year ended December 31, 2004, the amortization expense of the other identifiable
intangible assets subject to amortization was 22 million. The amortization expense is
expected to be 22 million,
22 million,
22 million,
17 million and
13 million for the
years ended December 31, 2005, 2006, 2007, 2008 and 2009, respectively.
 e) Impairment of brand names Under Finnish GAAP, brand names are amortized based on their estimated economic life. Their
carrying value is tested for impairment when there are indications that the income generating
capacity of the brand name has been reduced due to internal or external factors. Under Metsos
impairment principles, if a reporting unit, subject to impairment testing, carries both goodwill
and intangible assets on its balance sheet, any impairment loss is primarily offset against the
goodwill. If the impairment loss exceeds the carrying value of goodwill, the excess will be written
off against other intangible assets. Under U.S. GAAP, certain intangible assets, such as brand names, are considered to have an
indefinite life and therefore are not amortized. Their carrying value is tested annually for
impairment either separately or together with goodwill. In the second phase of the goodwill
impairment assessment, in order to arrive at the implied fair value of the goodwill, the company
has to calculate the fair values of the assets and liabilities related to the reporting unit
subject to testing. Should the carrying value of an intangible asset with indefinite life exceed
its implied fair value calculated for the second phase, as was the case in 2003, in the impairment
assessment of one of Metso Minerals reporting unit, the excess would be recognized as an
impairment loss. In 2003, as a result of the second phase test, Metso recognized an impairment loss
of 13 million on brand names. The implied fair value of the brand names was evaluated through the
relief from royalty method. In the year ended December 31, 2004, Metso performed its annual impairment test and concluded
that there were no indications of impairment. F-54




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) f) Fair value of financial derivatives Under U.S. GAAP, all derivative financial instruments are recognized on the balance sheet at
fair value with changes in fair values recognized through earnings unless strict hedge accounting
criteria for cash flow hedges or hedges of net investments have been met. In addition, SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities requires the Company to
bifurcate certain hybrid contracts (i.e. contracts with embedded derivatives) and to fair value the
derivative components through earnings. Metso enters into forward exchange contracts to manage its foreign exchange exposure related
to firm commitments and anticipated revenues net of expenses denominated in foreign currencies
other than the functional currencies. As permitted under Finnish GAAP, Metso has deferred the
unrealized gains and losses (balance sheet date fair values) on such hedges until the underlying
transaction has been recorded in the financial statements. Under U.S. GAAP, as Metso has not met
the SFAS No. 133 hedge accounting criteria, such unrealized gains and losses must be included in
the determination of net income, resulting in a U.S. GAAP income adjustment of 33 million, (10)
million and (1) million for the years ended December 31, 2002, 2003 and 2004, respectively. Metso has entered into long-term swap contracts to hedge its interest rate exposure. Under
Finnish GAAP, the Company accounts for the swap contracts using the accrual method. Under U.S.
GAAP, swap contracts are fair valued and changes in fair values must be included in the
determination of net income resulting in a U.S. GAAP income adjustment of 3 million 0 million and
(3) million for the years ended December 31, 2002, 2003 and 2004, respectively. Under Finnish GAAP, the Company is not required to bifurcate and fair value foreign currency
embedded derivatives included in firm commitments. Under U.S. GAAP, firm commitments, in which the
currency is not the functional currency of either counter-party, must be fair valued on the balance
sheet with changes in fair values recorded through earnings. The recording of embedded derivatives,
at fair values, in Metsos U.S. GAAP net income amounted to (1) million, (13) million and 3
million for the years ended December 31, 2002, 2003 and 2004, respectively. In 2003, Metso extended its risk management policy to include commodity forwards. Their
designation and effectiveness testing do not meet hedge accounting criteria under U.S. GAAP and the
changes in fair value are recognized through earnings. Their effect to Metsos U.S. GAAP net income
was (1) and (0) million for the year ended December 31, 2003 and 2004, respectively. The combined effect of these adjustments in Metsos U.S. GAAP net income and shareholders
equity for the years ended December 31, 2002, 2003 and 2004, respectively, is as follows: Gross
    
    
    Tax
    
    
    Net( in millions)Balance sheet difference as at January 1, 2002
    
    
    (8
    )
    
    
    2
    
    
    
    (6
    )Changes in fair values recognized through 2002
U.S. GAAP earnings
    
    
    35
    
    
    
    (10
    )
    
    
    25Balance sheet difference as at December 31, 2002
    
    
    27
    
    
    
    (8
    )
    
    
    19Changes in fair values recognized through 2003
U.S. GAAP earnings
    
    
    (24
    )
    
    
    7
    
    
    
    (17
    )Balance sheet difference as at December 31, 2003
    
    
    3
    
    
    
    (1
    )
    
    
    2Changes in fair values recognized through 2004
U.S. GAAP earnings:Continuing operations
    
    
    3
    
    
    
    (1
    )
    
    
    2Discontinued Operations
    
    
    (4
    )
    
    
    1
    
    
    
    (3
    )Balance sheet difference as at December 31, 2004
    
    
    2
    
    
    
    (1
    )
    
    
    1
 F-55




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Under Finnish GAAP, Metso applies hedge accounting and records the realized gains and losses
on hedging instruments to the same income statement line item and cash flow statement line item as
the underlying hedge transaction is recorded. Under U.S. GAAP, the following adjustments would be
made to the income statement line items for the years ended December 31, 2002, 2003 and 2004,
respectively: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Operating profit
    
    
    (74
    )
    
    
    (56
    )
    
    
    3Financial income and expenses
    
    
    109
    
    
    
    32
    
    
    
    (0
    )Income taxes
    
    
    (10
    )
    
    
    7
    
    
    
    (1
    )Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    (3
    )Net income
    
    
    25
    
    
    
    (17
    )
    
    
    (1
    )
 g) Pension surplus refund During 2000, Metso received a surplus refund amounting to 14 million before taxes from the
Swedish pension insurer Alecta (SPP). The refund was received partly in cash with the remaining
portion of the total amount mainly utilizable against future pension premiums. Under Finnish GAAP,
the total surplus refund was recognized in income in 2000. Under U.S. GAAP, only the portion reimbursed in cash can be recognized in income. As at
December 31, 2001, Metso had received, of the total refund, 11 million in cash. In consecutive
years, the cash payments have amounted to 2 million and 1 million before taxes for the years
ended December 31 2002 and 2003, respectively. As of December 31, 2004, the total refund has been
received or utilized against premiums settling the difference between Finnish and US GAAP from
previous years. h) Employee benefit plans Pensions and other postretirement benefits Metso generally records pension expense in accordance with local accounting practices in the
countries in which employees are provided with such benefits. Under U.S. GAAP, pension expense is recorded on a full accrual basis and reflected in the
income statement over the working lives of the employees provided with such benefits. The economic
and demographic assumptions used in calculating pension expense are to be reviewed and updated
periodically to the extent that local market economic conditions and demographics change. The companies within Metso have various pension schemes pursuant to local conditions and
practices of the countries in which they operate. Most of these programs are defined benefit
pension schemes with retirement, disability, death and termination income benefits. The retirement
income benefits are generally a function of years of employment and the final salary with Metso,
and are usually coordinated with local national pensions. The schemes are generally funded through
payments to insurance companies or to trustee-administered funds as determined by periodic
actuarial calculations. Metso also maintains some multiemployer pension arrangements, insured plans
and defined contribution pension arrangements. Contributions to these plans amounted to
approximately 75 million, 67 million, and 84 million for years ended December 31, 2002, 2003,
and 2004, respectively. Metso provides certain health care and life insurance benefits for retired employees.
Substantially all the U.S. and Canadian employees are provided these benefits. Under U.S. GAAP,
SFAS No. 106 Employers Accounting for Postretirement Benefits Other than Pensions requires Metso
to accrue the estimated cost of postretirement benefit payments during the years the employee
provides services. Metso uses December 31 as measurement date for its pension plans. F-56




---



##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) For its noninsured, employer-sponsored defined benefit pension schemes, net periodic benefit
cost included in Metsos net profit (loss) for the years ended December 31, 2002, 2003 and 2004,
calculated in accordance with U.S. GAAP, includes the following components for companies subject to
SFAS No. 87 and 106 recalculation: Pension and post-retirementPension benefits, domestic
    
    
    benefits, foreign2002
    
    
    2003
    
    
    2004
    
    
    2002
    
    
    2003
    
    
    2004( in millions)
    
    
    ( in millions)Service cost
    
    
    16
    
    
    
    14
    
    
    
    9
    
    
    
    10
    
    
    
    8
    
    
    
    6Interest cost
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    22
    
    
    
    20
    
    
    
    19Expected return on plan assets
    
    
    
    
    
    
    
    
    
    
    (0
    )
    
    
    (15
    )
    
    
    (12
    )
    
    
    (13
    )Net amortization
    
    
    2
    
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    2
    
    
    
    2Employee contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    
    24
    
    
    
    20
    
    
    
    14
    
    
    
    18
    
    
    
    18
    
    
    
    14Special adjustments:SFAS No. 88 events
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (11
    )Other adjustment
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    1
    
    
    
    3
    
    
    
    7Grand total net periodic benefit cost
    
    
    24
    
    
    
    20
    
    
    
    18
    
    
    
    19
    
    
    
    22
    
    
    
    10
 The following tables set forth the change in benefit obligation and the amounts, which would
be recognized in Metsos consolidated balance sheet in accordance with U.S. GAAP for the years
ended December 31, 2003 and 2004: Pension and post-Pension benefits, domestic
    
    
    retirement benefits, foreign2003
    
    
    2004
    
    
    2003
    
    
    2004( in millions)
    
    
    ( in millions)Change in benefit obligationBenefit obligation at beginning of year
    
    
    102
    
    
    
    102
    
    
    
    334
    
    
    
    335Service cost
    
    
    14
    
    
    
    9
    
    
    
    8
    
    
    
    6Interest cost
    
    
    6
    
    
    
    6
    
    
    
    20
    
    
    
    19SFAS No. 88 events
    
    
    (3
    )
    
    
    
    
    
    
    (4
    )
    
    
    (12
    )Participant contributions
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Amendments
    
    
    
    
    
    
    (7
    )
    
    
    2
    
    
    
    (1
    )Special termination benefits
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    Increase in coverage
    
    
    
    
    
    
    11
    
    
    
    4
    
    
    
    6Acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Actuarial loss (gain)
    
    
    (1
    )
    
    
    (12
    )
    
    
    22
    
    
    
    14Benefits paid
    
    
    (16
    )
    
    
    (5
    )
    
    
    (21
    )
    
    
    (20
    )Currency effect
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (13
    )Benefit obligation at end of year
    
    
    102
    
    
    
    104
    
    
    
    335
    
    
    
    335
 F-57




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Pension and post-retirementPension benefits, domestic
    
    
    benefits, foreign2003
    
    
    2004
    
    
    2003
    
    
    2004( in millions)
    
    
    ( in millions)Change in plan assetsFair value of plan assets at beginning of year
    
    
    
    
    
    
    0
    
    
    
    167
    
    
    
    167Actuarial return on plan assets
    
    
    
    
    
    
    1
    
    
    
    21
    
    
    
    16Company contribution
    
    
    16
    
    
    
    7
    
    
    
    22
    
    
    
    13FAS 88 events
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Participant contribution
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Other adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Benefits paid
    
    
    (16
    )
    
    
    (5
    )
    
    
    (21
    )
    
    
    (20
    )Increase in coverage
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    1Currency effect
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    (8
    )Fair value of plan assets at end of year
    
    
    0
    
    
    
    10
    
    
    
    167
    
    
    
    169Funded status reconciliationFunded status
    
    
    (102
    )
    
    
    (94
    )
    
    
    (168
    )
    
    
    (165
    )Unrecognized transitional obligations (asset)
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0Unrecognized prior service cost
    
    
    (6
    )
    
    
    (12
    )
    
    
    5
    
    
    
    3Unrecognized actuarial (gain) loss
    
    
    15
    
    
    
    1
    
    
    
    41
    
    
    
    45Prepaid (accrued) benefit cost
    
    
    (93
    )
    
    
    (105
    )
    
    
    (122
    )
    
    
    (117
    )
 Under U.S. GAAP, an additional minimum liability is recognized and a charge made to other
comprehensive income when the accumulated benefit obligation exceeds the fair value of plan assets
to the extent this amount is not covered by the net liability recognized in the balance sheet. For
the years ended December 31, 2003 and 2004, an additional minimum liability of 25 million and 35
million was recognized, respectively. Amounts recognized in the statement of financial position consist of: Pension and post retirementPension benefits, domestic
    
    
    benefits, foreign2003
    
    
    2004
    
    
    2003
    
    
    2004( in millions)
    
    
    ( in millions)Accrued employee benefit liability
    
    
    (93
    )
    
    
    (105
    )
    
    
    (152
    )
    
    
    (157
    )Prepaid benefit cost
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Intangible asset
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    4Accumulated other comprehensive income
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    31Net amount recognized
    
    
    (93
    )
    
    
    (105
    )
    
    
    (122
    )
    
    
    (117
    )For plans where ABO exceeds assets:ABO
    
    
    71
    
    
    
    81
    
    
    
    238
    
    
    
    260PBO
    
    
    102
    
    
    
    97
    
    
    
    258
    
    
    
    311Fair value of assets
    
    
    
    
    
    
    4
    
    
    
    131
    
    
    
    143
 Weighted average assumptions used to determine the net periodic benefit cost for years ended
December 31, 2003 and 2004 are as follows: Pension and post-retirementPension benefits, domestic
    
    
    benefits, foreign2003
    
    
    2004
    
    
    2003
    
    
    2004Discount rate
    
    
    5.50
    %
    
    
    5.25
    %
    
    
    6.45
    %
    
    
    6.02
    %Expected return on plan assets
    
    
    
    
    
    
    
    
    
    
    7.89
    %
    
    
    8.04
    %Rate of compensation increase
    
    
    3.50
    %
    
    
    3.00
    %
    
    
    3.69
    %
    
    
    3.55
    %
 The expected return on plan assets is set by reference to historical returns on the main asset
classes, current market indicators such as long-term bond yields and the expected long-term
strategic asset allocation of each plan. F-58




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Weighted average assumptions used to determine the benefit obligations as of December 31 are
as follows: Pension and post-retirementPension benefits, domestic
    
    
    benefits, foreign2003
    
    
    2004
    
    
    2003
    
    
    2004Discount rate
    
    
    5.25
    %
    
    
    5.00
    %
    
    
    6.02
    %
    
    
    5.71
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.22
    %
    
    
    3.55
    %
    
    
    3.68
    %
 An increase of one percentage point in the assumed health care cost trend would increase the
accumulated postretirement benefit obligation by 2 million at December 31, 2004. It would increase
the sum of the service and interest cost by 0.2 million for 2004. A decrease of one percentage
point in the assumed health care cost trend would decrease the accumulated postretirement benefit
obligation by 2 million at December 31, 2004. It would decrease the sum of the service and
interest cost by 0.2 million for 2004. The health care cost trend during the next four years is
expected to fall from 9 percent to five percent. Following additional information, as required in accordance with SFAS 132 Employers
Disclosure about Pensions and Other Postretirement Benefits Revised, which was issued in December
2003, applied to domestic plans in the year of issue and was extended to include foreign plans in
2004. In 2005, Metso expects to contribute 16 million in respect to the Finnish TEL system for the
pension liability. At December 31, 2003 and 2004, the accumulated benefit obligation for domestic
plans amounted to 71 million and 86 million, respectively. The weighted-average plan asset allocations were following as of the balance sheet date: Asset category
    
    2004Equity securities
    
    
    52
    %Bonds
    
    
    45
    %Other
    
    
    3
    %
 The asset allocation for each plan is determined locally in conjunction with investment and
actuarial advice, with reference to the plans liability profile and any local statutory
requirements. The current allocation of assets is in line with the target allocation of assets. The estimated future benefit payments, which reflect expected future service, as appropriate,
are following: Pensionplans
    
    
    Other plans( in millions)Year2005
    
    
    19
    
    
    
    32006
    
    
    19
    
    
    
    32007
    
    
    20
    
    
    
    32008
    
    
    20
    
    
    
    32009
    
    
    21
    
    
    
    32010-2014
    
    
    107
    
    
    
    14
 F-59




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) i) Restructuring costs Timing difference in recognition of restructuring costs under Finnish GAAP and U.S. GAAP in
the year December 31, 2002 Under Finnish GAAP, Metso recognized downsizing and restructuring costs of 36 million for the
year ended December 31, 2001. Under U.S. GAAP, certain portions of the restructuring and integration costs, amounting to 5
million, did not qualify for accrual and expense recognition in the year ended December 31, 2001.
As the total amount was realized in the year ended December 31, 2002, the difference between income
under Finnish and U.S. GAAP was reversed in 2002. Timing difference in recognition of restructuring costs under Finnish GAAP and U.S. GAAP in
the year ended December 31, 2003 In June 2003, Metso announced an efficiency improvement program affecting all business areas.
The program was designed to cut overhead costs aiming to achieve substantial cost savings. For the
year ended December 31, 2003, Metso recognized 103 million of expenses under the efficiency
improvement plan in accordance with Finnish GAAP. The plan included streamlining of sales and
administrative organizations and closing down plants to reduce excess production capacity in the
United States and in Europe. The personnel cuts have resulted in a reduction of some 1,900 persons
both through involuntary terminations and through disposals and outsourcing solutions. The
realization of final measures under the plan is expected to cause a further reduction of 140
persons in 2005. The realized and planned costs have been presented in detail in Note 9. Under U.S. GAAP, a liability for a cost associated with an exit or disposal activity is
measured at fair value and recognized when the liability is incurred. These costs include, but are
not limited to, one-time benefits provided to current employees, who are involuntarily terminated
and costs to terminate contracts, other than capital leases. If employees are required to render
service until they are terminated in order to receive the termination benefits, the cost under U.S.
GAAP is recognized ratably over the future service period whereas under Finnish GAAP, a provision
for the full termination benefit cost is recognized in the period in which the Company becomes
legally or constructively committed to a plan. Certain portions of the costs related to efficiency
improvement program, amounting to 30 million before a tax effect of 6 million, did not meet the
criteria for accrual and expense recognition under U.S. GAAP for the year ended December 31, 2003,
and were reversed in the income statement and shareholders equity reconciliation of Note 30. In the year ended December 31, 2004, the final outcome of certain measures, including gains on
disposals, under the efficiency improvement program differed from the initial projections by 10
million, reducing the total cost from the expected 103 million down to 93 million. Under Finnish
GAAP, the reduction was recognized under nonrecurring items in 2004. As certain employee
termination and other costs included in this reduction had not met the recognition criteria under
U.S. GAAP in the previous year, the impact of the reduction to the net income under U.S. GAAP was
2 million. In addition, as part of the program, Metso sold certain assets related to production
operations, including land, buildings and equipment to a buyer for 6 million and recognized under
nonrecurring items, as part of the savings of 10 million, a gain on sale of these assets of 3
million in accordance with Finnish GAAP. Concurrently, Metso entered into a partnering agreement
with the buyer for production of certain goods. As part of the sales agreement, Metso is obligated
to repurchase the assets disposed if the buyer defaults on the partnering agreement within the
first year commencing on October 1, 2004. For U.S. GAAP, a sale cannot be recognized if continuing involvement of the seller exists in
relation to the assets sold. As such, this sale cannot be recognized as the obligation to
repurchase the assets sold within the first year of the contract constitutes continuing involvement
for Metso. An adjustment of 2 million, net of tax effect of 1 million, has been recorded to
reverse the gain on sale of the assets. F-60




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METSONotes to Consolidated Financial Statements  (Continued) No more costs are expected to be recognized under the 2003 program. The total cost of the
program per reporting segment has been following: ( in millions)Metso Paper
    
    
    33
    (1)Metso Minerals
    
    
    52Metso Automation
    
    
    6Metso Ventures
    
    
    5Total cost of the program
    
    
    96
   (1)
    
    Includes impact of reversal of gain of 3 million on disposal under U.S. GAAP. Under U.S. GAAP, a cost reserve of 24 million, net of tax effect of 6 million,
resulting from the program, which did not qualify for recognition in the year ended December 31,
2003, was reversed in 2004 eliminating the timing difference between Finnish and U.S. GAAP. Timing difference in recognition of restructuring costs under Finnish GAAP and U.S. GAAP in
the year ended December 31, 2004 In 2004, Metso decided on a program for renewal of Metso Papers business concept with the aim
to streamline the cost structure. The main locations affected by the program are operations in
Finland, Sweden and in North America. The measures include personnel reductions in production and
administration, disposals of non-cores sites and reorganization of the tissue business line. Under Finnish GAAP, Metso recognized 26 million of restructuring costs under the 2004
program, see Note 9 for additional information. Under U.S. GAAP, certain costs, amounting to 1
million, net of tax effect of 1 million, related to the program did not qualify for recognition
and have been reversed in the income statement and shareholders equity in the year ended December
31, 2004. Cost accruals under U.S. GAAP for restructuring plans The table below illustrates the activity in the restructuring reserves: As of December 31,2003
    
    
    2004( in millions)Balance as at January 1
    
    
    53
    
    
    
    53Translation difference
    
    
    (3
    )
    
    
    (1
    )Additions to current year reserves
    
    
    39
    
    
    
    58Adjustments to prior year reserves
    
    
    
    
    
    
    (2
    )Amounts paid/charged to the reserve
    
    
    (36
    )
    
    
    (64
    )Balance as at December 31
    
    
    53
    
    
    
    44
 Included in the balances above are amounts related to lease contracts and post-employment
pension amounting to 9 million and 14 million at December 31, 2003 and 2004 respectively, which
have been included in long-term liabilities as the payout of these obligations will not be
completed within one year. F-61




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METSONotes to Consolidated Financial Statements  (Continued) Under U.S. GAAP, the cost accrual for the 2003 efficiency improvement program was as follows: As of December 31,2003( in millions)Reserve recorded under Finnish GAAP
    
    
    77Reclassified under U.S. GAAP as deductions to fixed assets and inventory
    
    
    (17
    )Efficiency improvement program reserve related to restructuring costs
under Finnish GAAP
    
    
    60Amounts reversed under U.S. GAAP
    
    
    (30
    )U.S. GAAP reserve as of December 31, 2003
    
    
    30
 Under Finnish GAAP, as of December 31, 2003, certain impairment losses on fixed assets and an
inventory obsolescence reserve together totalling 17 million under the program were included as
provisions to the balance sheet under Finnish GAAP. Under U.S. GAAP such amounts are recorded as
deductions of the related asset balances. The reserve recorded under U.S. GAAP was mainly composed of pension liabilities and early
retirement measures, which amounted to 10 million, and of employee termination benefits of 16
million. The remaining amount of 4 million included other restructuring costs related to reduction
of production capacity and streamlining of the sales organization under the program. j) Written put option on subsidiary shares Under Finnish GAAP, certain obligations, such as written put options on subsidiary shares,
need not be recognized before they become exercisable by the counterparty. Under U.S. GAAP, Metso was required to fair value such written put options and to recognize
them as a liability on the balance sheet. Metso had issued a put option obligating it to redeem, at
a fixed price, the minority ownership in one of its subsidiaries. The option, which could be
exercised between January 1, 2005 and September 30, 2005, was fair valued by discounting the
settlement amount to its present value, adjusted by the value of the minority ownership under U.S.
GAAP as of December 31, 2003. In the year ended December 31, 2004, Metso exercised its right to repurchase the minority
ownership at a pre-agreed price causing the written put option to lapse. Under Finnish GAAP, Metso reversed 5 million of the previously recognized gain and recorded
the shares at their fair value eliminating the timing difference in net income between U.S. GAAP
and Finnish GAAP. k) Investments Under Finnish GAAP, Metso records short-term investments at market value and changes in the
market value are recorded as part of financial income and expense in the Consolidated Statement
of Income. Under Finnish GAAP, Metso records other long-term investments, other than equity
securities, at lower of cost or market value. Shares are recorded at lower of cost or market value,
when the market value is considered to reflect a permanent impairment of the investment. For U.S. GAAP purposes, all of Metsos short-term and other long-term investments in debt
securities and equity securities with a readily determinable market value are classified as
available-for-sale and recorded at fair value with changes in unrealized appreciation recorded
directly to shareholders equity, net of applicable deferred income taxes. As a result, Metso
recognized 6 million and 2 million as of December 31, 2003 and 2004, respectively as an
adjustment to shareholders equity under U.S. GAAP. F-62




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Available-for-sale securities in accordance with U.S. GAAP are summarized as follows: Gross
    
    
    GrossU.S. GAAP
    
    
    unrealized
    
    
    unrealized
    
    
    MarketCost(1)
    
    
    holding gains
    
    
    holding losses
    
    
    Value( in millions)December 31, 2003
    
    
    35
    
    
    
    6
    
    
    
    (0
    )
    
    
    41December 31, 2004
    
    
    7
    
    
    
    2
    
    
    
    (0
    )
    
    
    9
   (1)
    
    U.S. GAAP cost is comprised of the historical acquisition price. The gain realized on disposal of available-for-sale securities was 4 million and 3
million for the years ended December 31, 2004 and 2003, respectively. l) Net investment hedge In the year ended December 31, 2002, Metso had designated an intercompany foreign currency
denominated loan as a hedge of a net investment under Finnish GAAP and as a result recorded the
exchange rate difference against the translation difference arising from the hedge of the net
investment at consolidation. Under U.S. GAAP, hedge accounting may be applied in consolidation only
if the intercompany loan designated as a hedging instrument is offset by a third-party loan. The
exchange rate gain has been reversed from cumulative translation adjustment accounts and recognized
as income in the year ended December 31, 2002. Under Finnish GAAP, Metso has applied hedge accounting for a forward exchange contract
designated as a hedge of its net investments in foreign subsidiaries denominated in CAD and USD.
The subsidiaries are owned by the parent company, which has the euro as its functional currency. Under U.S. GAAP, the hedge effectiveness criteria are not met as the change in the fair value
of the hedging instrument is based on changes in CAD/USD spot exchange rates where as the
translation adjustment arises between CAD and EUR and USD and EUR, respectively. As a result, the
unrealized loss on the hedging instrument has been included in the determination of net income
under U.S. GAAP for the years ended December 31, 2003 and 2004. m) Repurchase commitments and securitization Repurchase commitments Metso has entered into certain contracts to sell machines, which include commitments to buy
back the machine at a minimum specified value at the end of the contract period. Under Finnish
GAAP, revenue is recognized in full and any liability resulting from the guarantee is disclosed as
a contingent liability and recognized only when incurred. U.S. GAAP precludes recognition of revenue for these contracts and accordingly, the revenue
and gross profit related to these sales, net of taxes, has been reversed. Under U.S. GAAP, the
amounts received for these machines, net of the guaranteed amount, are recorded as deferred revenue
and amortized over the contract period. The equipment remains as an asset on the balance sheet and
is amortized over the contracted period to the lower of its repurchase value or market value. At
the end of the contract period, if the repurchase commitment has not been exercised, the remaining
deferred revenue is recognized as income against the remaining value of the equipment. Securitization Metso has entered into various agreements with third party financial institutions to sell
certain receivables with recourse. These agreements require periodic installments of principal and
interest over periods of up to five years from inception, with interest rates based on market
conditions. Metso has retained the servicing of substantially all of these contracts. The Swedish Export Credits Guarantee Board provides an export guarantee for the benefit of the
Company covering 100% political risk and 80-85% of commercial risk on the receivables. Metso
provides the F-63




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) buyer of the receivables with a guarantee to cover any non-payment by the customer not covered
by the Swedish Export Credits Guarantee. Net receivables outstanding at December 31, 2003 and 2004 relating to finance contracts sold
were 14 million and 5 million respectively. n) Treasury stock Under Finnish GAAP, treasury stock is presented within financial assets. Under U.S. GAAP,
treasury stock is to be shown as a deduction of the consolidated shareholders equity and,
consequently, 1 million at December 31, 2003 and 2004, respectively, has been deducted from the
shareholders equity under U.S. GAAP. o) Translation difference Under Finnish GAAP, the Company records certain purchase accounting adjustments related to
foreign subsidiaries in euro, which is the functional currency of the Parent Company. Under U.S. GAAP, purchase accounting adjustments are recorded in the functional currency of
the subsidiary to which they relate. As a result, currency translation differences have been
recognized with respect to such purchase accounting adjustments. The translation difference is
following: As of December 31,2003
    
    
    2004( in millions)Goodwill
    
    
    (61
    )
    
    
    (50
    )Brand names
    
    
    (6
    )
    
    
    (2
    )Customer value
    
    
    (5
    )
    
    
    (4
    )Patents
    
    
    (0
    )
    
    
    (0
    )Land and water areas.
    
    
    (1
    )
    
    
    (1
    )Buildings
    
    
    (2
    )
    
    
    (1
    )Other tangible assets
    
    
    (1
    )
    
    
    (1
    )Deferred taxes
    
    
    4
    
    
    
    3Total
    
    
    (72
    )
    
    
    (56
    )
 p) Fees for bond exchange During 2004, Metso entered into several transactions with existing lenders to exchange 344
million of
500 million
bonds issued under Euro Medium Term Note Program for new bonds with a lower interest rate
and a longer term. As a result of these transactions, under Finnish
GAAP, Metso capitalized
23
million of premiums paid to existing lenders to reacquire the original bonds and 1 million of fees
paid to third parties to execute these transactions. Metso also wrote off 1 million of unamortized
costs relating to the original bonds (See Note 18 for further details on these exchange
transactions). U.S. GAAP classifies exchanges of debt into two categories: extinguished or modified. This
classification is determined based on a test of the change in the present value of remaining cash
flows for the original debt and the new debt. If this change exceeds 10% of the original debt
remaining cash flow, the debt exchange is considered to be an extinguishment of the original debt.
The accounting treatment of the fees paid to creditors and third parties varies depending on the
classification of the exchange. Finnish GAAP does not have this classification and treats all debt
exchanges in the same manner. In 2004, for U.S. GAAP purposes, some of the exchange transactions
qualified as extinguishments of debt, while others qualified as
modifications. For U.S. GAAP,
2 million
of the 23 million of premiums paid to existing lenders is recorded as a loss on extinguishment of the
bonds, as these bonds qualified as extinguished under U.S. GAAP. For the transactions which the
bonds qualified as modified under U.S. GAAP, the fees of 1 million paid to third parties are
expensed and the 1 million of unamortized costs relating to the original bonds remain as an asset
on the balance sheet. F-64




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) q) Valuation allowances for deferred tax assets Under Finnish GAAP, deferred tax assets are reduced by a valuation allowance if, based on
the weight of available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Available evidence includes internal
projections of future earnings which are utilized to assess the probability that the
deferred tax assets will not be realized. Under U.S. GAAP, if there is objective negative
evidence, such as cumulative losses for recent years, the weight given to positive
evidence would be commensurate with extent to which it can be objectively verified. As a
result, internal projections normally would not be assigned any significant weight in
assessing the need for a valuation allowance.In addition, in accordance with Finnish GAAP, the need for a valuation allowance is
assessed based only on the deferred tax assets which are expected to be utilized over a
reasonable time in the future. In determining the need for a valuation allowance in
accordance with U.S. GAAP, a company is required to consider taxable income that will
arise within the statutory period over which the deferred tax asset may be utilized.Due to these items, differences may arise in regards to the determination of the valuation
allowance under Finnish GAAP versus U.S. GAAP.In connection with the preparation of the annual report on Form 20-F, an error was
detected in the 2002 and 2003 financial statements regarding the application of the
provisions for valuation allowances related to deferred tax assets as required by
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS
109). In accordance with FAS 109, the determination of the amount of a valuation
allowance is based on the weight of all available evidence, both positive and negative.
When negative evidence exists, such as cumulative losses for recent years as is the case
in the Companys U.S. operations, projections of future taxable income will generally not
be sufficient to overcome the negative evidence of cumulative losses. When positive
evidence exists, such as taxable income, as is the case in the Companys German
operations, the valuation allowance should reflect that amount which is more likely than
not to not be realized within the statutory period over which the deferred tax asset may
be utilized.In order to correctly record the valuation allowance in accordance with FAS 109, an
additional valuation allowance related to the Companys U.S. operations of 91 million has
been recorded as of December 31, 2002, with a corresponding increase to deferred income
tax expense. In 2003, the consolidated balance sheet would still reflect substantially a
full valuation allowance for the U.S. deferred tax assets; however, the amounts previously
recognized in 2003 to increase this valuation allowance would have been recorded in the
previous year as noted above. In addition, the amount previously recognized as a valuation
allowance related to the German operations has been reversed in 2003. The impact of this
restatement on the U.S. GAAP financial statements has been summarized in Note 30 (see Note
30).Under Finnish GAAP, the balance sheet presentation of deferred taxes differs from the
presentation requirements set forth in U.S. GAAP, see Note 8 for Finnish GAAP disclosure.Under U.S. GAAP, the current and non-current deferred tax liabilities and assets are
presented as a net current and as a net non-current amount, consistent with the
classification of the related assets and liabilities having generated the deferred tax.
The classification is made for each separate tax-paying component within each taxing
jurisdiction. Following table presents the deferred tax assets and liabilities under U.S.
GAAP according to the presentation prescribed by SFAS 109 Accounting for Income Taxes :
 F-65




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) As of December 31,2003
    
    2004( in millions)Non-current assetsTax losses carried forward
    
    
    171
    
    
    
    210Other
    
    
    31
    
    
    
    38Valuation allowance
    
    
    (106
    )
    
    
    (106
    )96
    
    
    
    142Current assetsInventory
    
    
    23
    
    
    
    19Reserves
    
    
    34
    
    
    
    31Accruals
    
    
    37
    
    
    
    32Medical benefits
    
    
    15
    
    
    
    2Other
    
    
    5
    
    
    
    3Valuation allowance
    
    
    (55
    )
    
    
    (49
    )59
    
    
    
    38Current liabilitiesInventory
    
    
    0
    
    
    
    (0
    )Inventory
    
    
    (1
    )
    
    
    0(1
    )
    
    
    0Non-current liabilitiesFixed assets
    
    
    (53
    )
    
    
    (4
    )Purchase price adjustments
    
    
    (37
    )
    
    
    (40
    )Tax allocation reserve
    
    
    (12
    )
    
    
    (0
    )Other
    
    
    (2
    )
    
    
    (0
    )(104
    )
    
    
    (44
    )Deferred tax asset, net
    
    
    50
    
    
    
    136
 r) Discontinued Operations In November 2002, Metso announced it signed a memorandum of understanding with a Swiss buyer
Bobst Group SA to dispose of the Converting Equipment group, which manufactures equipment for the
packaging industry. The transaction was closed on January 30, 2004. As part of reorientation of Metsos strategic direction and to strengthen its balance sheet,
Metso announced in February 2004 its intention to explore the business development possibilities,
including disposal, of its Compaction and Paving business line within Metso Minerals. The disposal
of Compaction and Paving was completed on June 30, 2004. As part of its policy to dispose of
non-core businesses, Metso announced in November 2004 the sale of Reedrill, specialized in sale and
manufacturing of drilling equipment, to Terex Corporation, U.S. based group. The transaction was
closed in December 2004. In accordance with Finnish GAAP, the results of Discontinued Operations are included in the
determination of consolidated net income. Under U.S. GAAP, the Converting Equipment group, Compaction and Paving business line and
Reedrill business meet the criteria of a component entity classified as held for sale under SFAS
144, Accounting for the Impairment or Disposal of Long-lived Assets, and accordingly, income from
continuing and Discontinued Operations has been presented separately and all prior period
information have been restated to reflect such presentation. F-66




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Certain income statement line items for the Discontinued Operations are presented in the
following table: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)(restated)Net sales
    
    
    558
    
    
    
    560
    
    
    
    263Operating profit
    
    
    19
    
    
    
    (42
    )
    
    
    12Net income
    
    
    19
    
    
    
    (39
    )
    
    
    8
 The above table has been reclassified for years 2002 and 2003 to include Reedrill, which
qualified as held for sale in 2004. As of December 31, 2003, the main balance sheet items for the Discontinued Operations were: ( in millions)Fixed assets and long-term investments
    
    
    232Inventories
    
    
    120Other current assets
    
    
    151Total assets
    
    
    503Shareholders equity
    
    
    192Long-term liabilities
    
    
    58Short-term liabilities
    
    
    253Shareholders equity and liabilities
    
    
    503
 The goodwill related to the disposed operations amounted to 135 million of which 122 million
concerned the Compaction and Paving business. Under Finnish GAAP, intangible and tangible fixed assets related to Discontinued Operations
continue to be amortized even after having being qualified as held-for-sale. Under U.S. GAAP, in accordance with SFAS 144, fixed assets, which qualify as held-for-sale
either individually or as part of a disposal group, are no longer amortized when the held-for-sale
criteria is met. A depreciation cost of 2 million related to Discontinued Operations recognized
under Finnish GAAP in the year ended December 31, 2003 was reversed under U.S. GAAP. As the
disposals of the businesses have been realized in the year ended December 31, 2004, the previous
year adjustment has been offset against the loss on disposal under U.S. GAAP. Under U.S. GAAP, the loss on disposal of Discontinued Operations was 72 million, which is 46
million higher than the loss recognized under Finnish GAAP. The loss under U.S. GAAP differs from
the loss under Finnish GAAP due to differences in the underlying book values of the disposed
operations, primarily arising from certain intangible assets and goodwill which are not amortized
under U.S. GAAP. The accumulated goodwill amortization on Discontinued Operations recognized under
Finnish GAAP and reversed under U.S. GAAP amounted to 28 million. F-67




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METSONotes to Consolidated Financial Statements  (Continued) s) Consolidated Statement of Comprehensive Income The Company has adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and presentation of
comprehensive income and its components. The Company has chosen to present comprehensive income in
accordance with Finnish GAAP and components of comprehensive income consist of the following: Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)Comprehensive incomeNet income under Finnish GAAP
    
    
    65
    
    
    
    (258
    )
    
    
    69Other comprehensive incomeForeign currency translation adjustments
    
    
    (127
    )
    
    
    (55
    )
    
    
    (12
    )Hedging of net investment denominated
in foreign currency, net of taxes of
(17) million,(16) million and
3 million, respectively
    
    
    42
    
    
    
    39
    
    
    
    0Additional minimum liability, net of
tax benefit of 3 million, 4 million
and 1 million, respectively
    
    
    (5
    )
    
    
    (6
    )
    
    
    (2
    )Other comprehensive income
    
    
    (90
    )
    
    
    (22
    )
    
    
    (14
    )Comprehensive income
    
    
    (25
    )
    
    
    (280
    )
    
    
    55
 t) Earnings per share Earnings per share for Finnish GAAP purposes is based on income before extraordinary items and
income taxes, adjusted for minority interest and taxes related for normal business operations (see
Note 1 Accounting Principles for detailed discussion). Under U.S. GAAP, basic earnings per share
is calculated by dividing net income by the weighted average number of common shares outstanding
during the year. Diluted earnings per share is calculated by adjusting the weighted average number
of outstanding shares to include the weighted average number of potential common stock, such as
stock options. Weighted average shares diluted include 100,000 stock options, which could be
exercised to the employees favor at December 31, 2004. In prior years, these stock options were
anti-dilutive. u) Customer tooling The fixed asset balance as of December 31, 2003 and 2004 includes 18 million and 29 million,
respectively, related to amounts received from customers to invest in specific equipment to fulfill
the contractual obligations to them. The amounts received have been recorded as a liability under
advances received and are being amortized. As a result of the offsetting impact of the depreciation
of such assets and amortization of amounts received, the net impact to the earnings under U.S. GAAP
is zero. v) Stock compensation Pursuant to SFAS No. 123 Accounting for Stock-Based Compensation, the Company has elected to
account for its stock option plan under the intrinsic value method of APB Opinion 25 Accounting
for Stock Issued to Employees and adopt only the disclosure provisions of SFAS No. 123. As of
December 31, 2004, the compensation expense was not considered as material under APB 25 related to
the Companys employee stock options. Under SFAS No. 123, stock options are valued at grant date
using the Black-Scholes valuation model and compensation costs are recognized ratably over the
vesting period. Had compensation costs been determined as prescribed by SFAS No. 123, the Companys
net income and earnings per share would have been reduced to pro forma amounts indicated in the
following table: F-68




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) Year ended December 31,2002
    
    
    2003
    
    
    2004( in millions)(restated)
    
    (restated)Net income (loss)as reported
    
    
    22
    
    
    
    (235
    )
    
    
    2Stock based compensation cost included
in the determination of net income,
net of taxes
    
    
    
    
    
    
    
    
    
    
    Stock based compensation cost that
would have been included in the
determination of net income if the
fair value method was used, net of
taxes
    
    
    (3
    )
    
    
    (1
    )
    
    
    (0
    )Pro forma
    
    
    19
    
    
    
    (236
    )
    
    
    2Basic and diluted earnings (loss) per shareas reported
    
    
    0.16
    
    
    
    (1.73
    )
    
    
    0.01Pro forma
    
    
    0.14
    
    
    
    (1.73
    )
    
    
    0.01
 The Company has currently three option programs, the 2000 stock option plan, the 2001 stock
option plan and the 2003 stock option plan. The Board of directors of Metso Corporation proposed to the 2003 Annual General Meeting held
in April 2003 that stock options, named 2003A, 2003B and 2003C, be issued to the key persons of
Metso Group and to its wholly owned subsidiary, Metso Capital Oy (the 2003 Plan). Upon issue all
stock options were distributed to Metso Capital Oy. Metso Capital Oy distributes stock options to
the key persons of Metso Group by the resolution of the Board of Directors. The total number of
stock options distributed to the key persons under the 2003 Plan cannot exceed 5,600,000 stock
options. No stock options under the 2003 Plan have been granted, apart from 100,000 options granted on
March 1, 2004 to the new President and chief executive officer. Compensation costs recorded for
this grant are considered to be immaterial. Metsos Board of Directors decided on May 26, 2004 to reduce the number of options related to
the year 2003 option program to 2,900,000. Metsos Board decided that it will not distribute the
total 4,900,000 (2,400,000 2003A and 2,500,000 2003C) options, and it will propose to the 2005
Annual General Meeting that these options be canceled. With respect to the year 2003 program,
Metsos Board of Directors reserved 100,000 year 2003A options and 100,000 year 2003C options for
future needs. Metsos Board of Directors also decided that the maximum number of year 2003B options that
could be distributed would be 2,500,000 but as the minimum performance criteria were not fulfilled
in 2004, no options will be distributed from the program. F-69




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) 2003A
    
    2003B
    
    2003CNumber of stock options
    
    
    2,600,000
    
    
    
    2,600,000
    
    
    
    2,600,000Subscription period
    
    April 1,
2006 
April 30, 2009
    
    April 1,
2007 
April 30, 2010
    
    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
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, 2005 adjusted by
dividends payable after January 1, 2005
but before the date of the share
subscription. 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.
 If a subscriber of the options under the 2003 Plan ceases to be employed by or in the service
of the Metso Group for any other reason than retirement or death before April 1, 2008, such person
is obligated without delay to offer to the Company free of charge the warrants for which the share
subscription period had not begun at the last day of such persons employment. The 2001 Annual General Meeting approved of an issue of two series of warrants (the 2001
Plan), named A and B, to persons belonging to the management and to certain other key persons with
following conditions: A warrants
    
    B warrantsNumber of warrants
    
    
    500,000
    
    
    
    500,000Exercise period
    
    April 1, 2001  April 30,
2005
    
    April 1, 2003  April 30,
2005Exercise price per warrant
    
    15.60 adjusted by dividends payable after March 1, 2001.
The exercise price cannot be below par value.Subscription
    
    One stock option gives the right to subscribe one share.
 The series A and B stock options issued by Metso in 2001 were combined and made available for
trading as a separate security on the main list of the Helsinki Exchanges from April 1, 2003. The 2000 Annual General Meeting approved a plan (the 2000 Plan) in order to standardize the
incentive programs of the Group in such a manner that the warrant holders of Valmet Corporation and
Rauma Corporation were offered a possibility to convert their warrants in the aforementioned
companies to the warrants being issued. As a result of the 2000 Plan, 3,500,000 outstanding Valmet
and Rauma warrants were converted to the plan. Under the 2000 Plan, two series of warrants, named A
and B, are issued to persons belonging to the management and certain other key persons with
following conditions: F-70




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) A warrants
    
    B warrantsNumber of warrants
    
    
    2,500,000
    
    
    
    2,500,000Exercise period
    
    April 1, 2001  April 30,
2005
    
    April 1, 2003  April 30,
2005Exercise price per warrant
    
    16 adjusted by dividends payable after March 1, 2000.
The exercise price cannot be below par value.Subscription
    
    One warrant gives the right to subscribe one share.
 To the extent the subscription rights of warrants are not used by the persons included in the
2000 or 2001 Plan, they can be subscribed by Metso Corporations subsidiary, Metso Capital Oy. The
Board of Directors of Metso Corporation is authorized to transfer such warrants in future to
persons becoming eligible to its incentive plan. The series B stock options that Metso issued in 2000 were made available for trading on the
main list of the Helsinki Exchanges combined with the series 2000 A stock options from April 1,
2003. If a subscriber of the warrants under the 2000 or 2001 Plan ceases to be employed by or in the
service of the Metso Group for any other reason than retirement or death before April 1, 2003, then
such person is obligated without delay to offer to the Company free of charge the warrants for
which the share subscription period had not begun at the last day of such persons employment. The following tables summarizes information about stock options outstanding at December 31,
2004: Number of
    
    
    Weighted
    
    
    WeightedShares to be
    
    
    Average
    
    
    Averagesubscribed
    
    
    Fair Value
    
    
    Exercise Price2000 PlanOutstanding at January 1, 2000
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    4,902,500
    
    
    
    2.82
    
    
    
    15.60Forfeited
    
    
    35,000
    
    
    
    
    
    
    
    15.60Outstanding at January 1, 2001
    
    
    4,867,500
    
    
    
    
    
    
    
    15.60Granted
    
    
    295,000
    
    
    
    0.68
    
    
    
    15.00Forfeited
    
    
    227,500
    
    
    
    
    
    
    
    15.60Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2001
    
    
    4,935,000
    
    
    
    
    
    
    
    15.57Granted
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    61,000
    
    
    
    
    
    
    
    15.56Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2002
    
    
    4,874,000
    
    
    
    
    
    
    
    15.56Granted
    
    
    30,000
    
    
    
    0.07
    
    
    
    14.20Forfeited(1)
    
    
    34,250
    
    
    
    
    
    
    
    15.56Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2003
    
    
    4,869,750
    
    
    
    
    
    
    
    15.56Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2004
    
    
    4,869,750
    
    
    
    
    
    
    
    15.65
   (1)
    
    The forfeiture requirement has expired on April 1, 2003. F-71




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Number of
    
    
    Weighted
    
    
    WeightedShares to be
    
    
    Average
    
    
    Averagesubscribed
    
    
    Fair Value
    
    
    Exercise Price2001 PlanOutstanding at January 1, 2001
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    675,000
    
    
    
    1.11
    
    
    
    15.00Forfeited
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2001
    
    
    675,000
    
    
    
    
    
    
    
    15.00Granted
    
    
    120,000
    
    
    
    1.62
    
    
    
    14.40Forfeited
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2002
    
    
    795,000
    
    
    
    
    
    
    
    14.91Granted
    
    
    105,000
    
    
    
    0.23
    
    
    
    13.80Forfeited(1)
    
    
    27,500
    
    
    
    
    
    
    
    15.56Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2003
    
    
    872,500
    
    
    
    
    
    
    
    14.54Granted
    
    
    30,000
    
    
    
    0.11
    
    
    
    13.25Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2004
    
    
    902,500
    
    
    
    
    
    
    
    14.49
   (1)
    
    The forfeiture requirement has expired on April 1, 2003. The fair value of the 2001 plan option is based on the quoted market value of the option
in the Helsinki Stock Exchange on the date of grant March 1, 2004. Number of
    
    
    Weighted
    
    
    WeightedShares to be
    
    
    Average
    
    
    Averagesubscribed
    
    
    Fair Value
    
    
    Exercise Price2003 PlanOutstanding at January 1, 2003
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    100,000
    
    
    
    4.79
    
    
    
    9.75Forfeited
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2004
    
    
    100,000
    
    
    
    
    
    
    
    9.75
 The fair value of the options is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: Year ended December 31,2002
    
    
    2003
    
    
    20042000 PlanExpected volatility
    
    
    
    
    
    
    33.11
    %
    
    
    Risk-free interest rate
    
    
    
    
    
    
    2.52
    %
    
    
    Dividend yield
    
    
    
    
    
    
    6.11
    %
    
    
    Expected life (years)
    
    
    
    
    
    
    1.33
    
    
    
    
 F-72




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Year ended December 31,2002
    
    
    2003
    
    
    20042001 PlanExpected volatility
    
    
    46.45
    %
    
    
    31.87
    %
    
    
    Risk-free interest rate
    
    
    3.80
    %
    
    
    2.50
    %
    
    
    Dividend yield
    
    
    5.55
    %
    
    
    6.09
    %
    
    
    Expected life (years)
    
    
    1.7
    
    
    
    1.29
    
    
    
    2003 PlanExpected volatility
    
    
    
    
    
    
    
    
    
    
    39.93
    %Risk-free interest rate
    
    
    
    
    
    
    
    
    
    
    3.29
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    0.00
    %Expected life (years)
    
    
    
    
    
    
    
    
    
    
    5.17
 Valmet The 1998 Annual General Meeting approved an issue of two series of warrants to persons
belonging to the management of the Company and to certain other key persons (the 1998 I plan).
The warrants entitle the holders to subscribe to an aggregate of 2,000,000 shares in Valmet
(1,000,000 shares in each series). The subscription period for the new shares commenced on April 1,
2001 for the first series, entitling holders to subscribe for new shares of Valmet at a price of
18.16 per share, and on April 1, 2003 for the second series, entitling the holders to subscribe
new shares of Valmet at a price of 19 per share. The subscription period for both series will
close on March 31, 2005. The share subscription price for both series is adjusted by dividends
distributed after May 1, 1998 and before the date of the subscription. As of December 31, 2004, no
shares had been subscribed for under the 1998 I plan. Consequent to the approval of the 2000 plan
of Metso, the holders utilized the possibility to convert their warrants of the 1998 I Plan to
warrants under the 2000 Plan. Rauma In February 1998, the shareholders approved a plan (the 1998 II plan) to issue warrants (A,
B and C warrants) to certain senior management employees of Rauma. The aggregate amount of warrants
issued was 1,100,000. Each warrant entitles its holder to subscribe for one share of Rauma. The A
warrants entitle the holders to subscribe to 330,000 shares of Rauma during the period from April
17, 2001 to April 17, 2005. The B warrants entitle the holders to subscribe to 330,000 shares of
Rauma during the period from April 17, 2002 to April 17, 2005. The C warrants entitle the holders
to subscribe to 440,000 shares of Rauma during the period from April 17, 2003 to April 17, 2005.
The original subscription price was 20.35 per share, adjusted by the dividends distributed after
May 1, 1998 and before the date of subscription. The merger between Valmet and Rauma adjusted the
subscription price to 18.68 per share for both warrants based on the exchange ratio. The
expiration date for all warrants is April 17, 2005. No share entitlements provided by options
transferred from Rauma Corporation were subscribed for in 2003 or in 2004. Consequent to the approval of the 2000 plan of Metso Corporation, the holders utilized the
possibility to convert their warrants of the 1998 II Plan to warrants under the 2000 Plan. No other bonds with warrants or convertible bonds were outstanding during 2004. w) Classification differences and Other Disclosures Cash and cash equivalents Under Finnish GAAP, the cash and cash equivalents include liquid funds and traded short-term
investments with a maturity not exceeding three months as of the date of closing. Under
U.S. GAAP, the cash equivalents include only short-term liquid investments with an
original maturity of three months or less. The shorter maturity would reduce Cash and cash
equivalents of the consolidated balance sheet by
47 million and increase Other short-term
investments by the same amount in the year ended December 31, 2004. This would also impact the
cash flow statement as an increase in funds F-73




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##### Table of Contents



METSONotes to Consolidated Financial Statements  (Continued) invested in marketable
securities by
47 million and as a reduction of the net cash provided
by the investing activities from
359 million
down to 312 million. Discontinued Operations Under Finnish GAAP, the long-term items related to Discontinued Operations remain classified
as long-term in the consolidated balance sheet based on their maturity in the entity carrying the
respective items. Under U.S. GAAP, long-term assets and liabilities of Discontinued Operations are reclassified
as short-term in the consolidated balance sheet from the moment onwards that the operations qualify
as held-for-sale. In the year ended December 31, 2003, Discontinued Operations included 232
million of long-term assets and 58 million of long-term liabilities, which, under U.S. GAAP, would
have been classified as current. In the year ended December 31, 2004, Metso did not own operations,
which would have qualified as held-for-sale. Impairment Under Finnish GAAP, impairment losses on intangible and tangible assets can be recognized as
liabilities, especially if the underlying asset is held for sale and the reserve reflects the
expected unrealized loss at disposal. In connection with the efficiency improvement program
launched in 2003, Metso recognized various write-downs of long-lived assets and inventory
obsolescence for an amount of 17 million as accrued liabilities. Under U.S. GAAP, impairment losses and inventory obsolescence are recognized as a reduction of
the cost basis of the underlying assets. The write-downs would have impacted the value of inventory
by 1 million, the value of intangible assets by 2 million and the value of tangible fixed assets
by 14 million. Service revenues The service revenue, consisting solely of service such as repair and maintenance provided to
customers and third parties, is less than 10 percent of Metsos consolidated net sales in 2004. The
aftermarket activity as defined in Metso comprises, but is not limited to spare and wear part
sales, certain modernizations of customer equipment, performance testing and evaluation. x) Valuation and Qualifying Accounts Allowance for doubtful accounts for the three years ended December 31, 2002, 2003 and 2004 is
set forth below: Balance at
    
    
    Charged to
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    Cost and
    
    
    
    
    
    
    
    
    
    
    Endof Year
    
    
    Expenses
    
    
    Deductions
    
    
    Other(1)
    
    
    of Year( in millions)2002
    
    
    56
    
    
    
    13
    
    
    
    (16
    )
    
    
    (8
    )
    
    
    452003
    
    
    45
    
    
    
    5
    
    
    
    (13
    )
    
    
    (3
    )
    
    
    342004
    
    
    34
    
    
    
    12
    
    
    
    (4
    )
    
    
    (5
    )
    
    
    37
   (1)
    
    Includes foreign currency translation effects. F-74




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##### Table of Contents



METSO
Notes to Consolidated Financial Statements  (Continued) Allowances for inventory accounts for the three years ended December 2002, 2003 and 2004
is set forth below: Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Endof Year
    
    
    Additions(1)
    
    
    Deductions
    
    
    Other(2)
    
    
    of Year( in millions)2002
    
    
    80
    
    
    
    12
    
    
    
    (13
    )
    
    
    (7
    )
    
    
    722003
    
    
    72
    
    
    
    15
    
    
    
    (15
    )
    
    
    (5
    )
    
    
    672004
    
    
    67
    
    
    
    10
    
    
    
    (18
    )
    
    
    (2
    )
    
    
    57
   (1)
    
    Excludes amounts recorded as direct write-off of inventories of 7 million, 3 million and
6 million for the years ended December 31, 2002, 2003 and 2004, respectively.(2)
    
    Includes foreign currency translation effects. y) New Accounting Standards In December 2003, the Medicare Prescription Drug, Improvements and Modernization Act of 2003
(the Medicare Act) was approved in the United States. The Medicare Act provides for two new
prescription drug benefit features under Medicare. Metso provides post-retirement benefits to some
of its United States employees so the benefits provided are impacted by the Medicare Act. SFAS 106,
Employers Accounting for Post-retirement Benefits Other Than Pensions, requires that enacted
changes in the law that take effect in future periods and that will affect the future level of
benefit coverage be considered in the current period measurements for benefits expected to be
provided in those future periods. Metso has determined the Medicare Act had an immaterial effect on
the cost of medical benefits to be borne by Metso. In March 2004, the EITF reached consensus on Issue No. 03-01, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-01). EITF
03-01 provides guidance on other-than-temporary impairment models for marketable debt and equity
securities and non-marketable securities accounted for under the cost method. On September 30,
2004, the FASB issued FSP 03-01-1, Effective Date of Paragraphs 10-20 of EITF Issue 03-01, The
Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, delaying the
effective date for the recognition and measurement guidance in EITF 03-01, until certain
implementation issues are addressed and a final FSP is issued. The disclosure requirements in EITF
03-01 remain effective. Metso has complied with the disclosure requirements for the year ended
December 31, 2004. In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4, clarifying the existing requirements in ARB No. 43 regarding normal capacity,
spoilage costs and idle capacity costs. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The adoption of FAS 151 will not have an impact
on the Metsos consolidated results of operation or financial position, since the key elements are
already utilized in Metsos US GAAP consolidated financial statements. In December 2004, the FASB published FASB Statement No. 123 (revised 2004). Share-Based
Payments. This provides guidance on how companies must recognize the compensation cost relating to
share-based payment transactions in their financial statements. It will require companies to
recognize a compensation cost for the value of options granted in exchange for employee services,
based on the grant date fair value of those instruments. FASB No. 123 (revised) is effective for
public entities as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005, however early application is possible. Metso intends to adopt this revised
standard from January 1, 2005. Metso is currently assessing what impact the pronouncement will have
on its consolidated financial statements. Note 31. Subsequent Events In March 2005, Metso announced the disposal of Metso Drives, a business line reported under
the segment of Metso Ventures. The debt-free price for the divestment amounted to roughly 98
million. Metso Drives manufactures mechanical power transmission equipment. The sale will become
effective after the buyer obtaining the relevant regulatory approvals. F-75