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ERICSSON ANNUAL REPORT 2005
Communication is
a basic human need.
Telefonaktiebolaget LM Ericsson
Group Function Communications
SE-164 83 Stockholm, Sweden
www.ericsson.com
Printed on Scandia 2000 and Ideal volym – totally chlorine free (TCF)
paper that meets international environmental standards.
ISSN 1100-8962
© Telefonaktiebolaget LM Ericsson 2006
CONTENTS
2005 MILESTONES
LARGEST CONTRACTS IN 129 YEAR HISTORY
Ericsson signs multi-year agreements to manage 3’s networks
in Italy and UK, covering more than eight million subscribers.
EXCLUSIVE SUPPLIER FOR THE “BRAINS” OF
‘‘NEXT GENERATION’’ NETWORK
Ericsson’s Softswitch selected to play a key strategic role in
the development of BT’s 21st Century Network.
FIRST MOBILE BROADBAND (HSDPA) NETWORKS
IN COMMERCIAL SERVICE
During 2005, Ericsson deployed HSDPA in 21 networks in
17 countries in Asia, the Middle East, Africa, Europe and
North America. This includes the world’s first commercial
HSDPA launch for Cingular in the US.
ERICSSON INSIDE
Ericsson’s 3G/WCDMA platforms are now in more than
15 million mobile phones, representing an industry-leading
market share.
EXPANDING OUR PRODUCT AND MARKET PORTFOLIO
Marconi aquisition strengthens Ericsson’s position in the
accelerating optical transmission and broadband access
markets.
BRINGING MULTIMEDIA CONTENT TO
OPERATORS AND CONSUMERS
Ericsson entered into distribution agreements with major
record labels and Napster to enhance the availability of mobile
music, and launched a mobile TV application to bring
interactive television to mobile devices.
ANNUAL REPORT 2005
1
OPERATIONAL REVIEW
25
SHARE INFORMATION
30
TWO-YEAR SUMMARY
32
LETTER FROM THE CHAIRMAN
33
BOARD OF DIRECTORS’ REPORT
(AUDITED CHAPTER)
41
CONSOLIDATED FINANCIAL STATEMENTS
(AUDITED CHAPTER)
45
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (AUDITED CHAPTER)
89
PARENT COMPANY FINANCIAL STATEMENTS
(AUDITED CHAPTER)
95
NOTES TO THE PARENT COMPANY FINANCIAL
STATEMENTS (AUDITED CHAPTER)
108
AUDITORS’ REPORT
109
INFORMATION ON THE COMPANY
118
FORWARD-LOOKING STATEMENTS
119
RISK FACTORS
123
SHAREHOLDER INFORMATION
CORPORATE GOVERNANCE REPORT 2005
INTERNAL CONTROL REPORT 2005
Project management Ericsson Investor Relations
Design and production Publicis Stockholm and Paues Media
Photography Andreas Lind and Dan Kullberg (page 24)
Reprographics C2
Printing Elanders, Falköping, Sweden
EN/LZT 108 8181 R1A
FINANCIAL
HIGHLIGHTS *
SEK million
Net sales
Operating income
– operating margin
Net income
Earnings per share, diluted, SEK
Cash dividends per share, SEK
2005
2004 1)
151,821
33,084
21.8%
24,460
1.53
0.45 2)
131,972
26,706
20.2%
17,836
1.11
0.25
YEAR-END POSITION, SEK million
208,829
Total assets
86,980
Working capital
133,621
Capital employed
6,966
Property, plant and equipment
104,677
Stockholders’ equity
Minority interests
850
Interest-bearing provisions and liabilities 28,094
53,411
Net cash
RATIOS
Return on equity
Return on capital employed
Equity ratio
Capital turnover
Inventory turnover
Accounts receivable turnover
26.2%
28.7%
50.5%
1.2
5.0
4.1
186,186
69,268
115,144
5,845
80,445
1,057
33,643
42,911
24.2%
26.4%
43.8%
1.2
5.7
4.1
STATISTICAL DATA, YEAR-END
Number of employees
– Worldwide
– Of which in Sweden
Export sales from Sweden, SEK million
56,055
21,178
93,879
50,534
21,296
86,510
* This year, there is only a two-year comparison due to the change to IFRS.
NET SALES:
Strong growth in global services
and mobile networks fueled the
15 percent increase.
OPERATING MARGIN:
Record operating margin reflects
our commitment to operational
excellence.
NET INCOME:
Net income grew by 37 percent
making 2005 the most profitable
year in Ericsson’s history.
NET CASH:
Net cash increased by 24 percent to
our highest level ever. This strong
cash generation allowed our Board
of Directors to propose an 80
percent dividend increase.
RETURN ON EQUITY
AND EQUITY RATIO:
Record profits lead to strong returns
for shareholders and 26.2 percent
ROE. Equity ratio now above
50 percent.
1) 2004 has been restated in
accordance with IFRS.
2) For 2005, as proposed by the
Board of Directors.
OUR 10 LARGEST MARKETS
NET SALES (SEK billion)
REGIONAL UPDATE 2005
Ericsson net sales (SEK billion) and growth (%) year-over-year
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* Excludes phones which are
now part of Sony Ericsson
Mobile Communications.
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F I N A N C I A L H I G H L I G H T S
1
WHAT IT MEANS TO BE THE PRIME DRIVER IN AN ALL-
COMMUNICATING WORLD
2
WHAT IT MEANS TO BE THE PRIME DRIVER IN AN ALL-
COMMUNICATING WORLD
From the time our first cry announces our arrival into the world, our need
to communicate starts to grow. Interacting with our parents and friends
and sharing ideas, we develop our social skills and communication be-
comes a fundamental part of our lives. We soon want to communicate over
longer distances and while on the move.
Mobile communication is now a part of the everyday lives of some two
billion people. New ways to enjoy media are emerging with news, music,
gaming, television and other experiences conveniently available any time
and any place via fixed and mobile broadband.
Communication is also improving our profes-
sional lives with greater working efficiency,
smarter business processes and increased
flexibility in blending private and professional
life. These are all vital elements of our vision
that motivate us as we lead the way into the
all-communicating world of the future.
“ Putting appealing,
easy to use services
in the hands of users
is a great challenge.”
However, two-thirds of the world’s population still do not benefit from
communication services. Making communication available and affordable
for everybody is an equally important dimension of our vision.
Putting appealing, easy-to-use communication services in the hands of
billions of users is a great challenge. It requires not only innovation and
technology leadership but also a deep understanding of consumer require-
ments, market conditions and the ability to undertake large scale assign-
ments. Only a few companies can make this work end-to-end, all the way
from one person to another, regardless of which devices and networks
they are using.
Ericsson thrives on such technical challenges, but being the prime
driver also requires people working together to create new services, new
solutions, new ways of communicating for the benefit of all people. At
Ericsson we have all of this, and that’s one reason why operators choose
to partner with us more than with any other supplier. That’s also why we
can confidently say that we are uniquely positioned to be the Prime Driver
in an All-Communicating World.
O U R V I S I O N
3
TO MY FELLOW SHAREHOLDERS,
Carl-Henric Svanberg
President & CEO
4
TO MY FELLOW SHAREHOLDERS,
2005 was a tremendous year for Ericsson and for the communications
industry as a whole. A record number of people signed up for mobile
services, raising the total number of mobile subscriptions by 450 million.
Almost 800 million mobile phones were sold and shipments of radio
network equipment reached an all-time high. With Ericsson’s 15 percent
sales growth outpacing the rate of the mobile systems market, we clearly
benefited from these strong industry trends. Our large installed base
enabled us to leverage our position with existing customers to gain market
share as we entered into new business agreements in all regions of
the world.
Financially, we delivered solid profitability with group operating margins
of 21.8 percent and a net income increase of 37 percent. This ability
to increase our net income significantly faster than sales, demonstrates
the importance of scale and our commitment to
operational excellence.
2005 was exciting from other perspectives as
well. During the year we started to manufacture
GSM systems in India and expanded our research
and development capacity in the US and China.
Our Marconi acquisition extends our market share
“ Collaboration and
insight build the trust
that fortifies our
business relationships.”
and customer base with fixed-line operators worldwide. It also strengthens
our offering in the strategically important areas of optical transmission,
broadband access and related services, providing us with a new base for
growth as operators continue their migration to ‘‘next generation’’ networks.
Our rapidly growing global services business now accounts for 28 percent
of systems’ sales. This business consists of more recurring revenues and
provides a relationship enhancing offering to our customers. As the year
drew to a close, we announced the largest contract in the history of our
company - an agreement with the operator 3 to build, manage and
develop their 3G/WCDMA network in the United Kingdom. This follows
similar contracts with the operator 3 in Australia and Italy. These and
other agreements with major global operators demonstrate the power of
M E S S A G E F R O M T H E C E O
5
our end-to-end capabilities. We have now publicly announced
By year end, we had already deployed 21 HSDPA networks in
more than 60 managed services contracts around the world.
17 countries and expect that most existing WCDMA operators
Our progress during the year positions us to bring better com-
will upgrade to HSDPA during 2006. We are excited about lead-
munication solutions to more people in all regions of the world.
ing this next era of mobile communications.
Most of the new mobile subscriptions this year came from
On the mobile phone side of the business, our mobile plat-
emerging markets, with China and Russia reporting the largest
forms technology is included in more WCDMA handsets than
number of additions. The continuing strong growth of mobile
any other suppliers’. And Sony Ericsson Mobile Communications
communications throughout most of Africa, Eastern Europe,
reported a record year of volumes, sales and profitability, ending
Latin America and Asia Pacific contributes to global economic
the year with a very competitive product portfolio and strong
and social development, illustrating the vitality of what we do.
momentum.
The significance of this should not be underestimated. Putting
Throughout our 129-year history, we have consistently been
these statistics in human terms means that in the near future,
at the forefront of innovation, responding to our customers’
more than 3 billion people, or almost half the world’s population,
needs and leading the industry into the future. As we continue
will be able to instantly connect to each other, essentially con-
to pursue our vision, I believe that we are entering 2006 as well
quering the obstructions of time and distance. It means that a
positioned as we have ever been. This ability to be the prime
mother, miles from medical care can quickly get advice on how
driver of our industry is attributable to three crucial elements –
to treat a sick child, farmers in rural India can check on com-
Our long-term customer relationships, Our commitment
modity prices in New Delhi, an artist in Tanzania can market his
to technology leadership and Our passion for operational
products outside of his village. It means that people throughout
excellence. I believe that it will be these same three things that
the world have equal access to information in real time when-
will keep us on top in the years to come.
ever and wherever they are. There are few inventions that have
such a profound effect on the lives of so many.
As we enter 2006, operators in the US, Japan and other
markets are in the early stages of the world’s first HSDPA mobile
broadband rollouts, bringing data speeds of several megabits
per second to mobile subscribers. We are there, as well as in
many other markets, helping to bring communications and new
capabilities to the world.
Over 90 WCDMA networks have been launched around the
world, of which we are a supplier to 49. We expect to deploy this
technology in more than a dozen new markets in the year ahead.
Carl-Henric Svanberg
President & CEO
6
M E S S A G E F R O M T H E C E O
LONG-TERM
CUSTOMER
RELATIONSHIPS
Strong, long-term customer relationships are integral to the suc-
cess of our business. We have been building the foundations of
today’s relationships for over 100 years and the benefits are still
being seen by our shareholders, our customers and consumers.
Dannie Botha from Transtel’s Head Office in Johannesburg South Africa,
Only by having local resources on the ground and access to
experts around the world, can we understand and respond to
with Charl Gous and Kryn Haak from Transtel Western Cape Region.
the unique needs and specific challenges of each customer. This
together, from the core network to the radio base stations, all
is one reason why all of the world’s top ten mobile operators are
the way to the subscriber. Our managed services business has
our customers, including the largest operators on six continents.
been a particularly strong relationship builder during 2005, as
Though our top 20 customers account for the majority of our
handling the day-to-day operations of a customer’s network
sales, in total we have more than 425 customers in over 140
creates a true partnership.
countries, and many of these customers have been with us for
The mutual trust we build with our customers not only trans-
decades. Why do operators choose Ericsson? When we survey
lates into business wins today but it enables us to better meet
our customers, the responses we most often hear are the most
their future needs as well. Bringing us into the network planning
basic: we listen, we are responsive, we are innovative, we
process early enables us to coordinate our development efforts
understand the consumers and we deliver on our promises.
to correspond with where operators see their businesses going
Of course it is also advantageous to consistently bring new
in the years ahead. While we receive valuable feedback from our
technologies to market, to provide end-to-end solutions including
customers, we are able to provide equally valuable consumer
mobile systems, fixed networks and a far-reaching services port-
research back to them through Ericsson Consumer & Enterprise
folio as well as cutting-edge mobile platforms and handsets.
Lab. And through our Mobility World unit we have created a glob-
In this way we ensure that all elements of the network function
al network of over 100,000 content providers, application devel-
opers and operators to bring all elements of the communications
value chain together to help drive the future of mobile data.
ERICSSON AND MAXIS
HELPING MAXIS INTRODUCE NEW DATA APPLICATIONS
“Maxis is deploying 3G services to capitalize on the growth potential of new broadband applications and
address the competitive dynamics of the Malaysian market. To do this effectively, we needed to work with a
partner with a clear vision - Ericsson’s global reputation made them the obvious choice. We did not want to
sit around and wait for the content market to develop - we wanted to create demand. Ericsson’s personalized
mobile music portal and existing content relationships helped us to move forward. Ericsson’s ability to host,
manage and integrate networks enabled us to reduce initial spending and focus on our core competencies.
We are very pleased with the reliability of the network. Usage and revenue growth have exceeded our
expectations and we foresee mobile music being a growth catalyst for the industry.”
Kugan Thirunavakarasu, head of Mobile Data, Maxis
L O N G -T E R M C U S T O M E R R E L AT I O N S H I P S
7
THE ADVANTAGE
OF TECHNOLOGY
LEADERSHIP
Bringing faster, more reliable and cost-efficient networks to the
world is what we do best. When operators choose their equipment
suppliers they are often selecting a partner for the next 10-15
years to take them through not only the initial deployment but
also the subsequent expansion and upgrade phase as new
solutions come to market.
Our early involvement with, and substantial contribution toward,
creating the world’s leading technology standards enable us to be
first-to-market with many of these solutions. This is a key differen-
tiator for Ericsson and a significant advantage for operators that
choose Ericsson as their network partner.
With nearly one-third of our employees working in Research
2003
Ericsson launches world’s first
commercial EDGE
network, increasing
data speeds and capacity
in GSM networks.
2004
Ericsson is first to launch a
network with IMS
(IP Multimedia Subsystem),
the initial step towards a
converged all-IP network.
2005
Ericsson is the first to rollout
HSDPA technology in a live
commercial network, bringing
broadband access to
mobile subscribers.
and Development and one of the industry’s largest mobile sys-
In addition to both mobile and fixed networks, we also develop
tems R&D programs, we are a technology leader. We hold over
and license technology platforms, including the chip design and
20,000 patents worldwide and are a leading contributor to the
software that are inside many of the world’s most advanced
standards of GSM and WCDMA technologies, as well as a con-
GPRS and WCDMA handsets.
siderable holder of Intellectual Property Rights (IPRs) in many
We have become much more efficient in recent years as we
other technologies. While our ability to license IPRs to other
have consolidated R&D centers and focused our investments
vendors generates additional profits for Ericsson, our deep com-
on fewer core technologies. This has enabled us to improve
mitment to developing technology based on open standards is
time-to-market and invest in new areas, such as multimedia
key to our success.
solutions, while decreasing R&D as a percentage of sales. This
is yet one more aspect of our technology leadership and a key
component of our drive for operational excellence.
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R&D
2004
23.4
R&D expenses: (SEK billion)
2005
24.5
R&D employees
2005
16,500 16,000
R&D as percentage of sales
2005
16.1%
2004
17.7%
2004
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2004 numbers are restated
according to IFRS.
PASSION FOR
OPERATIONAL
EXCELLENCE
Operational Excellence comes
naturally in our day-to-day
We believe that our business processes must be simple, efficient
tasks. We must all think about
and better than those of our competitors and thus our opera-
how we can do things better
tional excellence will be a competitive advantage. As a result of
– in everything from our own
this focus and the dedication of our employees, this past year
roles to how our business
our operating expenses increased by only five percent while
processes and the organiza-
generating sales growth of 15 percent, resulting in record profit-
tion works as a whole.’’
Joakim Westh
Head of Operational
Excellence
ability. We also improved our on-time delivery to an all-time high
while significantly increasing our radio base station volumes.
These are some of the results of operational excellence, but
the daily effort it takes to get there is much more complex.
As we entered 2005 we introduced a new senior management
position tasked with driving operational excellence throughout
the company. By focusing on operational excellence and creat-
ing a more efficient organization we can shorten lead times, im-
prove quality, reduce costs and motivate employees, all of which
have helped us to generate very positive feedback from our
customers in our annual satisfaction survey.
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ON TIME DELIVERY
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Some of the actions that we have taken include moving parts
Operational Excellence requires innovation and long-term
of our development function closer to the customer by including
planning to ensure that we are all working in the simplest and
it within our business units. In this way we ensure that we are
efficiently applying our resources to those areas that are most
smartest way possible. We will continue to pursue this in all of
our business processes. This will enable us to meet the customers’
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important for our customers. We have also created a new Multi-
needs and outperform the competition, a prerequisite for
media Solutions group that is focused on leveraging our end-to-
Ericsson to achieve true world leadership.
end capabilities to generate new consumer-focused solutions.
We have made strides toward streamlining our organization
with a focus on improving clarity and purpose in every unit and
simplicity in every process. It is apparent in our interaction with
customers, in the quality of our products and in the pride that
our employees take in developing those products faster than our
competitors and delivering on-time with our commitments.
There is still much work to be done. In the year ahead, one
important area will be to ensure operational excellence as we
integrate the recently acquired Marconi operations, particularly
in relation to sourcing, sales and delivery precision.
PA S S I O N F O R O P E R AT I O N A L E X C E L L E N C E
9
UNDERSTANDING
OUR MARKETS
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Mobile penetration; the number of subscriptions divided
by the total population in a geographical area.
Our long-term presence in many of the world’s markets trans-
lates into a deep understanding of local market conditions for
EMERGING MARKETS*
(45 PERCENT OF ERICSSON’S SALES)
business and insights into the global trends driving change.
For people in many parts of the world, access to traditional fixed
Consolidation has picked up momentum in recent years, cre-
network services is very limited. Here mobile networks are the
ating larger multinational operators. This is primarily driven by
best solution for rapid large-scale deployment. While GSM net-
the need for improved economies of scale, business growth,
works have been rolled out in most big cities, there is still much
expansion into new markets and the desire to better serve sub-
work to do to increase coverage in rural areas and boost capac-
scribers. More complex technology and the need to reduce
ity in larger cities. With subscriber penetration still low in most
costs have increasingly led operators to outsource network man-
of these markets, we are working with our customers to shrink
agement to vendors like Ericsson. While these drivers are constant
the “digital divide.” We are doing this by reducing the total cost
throughout many parts of the world, markets are in different
stages of developing their communications sector.
* The GSM Association (GSMA) defines an emerging market as a
country with a GNP per capita index below the World Bank
average and a mobile penetration below 60 percent.
10
U N D E R S TA N D I N G O U R M A R K E T S
of ownership for operators and developing relevant local applica-
tions. Progress is being made as Africa has been doubling its
subscriber base every two years and India is adding well over
two million subscribers per month. Despite the fact that many
of the new users are coming from areas with much lower average
income than today’s subscribers, their collective purchasing
power is significant. In some of these markets, the rollout of
mobile broadband is leading to an acceleration of data usage.
We expect that this will spread to many more markets in the
years ahead as governments award 3G licenses and locally
relevant content continues to be developed.
DEVELOPED MARKETS
(55 PERCENT OF ERICSSON’S SALES)
Despite high penetration levels, there is still room to grow.
Operators are focused on retaining subscribers, stimulating in-
creased usage and introducing attractive new data services to
generate additional revenues. This is driving capacity additions
to existing GSM networks and the rollout of WCDMA/HSDPA.
As of year-end, there were almost 50 million WCDMA subscrip-
tions worldwide and this number is expected to grow signifi-
cantly in the years ahead. Operators are now beginning to upgrade
their WCDMA networks to HSDPA to further improve speed and
efficiency. As usage is on the rise and both fixed and mobile data
are experiencing rapid growth, many of these operators will need
to make additional investments into capacity and transmission.
Meanwhile, operators are in the initial stages of making the evo-
lution to all-IP converged networks. This will enable operators
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OUR MARKET-SPECIFIC
APPROACH
Regardless of the individual market and the level of development,
our approach is the same - we leverage our local presence,
consumer understanding, global scale and technology leader-
ship to win business and serve the customer. Being able to
understand the local markets and rely on the knowledge and
expertise of a global organization brings a very powerful propo-
sition to our customers. It is the Ericsson people that make the
who operate both fixed and mobile networks to cost-effectively
difference.
deliver multimedia content including pictures, music, video and
television over either of these access points.
CONSUMER & ENTERPRISE LAB: UNDERSTANDING THE END USER
Consumer & Enterprise Lab is our specialized unit for understanding consumer behavior, which is crucial to
successfully bring new products and services to market. To help gain such knowledge, we annually conduct
over 20,000 consumer interviews in key markets. Henrik Pålsson, Head of Consumer & Enterprise Lab,
emphasizes the importance of understanding market trends; “In most countries, adoption of new services
is driven by teenagers and young adults, so knowing their habits and attitudes towards different products
and services is vital. For operators to be successful they must define the segments they are targeting and
package their offerings accordingly. Our long-term presence in most markets and our understanding of
consumer behavior are key differentiators that enable us to provide market-specific solutions to our customers
as we work to develop revenue-generating services.”
U N D E R S TA N D I N G O U R M A R K E T S
11
OUR BUSINESS
STRATEGY
To ensure that we are focusing our resources on the most important solu-
tions needed to drive the industry forward, we prioritize our work around
five clear areas that have been discussed and agreed to by Ericsson’s 200
top managers at our annual Global Management Conference. These con-
cepts are then shared with the entire organization and put into practice in
our daily business. This is one more way that we ensure that all of us at
Ericsson are working toward the same goals:
LEAD WIRELESS IN 2G, 3G AND BEYOND
We will reinforce our market leadership and further develop our wireless
technology to make 2G more efficient and 3G more advanced.
DRIVE COMPLETE SOLUTIONS USING TELECOM GRADE
STANDARDS
Working end-to-end and being a major contributor to the world’s leading
technology standards means that we see the whole picture, ensuring opera-
tors have access to everything they need to launch consumer services.
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12
O U R B U S I N E S S S T R AT E G Y
CREATE MORE EFFICIENT AND FLEXIBLE NETWORKS USING
IP AND IMS
Internet Protocol (IP) is transforming telecommunications, and our invest-
ments into IMS are starting to be rewarded. We will continue to lead the industry
in migrating both fixed and mobile operators towards converged IP-based
networks which are able to handle all forms of communications traffic.
EXPAND INTO HIGH POTENTIAL BUSINESS AREAS
Over the last several years we have built the largest global services busi-
ness in our sector and in 2005 clearly anchored our leadership with a
number of strategic wins. Our Marconi acquisition will also expand our
offerings in optical transmission and broadband access, areas where we
see strong opportunities going forward.
INNOVATE TO DEVELOP THE MARKET-LEADING PRODUCTS
AND SERVICES OF TOMORROW
Our technology leadership enables us to play a significant role in defining
standards, developing technologies, growing our patent portfolio and
launching innovative products and services.
ERICSSON AND TELEFONICA
LEADING THE
WAY TO
THE FUTURE
As one of the world’s largest multinational operators, with net-
networks of the future, where new and enriched services and
works in 18 countries, Telefonica is a valued customer of Ericsson
common functions will be reused for multiple fixed and mobile
and a prime example of how we can leverage our global footprint
applications. In this way, operators that have both fixed and
and end-to-end solutions to expand our business opportunities.
mobile operations can add additional revenue streams and
Ericsson is the prime vendor for Telefonica’s GSM/WCDMA net-
reduce their operating costs while delivering exciting new
work in their home country of Spain. So when it came time to
applications to their subscribers. This includes video telephony,
rollout GSM in their Latin American markets, they chose Ericsson
conference calling, presence management, instant messaging,
to supply most of their equipment and services once again. But
email and much more. Telefonica and Ericsson are leading the
it didn’t stop there. In April 2005, Telefonica announced that it
way to the converged world of the future, where consumers have
had turned to Ericsson for its most ambitious project yet - the
access to richer content and advanced applications on the device
world’s first commercial launch of an IP Multimedia Subsystem
that best suits their individual needs.
(IMS). IMS is an important step on the road toward the converged
O U R B U S I N E S S S T R AT E G Y
13
13
WINNING PROPOSITIONS
Our winning propositions address growth opportunities as well
connected and enjoy these Internet services while on the move.
as cost savings for our customers. Our approach is to apply our
Evolving today’s voice and data networks into more adapt-
competence, technology and large-scale efficiency with innovative
able, cost-efficient all-IP networks is a critical challenge to the
business solutions. Focus is on optimized total cost of ownership
future success of many operators. But operators cannot afford
for operators - lowering financial hurdles while providing new
to abandon their existing investments and convert to all-IP in
services to encourage subscriber growth and increased usage.
one giant step. They need an incremental step-by-step ap-
proach.
ENTERING NEW GEOGRAPHIC TERRITORIES –
Our evolution path to an all-IP network combines the best of
EXPANDER SOLUTIONS
today’s telephony services with broadband data and entertain-
In many countries, operators face the challenge of cost effec-
ment services. Application of our softswitch solution can reduce
tively addressing new geographic markets where subscriber
core network operating costs by 50 percent while preserving
density may initially be very low. Our studies show that consumers
existing services and prior investments in transmission and
in these markets have similar needs as those in more developed
switching nodes. The addition of Ericsson IMS enables new IP-
markets with higher penetration levels. The main differences are
based services for both mobile and fixed access users, and
found in monthly spending and affordability of handsets.
facilitates the smooth introduction of new services in parallel to
To serve this segment, operators must be able to profitably
legacy services supported by softswitch.
run operations at much lower revenue levels. An operator’s net-
work cost is mainly driven by the number of radio base station
INCREASED OPERATIONAL EFFICIENCY – SERVICES
sites needed to provide the coverage and capacity for the
Operators are continuously challenged to keep spending under
required quality of service.
control while launching a wider range of services for new revenue
Applying the advanced functionality and flexibility of our high
streams. Many operators are considering outsourcing non-core
performance radio base stations, we can reduce the number of
sites an operator needs by one-third. With capital expenditures
as well as operating costs some 30 percent lower than tradi-
business operations to increase their flexibility in meeting these
challenges. As an industry leader in this area, we are well placed
to advise operators on the strategies and solutions that best
tional configurations, operators can offer services at prices
support their goals.
affordable to a much larger population.
Cost reductions of some 15–20 percent can typically be
Taking a total cost of ownership approach also means that
achieved with our managed services offerings. Our approach
our Expander solutions have been designed to not only provide
basic services at low cost, but also to prepare for the rollout of
more advanced services and increased capacity in a simple and
scalable way, without having to add more sites.
targets the operator’s business objectives, seeking powerful
and flexible solutions with consumer benefits. For operators, this
means reduced risks, lower costs and a faster time to market.
Consumers enjoy attractive, reliable services, strengthening the
operator’s market position.
BROADBAND EVERYWHERE –
EFFICIENT EVOLUTION TO ALL-IP
The Internet community, with more than one billion users, is
driving the rapid growth of broadband access. With faster speed
and better performance, Internet users are discovering new
ways to communicate and easy access to content. Now, the
introduction of mobile broadband is making it possible to stay
14
W I N N I N G P R O P O S I T I O N S
’’
Ericsson has consistently provided
high-quality, wireless network equip-
ment and services for Rogers and
our customers across the country.
Their global experience, technology
leadership and on-the-ground exper-
tise make them an invaluable part of
our success in the Canadian market.”
Bob Berner, Chief Technical Officer, Rogers Communications Inc.
ERICSSON AND ROGERS COMMUNICATIONS INC.
LAUNCHING
NEW SERVICES
and Rogers have cultivated a strong partnership which has
helped position Rogers as a leader in the Canadian market,
providing a high-quality network and innovative service offerings
to their customers. We provide expertise that assists Rogers
in a wide variety of areas including consumer understanding,
deployment services, and network integration and optimization.
This value-added support demonstrates Ericsson’s understand-
ing of the end-user trends, requirements and opportunities.
Recently, Rogers chose Ericsson as its exclusive systems
integrator and supplier for the deployment of its high-speed
Our end-to-end approach brings us closer to our customers.
WCDMA/HSDPA voice and data network. With the introduction
Nowhere is this more evident than with Canadian-based Rogers
of HSDPA, Rogers extends its leadership as Canada’s largest
Communications. Rogers is known for its unique asset mix of
supplier of wireless data services. By aligning our efforts with
mobile wireless, broadband data, digital cable services, tele-
Rogers specific needs at specific points in time, we have created a
phony, and media properties. For the past 20+ years, Ericsson
partnership that enables us to help drive the customer’s strategy.
ERICSSON IN NIGERIA
services. According to Leif Edwall, Managing Director of Ericsson
Nigeria, ‘‘Nigeria is a perfect example of Ericsson’s ability to use
our local presence and global scale to win new business. When
South Africa based MTN entered the Nigerian market our existing
relationship with them through our previous work in many other
markets put us in an excellent position to be their primary sup-
plier here as well. Our hard-working team in Nigeria enables us
to be the supplier of choice, not only for MTN, but also for M-Tel,
VMobile and Nitel. Our dedicated local team maintains very good
business relations with our customers.”
RAPID
SUBSCRIBER
GROWTH
Nigeria is the largest country in Africa with a population of more
than 140 million. Though Nigeria currently has less than 10 percent
mobile penetration, this number is growing rapidly. Five years
ago Nigeria represented limited business opportunity, but the
beginning of the GSM rollouts in 2001 changed that. Nigeria is
now a top 20 market in terms of sales and we have a leading
market share, supplying more than two-thirds of the country’s
network equipment. We provide a variety of solutions to four of
the top operators in Nigeria including GSM, GPRS and EDGE
networks, softswitch, mobile applications and professional
OUR MARKET POSITION
MARKET SHARE OF THE GSM/ WCDMA FAMILY
MOBILE TECHNOLOGY LEADERSHIP
We are the world’s leading supplier of GSM, GPRS, EDGE,
WCDMA and HSDPA equipment and services, the technology
family that connects more than 80 percent of the world’s mobile
subscribers. We are also leading the market in upgrading net-
works to mobile broadband via WCDMA/HSDPA.
IMS
18 contracts for commercial launch
Softswitch
Mobile networks – in more than 35 GSM & WCDMA networks
Fixed networks – for more than 40 customers
UPGRADING NETWORKS TO IMS AND SOFTSWITCH
Ericsson has comprehensive solutions for upgrading networks
to IMS and Softswitch architectures. Ericsson Mobile Platforms
includes IMS client architecture in their new releases. We have
a leading position in IMS and Softswitch, with solutions for both
fixed and mobile networks.
GLOBAL SERVICES AS PERCENT
OF SYSTEMS’ SALES
GLOBAL SERVICES SALES
SEK billion
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GROWING WITH GLOBAL SERVICES
Our Global Services include network rollout, systems integration,
technical support and managed services (network operation
����
and hosting). As a result of our world-class expertise, Ericsson
was entrusted to plan, build and integrate over 800 networks
during 2005.
����
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Ethernet-based
broadband access
– in more than
90 networks
EMPOWERING FIXED BROADBAND
Our IP-solutions for upgrading fixed networks to accommodate
broadband traffic enable operators to offer their subscribers
richer data content and a faster, lower-cost experience. We have
a strong position in Ethernet-based broadband access and with
Marconi’s ATM-based broadband access we will establish a
top-tier global position.
16
O U R M A R K E T P O S I T I O N
SONY ERICSSON
– OUR LINK TO
THE CONSUMER
Sony Ericsson Mobile Communications is a 50/50 joint venture
that combines our technology leadership with Sony’s consumer
electronics expertise. These complementary strengths enable
Sony Ericsson to bring innovative products to market and
These successful 2005 launches helped to propel Sony Ericsson
provide us with valuable insight into consumer trends. In 2005,
to new heights in 2005. The joint venture reported record sales
Sony Ericsson once again started a mobile phone trend with the
and profitability and enhanced its position with a number of
introduction of several Walkman®-branded music phones. The
leading operators and distributors.
W800 was the first in the industry to offer a quality digital music
��
experience and a high-performance 2 mega pixel auto-focus
��
camera, combined with a full-feature mobile phone. Another
innovative and popular model, the K750, raised the bar for imaging
quality in mobile phones, winning a number of industry awards
including the coveted TIPA (Technical Image Press Association)
award for Best Mobile Imaging Device.
��
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Sony Ericsson continues to expand its portfolio by adding a
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variety of handsets designed and priced for different market
segments. In the emerging WCDMA market, the K600 offers an
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attractive and affordable handset with no compromise on size
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or design. Additions to the 2G portfolio include basic affordable
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models, camera phones and sleek clamshell designs. This
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broadening phone portfolio, combined with Sony Ericsson’s
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accessories, PC-cards and Machine-to-Machine solutions,
�
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demonstrate the company’s progress in becoming a leading
supplier of a full range of innovative and feature-rich products.
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S O N Y E R I C S S O N – O U R L I N K T O T H E C O N S U M E R
17
COMMITMENT
TO OUR
EMPLOYEES
Ericsson is a knowledge company and, as such, we depend on
the competence and productive engagement of all of our em-
ployees. This is brought into the business context every day
through technology leadership, customer responsiveness and
operational excellence. Though over 20,000 patents have been
registered under Ericsson’s name, the true power of this
accomplishment is that each of these patents represents an
innovation created by an Ericsson employee.
Our ways of working are based on our core values of profes-
sionalism, respect and perseverance. Together they form an
essential part of the Ericsson brand and are a key contributor to
the company’s continued success. We strive to foster an orga-
nization and culture where employees meet challenges with
confidence, passion, responsiveness and accountability. They
are also well prepared with the most up-to-date industry prac-
tices and technological expertise that support the company’s
goals and strategies.
To facilitate this, we have built an efficient infrastructure to
access and share information including knowledge networks and
training centers with customized web-based learning tools.
solicit employee input through an annual survey and in 2005
almost 93 percent of our employees participated. This extra-
ordinarily high level of participation reflects our commitment
to employee development and our employees’ strong commit-
ment to help continuously improve our preparedness for future
To ensure the level of expertise of individual employees as well
opportunities.
as the company as a whole, we regularly assess our compe-
tency requirements and the capabilities of our workforce. We
Motivated and competent employees, working for a common
cause and acting as one company, are the foundation of our
success and the prerequisite to achieve our ultimate goals –
customer satisfaction and strong profitability. We strive to
provide a stimulating work environment characterized by continu-
ous learning and commitment to innovation. In return, our em-
ployees take pride in their work and make the difference with our
customers.
It is important for Ericsson to be the employer of choice. We
work hard to ensure that employees feel that they are making a
real contribution to something important and that their efforts
are recognized and appreciated. Only by clearly understanding
what the company stands for and where our opportunities lie,
can we work in unison to ensure success.
18
C O M M I T M E N T T O O U R E M P L O Y E E S
’’
ERICSSON AND 3
Though we are a very innovative company with excellent technology
and strong service delivery, at the end of the day our biggest strength
is the people we have on the ground.”
Jacqueline Hey, Head of Ericsson Northwest Europe
MANAGING
NETWORKS FOR
OPERATOR 3
When the operator 3 of the Hutchison Whampoa Group asked us
in the case of 3 UK Ericsson was not an infrastructure supplier
to manage their U.K. network in a 7-year deal signed this past
before the managed services agreement. That is one more reason
December, it was celebrated throughout our company. This is
why 3 UK is particularly rewarding. As a result of this partnership,
true not only because this partnership represents the largest con-
a supply of equipment, additional technology and related ser-
tract in our 129-year history, but because it was the 3rd country
vices will also be part of our future relationship.
where 3 decided to trust us with this critical function.
The size and breadth of these agreements are prime examples
This is not a decision that an operator takes lightly as it requires
of how our industry leading services organization, technology
a great deal of trust to commit to this handover. Yet when 3 asked
leadership, geographic reach and consistent performance
themselves who do they trust to run their network, Ericsson was
make us the supplier of choice for most of the world’s leading
the answer all three times – first in Australia, then in Italy and now
operators.
in the United Kingdom.
Unlike the previous two managed services deals where we
were actively supplying the equipment for their network buildout,
E R I C S S O N A N D 3
19
OUR BUSINESS
HELPS CREATE A
BETTER WORLD
Ericsson is committed to making positive contributions to the communities
in which we work and the world in which we live. Corporate Responsibility
encompasses everything we do to build an enduring value-creation capa-
bility for all our stakeholders; customers, employees, investors and society
as a whole. We strive to maintain the necessary controls to minimize risk,
and we link our products and services to an overall business goal of sus-
tainable growth.
Our corporate responsibilities are founded on three main principles:
Economic Prosperity: Pursuing sustainability based on sound eco-
nomic principles. We contribute to growth in the communities in which
we do business; we reduce our customers’ operating costs with an energy-
lean portfolio; we help to bridge the “digital divide” by making com-
munication affordable to all.
Environmental Performance: Designing products and services to
minimize impacts. We use design for environment (Df E) to avoid hazard-
ous substances and decrease power consumption. Also, telecommunica-
tion reduces the need for personal transportation.
Social Equity: Supporting the UN Global Compact. Ericsson was one
of the first companies to commit to the Compact’s ten principles, covering
human rights, fair labor practices, the environment and anti-corruption.
Ericsson supports the UN
Global Compact.
In 2005, we were again
included in the FTSE4Good and
the global DJSI World indexes.
And 2005 we were also
included in the European DJSI
STOXX Index for the first time,
where we were named the
Technology Equipment
Supersector Leader.
We are also listed as one of
the top 100 most sustainable
companies by Global 100.
20
C O R P O R AT E R E S P O N S I B I L I T Y
2005 HIGHLIGHTS
We adopted a risk-based approach to supply chain
management to better govern implementation of our code of
conduct.
Ericsson launched a new business model in Tanzania,
designed to provide affordable and profitable mobile services to
rural users, further building on our partnership with the United
Nations Development Program (UNDP) and the Swedish
International Development Cooperation Agency (SIDA)
in Tanzania.
Ericsson Response is our global initiative to rapidly establish
communications anywhere in the world in response to human
suffering caused by disasters. We provided support following
many natural disasters, including tsunamis, earthquakes and
hurricanes in Asia, the Middle East and the Americas.
Ericsson employees made numerous positive contributions
to society in the countries where they work and live.
These activities were determined by employees according
to local needs.
We improved our focus on product energy efficiency. Our
2005 WCDMA radio base stations consume 60 percent less
energy than 2001 models. And we plan to reach another
50 percent reduction from 2005 levels by 2008.
From August 13, 2005 Ericsson complies with the EU
Directive on Waste Electrical and Electronic Equipment (WEEE).
Our Ecology Management Take-Back implementation has
begun in more than 30 markets to reduce waste and promote
recycling.
We worked to ensure compliance with the EU RoHS
(Restriction of the Use of Certain Hazardous Substances)
directive by July 1, 2006. RoHS concerns the use of certain
substances in electrical and electronic equipment.
For more information, see
www.ericsson.com/corporate_responsibility
C O R P O R AT E R E S P O N S I B I L I T Y
21
ANTICIPATING THE
FUTURE
Over the past decade, developments in computers, telecommunications
and television have been remarkable – leading to a new era of social and
economic progress. While these changes may seem to have occurred
overnight, in reality, they were many years in the making.
Looking back at forecasts from the mid-1990’s, the International
Telecommunications Union (ITU) expected one billion mobile subscribers
by 2005. In actuality, the two billion subscriber mark was passed during
2005 and is now on the way to three billion before 2010, making mobility
‘‘Key to success is an
insightful long-term
perspective supported by
financial strength, global
reach and technology
leadership.”
the preferred and more often, the only method
of telecommunications.
Consumer demographics are shaping the
market. Today’s teenagers and young adults
spend more on mobile, Internet and entertain-
ment services than previous generations. As
this “mobile generation” matures, and new
generations are born into a mobile world, con-
sumer spending on mobile communications
should increase. This is a great opportunity for our customers to attract
new subscribers and grow their business, but only if they have a good
technology partner – one that understands the consumer and is prepared
for the future.
Our products have very long life cycles, often stretching 20 years or
more. Volume deployments of GSM started in the mid 1990’s and 2005
saw the highest ever shipments. While volume deployments of WCDMA
are just beginning, we are already investing R&D into the development of
even more advanced technologies so that we will be ready for the next
technology wave.
Looking ahead, fixed and mobile networks will converge around a com-
mon core network and service layer, providing operators with substantial
cost savings. Broadband access combined with an all-IP network environ-
ment will offer consumers transparent access to services in the most
convenient way. This combined with the rapidly increasing subscriber base
and consumer demographics bodes well for our business.
With a long-term-plan and a guiding vision to be the prime driver in an
all-communicating world, we will continue to lead our customers into the
future as we drive the growth of this fascinating industry.
22
A N T I C I PAT I N G T H E F U T U R E
Members of the Group Management Team (from left to right):
Henry Sténson , Head of Group Function Communications. Shares held: 19,533 Class B.
Bert Nordberg, Executive Vice President and Head of Group Function Sales & Marketing. Shares held: 31,794 Class B.
Torbjörn Nilsson, Head of Group Function Strategy & Product Management. Shares held: 62,127 Class B.
Hans Vestberg, Executive Vice President and Head of Business Unit Global Services. Shares held: 20,241 Class B.
Karl-Henrik Sundström, Executive Vice President, CFO and Head of Group Function Finance. Shares held: 20,472 Class B.
Carl-Henric Svanberg , President and CEO. Shares held: 15,635,599 Class B*.
Marita Hellberg, Head of Group Function Human Resources & Organization. Shares held: 35,755 Class B.
Håkan Eriksson , Chief Technology Officer and Head of Research & Development. Shares held: 11,313 Class B.
Carl Olof Blomqvist , General Counsel and Head of Group Function Legal Affairs. Shares held: 6,080 Class A, 28,633 Class B.
Björn Olsson, Executive Vice President and Head of Business Unit Systems. Shares held: 24,298 Class B.
Kurt Jofs, Executive Vice President and Head of Business Unit Access. Shares held: 216,714 Class B.
Joakim Westh, Head of Group Function Operational Excellence. Shares held: 107,941 Class B.
Sivert Bergman , Head of Business Unit Transmission & Transport Networks. Shares held: 4,825 Class B.
*The number of Class B shares includes holding by related natural and legal persons.
G R O U P M A N A G E M E N T T E A M
23
’’Delivering telecommunication
service to a country as large
and diverse as India, though
challenging, is imperative if
we are to further develop our
infrastructure and to grow our
economy. Ericsson’s associa-
tion with India, which started
way back in 1896, stands fur-
ther reinforced with their re-
cent opening of a new manu-
facturing facility. They have
not only brought global ex-
pertise but also developed
local competence needed to
support our operators with
solutions to meet the chal-
lenges. In this sense, Ericsson
is a strategic partner and a
valuable member of our in-
dustrial community.”
DAYANIDHI MARAN
Minister of Communications
and Information Technology
Government of India
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
SHARE INFORMATION
STOCK EXCHANGE TRADING
Ericsson’s Class A and Class B shares are traded on the Stockholm
Stock Exchange (Stockholmsbörsen) and the Class B shares are also
traded on the London Stock Exchange.
In the United States, the Class B shares are traded on NASDAQ in
the form of American Depositary Shares (ADS) evidenced by American
Depositary Receipts (ADR) under the symbol ERICY. Each ADS repre-
sents 10 Class B shares.
Approximately 43 (62) billion shares were traded in 2005, of which
about 73 (74) percent on the Stockholm Stock Exchange, about 16 (15)
percent on NASDAQ, and 11 (11) percent on the London Stock Ex-
change. Trading volume in Ericsson shares decreased by approximate-
ly 31 percent on the Stockholm Stock Exchange and by approximate-
ly 31 percent on NASDAQ as compared to 2004.
In 2005, Ericsson was included in the Dow Jones STOXX Sustain-
ability Index.
SHARE PRICE TREND
In 2005, Ericsson’s total market value increased by about 29 percent
to approximately SEK 441 billion (SEK 343 billion in 2004). The OMX
SPI index on the Stockholm Stock Exchange increased by 31 percent,
the NASDAQ telecom index decreased by approximately 7 percent and
the NASDAQ composite index increased by approximately 2 percent
in 2005.
SHARE CAPITAL
As of December 31, 2005, Ericsson’s share capital was SEK
16,132,258,678 (16,132,258,678) represented by 16,132,258,678 shares.
The par value of each share is SEK 1.00. As of December 31, 2005, the
shares were divided into 1,308,779,918 (1,308,779,918) Class A shares,
each carrying one vote, and 14,823,478,760 (14,823,478,760) Class B
shares, each carrying one-tenth of one vote. As of December 31, 2005,
Ericsson held 268,065,241 of its Class B shares.
No Class C shares, each carrying one-thousandth of one vote, are
outstanding.
SHARE TREND, THE STOCKHOLM
STOCK EXCHANGE, 2003–2005
SHARE TURNOVER 2005 (MILLION SHARES)
30
25
20
15
10
5
0
2003
2004
2005
Source: Svensk Börsinformation
B share, SEK
OMX SPI-index
6,000
5,000
4,000
3,000
2,000
1,000
0
London
NASDAQ
Stockholm
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
S H A R E I N F O R M AT I O N
25
SHARE DATA
Earnings per share, diluted (SEK) 1)2)
P/E ratio, Class B shares 2)
Dividend (SEK) 3)
1) For 2001 adjusted for stock dividend element of stock issue.
2) For 2004 restated in accordance with IFRS.
3) For 2005 as proposed by the Board of Directors.
SHARE PRICES ON THE STOCKHOLM STOCK EXCHANGE
(SEK)
Class A at last day of trading
Class A high for year (October 4, 2005)
Class A low for year (February 22, 2005)
Class B at last day of trading
Class B high for year (October 4, 2005)
Class B low for year (February 22, 2005)
2005
1.53
18
0.45
2005
27.50
28.70
19.80
27.30
29.00
19.40
2004
1.11
19
0.25
2004
21.70
26.10
14.00
21.20
24.50
12.70
2003
–0.69
–
0
2003
13.90
16.80
5.55
12.90
14.60
4.11
2002
–1.51
–
0
2002
8.60
42.89
3.80
6.10
44.78
2.96
2001
–1.94
–
0
2001
42.25
91.00
23.98
41.35
88.11
23.18
Offer and listing details
Host market NASDAQ ADS Prices
The tables below state the high and low sales prices quoted for our
ADSs on NASDAQ for the last five years. The NASDAQ quotations
represent prices between dealers, not including retail mark-ups, mark-
downs or commissions, and do not necessarily represent actual trans-
actions.
Principal trading market the Stockholm Stock Exchange
Share prices
The tables below state the high and low sales prices for our Class A
and Class B shares as reported by the Stockholm Stock Exchange for
the last five years. The equity securities listed on the A-list of the Stock-
holm Stock Exchange’s Official Price List of Shares currently comprise
the shares of 53 companies. Trading on the exchange generally con-
tinues until 5:30 p.m. each business day. In addition to official trading
on the exchange, there is also trading off the exchange during official
trading hours and also after 5:30 p.m. Trading on the exchange tends
to involve a higher percentage of retail clients, while trading off the
exchange often involves larger Swedish institutions, banks arbitraging
between the Swedish market and foreign markets, and foreign buyers
and sellers purchasing shares from or selling shares to Swedish institu-
tions.
The exchange publishes a daily Official Price List of Shares which
includes the volume of recorded transactions in each listed stock, to-
gether with the prices of the highest and lowest recorded trades of the
day. The Official Price List of Shares reflects price and volume informa-
tion for trades completed by the members.
The annual high and low market prices on these markets were as
follows:
ANNUAL HIGH AND LOW MARKET PRICES
Period
2001
2002
2003
2004
2005
NASDAQ
USD per ADS1)
Low
22.03
3.40
5.20
17.93
27.78
High
97.50
43.33
18.85
34.57
37.19
THE STOCKHOLM STOCK EXCHANGE
SEK per Class A share
Low
High
23.98
91.00
3.80
42.89
5.55
16.80
14.00
26.10
19.80
28.70
SEK per Class B share
Low
23.18
2.96
4.11
12.70
19.40
High
88.11
44.78
14.60
24.50
29.00
Share market prices prior to August 8, 2002, have been adjusted for the stock dividend element of the stock issue.
1) One ADS = 10 Class B shares. (Prior to October 23, 2002, one ADS = one Class B share. Share prices have been adjusted accordingly.)
26
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Quarterly high and low market prices
The table below states the high and low sales prices for each quarter of 2004 and 2005.
Period
2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
1) One ADS = 10 Class B shares
NASDAQ
USD per ADS1)
Low
THE STOCKHOLM STOCK EXCHANGE
SEK per Class A share
Low
High
SEK per Class B share
Low
High
17.93
24.72
23.18
27.76
27.78
27.80
31.74
32.17
25.10
26.10
24.50
24.10
22.40
26.10
28.40
28.70
14.00
20.50
19.50
20.70
19.80
19.80
24.30
25.30
23.50
24.50
23.20
23.80
22.10
26.30
28.50
29.00
12.70
19.10
17.40
19.80
19.40
19.70
24.30
25.20
High
31.41
32.32
31.37
34.57
32.49
33.87
36.99
37.19
Monthly high and low market prices
The table below states the high and low sales prices for each of the last six months (August 2005 to January 2006).
Month
August 2005
September 2005
October 2005
November 2005
December 2005
January 2006
1) One ADS = 10 Class B shares
NASDAQ
USD per ADS1)
Low
33.50
34.75
32.19
32.17
32.86
33.63
High
36.99
36.87
37.19
33.91
35.15
37.00
THE STOCKHOLM STOCK EXCHANGE
SEK per Class A share
Low
High
25.50
27.70
25.70
28.40
25.30
28.70
25.80
27.50
26.50
28.30
25.80
28.90
SEK per Class B share
Low
25.30
25.70
25.20
25.60
26.40
25.60
High
27.80
28.50
29.00
27.50
28.10
28.80
CHANGES IN NUMBER OF SHARES AND CAPITAL STOCK 2001–2005
2001 Conversions of convertible debentures
2001 New issue (Class C shares) (later converted to Class B)
2002 Conversions of convertible debentures
2002 New issue (Class B shares) 1:1
2003 New issue (Class C shares) (later converted to Class B)
2003 December 31
2004 December 31 (no changes)
2005 December 31 (no changes)
Number of shares
168,395
155,000,000
560
7,908,754,111
158,000,000
16,132,258,678
16,132,258,678
16,132,258,678
Capital stock
168,395
155,000,000
560
7,908,754,111
158,000,000
16,132,258,678
16,132,258,678
16,132,258,678
S H A R E I N F O R M AT I O N
27
SHAREHOLDERS
As of December 31, 2005, we had 869,861 shareholders registered at
VPC (the Swedish Securities Register Center). According to information
provided by Citibank, there were 119,361,288 ADSs outstanding as of
December 31, 2005 and 6,298 registered holders of such ADSs. A
significant number of the ADSs are held of record by banks, brokers
and/or nominees for the accounts of their customers. As of December
31, 2005, banks, brokers and/or nominees held ADSs on behalf of
224,696 accounts.
According to information known by year-end 2005, approximately
81 (80) percent of our Class A and Class B shares were owned by
Swedish and international institutions.
TEN LARGEST COUNTRIES OF OWNERSHIP
Percent of capital
Sweden
United States
United Kingdom
Luxembourg
Switzerland
Germany
France
Netherlands
Belgium
Denmark
Japan
Other countries
Source: SIS Ägarservice AB
The following table sets forth share information, as of December 31,
2005, with respect to our largest shareholders registered at VPC and
known by us, ranked by percentage of voting rights:
LARGEST SHAREHOLDERS BY VOTING RIGHTS, DECEMBER 31, 2005
Identity of
person or group 1)
Investor AB
AB Industrivärden
Svenska Handelsbankens Pensionsstiftelse
Livförsäkrings AB Skandia
Pensionskassan SHB Försäkringsförening
Alecta
Robur Fonder
SEB-Trygg Försäkring
SHB/SPP fonder
AMF Pension
Nordea Fonder
Tredje AP-fonden
Första AP-fonden
Fjärde AP-Fonden
SEB fonder
Svenska Handelsbankens Personalstiftelse
Andra AP-fonden
AFA Försäkring
Number of
Class A shares
513,320,192
372,000,000
83,903,000
58,960,986
63,360,000
13,725,000
7,438,773
27,923,095
664,089
4,763,682
2,593,202
11,945,095
7,472,938
2,812,755
3,541,090
20,000,000
1,367,271
–
Percentage of
total Class A
shares
39.22
28.42
6.41
4.51
4.84
1.05
0.57
2.13
0.05
0.36
0.20
0.91
0.57
0.22
0.27
1.53
0.10
–
Number of
Class B
shares
297,073,324
5,100,000
–
81,258,181
–
371,160,279
376,867,325
58,045,000
315,040,121
268,000,000
247,448,828
151,570,735
167,206,311
208,305,145
189,561,780
–
173,646,901
140,203,301
Percentage of
total Class B
shares
2.00
0.03
–
0.55
–
2.50
2.54
0.39
2.13
1.81
1.67
1.02
1.13
1.41
1.28
–
1.17
0.95
Foreign owners 2)
of which Capital Group
of which Fidelity funds
16,239,472
–
–
1.24 7,391,350,675
477,804,643
339,540,793
–
–
Others
Total
96,749,278
1,308,779,918
7.40 4,381,640,854
100% 14,823,478,760
1) Sources: SIS Ägarservice AB and VPC AB, December 31, 2005 and Capital Precision, December 2005.
2) Including Nats Cumco as Nominee: 1,122,692,601 Class B shares.
49.86
3.22
2.29
29.56
100%
28
As of December 31,
2004
53.7%
26.9%
4.7%
4.1%
1.7%
1.2%
0.9%
–
0.9%
0.8%
–
4.1%
2005
54.1%
26.5%
4.3%
3.8%
1.8%
1.1%
1.1%
0.9%
0.9%
0.9%
0.6%
4.0%
Voting
rights,
percent
19.46
13.35
3.01
2.40
2.27
1.82
1.62
1.21
1.15
1.13
0.98
0.97
0.87
0.85
0.81
0.72
0.67
0.50
27.06
1.71
1.22
19.17
100%
Percentage
of capital
5.02
2.34
0.52
0.87
0.39
2.39
2.38
0.53
1.96
1.69
1.55
1.01
1.08
1.31
1.20
0.12
1.08
0.87
45.90
2.96
2.10
27.78
100%
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
The following table indicates changes in holdings of the Class A and
Class B shares, respectively, held by major shareholders and percent
of voting rights, as of December 31, 2003, 2004 and 2005.
Person or group (percent)
Investor AB
AB Industrivärden
Svenska Handelsbankens Pensionsstiftelse
Livförsäkrings AB Skandia
Pensionskassan SHB Försäkringsförening
Alecta
Robur Fonder
SEB Trygg Försäkring
SHB/SPP Fonder
AMF Pension
Nordea Fonder
Tredje AP-fonden
Första AP-fonden
Fjärde AP-fonden
SEB fonder
Svenska Handelsbankens Personalstiftelse
Andra AP-fonden
AFA Försäkring
2005
Class A Class B
shares
shares
2.00
39.22
0.03
28.42
6.41
-
0.55
4.51
4.84
-
2.50
1.05
2.54
0.57
0.39
2.13
2.13
0.05
1.81
0.36
1.67
0.20
1.02
0.91
1.13
0.57
1.41
0.22
1.28
0.27
1.53
–
1.17
0.10
0.95
–
Voting
rights
19.46
13.35
3.01
2.40
2.27
1.82
1.62
1.21
1.15
1.13
0.98
0.97
0.87
0.85
0.81
0.72
0.67
0.50
2004
Class A Class B
shares
shares
2.00
39.22
–
28.42
–
6.41
0.50
4.51
–
4.84
1.25
0.19
2.65
0.51
0.39
2.13
1.74
0.24
2.15
0.36
1.64
0.26
0.97
0.94
1.17
0.57
1.32
0.22
1.25
0.27
–
1.53
Voting
rights
19.46
13.33
3.01
2.38
2.27
0.75
1.62
1.22
1.05
1.33
1.01
0.97
0.90
0.81
0.80
0.72
2003
Class A Class B
shares
shares
3.58
39.11
1.15
28.34
0.23
7.38
1.09
4.53
0.20
4.83
–
–
3.09
0.00
0.77
1.98
1.71
0.14
–
–
–
–
1.03
0.77
1.31
0.33
–
–
1.52
0.04
0.06
1.52
Voting
rights
38.29
27.72
7.21
4.45
4.72
–
0.07
1.95
0.17
–
–
0.78
0.36
–
0.08
1.49
Foreign owners
of which Capital Group
of which Fidelity funds
Others
Total
1.24
–
–
49.86
3.22
2.29
27.06
1.71
1.22
1.82
–
–
50.15
2.54
5.52
27.48
1.35
2.93
1.09
–
–
45.74
0.00
5.51
2.12
0.00
2.93
7.40
19.17
29.56
100.00 100.00 100.00
5.85
20.04
32.75
100.00 100.00 100.00
8.36
9.05
38.45
100.00 100.00 100.00
Source: SIS Ägarservice AB and VPC AB, December 31, 2005, Ilios and Capital Precision, December 2005.
Our major shareholders do not have different voting rights than other
shareholders.
As far as we know, the Company is not directly or indirectly owned
or controlled by another corporation, by any foreign government or by
any other natural or legal person(s) severally or jointly.
As of December 31, 2005, the total number of voting securities of the
Company owned by officers and directors as a group was:
Number of
Class A
shares
Number of
Class B
shares
Voting
rights,
percent
Officers and directors as
a group (27 persons)
6,080
17,863,398
0.06
For individual holdings, see “Corporate Governance Report”.
S H A R E I N F O R M AT I O N
29
TWO-YEAR SUMMARY
SEK million
Net sales
Operating income
– operating margin
Financial net
Net income
Year-end position
Total assets
Working capital
Capital employed
Property, plant and equipment
Stockholders’ equity
Minority interests
Interest-bearing provisions and liabilities
Other information
Earnings per share, basic, SEK
Earnings per share, diluted, SEK
Cash dividends per share, SEK
Stockholders’ equity (SEK per share)
Number of shares (in millions)
– outstanding, basic, at end of period
– average, basic
– average, diluted
Additions to property, plant and equipment
Depreciation on property, plant and equipment
R&D and other technical expenses
– as percentage of net sales
Ratios
Return on equity
Return on capital employed
Equity ratio
Debt-equity ratio
Current ratio
Capital turnover
Inventory turnover
Accounts receivable turnover
Return on sales
Payment readiness, SEK million
– as percentage of net sales
Net cash, SEK million
Statistical data, year-end
Number of employees
– Worldwide
– Of which in Sweden
This year, there is only a two-year comparison due to the change to IFRS.
1) 2004 has been restated in accordance with IFRS.
2) For 2005, as proposed by the Board of Directors.
30
2005
151,821
33,084
21.8%
251
24,460
208,829
86,980
133,621
6,966
104,677
850
28,094
1.53
1.53
0.45 2)
6.60
15,864
15,843
15,907
3,365
2,804
24,454
16.1%
26.2%
28.7%
50.5%
0.3
1.9
1.2
5.0
4.1
23.5%
78,647
51.8%
53,411
2004 1)
131,972
26,706
20.2%
–540
17,836
186,186
69,268
115,144
5,845
80,445
1,057
33,643
1.11
1.11
0.25
5.08
15,832
15,829
15,895
2,452
2,434
23,421
17.7%
24.2%
26.4%
43.8%
0.4
2.0
1.2
5.7
4.1
22.9%
81,447
61.7%
42,911
56,055
21,178
50,534
21,296
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Working capital: Current assets less current non-interest-bearing
provisions and liabilities.
Debt-equity ratio: Defined as total interest-bearing provisions
and liabilities divided by Equity.
Capital employed: Capital employed is defined as total assets
less non-interest-bearing provisions and liabilities.
Current ratio: Current assets divided by the sum of current
provisions and liabilities.
Earnings per share: See Notes to the Consolidated Financial
Statements – Note C1, “Significant Accounting Policies”, for
information on principles for calculation of earnings per share.
Capital turnover: Net sales divided by average Capital employed.
Inventory turnover: Cost of sales divided by average Inventory.
Cash dividends per share: Defined as dividends paid divided
by average number of shares, basic.
Accounts receivable turnover: Net sales divided by average
Accounts receivable.
Stockholders’ equity (SEK per share): Defined as
Stockholders’ equity divided by the Number of shares outstanding,
basic, at the end of the period.
Return on sales: Operating income plus Financial income
expressed as a percentage of net sales.
Return on equity: Defined as Net income as a percentage of
average Stockholders’ equity (based on the amounts at January 1
and December 31).
Payment readiness: Defined as cash and cash equivalents and
short-term investments less short-term borrowings plus long-term
unused credit commitments. Payment readiness is also shown as a
percentage of net sales.
Return on capital employed: Defined as the total of Operating
income plus Financial income as a percentage of average capital
employed (based on the amounts at January 1 and December 31).
Net cash: Defined as cash and cash equivalents plus short-term
cash investments less interest-bearing provisions and liabilities.
Equity ratio: Defined as Equity, expressed as a percentage of total
assets.
T W O -Y E A R S U M M A R Y
31
LETTER FROM THE CHAIRMAN
Dear Shareholder,
Ericsson performed well during 2005 – generating the highest profit-
ability and largest net cash position in its history. The strong sales
growth and healthy profit levels signify the ongoing benefits of restruc-
turing and the hard work of employees around the world.
Ericsson shares also performed well during 2005 – appreciating 29
percent in value and outperforming the most relevant stock market
indices. Continued robust financial performance convinced all credit
rating agencies to restore their investment grade ratings for Ericsson.
The financial community has acknowledged our sustainable devel-
opment efforts. Ericsson was not only named the Supersector leader
in the Dow Jones STOXX Sustainability Index but also included in the
FTSE4Good Europe 50 index and listed among the Global 100 Most
Sustainable Corporations. This recognition reflects our ongoing efforts
to build an enduring value-creation capability for all stakeholders: inves-
tors, customers, employees and society.
The Board of Directors works to ensure that Ericsson adheres to
high standards of corporate governance and that business is con-
ducted in an ethical manner. Although I believe that our management
controls are generally in line with best practices, we continuously strive
to make them even better. Along these lines, steering documents and
work procedures have been evaluated and adapted to the recently in-
troduced Swedish Code of Corporate Governance. Implementation of
the applicable requirements of the U.S. Sarbanes-Oxley Act remains
well on track to meet the required effective dates.
In addition to the financial and operational performance, there was
good progress on a number of strategic initiatives. Ericsson’s leading
position in “next-generation” network technology was reinforced with
the early introduction of mobile broadband as well as softswitch and
IP Multimedia Subsystem (IMS) based networks for fixed and mobile
operators. This includes the world’s first commercial launches of each
of these technologies. While these accomplishments demonstrate
Ericsson’s leadership in delivering “next-generation” networks, the
Group is creating significant value in other areas as well.
During 2005, Ericsson was awarded two record-breaking managed
services agreements, which increased the total number of subscribers
in networks managed by the Company to 53 million – establishing Er-
icsson as a market leader in this increasingly important area. Sony
Ericsson Mobile Communications significantly improved their position
with a number of award winning models and popular Walkman® brand-
ed music phones.
In addition to these organic developments, we also agreed to ac-
quire key assets from Marconi to strengthen the Company’s position in
rapidly growing markets such as optical transmission and broadband
access. All in all, we are building on Ericsson’s competitive advantages
to expand the Company’s market position and invest in key growth
areas for the future.
On behalf of the Board of Directors, I would like to thank the manage-
ment team and all Ericsson employees for their accomplishments dur-
ing the year. This year’s solid performance is also a testament to your
valued support as a shareholder. I thank you for allowing me to serve
as your Chairman during 2005 and look forward to the continued suc-
cess of our Company.
Sincerely yours,
Michael Treschow
Chairman of the Board
32
L E T T E R F R O M T H E C H A I R M A N
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
BOARD OF DIRECTORS’ REPORT
This Board of Directors’ Report contains discussion and analysis of
the financial statements and operational results. This report also
includes “forward-looking statements” about future market
conditions, strategies and anticipated results. Such statements are
based on assumptions and estimates, which are subject to risks
and uncertainties. Actual results could differ materially from those
described or indicated by such forward-looking statements. For
further discussion, please see “Forward-looking Statements.”
The terms “Ericsson”, “Group”, “the Company”, or similar all
refer to Telefonaktiebolaget LM Ericsson and its consolidated
subsidiary companies. Unless otherwise noted, numbers in
parenthesis indicate prior year, i.e. 2004.
As of January 1, 2005, Ericsson changed accounting principles
to International Financial Reporting Standards (IFRS) as required
by all publicly listed companies within the EU (European Union).
Our consolidated financial statements for 2004 have been restated
according to IFRS. However, the Parent Company is required by
Swedish regulations to continue reporting according to Swedish
GAAP.
SUMMARY
With sales increasing 15 percent and net income 37 percent, the Com-
pany’s 2005 performance can be characterized by profitable growth
and good progress in strategically important areas. Ericsson supplied
the first 3G/HSDPA mobile broadband network in commercial service.
Ericsson is the first and only supplier with an IMS-based service layer
in commercial operation. BT named Ericsson as the exclusive supplier
of softswitching functions for their 21st Century Network in the UK.
These achievements reinforce Ericsson’s leading position in “next gen-
eration” networks.
Professional services operations were expanded considerably with
a number of multi-year managed services agreements, including the
two largest agreements in the Company’s history. The majority of all 3G
handsets sold outside of Japan are based on technology supplied by
Ericsson Mobile Platforms. The Sony Ericsson Mobile Communications
joint venture also reported solid progress and has now reached positive
accumulated earnings.
The acquisition of Marconi’s optical transmission, broadband access
and other strategic operations is expected to significantly improve the
Company’s position in these high-growth markets. All in all, we have
strengthened the Company’s ability to benefit from a number of growth
opportunities beyond those offered by the mobile systems equipment
market.
MARKET ENVIRONMENT AND TREND INFORMATION
2005 was a record year in terms of net subscriber additions: some 450
million new mobile subscriptions and almost 800 million mobile phones
were sold. Network equipment markets also developed positively dur-
ing 2005 with particularly strong growth in mobile systems, fixed broad-
band access and optical transmission.
contracts. A number of major contracts for new network rollouts are
expected to be awarded in the near term and price competition is like-
ly to intensify during the bidding process. The price/performance trend
in both mobile phones and network infrastructure is significantly ex-
panding the addressable market with resulting unit volume increases
more than offsetting lower average selling prices.
New mobile subscriptions, mainly in emerging markets, increased
usage in almost all regions and expanding deployment of 3G networks
drove growth within the mobile systems market. There are now some
two billion mobile subscribers worldwide and global subscription pen-
etration was 34 (27) percent at year-end. We expect another billion net
subscription additions before the end of this decade, which will drive a
significant increase in the number of initial network build outs and cre-
ate opportunities for network rollout services and professional services
in addition to mobile network systems offerings.
Total traffic on mobile networks worldwide grew an estimated 30%
in 2005, driven by subscriber additions and increased average minutes
of use (MOU). Western Europe is among the highest penetrated mobile
markets in the world in terms of subscriptions. However, Western Eu-
ropean usage is significantly lower than the average for the rest of the
world. Increased tariff competition among operators is expected to
stimulate Western European usage closer to the global average over
the coming few years, requiring continued expansion of mobile network
capacity.
At year-end, there were 91 3G/WCDMA networks in commercial
service of which Ericsson is a supplier to 49. The number of WCDMA
subscriptions almost tripled during 2005 and now exceeds 47 million.
Net subscriptions are expected to increase rapidly as more 3G networks
are placed in service and as lower-cost handsets become available.
Operator consolidation continues to be a key trend in a number of
markets. In North America, operator consolidation caused a temporary
slowdown in GSM/EDGE investments during 2004 and early 2005 while
the companies involved underwent their merger process. In Latin Amer-
ica, where significant operator consolidation occurred in 2003 and
earlier, we experienced extraordinarily strong growth for the second
consecutive year, especially from operators converting to GSM technol-
ogy. In Europe, we see an acceleration of cross border expansion as
operators there seek revenue growth and economies of scale. In other
regions, operator consolidation is ongoing with the emergence of a
number of rapidly growing pan-regional operators.
Within fixed networks, many operators are contemplating a conver-
sion to an all-IP (Internet Protocol) broadband environment. This will
enable more efficient handling of fixed and mobile voice, data and image
based communications as well as provide a platform for converged
services. Several operators have already started such an upgrade pro-
cess with many others expected to follow soon. While we believe that
fixed network operators’ spending for network equipment in total was
up slightly in 2005, certain segments essential to “next generation”
networks – optical transmission, broadband access and IMS/softswitch
– showed stronger growth.
Excluding the effects of technological developments, pricing trends
remained similar to previous years with competition continuing to be
especially intense regarding strategic pricing necessary to win new
In addition to network rollout and systems integration services, the
opportunity to supply network management and hosting of services for
network operators is growing strongly. The market for such managed
B O A R D O F D I R E C T O R S ’ R E P O R T
33
services is estimated at USD 8 billion in 2005 with good growth pros-
pects going forward as operators realize the competitive advantages
that are made possible when outsourcing operations and other non-
strategic activities. Smaller operators especially benefit by gaining ac-
cess to service capabilities and content far beyond what they could
normally afford while at the same time lowering their risks and improv-
ing their time to market.
GOALS, STRATEGY AND FINANCIAL RESULTS
Our ultimate goal is for the Company to generate growth and com-
petitive profit that is sustainable over the longer term. Ericsson’s strat-
egy is to be the preferred business partner to customers, especially the
world’s leading network operators. Ericsson strives to be the market
and technology leader for the supply and operation of network infra-
structure. Being a market leader allows the Company to leverage econ-
omies of scale to develop superior products and services and thereby
offer customers competitive advantages. In addition, when systems
integration is combined with mobile platform products and the Sony
Ericsson joint venture for mobile handsets, the scope of Ericsson’s
operations extends to complete end-to-end solutions.
Progress relative to financial targets
The Company performed in line with its financial targets of:
• Increase sales at least in line with the market growth;
• Deliver best-in-class operating margins, i.e. better than the main
• Generate positive cash flow before financing;
• Maintain Investment Grade credit ratings.
competitors;
Sales
Group sales grew 15 percent mainly driven by increased sales within
our systems segment, which consists of network equipment and re-
lated services. The effect of fluctuations in foreign exchange rates was
not significant on reported sales. Unit volume increases drove mobile
network sales growth while network buildout projects and profession-
al services drove Global Services growth. Based on Ericsson’s report-
ed sales combined with the publicly reported and estimated sales for
Ericsson’s main competitors, we believe the mobile systems market
grew approximately 11 percent in USD terms during 2005. During this
period, Ericsson’s mobile systems sales increased by 15 percent mea-
sured in constant currencies, indicating that Ericsson grew faster than
the market.
were particularly encouraging as the Company was awarded a number
of contracts for network management, including the largest contracts
in Ericsson’s history.
Within fixed networks, Ericsson was awarded a number of contracts
for “next generation” converged networks that include broadband ac-
cess, IMS/softswitch and packet switching products. We are optimistic
regarding growth opportunities for broadband access, optical transmis-
sion and converged networks and are increasing our focus in these
areas with the acquisition of key assets of Marconi.
Positive sales developments within Mobile Platforms and Cables
(Network Technologies) were not sufficient to compensate for lower
sales by the other units within Other Operations. Total sales declined
by 4 percent and operating income was SEK 1 billion lower mainly due
to losses in Enterprise Systems, Microwave Systems and Power Mod-
ules. Operating margin within Other Operations was also negatively
affected by approximately SEK 0.2 billion due to one-off payments for
breach of contract damages following an arbitration award.
During the year, we announced 78 new or expanded agreements to
supply network equipment and/or related services to operators around
the world. This compares with 59 in 2004 and 58 in 2003. Although we
do not book frame agreements as firm orders, such customer commit-
ments reassure the robustness of our order backlog, which is at the
highest level in three years.
Margins and operating expenses
Our ambition is for Ericsson to generate competitive margins. With
best-in-class operating margins, the Company continued to perform at
record levels. The lower gross margins were mainly a reflection of a
product mix that has a significantly higher proportion of services sales.
Operating margin was improved by tight cost control of operating ex-
penses, especially selling, general and administrative expenses.
While sales increased 15 percent, operating expenses increased
only 5 percent. Operating expenses measured as a percentage of net
sales decreased from 30 percent in 2004 to 27 percent in 2005 reflect-
ing ongoing efficiency improvements as well as the continued benefits
of the cost reduction measures completed in 2004.
Going forward, we want the Company to continue to deliver com-
petitive profit. We must also ensure a healthy balance between short-
term profit and longer-term growth. Reinvesting more profits now will
strategically position Ericsson to better benefit from a number of op-
portunities in the future.
Sales of services grew 29 percent during 2005, reflecting strong
market growth and our market position. Sales of professional services
Other income statement items
Share in earnings of joint ventures and associated companies before
SALES BY SEGMENT AND GEOGRAPHIC REGION 2005
(SEK m.)
Western Europe
Central and Eastern Europe,
Middle East and Africa
Asia Pacific
North America
Latin America
Total
34
Systems
35,705
38,781
29,914
18,773
18,813
141,986
Percent
change
6%
Other
Operations
6,235
Percent
Change
–3%
21%
10%
27%
33%
17%
1,167
1,512
659
262
9,835
–23%
8%
–9%
–26%
–6%
Total
41,940
39,948
31,426
19,432
19,075
151,821
Percent
change
5%
19%
10%
26%
32%
15%
Percent
of total
28%
26%
21%
13%
12%
100%
tax were stable with continued solid contribution from Sony Ericsson
Mobile Communications. Ericsson’s 50 percent share in earnings of the
joint venture increased from SEK 2.1 billion in 2004 to SEK 2.3 billion.
During the year, the joint venture also achieved the significant milestone
of retained earnings exceeding cumulative losses.
The strong cash position and repayment of debt improved the finan-
cial net from SEK –0.5 billion in 2004 to SEK 0.3 billion.
Income after financial items was SEK 33.3 (26.2) billion. This was an
improvement of SEK 7.2 billion on a sales increase of SEK 19.8 billion.
Net income attributable to the stockholders of the parent company
improved to SEK 24.3 (17.5) billion and diluted earnings per share im-
proved to SEK 1.53 (1.11). Diluted earnings per share according to US
GAAP were SEK 1.54 (0.91).
Balance Sheet and Cash flow
Capital usage and cash position improved during 2005. Total assets
were SEK 208.8 (186.2) billion at year-end, an increase of 12 percent
compared to 2004. The largest items contributing to the increase were
higher accounts receivable and inventories reflecting the increased
business activity.
SEK 0.9 billion of non-current borrowings was repaid. Post-employ-
ment benefits were funded by SEK 8.3 billion with the establishment of
a pension trust.
Net cash developed favorably, with the excess of cash over debt
increasing from SEK 42.9 billion to SEK 53.4 billion. Equity increased
to SEK 105.5 (81.5) billion and the equity ratio improved to 50.5 (43.8)
percent.
Return on Capital Employed (ROCE) was 29 percent compared with
26 percent in 2004.
Cash flow before financial investing activities
Cash flow before financial investing activities was SEK 11.3 (17.7) billion,
driven mainly by improved income. SEK 8.3 billion was used to fund the
Swedish pension trust and netted against a corresponding liability on
the balance sheet. Excluding this item, cash flow before financial invest-
ing activities was SEK 19.6 billion. Cash outlays regarding restructuring
amounted to SEK 2.0 (5.7) billion, where SEK 1.5 billion relates to re-
structuring programs initiated during 2001–2003.
Due to the strong sales growth this year involving significant network
rollouts with long project intervals in markets with slower payment pat-
terns, working capital efficiency, although still healthy, declined com-
pared with 2004. Efforts to further improve capital efficiency will con-
tinue, especially within inventories.
WORKING CAPITAL EFFICIENCY MEASURES
Target
<90
>5.5
>45
Days Sales Outstanding (DSO)
Inventory Turnover (ITO)
Payable Days 1)
2005
81
5.0
52
2004
75
5.7
51
1) Payable days: Accounts payable divided by Cost of sales and multiplied by 365
days.
Capital expenditures
We continuously monitor the Company’s capital expenditures and
evaluate whether adjustments are necessary in light of market condi-
tions and other economic factors. Capital expenditures were mainly for
investments in test equipment used to develop, manufacture and deploy
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
network equipment. The increase in capital expenditures from 2004 to
2005 was mainly due to investments needed to support the rapidly
growing services business. Capital expenditures in relation to sales is
not expected to be significantly different in 2006. However, in addition
to these capital expenditures there are commitments to repay SEK 9.8
billion of debt and SEK 16.8 billion for the purchase of certain assets
from Marconi. With a net cash position at year-end of SEK 53.4 billion,
we expect the Company to be able to cover all 2006 capital expenditure
with no additional borrowings, by using funds generated from opera-
tions.
The following table summarizes annual capital expenditures during
the five years ended December 31, 2005:
CAPITAL EXPENDITURES 2001–2005
2004
SEK billion
2.5
Capital expenditures
1.1
of which Sweden
2005
3.4
1.0
2003
1.8
1.1
2002
2.7
1.2
2001
8.7
3.8
Off Balance Sheet items
Customer financing credits of SEK 0.1 (0.6) billion issued by third parties
and guaranteed by Ericsson were outstanding as per December 31,
2005. Also see Notes to the Consolidated Financial Statements – Note
C21, “Financial Risk Management and Financial Instruments.”
Credit ratings
Moody’s as well as Standard & Poor’s (S&P) credit rating agencies
raised Ericsson’s credit ratings during 2005. At year-end, their ratings
of Ericsson’s creditworthiness were Baa3 for Moody’s and BBB– for
S&P, both considered to be Investment Grade.
ERICSSON CREDIT RATINGS YEAR END 2004–2005
Moody’s
Standard & Poor’s
2005
Baa3
BBB–
2004
Ba2
BB+
Research and development
A robust R&D program is key to Ericsson’s competitiveness and future
success. With most R&D invested in mobile communications network
infrastructure, Ericsson’s program is one of the largest in the industry.
We have increased investments in the strategically important areas of
broadband access, core network and service layer for fixed and mobile
networks. With the acquisition of Marconi, we will broaden R&D invest-
ments to include optical transmission and further strengthen broadband
access, softswitch/IMS and IP routing capabilities.
R&D PROGRAM
Expenses (SEK billion)
As percent of sales
Employees within R&D at December 31
Patents
2005
24.5
16.1%
16,500
20,000
2004
23.4
17.7%
16,000
16,000
During 2006, R&D expenses, excluding effects from the Marconi ac-
quisition, are expected to remain at about the same level in absolute
terms as in 2005.
B O A R D O F D I R E C T O R S ’ R E P O R T
35
During 2005, there were several small acquisitions to increase ca-
pacity mainly to handle growing systems integration business. The
Company also made two technology acquisitions, Netspira and Axxes-
sit, to expand the systems product portfolio.
There were no material acquisitions or divestitures completed during
2003 or 2004.
Material contracts and contractual obligations
Primary contractual obligations are outlined in the table below. Operat-
ing leases are mainly related to offices and production facilities. Pur-
chase obligations are mainly related to outsourced manufacturing, R&D
and IS/IT operations and for components for our own manufacturing.
With the exception of the Marconi acquisition, Ericsson has not been a
party to any material contracts over the last two years other than those
entered in the ordinary course of business.
CONTRACTUAL OBLIGATIONS 2005
(SEK million)
Long-term debt 1)
Capital lease
obligations 2)
Operating leases 2)
Other non-current
liabilities
Purchase
obligations 3)
Commitments
for customer
financing 1)
Total
Payment due by period
Total
21,964
<1
year
9,739
1–3
years
3,279
3–5
years
8,360
>5
years
586
2,697
10,807
199
2,134
389
3,321
324
2,409
1,785
2,943
2,740
32
781
7,398
7,398
–
3
–
1,924
–
3,643
49,249
3,643
23,145
–
7,770
–
11,096
–
7,238
1) See also Notes to the Consolidated Financial Statements – Note C21, “Financial
Risk Management and Financial Instruments.”
2) See also Notes to the Consolidated Financial Statements – Note C27, “Leasing.”
3) The amounts of purchase obligations are gross, before deduction of any related
provisions.
Critical accounting estimates
The preparation of financial statements and application of accounting
policies often involve management’s judgment and/or the use of esti-
mates and assumptions deemed to be reasonable and prudent. How-
ever, other results may be derived using different assumptions or esti-
mates. There are a number of accounting policies subject to such
estimates or assumptions. Please see Notes to the Consolidated Fi-
nancial Statements – Note C2, ”Critical Accounting Estimates and Judg-
ments” for more information about the policies that we believe have the
most significant impact on Ericsson’s reported results and financial
position.
Acquisitions/divestitures, partnerships
and joint ventures
During 2005, Sony Ericsson Mobile Communications AB (SEMC) re-
ported strong unit volume and sales increases. Income before tax im-
proved during the year with the higher volumes and sales. The improved
performance is mainly a result of focusing on imaging, music and en-
terprise phones while increasing the number of more affordable and
attractively designed models. SEMC’s ambition is continued profitable
growth by leveraging the opportunities created by the combination of
the parent companies’ technologies in the joint venture. The joint ven-
ture results are accounted for under the equity method with no sales
included in Ericsson’s financial statements. For more information see
Notes to the Consolidated Financial Statements – Note C1, “Significant
Accounting Policies.”
SONY ERICSSON RESULTS 2004–2005
Shipments (unit millions)
Sales (EUR m.)
Income before tax (EUR m.)
Net income (EUR m.)
Ericsson share of earnings (SEK billion)
2005
51.2
7,268
514
356
2.3
Percent
2004 change
21%
42.3
11%
6,525
6%
486
13%
316
5%
2.1
SEMC invested approximately USD 14 million to purchase a controlling
stake in Beijing Suohong Electronics Co, Ltd (BSE). The investment
increased SEMC’s ownership from 10 percent to 74.5 percent and
strengthened its in-house manufacturing capacity. BSE will be con-
solidated into SEMC from the first quarter of 2006 with minor effects
on reported results. Local minority shareholder ownership remains un-
changed.
For more information on transactions with SEMC, please also see
Notes to the Consolidated Financial Statements – Note C30, “Related
Party Transactions.”
During 2004, Ericsson made a public offer to purchase shares of
Ericsson S.p.A. in Italy, increasing Ericsson’s ownership to 93 percent.
In the first quarter of 2005, a Residual Public Offer was launched for
the remaining shares and subsequently Ericsson S.p.A. was delisted
from the Milan Stock Exchange. In total SEK 2.2 billion was paid out for
the shares of which SEK 0.6 billion in 2005.
On October 25, 2005, Ericsson announced the intention to acquire
key assets of Marconi’s telecommunications operations for SEK 16.8 bil-
lion in cash. The acquisition strengthens Ericsson’s position in the ac-
celerating transmission segment and expands Ericsson’s platform for
leadership in “next generation” converging networks. As fixed and mo-
bile services converge, Ericsson’s customers will benefit from the ac-
quisition.
Ericsson is acquiring assets expected to generate 2005 sales of
approximately SEK 14.0 billion (GBP 1.0 billion). The acquired opera-
tions had net tangible assets of approximately SEK 1.4 billion (GBP 0.1
billion) as of September 30, 2005. The remaining acquisition cost will
mainly be allocated to intellectual property rights (patents, brands, trade
marks, etc). The acquisition is expected to have a neutral effect on
earnings per share in 2006 and contribute positively to earnings per
share from 2007.
36
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
CORPORATE GOVERNANCE
Although internal policies and directives for governance and other im-
portant rules for managing the Company’s business activities have long
been established, we have adapted our work procedures in line with
relevant developments in Sweden and the United States regarding re-
porting, disclosure and other requirements for listed companies as well
as changes in legislation, such as the new Swedish Companies Act and
the US Sarbanes-Oxley Act.
In accordance with the recently introduced Swedish Code of Cor-
porate Governance, a separate Corporate Governance Report as well
as an Internal Control Report have been prepared. There have been no
amendments or waivers to Ericsson’s Code of Business Ethics and
Conduct for any director or member of management.
Foreign exchange risks
With significant transaction volumes in currencies other than SEK, the
Company has a net exposure to a number of currencies. The duration
of this exposure is also considerable, as many contracts have long lead
times between order and delivery. A variety of hedging activities, cover-
ing on average the forthcoming 6–9 months, are used to managed
foreign exchange risks.
The largest foreign exchange exposure is to the US dollar and related
currencies, which represented 46 percent of sales in 2005. Assuming
other foreign exchange exposures remained the same, a 10 percent
plus/minus change in the USD/SEK exchange rate would affect operat-
ing income by plus/minus SEK 3.3 (3.6) billion before any hedging ef-
fects.
RISK MANAGEMENT
Risk taking is an inherent part of doing business. To manage risks, a
coordinated process is used whereby risks are identified, probability of
occurrence assessed and potential consequences estimated. Actions
are then taken to reduce or mitigate the risk exposures and limit poten-
tial unfavorable consequences.
We broadly categorize risks into operational risks and financial risks.
Our approach to risk management leverages the scale and diversity of
our business activities and balances central coordination with well-
defined risk management responsibilities within each operational
unit.
Operational risk management
Risk management has been integrated within the Ericsson Group Man-
agement System and business processes. The operational risk man-
agement framework applies universally across all business activities
and is based on the following principles:
Each risk is owned and managed by an operational unit that is held
accountable with oversight made through unit steering boards and
Group Management.
Risks are dealt with on three levels: in the strategy process, in an-
nual target setting and within ongoing operations by transaction (cus-
tomer bid/contract, acquisition, investment, product development
project, etc).
Approval limits are clearly established with escalation according to
a well-defined delegation of authority.
A central security and risk management unit coordinates manage-
ment of certain risks, such as business interruption, information secu-
rity/IT risks and physical security as well as insurable risks. A crisis
management council deals with ad hoc events of a serious nature.
Financial risk management
We have an established policy governing the Group’s financial risk man-
agement, which is carried out by the Treasury function within the Parent
Company and supervised by the Board of Directors’ Finance Commit-
tee.
For further information on objectives, policies and strategies for fi-
nancial risk management please see Notes to the Consolidated Finan-
cial Statements – Note C20, “Interest-Bearing Provisions and Liabilities”
and Note C21, “Financial Risk Management and Financial Instru-
ments.”
Interest rate risks
Ericsson is exposed to interest rate risk through market value fluctua-
tions of certain balance sheet items and through changes in interest
expenses and income. Assuming the net cash position remained at SEK
53.4 billion, a sustained change in interest rates of plus/minus 0.25
percentage points would have an annual impact on the financial net of
approximately plus/minus SEK 135 million.
Credit risk in trade receivables
At year-end 2005, trade receivables amounted to SEK 41.2 (32.6) billion,
less allowances of SEK 1.4 (1.8) billion. Extended payment terms for
trade credits and overdue accounts receivable amounts are regularly
reviewed with provisions made to cover any expected losses. Histori-
cally, credit losses have been minimal mainly because the customer
base largely consists of well established and financially sound network
operators.
Customer finance risk
At year-end 2005, gross exposure to customer financing amounted to
SEK 7.0 (8.9) billion of which one percent was off-balance sheet. Latin
America accounts for 58 (60) percent with the remaining exposure
mainly related to Central and Eastern Europe, Middle East and Africa.
Risk provisions amount to 29 (32) percent of the gross exposure.
In most customer financing agreements, credit risks are covered by
security arrangements, normally in the form of pledges of equipment,
pledges of certain of the borrower’s assets and/or pledges of shares in
the operating company. Provisions are made and reported as part of
selling expenses.
Unutilized but outstanding customer financing commitments
amounted to SEK 3.6 (2.2) billion at year-end. New credits are only
given on a very selective basis for strategic reasons.
Financial credit risk
Financial instruments carry an element of risk in that counterparts may
be unable to fulfill their payment obligations. All derivative transactions
are covered by ISDA Master agreements to reduce the credit risk. Dur-
ing 2005, no credit losses were incurred from such instruments.
B O A R D O F D I R E C T O R S ’ R E P O R T
37
Liquidity and refinancing risk
We expect the Company’s strong cash position to satisfy any short-term
liquidity requirements. During 2005, there have been no material de-
faults in the payment of principle or interest, or any other material default
relating to the indebtedness of Ericsson or any of its subsidiaries.
From August 13, 2005, Ericsson complies with the EU directive on
Waste Electrical and Electronic Equipment (WEEE). Work continues to
ensure compliance by July 1, 2006 of the EU directive on Reduction of
Hazardous Substances (RoHS).
CORPORATE RESPONSIBILITY
Effective management of social, environmental and geopolitical issues
can help to assure an enduring capability for value creation and com-
petitive advantage. Ericsson supports the UN Global Compact and its
ten guiding principles. We see these principles not only as a prerequisite
for sound, long-term business but also as guiding principles and as
such, we are committed to responsible business practices for sustain-
able economic growth that benefit all of our stakeholders. Our commit-
ment to employees, customers, shareholders and the broader global
community is underscored by external recognition of our efforts.
Ericsson was again included in the FTSE4Good and the Dow Jones
Sustainability indices. And for 2005, we were named the Technology
Supersector leader for the DJSI STOXX sustainability index.
Ericsson publishes a separate Sustainability Report annually, usu-
ally during the second quarter, which provides comprehensive informa-
tion about corporate responsibility and our related activities.
Employees
Every year an employee satisfaction survey is conducted to assess our
Human Capital Index (HCI) and Empowerment Index (EI). In 2005 over
92 (90) percent of employees participated in this survey. The results
show a marked improvement from last year with both indices exceeding
our target levels. The Human Capital Index as well as the Empowerment
Index improved by 7 points. HCI measures the employees’ contribution
in adding value for our customers and meeting business goals. EI ad-
dresses how employees act on their own initiative to achieve the Com-
pany’s goals.
Employee headcount at year-end was 56,055 (50,534). Most of the
additions were to support the growing services business. During the
year, 2,377 employees departed while 7,898 joined the company. Please
also see Notes to the Consolidated Financial Statements – Note C29,
“Information Regarding Employees, Members of the Board of Directors
and Management.”
Community Involvement
We are committed to being a responsible member of the global society
and of the communities in which the Company operates. Employees
are encouraged and empowered to make a positive contribution to the
world around them. Their contributions are of many kinds, determined
by our employees according to local needs. They may, for example, be
in the fields of health care, social and humanitarian aid, scholarships
and other educational support, art and culture, the environment, chil-
dren’s welfare as well as many other charitable activities.
Ericsson Response is a global initiative to rapidly provide specialists
and communications equipment anywhere in the world in response to
human suffering caused by disasters. Ericsson Response assists the
disaster relief operations of the United Nations Development Program
(UNDP), the Office for the Coordination of Humanitarian Affairs (OCHA)
and the International Federation of Red Cross and Red Crescent Soci-
eties (IFRC). During 2005, Ericsson Response provided relief support
for many natural disasters around the world, including the tsunami in
South East Asia, earthquakes in the Middle East as well as hurricanes
in the Americas. Ericsson is also aiding reconstruction work in these
disaster areas.
Environment and health
We believe that the Company is in compliance with all material environ-
mental, health and safety laws and regulations required by its operations
and business activities. Ericsson provides public information on radio
waves and health and supports independent research to further in-
crease knowledge in this area. Ericsson currently co-sponsors more
than 40 different ongoing research projects related to electromagnetic
fields (EMF), radio waves and health. Public health authorities and in-
dependent expert groups have reviewed the total amount of research
and they have consistently concluded that the balance of evidence does
not demonstrate any health effects associated with radio wave exposure
from either mobile phones or radio base stations.
Executive Compensation
The remuneration committee continues to be mindful of the debates
around the world on executive salaries and benefits. We remain confi-
dent that current policies and practices concerning authorization, com-
pliance and control of senior executive compensation within Ericsson
are appropriate and reasonable.
As of December 31, 2005, there were no loans outstanding from,
and no guarantees issued to or assumed by Ericsson for the benefit of
any member of the Board of Directors or senior management.
LEGAL AND TAX PROCEEDINGS
Together with most of the mobile communications industry, Ericsson
has been named a defendant in five class actions in the United States
where plaintiffs allege that adverse health effects could be associated
with the use of mobile phones. Three of those cases are pending in
federal court and the other two are pending in state court in New York
and the District of Columbia.
Ericsson is engaged in litigation with an Australian company, QPSX,
in the Federal Court of Australia. QPSX’s claim relates to an alleged
breach by Ericsson of a patent license agreement. Ericsson has con-
tested the claim.
Atmel Corporation was awarded approximately USD 43.1 million in
damages after the International Centre for Dispute Resolution, Interna-
tional Arbitration Tribunal found Ericsson liable for breaches of contract
and misappropriation of trade secrets relating to Atmel’s proprietary
AVR microcontroller technology. This lawsuit came about as a result of
reorganizing our Phones segment, i.e. formation of the Sony Ericsson
Mobile Communications joint venture and establishment of Ericsson
Mobile Platforms. We believed the new structure was covered by the
original agreement with Atmel. Ericsson Mobile Platforms no longer
uses this technology and the ruling will not affect either unit’s business
going forward.
38
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Ericsson filed a complaint to the European Commission requesting
that it investigate and stop Qualcomm’s anti-competitive conduct in the
licensing of essential patents for 3G mobile technology. At the same
time, Broadcom, NEC, Nokia, Panasonic Mobile Communications and
Texas Instruments each filed similar complaints claiming Qualcomm is
violating EU competition law and failing to meet the commitments Qual-
comm made to international standardization bodies around the world
that it would license its technology on fair, reasonable and non-dis-
criminatory terms.
The Swedish National Economic Crimes Bureau has added to the
indictment against some current and former employees of Ericsson for
evasion of tax control. The addition concerns the way the accounting
of some payments from Ericsson to Bank Austria during the years 1999
and 2000 was handled.
From 2001 to the beginning of 2005, Swedish fiscal authorities dis-
allowed, for corporate income tax purposes, the Parent Company and
the subsidiary companies Ericsson Telecom AB and Ericsson Radio
Systems AB (renamed Ericsson AB) deductions for sales commission
payments via external service companies to sales agents in certain
countries. Most of these taxes have been paid with the rest provisioned
for.
BOARD OF DIRECTORS
More information regarding the Board Of Directors and its members as
well as the Board and its committee activities can be found in the Cor-
porate Governance Report.
Changes to the Board membership
The Board of Directors is elected yearly at the Annual General Meeting
for the period until the end of the next Annual General Meeting. At the
Annual General Meeting on April 6, 2005, Ulf J. Johansson was elected
to succeed Lena Torell. Sir Peter L. Bonfield, Sverker Martin-Löf, Nancy
McKinstry, Eckhard Pfeiffer and Carl-Henric Svanberg were re-elected
as members of the Board. Michael Treschow was re-elected chairman
of the Board. Arne Mårtensson and Marcus Wallenberg were re-elect-
ed deputy chairmen.
Board compensation
Members of the Board, who are not employees of the Company, have
not received any compensation other than the fees paid for Board du-
ties as outlined in Notes to the Consolidated Financial Statements –
Note C29, “Information Regarding Employees, Members of the Board
of Directors and Management.” Members and Deputy Members of the
Board, who are employees, i.e. the CEO and the employee representa-
tives, have not received any remuneration or benefits other than their
normal employee entitlements, with the exception of a small fee paid to
the employee representatives for each board meeting attended.
PARENT COMPANY
The Parent Company business consists mainly of corporate manage-
ment, holding company functions and, from January 1, 2005, internal
banking activities previously performed on a commission basis by
Ericsson Treasury Services AB. The Parent Company business also
includes customer credit management performed on a commission
basis by Ericsson Credit AB.
The Parent Company is the owner of the majority of intellectual
property rights and manages the patent portfolio, including patent ap-
plications, licensing and cross licensing of patents and defending of
patents in litigations.
The Parent Company has 8 (11) branch offices. In total, the Group
has 51 (45) branch and representative offices.
Net sales for the year amounted to SEK 1.1 (2.6) billion and income
after financial items was SEK 14.0 (7.4) billion. Exports accounted for
96 percent of net sales in 2005 (98 percent in 2004). No consolidated
companies were customers of the Parent Company’s sales in 2005 or
2004, while 27 percent (21 percent in 2004) of the Company’s total
purchases of goods and services were from such companies. Profits
from disposal of shares to a subsidiary contributed SEK 6.8 billion to
income.
Major changes in the Parent Company’s financial position for the
year include increased current and non-current receivables from sub-
sidiaries of SEK 11.3 billion, increased investments in subsidiaries of
SEK 4.2 billion and decreased other current receivables of SEK 4.5
billion. At year-end, cash and short-term cash investments amounted
to SEK 75.0 (71.7) billion.
In accordance with the conditions of the Stock Purchase Plans and
Option Plans for Ericsson employees, 31,649,876 shares from treasury
stock were sold or distributed to employees during the year. The nom-
inal amount of these shares is SEK 31.6 million, representing less than
one percent of capital stock, and compensation received amounted to
SEK 179.1 million. The holding of treasury stock at December 31, 2005
was 268,065,241 Class B shares. The nominal amount of these shares
is SEK 268.1 million, representing 2 percent of capital stock, and re-
lated acquisition cost amounts to SEK 596.5 million.
POST CLOSING EVENTS
Change in accounting principles for pensions 2006
Effective January 2006, Ericsson will adopt the new option in IAS 19,
Employee benefits, on how to recognize actuarial gains and losses. The
currently used method to recognize actuarial gains and losses – to the
extent that they fall outside the 10 percent corridor – is that they are
amortized over the average remaining service time of plan participants.
Instead, all actuarial gains and losses will effective January 1, 2006, be
recognized directly to equity, net of deferred tax, in the period they
occur. Earlier reporting-periods will be restated accordingly. The adop-
tion of the new option will increase provision for post-employment ben-
efits with approximately SEK 3.5 billion, accruals for social security with
SEK 0.8 billion and will affect equity by approximately SEK 3.1 billion
net of tax as per January 1, 2006.
Marconi acquisition
Marconi shareholder and relevant regulatory approvals have been ob-
tained and closing took place on January 23, 2006, with the exception
of a few smaller subsidiaries. The acquired operations will be consoli-
dated into Ericsson’s accounts starting with the first quarter of 2006.
The integration process has started with the Marconi products and
solutions planned to be fully integrated into Ericsson’s portfolio. Under
the transaction approximately 6,660 employees have been transferred
to Ericsson in January 2006.
B O A R D O F D I R E C T O R S ’ R E P O R T
39
PROPOSED DISPOSITION OF EARNINGS
The Board of Directors proposes that a dividend of SEK 0.45 (0.25) per
share be paid to shareholders duly registered on the Record date of
April 13, 2006, and that the Company retains the remaining part of
non-restricted equity. The Class B treasury shares held by the Parent
Company are not entitled to receive a dividend.
Assuming that no treasury shares remain within the Company on
the Record date, the Board of Directors propose that earnings be dis-
tributed as follows:
Amount to be paid to the shareholders
Amount to be retained
by the Parent Company
SEK 7,259,516,405
SEK 21,709,793,259
Total non-restricted equity
of the Parent Company
SEK 28,969,309,664
As basis for its proposal for a dividend, the Board of Directors has made
an assessment in accordance with Chapter 18, Section 4 of the Swed-
ish Companies Act of the Company’s and the Group’s need for financial
resources as well as the Company’s and the Group’s liquidity, financial
position in other respects and long-term ability to meet its commit-
ments. The company reports an equity ratio of 50.5% and net cash
amounts to SEK 53.4 bilion.
The Board of Directors has also considered the Company’s and the
Group’s position in general. In this respect, the Board of Directors has
taken into account known commitments that may have an impact on
the Company’s financial position. Such commitments are for example
the acquisition of certain operations from Marconi and repayment of
debts during 2006.
The proposed dividend does not limit the Company’s ability to make
investments or its need of funds.
It is the Board of Directors’ assessment that the proposed dividend
is well-balanced considering the type, scope and risks of the business
activities and the Company’s and the Group’s capital requirements.
BOARD ASSURANCE
In accordance with section 3.6.2 of the Swedish Code of Corporate
Governance, assurance is hereby given by the Board of Directors and
the President and CEO that, to the best of our knowledge, the annual
accounts and the consolidated accounts have been prepared in
accordance with generally accepted accounting principles (GAAP) for
a publicly listed company, the information presented is consistent with
actual conditions and nothing of material value has been omitted that
would affect the picture of the company presented in this annual re-
port.
Stockholm February 24, 2006
Telefonaktiebolaget LM Ericsson (publ)
Org. no. 556016-0680
Arne Mårtensson
Deputy chairman
Michael Treschow
Chairman
Marcus Wallenberg
Deputy chairman
Nancy McKinstry
Peter L. Bonfield
Eckhard Pfeiffer
Sverker Martin-Löf
Ulf J. Johansson
Per Lindh
Torbjörn Nyman
Carl-Henric Svanberg
President and CEO
Jan Hedlund
40
B O A R D O F D I R E C T O R S ’ R E P O R T
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
CONSOLIDATED
INCOME STATEMENT
Years ended December 31, SEK million
Net sales
Cost of sales
Gross margin
Research and development and other technical expenses
Selling and administrative expenses
Operating expenses
Other operating income
Share in earnings of joint ventures and associated companies
Operating income
Financial income
Financial expenses
Income after financial items
Taxes
Net income
Of which:
Net income attributable to stockholders of the parent company
Net income attributable to minority interest
Other information
Average number of shares, basic (million)
Earnings per share, basic (SEK)
Earnings per share, diluted (SEK)
Notes
C4, C5
C7
C13
C8
C8
C9
C10
C10
2005
151,821
–82,369
69,452
–24,454
–16,800
–41,254
2,491
2,395
33,084
2,653
–2,402
33,335
–8,875
24,460
2004
131,972
–70,864
61,108
–23,421
–15,921
–39,342
2,617
2,323
26,706
3,541
–4,081
26,166
–8,330
17,836
24,315
145
17,539
297
15,843
1.53
1.53
15,829
1.11
1.11
C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
41
CONSOLIDATED
BALANCE SHEET
December 31, SEK million
ASSETS
Non-current assets
Intangible assets
Capitalized development expenses
Goodwill
Other
Property, plant and equipment
Financial assets
Equity in joint ventures and associated companies
Other investments in shares and participations
Customer financing, non-current
Other financial assets, non-current
Deferred tax assets
Current assets
Inventories
Financial assets
Accounts receivable – trade
Customer financing, current
Other current receivables
Short-term investments
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity
Stockholders’ equity
Minority interest in equity of consolidated subsidiaries
Non-current liabilities
Post-employment benefits
Other provisions, non-current
Deferred tax liabilities
Borrowings, non-current
Other non-current liabilities
Current liabilities
Other provisions, current
Borrowings, current
Accounts payable
Other current liabilities
Total equity and liabilities 1)
Assets pledged as collateral
Contingent liabilities
1) Of which interest-bearing provisions and liabilitites 28,094 (33,643).
42
Notes
2005
2004
C11
C12, C27, C28
C13
C9
C14
C15
C16
C21
C21
C17
C18
C19
C20,C21
C19
C20, C21
C23
C22
C24
C25
6,161
7,362
939
8,091
5,766
748
6,966
5,845
6,313
805
1,322
3,514
17,294
50,676
4,155
543
2,150
1,236
20,766
49,300
19,208
14,003
41,242
3,624
12,574
39,767
41,738
158,153
208,829
104,677
850
105,527
3,125
904
391
14,185
2,740
21,345
17,764
10,784
12,584
40,825
81,957
208,829
549
1,708
32,644
1,446
12,239
46,142
30,412
136,886
186,186
80,445
1,057
81,502
10,087
1,146
421
21,837
1,856
35,347
23,632
1,719
10,988
32,998
69,337
186,186
7,985
1,014
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
CONSOLIDATED STATEMENT
OF CASH FLOWS
Years ended December 31, SEK million
OPERATIONS
Net income attributable to stockholders of the parent company
Notes
2005
2004
Adjustments to reconcile net income to cash
C26
C12
C26
C11
Operating net assets
Inventories
Customer financing, current and non-current
Accounts receivable
Provisions and post-employment benefits
Other operating assets and liabilities, net
Cash flow from operating activities
Investing activities
Investments in property, plant and equipment
Sales of property, plant and equipment
Acquisitions and sales of shares and other investments, net
Product development
Net change in capital contributed by minority
Other investing activities
Cash flow from operating investing activities
Cash flow before financial investing activities
Short-term investments
Cash flow from investing activities
Cash flow before financing activities
Financing activities
Changes in borrowings, current, net
Proceeds from issuance of non-current borrowings
Repayment of non-current borrowings
Sale/repurchase of own stock
Dividends paid
Cash flow from financing activities
Effect of exchange rate changes on cash
Net change in cash
24,315
17,539
10,845
35,160
10,490
28,029
–3,668
–641
–5,874
–15,574
7,266
16,669
–3,365
362
–957
–1,174
20
–230
–5,344
–3,432
–65
–1,403
–1,990
1,340
22,479
–2,452
358
–1,549
–1,146
71
–70
–4,788
11,325
17,691
6,375
1,031
–26,050
–30,838
17,700
–8,359
–1,216
93
–947
117
–4,133
–6,086
–288
11,326
–1,502
870
–13,649
15
–292
–14,558
214
–22,703
Cash and cash equivalents, beginning of period
30,412
53,115
Cash and cash equivalents, end of period
C21
41,738
30,412
C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
43
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
Years ended December 31, SEK million
Opening balance
Adjustment for IAS 39, net
Adjusted opening balance
Changes in hedge reserve, net
Revaluation of other investments in shares
and participations, net
Changes in cumulative translation effects due to changes
in foreign currency exchange rates
Business combinations
Net income
Total income and expenses for the period
Stock issue, net
Sale of own shares
Stock Purchase and Stock Option Plans
Dividends paid
Adjustment of cost for stock issue 2002
Total transactions with owners
Closing balance
Stock-
holders’
equity 1)
80,445
1,489
81,934
–1,859
–150
4,037
–
24,315
26,343
–
117
242
–3,959
–
–3,600
104,677
2005
Total
equity
81,502
1,489
82,991
–1,859
–150
4,184
–342
24,460
26,293
17
117
242
–4,133
–
–3,757
105,527
Minority
interest
1,057
–
1,057
–
–
147
–342
145
–50
17
–
–
–174
–
–157
850
2004
Stock-
holders’ Minority
interest
2,299
–
2,299
equity 1)
63,820
–
63,820
Total
equity
66,119
–
66,119
–
–
–
–
–
–
–1,135
–
17,539
16,404
–
15
204
–
2
221
80,445
–65
–1,182
297
–950
–1,200
–1,182
17,836
15,454
–
–
–
–292
–
–292
1,057
–
15
204
–292
2
–71
81,502
1) For further information, please see “Notes to the consolidated statements, Note C17, “Stockholders’ equity”.
44
C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
CONTENTS
C1 Significant Accounting Policies ................................................................................................................................................................................................. 46
C2 Critical Accounting Estimates and Judgments ................................................................................................................................................................ 50
C3 Transition to IFRSs ............................................................................................................................................................................................................................. 52
C4 Segment Information ........................................................................................................................................................................................................................ 57
C5 Revenues ................................................................................................................................................................................................................................................. 59
C6 Expenses by nature ........................................................................................................................................................................................................................... 59
C7 Other Operating Income ................................................................................................................................................................................................................. 59
C8 Financial Income and Expenses ............................................................................................................................................................................................... 59
C9 Taxes ........................................................................................................................................................................................................................................................... 59
C10 Earnings per Share ............................................................................................................................................................................................................................ 60
C11 Intangible Assets ..................................................................................................................................................................................................................................61
C12 Property, Plant and Equipment .................................................................................................................................................................................................. 63
C13 Financial Assets ................................................................................................................................................................................................................................... 65
C14 Inventories ............................................................................................................................................................................................................................................... 67
C15 Accounts Receivable – Trade ...................................................................................................................................................................................................... 67
C16 Other Current Receivables ........................................................................................................................................................................................................... 67
C17 Stockholders’ Equity ........................................................................................................................................................................................................................ 68
C18 Post-employment Benefits ........................................................................................................................................................................................................... 69
C19 Other Provisions .................................................................................................................................................................................................................................. 72
C20 Interest-bearing Provisions and Liabilities .......................................................................................................................................................................... 73
C21 Financial Risk Management and Financial Instruments ............................................................................................................................................. 73
C22 Other Current Liabilities .................................................................................................................................................................................................................. 77
C23 Accounts and Notes Payable – Trade .................................................................................................................................................................................... 77
C24 Assets Pledged as Collateral ...................................................................................................................................................................................................... 77
C25 Contingent Liabilities ........................................................................................................................................................................................................................ 77
C26 Statement of Cash Flows ............................................................................................................................................................................................................... 77
C27 Leasing ...................................................................................................................................................................................................................................................... 78
C28 Tax Assessment Values in Sweden ......................................................................................................................................................................................... 79
C29 Information Regarding Employees, Members of the Board of Directors and Management ............................................................... 79
C30 Related Party Transactions .......................................................................................................................................................................................................... 84
C31 Fees to Auditors ................................................................................................................................................................................................................................... 84
C32 Reconciliation to Accounting Principles Generally Accepted in the United States .................................................................................. 85
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
45
C1 SIGNIFICANT ACCOUNTING
POLICIES
in shares and participations and carried at fair value. Fair values are
based on quoted market prices or rates. If official rates or market pric-
es are not available, fair values are calculated by discounting the ex-
pected future cash flows at prevailing interest rates.
The consolidated financial statements of Telefonaktiebolaget LM Eric-
sson, the Parent Company and its subsidiary companies (“the Com-
pany”) for 2005 and 2004 are prepared in accordance with Interna-
tional Financial Reporting Standards. IFRS below refer to all these
standards. For Ericsson, there is no difference between IFRS and IFRS
as adopted by the EU by December 31, 2005 and the Swedish Annual
Accounts Act. We have also applied URA 43 Accounting for special
payroll tax and tax on investment returns and URA 46 IFRS 2 and ac-
counting for social security expenses, issued by the Swedish Financial
Accounting Standards Council (Redovisningsrådet). IFRSs differs in
certain aspects from generally accepted accounting principles in the
United States (US GAAP). For a description of major differences, with
respect to Ericsson’s financial statements, see Note C32, Reconciliation
to Accounting Principles Generally Accepted in the United States.
Ericsson has applied IFRSs since January 1, 2005. All amounts
related to 2004 have been restated in accordance with IFRSs, except
for IAS 39 which has been applied as from January 1, 2005. In Note C3,
Transition to IFRSs, a reconciliation of the restatement is made for the
transition to IFRSs.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Par-
ent Company and all subsidiary companies. Subsidiary companies are
all companies in which Ericsson has an ownership and directly or indi-
rectly, including effective potential voting rights, has a voting majority
or Ericsson by agreement has control or retains the majority of the re-
sidual or ownership risk of the entity.
Inter-company transactions have been eliminated. Elimination of unre-
alized profits in inventory is made in full without consideration of minor-
ity interests.
The consolidated financial statements are prepared in accordance
with the purchase method. Accordingly, consolidated stockholders’
equity includes equity in subsidiary companies and associated com-
panies earned only after their acquisition.
ASSOCIATED COMPANIES AND JOINT VENTURES
Investments in associated companies and joint ventures, where voting
stock interest including effective potential voting rights is at least 20
percent but not more than 50 percent, or where a corresponding influ-
ence is obtained through agreement, are accounted for according to
the equity method. IFRS 3 has been applied for the accounting of these
companies. Ericsson’s share of income before taxes is reported in item
“Share in earnings of joint ventures and associated companies”, includ-
ed in Operating Income. Taxes are included in item “Taxes”. Unrealized
internal profits in inventory in associated companies purchased from
subsidiary companies are eliminated in the consolidated accounts in
proportion to ownership. Investments in associated companies are
shown at equity after adjustments for unrealized inter-company profits
and goodwill (see “Goodwill” below).
Undistributed earnings of associated companies included in con-
solidated equity are reported as Retained earnings, as detailed in Note
C17, Stockholders’ equity.
All other equity instruments are accounted for as Other investments
46
GOODWILL
At the acquisition of a business, an allocation is made of the purchase
price in which fair values are assigned to acquired assets, for example
intangible assets such as customer relations, brands and patents,
based upon appraisals made. Goodwill arises when the purchase price
exceeds the fair value of recognizable acquired net assets.
Goodwill resulting from acquisitions of businesses is subject to im-
pairment review at least annually in the fourth quarter and when there
are indications that the carrying value may not be recoverable. The
carrying values are not considered to be recoverable when the ex-
pected discounted cash flows are less than the carrying values. An
impairment loss is determined based on the amount by which the car-
rying value exceeds the recoverable amount. Goodwill related to assets
in foreign currency is remeasured at period-end exchange rates.
TRANSLATION OF FINANCIAL STATEMENTS IN
FOREIGN CURRENCY
For most subsidiary companies, joint ventures and associated compa-
nies, the local currency is the currency in which the companies pri marily
generate and expend cash, and is thus considered their functional
(business) currency. Their financial statements plus goodwill related to
such companies, if any, are translated to SEK by translating assets and
liabilities to the closing rate at the balance sheet day and income state-
ment items at average exchange rates, with translation adjustments
reported directly in consolidated equity. When a company is sold, ac-
cumulated translation adjustments are included in consolidated in-
come.
For a limited number of companies, the functional currency is a cur-
rency other than the local currency. The financial statements of such
companies are translated in two steps. In the first step, remeasurement
is made into the functional currency and resulting exchange rate gains/
losses are reported in income. In the second step, from the functional
currency to SEK, the financial statements are translated as above. Ef-
fective portion of foreign exchange gains and losses on hedge instru-
ments designated to hedge the net investments in foreign entities are
reported directly in consolidated equity, net of tax effects, to offset the
translation adjustments above. Ineffective and undesignated portions of
foreign exchange gains and lossed are reported in operating income.
REVALUATION OF FOREIGN CURRENCY ITEMS IN
INDIVIDUAL COMPANIES
In the financial statements, receivables and liabilities in foreign curren-
cies are revalued at year-end exchange rates.
Foreign exchange gains and losses are divided into operational and
financial. Effects of hedging are in the income statement reported to-
gether with the hedged item.
The net difference between foreign exchange gains/losses on op-
erating transactions and gains/losses on hedging through foreign ex-
change derivatives are included in cost of goods sold. Gains and
losses on foreign exchange attributable to financial assets are included
in financial income and gains and losses related to financial liabilities
are included in financial expenses.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
IAS 39 was adopted as from January 1, 2005 with early adoption of
the amendment related to hedging of group internal transactions. In
2004, Foreign exchange derivatives hedging off-balance exposures
were treated off-balance, also referred to as ”Deferral hedge account-
ing”. When the hedged transaction occurred, the hedged spotrate was
used for the transaction and the derivative was moved on-balance. The
theoretical interest portion was accrued over the life of the derivative.
Interest rate derivatives used as hedges were valued at amortized cost,
which was in-line with the underlying transaction.
period. Revenue for training, consulting, engineering, installation and
similar services is generally recognized when the services are provid-
ed.
Mobile platform license revenues are included in reported Net Sales
and contracted based on the number of handsets or components pro-
duced by the customer. Revenue is recognized when the customer
production has been made.
For sales between consolidated companies, associated companies,
joint ventures and segments we apply arm’s length pricing.
REVENUE RECOGNITION
Sales are recorded net of value added taxes, goods returned, trade
discounts and rebates. Revenue is recognized with reference to all
significant contractual terms when the product or service has been
delivered, when the revenue amount is fixed or determinable and when
collection is reasonably assured.
We offer a comprehensive portfolio of telecommunication and data
communication systems and services covering a range of technologies.
The majority of our products and services are sold as parts of contracts
including several items. The nature of the products and services being
sold, and the contractual terms taken as a whole, determine the ap-
propriate revenue recognition method. The contracts are of three main
types:
• delivery-type
• construction-type
• contracts for various types of services, for example multi-year man-
aged services contracts
SHARE-BASED EMPLOYEE COMPENSATION
Stock option plans
Ericsson has chosen to not apply IFRS 2 to equity instruments granted
before November 7, 2002, in accordance with IFRS 1 and IFRS 2.
IFRS 2 is applied for one employee option program granted after
November 7, 2002. The vesting period for this program ended during
2005, and Ericsson recognized compensation costs representing the
fair value at grant date of the outstanding employee options. In the
balance sheet the corresponding amounts are accounted for as equity.
The fair value of the options was calculated using an option-pricing
model. The total costs were recognized during the vesting period (3
years), i.e. the period during which the employees had to fulfil vesting
requirements. When the options are exercised, social security charges
are to be paid in certain countries on the value of the employee benefit;
generally based on the difference between the market price of the share
and the strike price. Until exercise, estimated costs for such social
security charges are accrued.
Large customer frame agreements may include different types of un-
dertakings and may result in a mix of construction-type contracts, de-
livery-type contracts and service contracts.
Different revenue recognition methods are applied based on the
solutions provided to our customers, the nature and sophistication of
the technology involved and the contract conditions in each case. Spe-
cific contractual performance and acceptance criteria impact the timing
and amounts of revenue recognized.
Revenues from construction-type contracts are generally recog-
nized using the percentage-of-completion method. The degree of
completion is measured using either the milestone output method or,
to a very limited extent, the cost-to-cost method. The terms of construc-
tion-type contracts generally define deliverables or milestones for prog-
ress billing to the customer, which also well reflect the degree of com-
pletion of the contract.
The profitability of contracts is periodically assessed and adjusted,
if necessary, based on changes in circumstances. Provisions for losses,
with full amounts, are immediately made when losses are probable.
For delivery-type contracts revenue is recognized when risks and
rewards have been transferred to the customer, normally stipulated in
terms of trade. Delivery-type contracts that have multiple elements,
revenue is allocated to each element based on relative fair values. If
there are undelivered elements essential to the functionality of the
delivered elements, or, if fair values are not available for all elements,
we defer the recognition of revenue until all elements essential to the
functionality have been delivered or fair values exist for the undelivered
elements.
Revenue for period service contracts and managed services con-
tracts, covering longer periods is recognized pro rata over the contract
Stock purchase plans
For stock purchase plans, compensation costs are recognized during
the vesting period, based on the fair value of the share at the employee’s
investment date. The fair value is based upon the share price at invest-
ment date adjusted for that no dividends will be received prior to match-
ing. The investment date is considered as the grant date. In the balance
sheet the corresponding amounts are accounted for as equity. Vesting
conditions affect the number of shares that Ericsson will match. For
shares under performance-based matching programs, the Company
assesses the probability of meeting the performance targets when
calculating the compensation costs. Compensation expenses are
based on estimates of the number of shares that will match at the end
of the vesting period. When shares are matched, social security charg-
es are to be paid in certain countries on the value of the employee
benefit. The employee benefit is generally based on the market value
of the shares at the matching date. During the vesting period, esti-
mated social security charges are accrued.
BORROWING COSTS
The Company does not capitalize any borrowing costs, including bor-
rowing cost related to financing of construction of tangible assets.
Costs are expensed as incurred.
NON-CURRENT ASSETS HELD FOR SALE
Non-current assets held for sale are valued at the lower of carrying
amount and fair value less cost to sell. At present, the occurrence of
assets held for sale are very limited.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
47
EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income attribut-
able to shareholders of the parent company by the average number of
shares outstanding during the year.
Diluted earnings per share are calculated by dividing net income
attributable to shareholders of the parent company by the sum of the
average number of ordinary shares outstanding and potential ordinary
shares. Potential ordinary shares are treated as dilutive when, and only
when, their conversion to ordinary shares decrease earnings per
share.
CLASSIFICATION AND MEASUREMENT
OF FINANCIAL INSTRUMENTS
IAS 39 was adopted as from January 1, 2005 with early adoption of the
amendment related to hedging of group internal transactions.
• Short-term investments are valued at fair value through profit and
• Loans and borrowings are valued using the amortized cost method.
loss in the consolidated accounts.
Derivative financial instruments are used to hedge foreign exchange
and interest rate risks.
• Foreign exchange derivatives are valued at fair value through profit
and loss. However, those foreign exchange derivatives fulfilling the
requirements for cash flow hedge accounting are valued at fair
value and effective portions of the designated risk are deferred in
consolidated stockholders’ equity net of tax effects. Ineffective and
undesignated portions are reported through profit and loss. The
amount deferred in equity is released to profit or loss when the
hedged transaction affects consolidated profit or loss, affecting net
sales or cost of goods sold based on the nature of the hedge.
• Interest rate-related derivatives are valued at fair value through
• Ericsson’s listed debt instruments (outstanding notes and bond
profit and loss.
loans) are valued at amortized cost, unless designated as hedged
item in a fair value hedge, when the hedged risk is valued at fair
value through profit and loss.
Foreign exchange gains and losses on operating assets and liabilities
are reported as adjustments to Cost of Sales. The corresponding re-
porting for financial items is adjustments to financial income and ex-
penses respectively.
In the consolidated accounts, gains and losses on operational
hedges are reported together with losses and gains on the underlying
position.
Financial assets and liabilities are offset and reported net in the
balance sheet when there is a legally enforceable right for offset and
there is an intent to settle on a net basis.
Fair values of financial instruments are based on quoted market
prices or rates. If official rates or market prices are not available, fair
values are calculated by discounting the expected future cash flows at
prevailing interest rates.
48
INTANGIBLE ASSETS OTHER THAN GOODWILL
These assets consist of capitalized development expenses and aquired
intangible assets, such as patents and software, and are stated at cost
less accumulated amortization/write-down. Amortization, depreciation
and any write-downs are included in “ Research and development and
other technical expenses” and “Cost of Sales” .
Costs incurred for development of products to be sold, leased or
otherwise marketed or intended for internal use are capitalized as from
when technological and economical feasibility has been established
until the product is available for sale or use. These capitalized costs
are mainly generated internally and include direct labor and related
overhead. Amortization of capitalized development costs begins when
the product is available for general release. Amortization is made on a
product or platform basis according to the straight-line method over
periods not exceeding five years. Research and development costs
directly related to orders from customers are accounted for as a part
of “Cost of sales”. Other research and development costs are charged
to expense as incurred.
Impairment tests are performed on a regular basis whenever there
is an indication of possible impairment. However, intangible assets not
yet available for use are tested annually. The carrying values are not
considered to be recoverable when the expected discounted cash flows
are less than the carrying values. An impairment loss is determined
based on the amount by which the carrying value exceeds the recover-
able amount.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated de-
preciation and any write-down due to impairment.
Annual depreciation, based upon the component approach, is gen-
erally made using the straight-line method, with estimated useful lives
of, in general, 40 years on buildings, 20 years on land improvements, 3
to 10 years on machinery and equipment, and up to 5 years on rental
equipment. Depreciation and any write-downs are included in “Cost of
Sales” and in the respective functional operating expenses.
Impairment tests of property, plant and equipment are made when-
ever there is an indication of possible impairment. Impairment losses
occur, as for intangible assets, when the carrying value exceeds the
recoverable amount. The recoverable amount is based upon either
expected discounted cash flows or the selling price reduced by the
costs of disposal. Provisions are made for expected costs for restora-
tion of land or buildings due to environmental obligations.
LEASING
Leasing when the company is the lessee
Finance lease contracts are capitalized and reported as property, plant
and equipment and as other current and non-current liabilities. Depre-
ciations are made as for property, plant and equipment. Operating lease
contracts are not capitalized.
Leasing when the company is the lessor
Leasing contracts with the company as a lessor are classified as finance
leases when the majority of risks and rewards are transferred to the
lessee, and otherwise as operating leases. Under a finance lease, we
recognize a receivable at an amount equal to the net investment in the
lease and recognize revenue in accordance with our revenue recogni-
tion principles. For operating leases, an asset is reported as property,
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
plant and equipment and revenues and depreciation are recognized on
a straight-line basis over the lease term.
DEFERRED TAXES
Deferred tax assets consist of (i) temporary differences between the
book values of assets and liabilities and their tax values and (ii) unuti-
lized tax loss carry-forwards. These assets are recoqnized to an amount
not larger than probable future taxable profits, against which the tax
deductions can be utilized.
The valuation of deferred tax assets involves assumptions regarding
the deductibility of costs not yet subject to taxation and regarding suf-
ficient future taxable income to enable utilization of unused tax losses
in different tax jurisdictions. All deferred tax assets are subject to an-
nual review of possible utilization. The largest amounts of tax loss
carry-forwards are in Sweden, with indefinite period of utilization.
The accumulated deferred tax assets/liabilities are remeasured
regularly by applying the current tax rate in each country. Adjustments
of deferred tax assets/liabilities attributable to changes in tax rates are
included in current year income.
RECEIVABLES AND CUSTOMER FINANCING
Receivables are reported at amortized cost, less allowances for impair-
ment charges.
When selling a receivable we de-recognize the receivable if we have
transferred substantially all the risks and rewards of ownership of the
receivable and recognize separately as assets or liabilities any rights
and obligations created or retained in the transfer.
We assess the collectibility of our receivables for purposes of initial
revenue recognition and to record receivables at fair value. In instances
where we have exposures related to guarantees to third parties for
customer financing, we have reported the extent of our exposure as
contingent liabilities. These contingent liabilities are reported net of risk
provisions.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value on a
first-in, first-out (FIFO) basis.
Risks of obsolescence have been measured by estimating market
value based on future customer demand and changes in technology
and customer acceptance of new products.
PROVISIONS
Provisions are made when we have legal or constructive obligations as
a result of past events and when it is probable that an outflow of re-
sources will be required to settle the obligations and the amounts can
be estimated reliably. However, the actual outflow as a result of the
obligation may vary from that estimate.
Our provisions mainly relate to warranty commitments, restructuring,
customer financing guarantees and other obligations, such as litigation
obligations, contractual discounts, customer contract loss provisions,
penalties or claims as well as unresolved income tax and value added
tax issues.
In the ordinary course of business, the company is subject to pro-
ceedings, lawsuits and other unresolved claims, including proceedings
under laws and government regulations and other matters. These mat-
ters are often resolved over long periods of time. We regularly assess
the likelihood of any adverse judgments in or outcomes of these matters,
as well as potential ranges of possible losses. Provisions are recognized
when it is probable that a liability has been incurred and the amount of
the loss can be reasonably estimated based on a detailed analysis of
each individual issue.
For losses on customer contracts we record provisions when a loss
from a contract is anticipated and is possible to estimate reliably. We
provide for the estimated future settlements related to patent infringe-
ments based on the probable outcome of each infringement. The ulti-
mate outcome or actual cost of settling an individual infringement may
vary from our estimates. We estimate the outcome of all potential patent
infringements made known to us through assertion and through our
own monitoring of patent-related cases in the relevant legal systems.
To the extent that we determine that an identified potential infringement
will probably than not result in an outflow of resources, we record a
provision based on our best estimate of the expenditure required to
settle infringement proceedings.
At various intervals we give our suppliers and/or subcontractors fore-
casts of expected purchases and also sometimes commit to minimum
levels during a certain period. The agreements often include compensa-
tion clauses for the event that material deviations from original plans
regarding production volumes or product mix should occur. As a result
of actual deviations from committed purchase levels or of received ac-
tual claims from these suppliers and/or subcontractors, we make provi-
sions for estimated compensation to such suppliers and/or subcontrac-
tors. Additionally, provisions are estimated and accrued for charges as
a result of known changes in design specifications that are provided to
production subcontractors. Amounts for provisions and subsequent net
amounts at settlements are charged to the corresponding item in the
income statement (i.e. costs related to component suppliers, production
subcontractors and installation subcontractors are included in “Cost of
Sales”. Costs regarding development subcontractors are included in
“R&D and other technical expenses”, and costs related to IT-providers
and other services are included in operating expenses or “Cost of Sales”
depending on the nature of the service. Such provisions are monitored
closely on a regular basis, with any additions/reversals charged to the
same account as the initial provision.
PENSIONS AND OTHER POST-EMPLOYMENT
BENEFITS
Pensions and other post-employment benefits are classified as either
defined contribution plans or defined benefit plans. Under a defined
contribution plan, the company’s only obligation is to pay a fixed amount
to a separate entity (a fund), and will have no obligation to pay further
contributions if the fund does not hold sufficient assets to pay all em-
ployee benefits. The related actuarial and investment risk falls on the
employee. Under a defined benefit plan it is the Company’s obligation
to provide agreed benefits to current and former employees. The re-
lated actuarial and investment risks fall on the Company.
The present value of the defined benefit obligations for current and
former employees is calculated using the Projected Unit Credit Method.
The calculations are based upon actuarial assumptions and are as a
minimum prepared annually. Actuarial assumptions are the Company’s
best estimate of the variables that determine the cost of providing the
benefits. When using actuarial assumptions, it is possible that the ac-
tual result will differ from the estimated result. These differences are
reported as actuarial gains and losses. They are for example caused
by unexpectedly high or low rates of employee turnover, changed life
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
49
expectancy, salary changes, the effect of changes in the discount rate
and differences between actual return on plan assets and the expected
return on plan assets. Actuarial gains and losses are amortized over
the employees expected average remaining service period if the gains/
losses exceed the greater of 10 percent of the present value of the
defined benefit obligation or 10 percent of the fair value of plan assets
at the beginning of period (the corridor).
The net of return on plan assets and interest on pension liabilities is
reported as financial income or expense.
STATEMENT OF CASH FLOWS
Foreign subsidiary companies’ amounts are translated at the average
exchange rate during the period. Subsidiary companies purchased
and/or sold are reported as cash flow from investment activities, net of
cash acquired/sold, and do not affect reported cash flow from opera-
tions.
Cash and cash equivalents consist of cash, bank and short-term
investments and are highly liquid financial instruments that have a re-
maining maturity of three months or less at the date of acquisition.
SEGMENT REPORTING
Primary segments
Ericsson has the following business segments:
• Systems, addressing operators of mobile and fixed line public tele-
• Phones, addressing distributors of mobile handsets to end users.
phone networks.
Financial information for this segment consists of our investment
and share in earnings of Sony Ericsson.
• Other operations, which consists of a number of different operations
with different types of customers. Each included operation repre-
sents, however, less than 10 percent of total net sales and is there-
fore considered too small to be reported separately. Included op-
erations are: Microwave Systems, Network Technologies, Enterprise
Systems, Mobile Platform Technology, Power Modules and other.
When determining our business segments, we have looked at which
market and to what type of customers our products are aimed and
through what distribution channels they are sold, as well as to com-
monality regarding technology, research and development. We regard
the Systems segment as on business segment, where the business
units Access, Systems, Global Services and Transmission and Trans-
port Networks represent different product lines within the segment.
This is due to the close technical relation between included products
– they are all integrated components in public telecommunications net-
works for fixed or mobile communication, subject to common technical
systems standards for e.g. GSM, TDMA, CDMA and WCDMA – and due
to the common supply and sales through our own sales organization
to operators of public networks, with contracts that as a rule include a
mix of products and services as well as installation from several prod-
uct lines.
Our second segment, Phones, is carried out through a joint venture
with Sony and develops and sells handsets for mobile telecommunica-
tions to distributors.
Our segment Other Operations is composed of a number of small-
er operating units, each too small to be reported individually as a sep-
arate segment, and each with different characteristics in terms of prod-
ucts, customers and distribution channels.
50
Secondary segments
Ericsson operates in five main geographical areas: (1) Western Europe,
(2) Central and Eastern Europe, Middle East and Africa, (3) Asia Pa-
cific, (4) North America and (5) Latin America. These areas represent
our geographical segments.
Financial information is provided to the Board for both primary and
secondary segments. These are subject to risk and returns that are
different from those of other segments.
GOVERNMENT GRANTS
Government grants are recognized when there is a reasonable assur-
ance of compliance with conditions attached to the grants and that the
grants will be received.
For Ericsson, government grants are linked to performance of re-
search or development work or to subsidized capital expenditures as
governmental stimulus to employment or investments in a certain coun-
try or region. The occurance of government grants is very limited. Gov-
ernment grants are normally reported as reductions of development
costs or reductions of capital expenditure, depending on their nature.
NEW IFRSs STANDARDS, AMENDED IAS STANDARDS
AND IFRIC INTERPRETATIONS AS FROM JANUARY 1,
2006
• IAS 19 Employee Benefits. As from January 1, 2006, the company
will apply the option for recognition of actuarial gains and losses in
equity. The amendment will be applied retrospectively as from
January 1, 2004. The effect of the application is an increase of pen-
sion liability of approximately SEK 3.5 b. and accruals for social
security of SEK 0.8 billion at January 1, 2006. The effect on stock-
holders’ equity net of tax is approximately SEK 3.1 b, as per January
1, 2006.
• IAS 39 Financial instruments: Recognition and Measurement. An
amendment requires a company to include liabilities resulting from
financial guarantee contracts in the balance sheet. This amendment
is not expected to have a significant impact on the financial position
and result.
• IFRIC 4 Determining whether an Arrangement contains a Lease. This
interpretation is not expected to have a significant impact on the
financial position and result.
• IFRIC 6 Liabilities arising from Participating in a Specific Market –
Waste of Electric and Electronical Equipment. This interpretation is
not expected to have a significant impact on the financial position
and result.
C2 CRITICAL ACCOUNTING
ESTIMATES AND JUDGMENTS
The preparation of financial statements and application of accounting
standards often involve management’s judgment or the use of estimates
and assumptions deemed to be reasonable and prudent at the time
they are made. However, other results may be derived using different
assumptions or estimates. Following are the accounting policies subject
to such estimates or assumptions that we believe could have the most
significant impact on our reported results and financial position.
REVENUE RECOGNITION
Parts of our sales is generated from large and complex customer con-
tracts. Managerial judgment is applied, among other aspects, regard-
ing contractual performance, estimated total contract costs, degree of
completion and conformance with acceptance criteria to determine the
amounts of revenue to be recognized and any loss provisions to be
made.
INVENTORY VALUATION
Inventories are valued at the lower of cost or net realizable value. Total
inventory reserves as of December 31, 2005 amount to SEK 2.5 (3.1)
billion or 12 (18) percent of gross inventory. Of the total inventory of SEK
19.2 billion, SEK 11.6 billion is contract work in progress and SEK 7.6
billion is mainly related to components and finished goods. For the
contract work in progress inventory, risks are related to the judgements
made in relation to revenue recognition, while for the component and
finished goods parts, the inventory risks are more related to techno-
logical obsolescence and estimates of net realizable values.
DEFERRED TAXES
Deferred tax assets are recognized for temporary differences between
reported and taxable income and for unutilized tax loss carry-forwards.
The largest amounts of tax loss carry-forwards are in Sweden, with an
indefinite period of utilization (i.e. with no expiry date). The valuation of
tax loss carry-forwards and our ability to utilize tax losses is based upon
our estimates of future taxable income in different tax juris dictions and
involves assumptions regarding the deductibility of costs not yet subject
to taxation.
At December 31, 2005, the value of unutilized tax loss carry forwards
amounted to SEK 28.0 (34.1) billion. The deferred tax amounts related
to loss carry-forwards are reported as non-current assets.
ACCOUNTING FOR INCOME-, VALUE ADDED-
AND OTHER TAXES
Accounting for these items is based upon evaluation of income, value
added tax rules and other taxes in all jurisdictions where we perform
activities. The total complexity of all rules related to taxes and the ac-
counting for these require management involvement in estimates and
judgments of probable outcomes.
CAPITALIZED DEVELOPMENT COSTS
Development costs for products that will be sold, leased or otherwise
marketed as well as those intended for internal use are capitalized. The
starting point for capitalization is based upon management’s judgment
that the technological and economical feasibility is confirmed, usually
when a product development project has reached a defined milestone
according to an established project management model. Capitalization
ceases and amortization of capitalized development amounts begins
when the product is available for general use with impairment testing
performed annually. The definition of amortization period also requires
management’s judgment.
At December 31, 2005, the amount of capitalized development costs
amounted to SEK 6.2 (8.1) billion.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
PROVISIONS
Valuation of receivables and exposures in customer
financing
We monitor the financial stability of our customers and the environment
in which they operate to judge their guarantees and the likelihood that
we will get paid for individual receivables. Most of our customers have
good creditworthiness. Total allowances for doubtful accounts as of
December 31, 2005, were SEK 1.4 (1.8) billion or 3.3 (5.3) percent of
our gross accounts receivable.
We regularly assess the credit risk and based on these assessments,
we record provisions for outstanding customer financing credits and
contingent liabilities, i.e. third party credits under our guarantees. These
risk provisions are included in “Selling and administrative expenses”.
Warranty commitments
Provisions for product warranties are based on historic quality rates as
well as assumptions on estimated quality rates for new products and
costs to remedy the various types of faults predicted. Total provisions
for product warranties as of December 31, 2005, amounted to SEK 4.8
(6.4) billion.
Pension and other post-employment benefits
Accounting for the costs of defined benefit pension plans and other
applicable post-employment benefits is based on actuarial valuations,
relying on key assumptions for discount rates, expected return on plan
assets, future salary increases, turnover rates and mortality tables. The
discount rate assumptions are based on rates for high-quality fixed-
income investments with durations similar to our pension plans. Ex-
pected return on plan assets consider long-term historical returns, al-
location of assets and estimates of future long-term investment returns.
At December 31, 2005, provisions for pensions and other post-employ-
ment benefits amounted to net SEK 2.0 (10.1) billion.
Other provisions
Other provisions are mainly comprised of contractual obligations and
penalties with most of the rest for risks associated with patent and
other litigations, contractual discounts and penalties of uncertain timing
or amount, supplier or subcontractor claims and/or disputes, as well
as provisions for income tax and value added tax unresolved issues
and estimated losses on customer contracts. The nature and type of
risks for these provisions differ and judgments related to them receive
special attention from the management. At December 31, 2005, Other
provisions amounted to SEK 11,5 (14.5) billion.
HEDGE ACCOUNTING AND FOREIGN EXCHANGE
RISKS
Foreign exchange risk in highly probable sales in future periods are
hedged using foreign exchange derivative instruments designated as
cash-flow hedges.
Establishing highly probable sales volumes involves gathering and
evaluating sales forecasts for future periods as well as analyzing ac-
tual outcome on a regular basis in order to fulfill effectiveness testing
requirements for hedge accounting. Deviations in outcome of sales
might result in that the requirements for hedging accounting is not
fulfilled.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
51
C3 TRANSITION TO IFRSs FROM
SWEDISH GAAP
The International Financial Reporting Standards (“IFRSs”) were ad-
opted in 2005. New IFRSs standards, amended IAS standards and
IFRIC Interpretations up to December 31, 2005, as endorsed by EU
have been applied.
In the transition to IFRSs, IFRS 1 First-time Adoption of Interna-
tional Financial Reporting Standards has been applied. January 1, 2004,
is the date of transition to IFRSs for Ericsson. IAS 32 and IAS 39 were
adopted as from January 1, 2005, as allowed by IFRS 1. The compari-
son year 2004 is restated in accordance with IFRSs.
Of the IAS and IFRSs standards, intangible assets, business com-
binations, share-based payment and financial instruments have had
the most significant impact on the financial position and result.
IAS 38 – INTANGIBLE ASSETS
When adopting the Swedish accounting standard RR 15 Intangible
assets in 2002, the standard was implemented prospectively only, i.e.
no restatement of previous periods was allowed, whereas IAS 38 In-
tangible assets was implemented retrospectively. The capitalization
according to Swedish GAAP during 2002–2004 was the same as per
IFRSs. Retrospective application under IFRSs lead to an increase in the
opening balance of intangible assets as of January 1, 2004, due to
capitalized development costs in years prior to 2002, and increased
amortizations on such assets during 2004 and onwards. The opening
balance for 2004 was equal to the closing balance according to US
GAAP per December 31, 2003, since capitalization of development
costs has been made for US GAAP purposes historically. Due to the
restatement to IFRSs, intangible assets increased by SEK 6,408 million,
deferred tax assets decreased by SEK 1,794 million and equity in-
creased by SEK 4,614 million respectively. As a result, amortization for
2004 increased by SEK 2,660 million under IFRSs.
IFRS 3 – BUSINESS COMBINATIONS INCLUDING
GOODWILL
The standard for reporting of business combinations (IFRS 3) has re-
sulted in changes in reporting of acquisitions of companies. Compared
to previous standard, IFRS 3 requires a more detailed purchase price
allocation, in which fair values to a larger extent are assigned to acquired
intangible assets, such as customer relations, brands and patents.
Goodwill arises when the purchase price exceeds the fair value of ac-
quired net assets. Goodwill arising from acquisitions is no longer am-
ortized but instead subject to impairment review; at least annually and
when there are indicators that the carrying value may not be recover-
able.
In Ericsson’s reporting during 2005, acquisitions carried out in 2004
have been accounted for in accordance with IFRS 3. As allowed by
IFRS 1, no adjustments for acquisitions prior to the transition date,
January 1, 2004, were made. The value of goodwill has been frozen at
January 1, 2004, and amortization reported under Swedish GAAP for
2004 has been reversed in IFRSs restatements.
IFRS 2 – SHARE-BASED PAYMENT
As allowed by IFRS 1, Ericsson has chosen not to apply IFRS 2 to equity
instruments granted before November 7, 2002. For one employee op-
tion program, granted after November 7, 2002, and not yet vested by
January 1, 2005, Ericsson recognizes a charge to income representing
the fair value at grant date of the outstanding employee options. The
fair value of the options was calculated using an option-pricing model.
The total costs are recognized over the vesting period (3 years). The
impact on operating profit was a charge of SEK 45 million in 2004.
For other programs there are no material differences.
IAS 32 AND 39 – FINANCIAL INSTRUMENTS AND
HEDGING
IAS 32 and 39 are standards that deal with disclosure, presentation,
recognition and measurement of financial instruments. These stan-
dards are applied prospectively from January 1, 2005.
A major effect is that all derivatives are recognized at fair value on
the balance sheet. Subsequent changes in fair value of derivatives are
recognized in the income statement, unless the derivative is a hedging
instrument in (i) a cash flow hedge or (ii) a hedge of a net investment in
a foreign operation. In those cases, the effective portion of fair value
changes of the derivative will be recognized in equity until the hedged
transaction affects the income statement, at which moment the ac-
cumulated deferred amount in equity is recycled to the income state-
ment.
For derivatives assigned as (iii) fair value hedges, fair value changes
on both the derivative and the hedged item, attributable to the hedged
risk, are recognized in the income statement and offset each other to
the extent the hedge is effective.
The opening balance January 1, 2005, was affected by SEK 3,556
million in assets, SEK 1,952 million in liabilities and SEK 1,155 million in
equity net of SEK 449 million deferred tax as a result of accounting for
derivatives at fair value.
Other investments in shares and participations are classified as
available-for-sale in accordance with IAS 39 and will thus be reported
at fair value.
For investments in quoted companies, fair values are determined
based on share prices at the balance sheet date and for non-quoted
investments, fair values are estimated.
As disclosed under “Revaluation of foreign currency items in indi-
vidual companies” in note C1, “Significant Accounting Policies”, IAS 39
was adopted as from January 1, 2005. The effect on the opening bal-
ance January 1, 2005, was an increase of SEK 411 million in assets and
an increase of SEK 334 million in equity, net of deferred tax of SEK 77
million.
IAS 19 – EMPLOYEE BENEFITS
Ericsson reports pensions and other post-employment benefits ac-
cording to IFRSs (IAS 19), which is similar to RR 29 that was imple-
mented from January 1, 2004.
Actuarial gains and losses were recognized in the opening balance
January 1, 2004.
For Ericsson, the new standard has resulted in an increase in re-
ported operating profit for 2004 of SEK 475 million. No difference in
reported earnings has arisen as a result of acquisitions carried out in
2004.
RECLASSIFICATION OF PROVISIONS
In accordance with IAS 1 Presentation of Financial Statements, provi-
sions need to be presented as both current and non-current. A liability
shall be classified as current when it satisfies any of the following cri-
52
teria: a) it is expected to be settled in the entity’s normal operating
cycle; b) it is held primarily for the purpose of being traded; c) it is due
to be settled within twelve months after the balance sheet date; or d) the
entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the balance sheet date. All
other liabilities shall be classified as non-current. Accordingly, Ericsson
has reclassified provisions in the balance sheet to current and non-cur-
rent liabilities under IFRSs.
RECONCILIATION OF CONSOLIDATED INCOME STATEMENT
SEK million
Net sales
Cost of sales
Gross margin
Research and development and other technical expenses
Selling expenses and administrative expenses
Operating expenses
Other operating income
Share in earnings of joint ventures and associated companies
Operating income
Financial income
Financial expenses
Income after financial items
Taxes
Minority interest
Net income
Of which:
Net income attributable to stockholders of the parent company
Net income attributable to minority interest
Other information
Average number of shares, basic (million)
Earnings per share, basic (SEK)
Earnings per share, diluted (SEK)
Reconciliation of Net income from Swedish GAAP to IFRSs
Net income, Swedish GAAP
Reclassification of minority interest
Reversal of amortization of goodwill
Stock option plans
Amortization of capitalization of development costs
Taxes
Net income, IFRSs
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
SUMMARY OF TRANSITION EFFECTS:
The effects of the adoption of IFRSs on the consolidated income state-
ment, balance sheet, cash flow and equity are shown in the tables
below.
Jan – Dec 2004
IFRSs
adjustments
Swedish
GAAP
131,972
–70,864
61,108
–20,861
– 16,244
–37,105
2,617
2,318
28,938
3,541
–4,081
28,398
–9,077
–297
19,024
–2,558
323
–2,235
5
–2,230
–2,230
745
297
–1,188
15,829
1.20
1.20
–0.09
–0.09
IFRSs
131,972
–70,864
61,108
–23,421
–15,921
–39,342
2,617
2,323
26,706
3,541
–4,081
26,166
–8,330
17,836
17,539
297
15,829
1.11
1.11
19,024
297
475
–45
–2,660
745
17,836
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
53
RECONCILIATION OF CONSOLIDATED BALANCE SHEET JAN 1, 2004
SEK million
ASSETS
Non-current assets
Intangible assets
Capitalized development expenses
Goodwill
Other
Property, plant and equipment
Financial assets
Equity in joint ventures and associated companies
Other investments in shares and participations
Customer financing, non-current
Other financial assets, non-current
Deferred tax assets
Current assets
Inventories
Financial assets
Accounts receivable - trade
Customer financing, current
Other current receivables
Short-term investments
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity
Stockholders’ equity
Minority interest in equity of consolidated subsidiaries
Minority interest in equity of consolidated subsidiaries
Non-current liabilities
Post-Employment benefits
Other provisions, non-current
Deferred tax liabilities
Borrowings, non-current
Other non-current liabilities
Current liabilities
Other provisions, current
Borrowings, current
Accounts payable
Other current liabilities
Jan 1, 2004
IFRSs
Swedish GAAP 1) adjustments
Jan 1, 2004
IFRSs
6,408
–1,794
4,614
4,784
5,739
687
6,505
2,970
433
3,027
1,342
27,735
53,222
10,965
31,886
979
12,718
73,207
129,755
182,977
20,092
–20,092
4,614
59,206
59,206
2,299
9,827
520
27,001
2,771
40,119
27,601
9,509
8,895
35,348
81,353
4,614
2,299
6,913
–2,299
2,095
2,095
–2,095
–2,095
11,192
5,739
687
6,505
2,970
433
3,027
1,342
25,941
57,836
10,965
31,886
979
12,718
20,092
53,115
129,755
187,591
63,820
2,299
66,119
9,827
2,095
520
27,001
2,771
42,214
25,506
9,509
8,895
35,348
79,258
Total equity and liabilities
1) Restated for changed accounting principle, IAS 19
182,977
4,614
187,591
54
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
RECONCILIATION OF CONSOLIDATED BALANCE SHEET DEC 31, 2004 AND JAN 1, 2005
SEK million
ASSETS
Non-current assets
Intangible assets
Capitalized development expenses, net
Goodwill
Other
Property, plant and equipment
Financial assets
Equity in joint ventures and associated companies
Other investments in shares and participations
Customer financing, non-current
Other financial assets, non-current
Deferred tax assets
Current assets
Inventories
Financial assets
Accounts receivable - trade
Customer financing, current
Other current receivables
Short-term investments
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity
Stockholders' equity
Minority interest in equity of consolidated subsidiaries
Minority interest in equity of consolidated subsidiaries
Non-current liabilities
Post-employment benefits
Other provisions, non-current
Deferred tax liabilities
Borrowings, non-current
Other non-current liabilities
Current liabilities
Other provisions, current
Borrowings, current
Accounts payable
Other current liabilities
Dec 31, 2004
Swedish GAAP
IFRSs Dec 31, 2004
IFRSs
adjustments
IAS 39
adjustments
Jan 1, 2005
IFRSs
4,343
5,324
748
5,845
4,150
543
2,150
1,236
21,815
46,154
14,003
32,644
1,446
12,239
3,748
442
5
-1,049
3,146
8,091
5,766
748
5,845
4,155
543
2,150
1,236
20,766
49,300
14,003
32,644
1,446
12,239
76,554
136,886
183,040
46,142
-46,142
3,146
46,142
30,412
136,886
186,186
77,299
77,299
1,057
10,087
421
21,837
1,856
34,201
24,778
1,719
10,988
32,998
70,483
3,146
1,057
4,203
-1,057
1,146
1,146
–1,146
–1,146
80,445
1,057
81,502
10,087
1,146
421
21,837
1,856
35,347
23,632
1,719
10,988
32,998
69,337
8,091
5,766
748
5,845
4,155
954
2,150
2,173
20,689
50,571
14,003
31,688
1,446
15,814
46,142
30,412
139,505
190,076
81,934
1,057
82,991
10,087
1,146
870
22,774
1,856
36,733
23,632
1,719
10,782
34,219
70,352
411
937
-77
1,271
-956
3,575
2,619
3,890
1,489
1,489
449
937
1,386
-206
1,221
1,015
Total equity and liabilities
183,040
3,146
186,186
3,890
190,076
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
55
IMPACT OF IFRSs ON THE STATEMENT
OF CASH FLOWS
According to IAS 7 “Cash Flow”, Ericsson defines cash and cash equiv-
alents to include only short-term highly liquid investments with remain-
ing maturity at acquisition date of three months or less. Under Swedish
accounting standards, a broader interpretation was earlier made, where
also readily marketable securities designated for liquidity management
purposes only and with a low risk for value changes and with a matu-
rity exceeding three months were included. The restated statements of
cash flow for 2004 and the opening balance for the Ericsson group
according to IAS 7 therefore reflects cash and cash equivalents that
are different to those previously reported under Swedish GAAP.
(SEK million)
Cash and cash equivalents
under Swedish GAAP
Less: amounts with maturity
exceeding three months
Cash and cash equivalents
under IFRSs
January 1, December 31,
2004
2004
73,207
76,554
–20,092
–46,142
53,115
30,412
RECONCILIATION OF EQUITY
Reconciliation of equity, Dec 31, 2003, according to Swedish
GAAP and Jan 1, 2004, according to IFRSs
Closing balance, Swedish GAAP
Effect of changed accounting principle, IAS 19
Opening balance according to Swedish GAAP
Reclassification of minority interest
Capitalization of development costs, net
Opening balance, IFRSs
60,481
–1,275
59,206
2,299
4,614
66,119
Reconciliation of equity, Dec 31, 2004,
from Swedish GAAP to IFRSs
Closing balance, Swedish GAAP
Reclassification of minority interest
Capitalization of development costs, net
Goodwill
Closing balance, IFRSs
Reconciliation of equity Dec 31, 2004 according
to IFRSs and Jan 1, 2005 including IAS 39
Closing balance, IFRSs
Hedge reserve, net
Revaluation of other investments, net
Opening balance Jan 1, 2005
77,299
1,057
2,699
447
81,502
81,502
1,155
334
82,991
56
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
C4 SEGMENT INFORMATION
BUSINESS SEGMENTS (PRIMARY)
2005
Net sales
Inter segment sales
Total net sales
Share in earnings of JV and associated companies
Operating income
Financial income
Financial expenses
Income after financial items
Taxes
Net income
Of which:
Net income attributable to stockholders
of the parent company
Net income attributable to minority interest
Segment assets 1) 2)
Associates
Total assets
Segment liabilities 3) 4)
Total liabilities
Systems
141,986
113
142,099
118
30,885
–
–
30,885
–
30,885
30,914
–
85,958
1,185
87,143
60,670
60,670
Phones
–
–
–
2,257
2,257
–
–
2,257
–
2,257
2,257
–
–
5,044
5,044
–
–
Other
operations
9,835
1,061
10,896
20
283
–
–
283
–
283
Unallocated
–
–
–
–
–341
2,653
–2,402
–90
–8,875
–8,965
Eliminations
–
–1,174
–1,174
–
–
–
–
–
–
–
270
–
10,541
84
10,625
6,461
6,461
–9,126
145
106,017
–
106,017
36,171
36,171
–
–
–
–
–
–
–
Group
151,821
–
151,821
2,395
33,084
2,653
–2,402
33,335
–8,875
24,460
24,315
145
202,516
6,313
208,829
103,302
103,302
1) Segment assets include property, plant and equipment, intangible assets, current and non-current customer financing, accounts receivable, inventory, prepaid expenses,
accrued revenues, derivatives and other current assets.
2) Unallocated assets include cash and cash equivalents, short term investments and deferred tax assets.
3) Segment liabilities include accounts payable, provisions, accrued expenses and deferred revenues, advances from customers and other current liabilities.
4) Unallocated liabilities include accrued interests, tax liabilities and interest-bearing provisions and liabilities.
Other segment items
Property, plant and equipment and intangible assets
Additions/capitalization
Depreciation
Amortization
Write-downs/reversals of write-downs
Number of employees
Operating income
Operating margin (%)
Income after financial items
5,166
–2,676
–2,976
271
50,107
30,885
22%
30,885
GEOGRAPHICAL SEGMENTS (SECONDARY)
2005
Western Europe
– of which Sweden
Central and Eastern Europe, Middle East and Africa
Asia Pacific
– of which China
North America
– of which United States
Latin America
Total
– of which EU
–
–
–
–
–
2,257
–
2,257
438
–127
–377
–
5,948
283
3%
283
–
–1
84
–
–
–341
–
–90
–
–
–
–
–
–
–
–
5,604
–2,804
–3,269
271
56,055
33,084
22%
33,335
Additions/
capitalization of
PP&E and
intangible assets
4,565
3,502
107
291
123
552
453
89
5,604
4,628
Total assets
153,155
132,442
7,421
20,867
8,964
13,974
13,207
13,413
208,829
153,101
Number of
employees
35,679
21,178
4,360
8,723
3,601
3,911
2,113
3,382
56,055
36,482
Net sales
41,940
6,110
39,948
31,426
11,544
19,432
17,904
19,075
151,821
45,288
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
57
BUSINESS SEGMENTS (PRIMARY)
2004
Net sales
Inter segment sales
Total net sales
Share in earnings of JV and associated companies
Operating income
Financial income
Financial expenses
Income after financial items
Taxes
Net income
Of which:
Net income attributable to stockholders
of the parent company
Net income attributable to minority interest
Segment assets 1) 2)
Associates
Total assets
Segment liabilities 3) 4)
Total liabilities
Systems
121,549
1,348
122,897
90
23,187
–
–
23,187
–
23,187
23,187
–
66,973
961
67,934
54,728
54,728
Phones
–
–
–
2,143
2,143
–
–
2,143
–
2,143
2,143
–
–
3,092
3,092
–
–
Other
operations
10,423
966
11,389
68
1,298
–
–
1,298
–
1,298
Unallocated
–
–
–
22
78
3,541
–4,081
–462
–8,330
–8,792
Eliminations
–
–2,314
–2,314
–
–
–
–
–
–
–
1,298
–
9,452
97
9,549
6,627
6,627
–9,089
297
105,606
5
105,611
43,329
43,329
–
–
–
–
–
–
–
Group
131,972
–
131,972
2,323
26,706
3,541
–4,081
26,166
–8,330
17,836
17,539
297
182,031
4,155
186,186
104,684
104,684
1) Segment assets include property, plant and equipment, intangible assets, current and non-current customer financing, accounts receivable, inventory, prepaid expenses,
accrued revenues, derivatives and other current assets.
2) Unallocated assets include cash and cash equivalents, short term investments and deferred tax assets.
3) Segment liabilities include accounts payable, provisions, accrued expenses and deferred revenues, advances from customers and other current liabilities.
4) Unallocated liabilities include accrued interests, tax liabilities and interest-bearing provisions and liabilities.
Other segment items
Property, plant and equipment and intangible assets
Additions/capitalization
Depreciation
Amortization
Write-downs
Number of employees
Operating income
Operating margin (%)
Income after financial items
3,898
–2,224
–4,381
–22
45,500
23,187
19%
23,187
GEOGRAPHICAL SEGMENTS (SECONDARY)
2004
Western Europe
– of which Sweden
Central and Eastern Europe, Middle East and Africa
Asia Pacific
– of which China
North America
– of which United States
Latin America
Total
– of which EU 1)
1) Restated due to new members in EU as of May, 2004.
58
–
–
–
–
–
2,143
–
2,143
399
–209
–82
–61
5,034
1,298
11%
1,298
–
–1
11
–35
–
78
–
–462
–
–
–
–
–
–
–
–
4,297
–2,434
–4,452
–118
50,534
26,706
20%
26,166
Additions/
capitalization of
PP&E and
intangible assets
3,571
2,868
83
230
130
320
165
93
4,297
3,620
Total assets
148,532
128,398
3,874
14,282
7,018
9,360
9,115
10,139
186,186
148,528
Number of
employees
32,826
21,296
3,527
7,493
2,897
4,139
2,156
2,549
50,534
33,625
Net sales
40,542
6,180
32,929
28,552
12,298
15,471
13,984
14,478
131,972
42,366
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
C5 REVENUES
C7 OTHER OPERATING INCOME
The majority of Ericsson’s products and services are sold as parts of
contracts including multiple elements. The nature of the products and
services being sold, and the contractual terms taken as a whole, de-
termine the appropriate revenue recognition method. The contracts are
of three main types:
Equipment sales
Of which:
– Construction-type contracts
– Delivery-type contracts
Service sales
Licenses
Total
Capital gains, license fees and other
operating revenues
Interest income
Dividends
2005
2004
125,856 110,985
107,844
23,477
2,488
18,012 23,319
87,666
19,301
1,686
151,821 131,972
2,760
2,310
9
3,119
3,346
8
C6 EXPENSES BY NATURE
Employee benefits expenses 1)
Depreciation and amortization expense 1)
2005
2004
34,458 32,356
7,004
5,802
1) Booked amount prior to adjustments for recognition and derecognition in inventory
and capitalized development costs.
Gains on sales of intangible assets and PP&E
Losses on sales of intangible assets and PP&E
Gains on sales of investments and operations
Losses on sales of investments and operations
Capital gains/losses, net
Other operating revenues mainly
including license fees
Total other operating income
2005
29
–120
205
–149
–35
2004
111
–229
510
–273
119
2,526
2,491
2,498
2,617
C8 FINANCIAL INCOME
AND EXPENSES
Financial income
Result from securities and receivables
accounted for as non-current assets
Other interest income and similar
profit/loss items
Total
Financial expenses
Interest expenses and similar profit/loss items
Financial net
2005
2004
293
354
2,360
2,653
3,187
3,541
–2,402
251
–4,081
–540
C9 TAXES
INCOME STATEMENT
The following items are included in Taxes:
Current income taxes for the year
Current income taxes related to prior years
Deferred tax income/expense (–) related
to temporary differences
Share of taxes in joint ventures and
associated companies
Taxes
2005
–3,635
138
2004
–2,324
–637
–4,753
–4,635
–625
–8,875
–734
–8,330
Deferred tax income and expenses
The amounts of deferred tax income and expenses are shown in the
following table:
Deferred tax income
Deferred tax expenses
Deferred tax income/expense, net
2005
1,888
–6,641
–4,753
2004
3,082
–7,717
–4,635
Deferred tax income refers mainly to certain provisions and consolida-
tion adjustments on group level.
Deferred tax expenses SEK 2,666 million out of SEK 6,641 million
refer to utilization of tax loss carry forwards. The remaining amount
refers to reversals of temporary differences regarding certain provisions
for mainly warranty commitments, provisions for customer financing
commitments and inventory write-downs.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
59
A reconciliation between actual tax income (– expense) for the year and
the theoretical tax income (– expense) that would arise when applying
statutory tax rate in Sweden, 28 percent on income before taxes is
shown in the table:
Income after financial items
2005
33,335
2004
26,166
Tax rate in Sweden (28%)
Effect of foreign tax rates
Current income taxes related to prior years
Benefits from temporary differences of prior
periods used to reduce deferred tax expense
Tax effect of expenses that are non-
deductible for tax purpose
Tax effect of income that are non-taxable
for tax purpose 1)
Tax effect of changes in tax rates
Tax effect of tax loss carryforwards, net
Taxes
–9,334
–489
138
–7,327
–286
–637
380
–
–515
–910
944
4
–3
–8,875
855
–18
–9
–8,330
Investments in subsidiary companies, joint ventures
and associated companies
Due to losses in certain subsidiary companies, the book value of certain
investments in those subsidiary companies, joint ventures and associ-
ated companies are less than the tax value of these investments. Since
deferred tax assets have been reported with respect also to losses in
these companies, and due to the uncertainty as to which deductions
can be realized in the future, no additional deferred tax assets are re-
ported.
Tax loss carryforwards
Deferred tax assets regarding unutilized tax loss carryforwards are
reported to the extent that realization of the related tax benefit through
the future taxable profits is probable also when considering the period
during which these can be utilized, as described below.
At December 31, 2005, these unutilized tax loss carryforwards
amounted to SEK 28,034 million. The tax effect of these tax loss car-
ryforwards are reported as assets.
The final years in which these loss carryforwards can be utilized are
1)
Income that is non-taxable includes R&D credits and other non-taxable income.
shown in the following table:
BALANCE SHEET
Deferred tax assets and liabilities
Tax effects of temporary differences, including unutilized tax loss carry-
forwards, have resulted in deferred tax assets and liabilities as fol-
lows:
Deferred tax assets
Deferred tax liabilities
2005
2004
17,294 20,766
421
391
Year of expiration
2006
2007
2008
2009
2010
2011 or later
Total
2005
499
163
32
33
49
27,258
28,034
Deferred tax assets relate to tax loss carryforwards, temporary differ-
ences due to certain provisions and consolidation adjustments on
group level. We estimate that approximately 40 percent of total deferred
tax assets will be recovered within 12 months. Deferred tax assets
regarding tax loss carryforwards amount to SEK 8,187 million (SEK
9,865 million in 2004).
Deferred tax asset are amounts recognized in countries where we
expect to be able to generate corresponding taxable income in the
future to benefit from tax reductions. The significant tax loss carryfor-
wards are related to countries with long or indefinite periods of utiliza-
tion, mainly Sweden and the U.S. Of the total deferred tax assets for
tax loss carryforwards, SEK 8,187 million, SEK 7,965 million will expire
2011 or later, of which SEK 6,363 million relate to Sweden with indefinite
time of utilization.
With our strong current financial position and profitability during
2005, we have been able to use part of our tax loss carryforwards dur-
ing the year, and we are convinced that Ericsson will be able to gener-
ate sufficient income in the coming years to utilize these deferred tax
assets.
Tax effects reported directly to stockholders’ equity
Tax effects reported directly to stockholders’ equity amount to
SEK 807 million (negative SEK 384 million for 2004 restated to IFRSs),
the amount reported is related to hedge accounting.
C10 EARNINGS PER SHARE
Net income attributable to stockholders
of the parent company (SEK million)
Average number of shares, basic (millions)
Earnings per share, basic (SEK)
Net income attributable to stockholders
of the parent company (SEK million)
Average number of shares after exercise
of stock options (million)
2005
2004
17,539
24,315
15,843 15,829
1.53
1.11
24,315
17,539
15,907 15,895
Earnings per share, diluted (SEK)
1.53
1.11
60
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
C11 INTANGIBLE ASSETS
Capitalized Capitalized
Capitalized
acquired
development development development
internal Capitalized
develop-
costs, for ment costs,
internal use
total Goodwill
Licenses
trademarks
and similar
Patents and
acquired
Other
research intangible
assets,
total
and
rights development
2005
Accumulated acquisition costs
Opening balance
Acquisitions/capitalization
Balances regarding acquired
and sold companies
Sales/disposals
Translation difference for the year
Closing balance
Accumulated amortization
Opening balance
Amortization for the year 1)
Balances regarding acquired
and sold companies
Sales/disposals
Translation difference for the year
Closing balance
Accumulated write-downs
Opening balance
Write-downs for the year
Sales/disposals
Translation difference for the year
Closing balance
Net carrying value
costs, to be
marketed
costs, for
internal use
11,876
1,174
–
–1,067
–
11,983
–3,458
–2,801
–
1,067
–
–5,192
–621
–95
–
–
–716
6,075
1,638
–
–
–
–
1,638
–1,424
–125
–
–
–
–1,549
–38
–
–
–
–38
51
1,094
–
–
–
–
1,094
–950
–83
–
–
–
–1,033
–26
–
–
–
–26
35
14,608
1,174
5,766
512
–
–1,067
–
14,715
–5,832
–3,009
–
1,067
–
–7,774
–685
–95
–
–
–780
6,161
–
–
1,084
7,362
–
–
–
–
–
–
–
–
–
–
–
7,362
1,022
38
11
–73
67
1,065
–901
–8
–7
78
–44
–882
–
–
–
–
–
183
1,118
515
–
–276
16
1,373
–477
–252
–
134
–8
–603
–14
–
–
–
–14
756
2,140
553
11
–349
83
2,438
–1,378
–260
–7
212
–52
–1,485
–14
–
–
–
–14
939
1) No intangible assets other than goodwill have indefinite useful lives.
Amortization and write-downs for capitalized development cost is reported as research and development and other technical expenses.
The goodwill is allocated to the business segment Systems, represent-
ing one cash-generating unit. The estimates used for measuring the
recoverable amounts for goodwill per cash-generating unit include
mainly assumptions for growth, profit development and capital expen-
diture requirements, including working capital.
The assumptions we have made are based on available industry
sources that provide estimates of the number of mobile subscribers.
The number of global subscribers will grow from 2 billion to 3 billion
within five years. The minutes of usage per user will also continue to
increase. Our impairment testing is based on the premise that changes
for the main assumptions are in line with the development for the glob-
al subscriber growth, with a slight decrease for the periods greater than
three years. The impairment test for goodwill has not resulted in any
need for write-down. A number of tests of sensivity have been made,
for example the effect of growth of just one percent. None of these tests
indicate requirement of impairment write-down. A discount rate of 12
percent has been applied for the discounting of projected cash flows.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
61
Capitalized Capitalized
Capitalized
acquired
development development development
internal Capitalized
develop-
costs, for ment costs,
internal use
total Goodwill
Licenses
trademarks
and similar
Patents and
acquired
Other
research intangible
assets,
total
and
rights development
1,091
3
–
–
–
1,094
–806
–144
–
–
–
–950
–26
–
–
–
–
–26
118
14,998
1,146
5,739
387
–
–1,536
–
14,608
–3,036
–4,139
–
1,343
–
–5,832
–770
–108
–
193
–
–685
8,091
–
16
–376
5,766
–
–
–
–
–
–
–
–
–
–
–
–
5,766
1,287
262
122
–646
–3
1,022
–1,231
–271
–37
636
2
–901
–
–
–
–
–
–
121
1,084
50
–
–14
–2
1,118
–438
–42
–
3
–
–477
–15
–
–
–
1
–14
627
2,371
312
122
–660
–5
2,140
–1,669
–313
–37
639
2
–1,378
–15
–
–
–
1
–14
748
2004
Accumulated acquisition costs
Opening balance
Acquisitions/capitalization
Balances regarding acquired
and sold companies
Sales/disposals
Translation difference for the year
Closing balance
Accumulated amortization
Opening balance
Amortization for the year
Balances regarding acquired
and sold companies
Sales/disposals
Translation difference for the year
Closing balance
Accumulated write-downs
Opening balance
Write-downs for the year
Balances regarding acquired
and sold companies
Sales/disposals
Translation difference for the year
Closing balance
Net carrying value
costs, to be
marketed
costs, for
internal use
12,274
1,138
–
–1,536
–
11,876
–1,022
–3,779
–
1,343
–
–3,458
–706
–108
–
193
–
–621
7,797
1,633
5
–
–
–
1,638
–1,208
–216
–
–
–
–1,424
–38
–
–
–
–
–38
176
62
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
C12 PROPERTY, PLANT AND EQUIPMENT
2005
Accumulated acquisition costs
Opening balance
Additions
Balances regarding acquired and sold companies
Sales/disposals
Reclassifications
Translation difference for the year
Closing balance
Accumulated depreciation
Opening balance
Depreciation for the year
Balances regarding acquired and sold companies
Sales/disposals
Reclassifications
Translation difference for the year
Closing balance
Accumulated write-downs, net
Opening balance
Write-downs for the year
Reversals of write-downs
Balances regarding acquired and sold companies
Sales/disposals
Translation difference for the year
Closing balance
Net carrying value
Machinery and
other technical
assets
Real estate
Other Construction in
process and
advance
payments
equipment,
tools and
installations
2,657
461
14
–196
229
347
3,512
–583
–366
–3
96
–4
–259
–1,119
–482
–
43
–1
–
81
–359
2,034
5,306
405
–14
–582
–121
206
5,200
–4,374
–489
13
562
173
–170
–4,285
–148
–14
–
–
–
17
–145
770
15,350
1,745
24
–2,001
659
1,369
17,146
–11,652
–1,949
–21
1,685
–169
–1,000
–13,106
–532
–
337
–
–
30
–165
3,875
303
754
–
–17
–767
14
287
–
–
–
–
–
–
–
–
–
–
–
–
–
–
287
Total
23,616
3,365
24
–2,796
–
1,936
26,145
–16,609
–2,804
–11
2,343
–
1,429
–18,510
–1,162
–14
380
–1
–
128
–669
6,966
Contractual commitments for the acquisition of property, plant and equipment as per December 31, 2005, amounted to SEK 1,448 million.
The reversal of write-downs has been reported under Cost of Sales.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
63
2004
Accumulated acquisition costs
Opening balance
Additions
Balances regarding acquired and sold companies
Sales/disposals
Reclassifications
Translation difference for the year
Closing balance
Accumulated depreciation
Opening balance
Depreciation for the year
Balances regarding acquired and sold companies
Sales/disposals
Reclassifications
Translation difference for the year
Closing balance
Accumulated write-downs, net
Opening balance
Write-downs for the year
Balances regarding acquired and sold companies
Sales/disposals/reversals of write-downs
Translation difference for the year
Closing balance
Net carrying value
Machinery and
other technical
assets
Real estate
Other Construction in
process and
advance
payments
equipment,
tools and
installations
2,888
51
–23
–100
–4
–155
2,657
–485
–226
16
66
7
39
–583
–505
–10
–
–
33
–482
1,592
5,829
267
–625
–332
243
–76
5,306
–4,590
–463
467
268
–122
66
–4,374
–229
–
81
–
–
–148
784
16,190
1,699
293
–2,363
15
–484
15,350
–12,294
–1,745
–74
2,102
115
244
–11,652
–585
–
28
25
–
–532
3,166
286
435
–14
–142
–254
–8
303
–
–
–
–
–
–
–
–
–
–
–
–
–
303
Total
25,193
2,452
–369
–2,937
–
–723
23,616
–17,369
–2,434
409
2,436
–
349
–16,609
–1,319
–10
109
25
33
–1,162
5,845
64
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
C13 FINANCIAL ASSETS
EQUITY IN JOINT VENTURES AND ASSOCIATED COMPANIES
Opening balance
Share in earnings
Taxes
Translation difference for the year
Change in hedge reserve
Dividends
Capital contributions
Reclassification
Sales
Closing balance
Goodwill, net, amounts to SEK 21 million (SEK 19 million in 2004).
Joint ventures Associated companies
2004
2005
1,217
3,092
180
2,257
–33
–604
–52
286
–
7
–97
–
7
–
47
–
–206
–
1,063
5,038
2005
1,063
138
–21
92
–
–32
33
2
–
1,275
2004
1,713
2,143
–701
–63
–
–
–
–
–
3,092
2005
4,155
2,395
–625
378
7
–32
33
2
–
6,313
Total
2004
2,930
2,323
–734
–115
–
–97
7
47
–206
4,155
SHARE OF ASSETS, LIABILITIES AND INCOME IN JOINT
VENTURE SONY ERICSSON MOBILE COMMUNICATIONS
SHARE OF ASSETS, LIABILITIES AND INCOME IN ASSOCIATED
COMPANY ERICSSON NIKOLA TESLA D.D.
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets
Net sales
Income after financial items
Income taxes for the year
Net income
Minority interest 1)
Assets pledged as collateral
Contingent liabilities
1,201
13,619
92
9,690
5,038
33,715
2,383
–604
1,653
–126
1
58
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets
Net sales
Income after financial items
Income taxes for the year
Net income
Minority interest
Assets pledged as collateral
Contingent liabilities
1) Share in earnings is reported net of minority interest.
Both these companies apply IFRSs in the reporting to Ericsson.
298
918
18
267
931
998
165
–20
145
–
7
143
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
65
OTHER FINANCIAL ASSETS
Accumulated acquisition costs
Opening balance
Effect of changed accounting principle, IAS 39
Additions
Sales/repayments/deductions
Reclassifications
Revaluation
Translation difference for the year
Closing balance
Accumulated write-downs/allowances
Opening balance
Effect of changed accounting principle, IAS 39
Write-downs/allowances for the year
Sales/repayments/deductions
Reclassifications
Translation difference for the year
Closing balance
Net carrying value
Other investments
in shares and
participations
2004
2005
Customer
financing,
non-current
2005
2004
Derivatives hedging
non-current liabilities
with a positive value
2004
2005
Other
financial assets,
non-current
2004
2005
2,318
256
26
–467
–2
–
205
2,336
2,308
–
161
–22
–52
–
–77
2,318
4,330
–
689
–2,215
–697
–
265
2,372
7,950
–
1,460
–2,234
–2,478
–
–368
4,330
–1,775
155
–1
225
–
–135
–1,531
805 2)
–1,875
–
44
3
–
53
–4,923
–2,180
–
–
–656
–128
1,115
807
2,221
559
63
–108
–1,775 –1 050 1) –2,180 1)
2,150
1 322
543 2)
–
937
–
–
–401
180
–
716
–
–
–
–
–
–
–
716
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,312
–
2,606 3)
–1,191
–
–
190
3,917
2,138
–
611
–410
–
–
–27
2,312
–1,076
–
12
–
–
–55
–796
–
–293
–
–
13
–1,119 –1,076
1,236
2,798
1) Write-downs are included in Selling expenses due to the close relation to operations.
2) Market value per December 31, 2005, for listed shares was SEK 8 (234) million with a net carrying value of SEK 8 (80) million.
3) Additions include funded pension plans with net assets of SEK 1,170 million. For further information, see Note C18, “Post-employment benefits”.
66
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
C14 INVENTORIES
Raw materials, components
and consumables
Manufacturing work
in progress
Finished products
and goods for resale
Contract work in progress
Less advances from customers
Inventories, net
2005
2004
4,699 5,557
139
232
2,770 3,720
12,753 7,278
–1,153 –2,784
19,208 14,003
C15 ACCOUNTS RECEIVABLE
– TRADE
Trade receivables excluding
associated companies
Allowances for impairment of receivables
Trade receivables, net
Trade receivables related to associated
companies and joint ventures
Total
2005
2004
42,198 33,906
–1,782
32,124
–1,382
40,816
426
520
41,242 32,644
Reported amounts are net of obsolescence allowances of SEK 2,519
million (SEK 3,146 million 2004).
Days sales outstanding were 81 in December, 2005 (75 in December,
2004).
MOVEMENTS IN OBSOLESCENCE ALLOWANCES
Retention receivables recognized as revenues were SEK 3,940 mil-
lion as of December, 2005 (SEK 3,749 million as of December, 2004).
Opening balance
Additions
Utilized
Translation difference for the year
Closing balance
2005
3,146
785
–1,560
148
2,519
2004
3,658
533
–976
–69
3,146
Contract work in progress includes amounts related to construction-
type contracts as well as other contracts with ongoing work in prog-
ress.
The cost of inventories recognized as an expense and included in
Cost of Sales is SEK 44,662 million.
For construction-type contracts in progress,
as per December 31, 2005:
Aggregate amounts of costs incurred
Aggregate amount of recognized profits
(less recognized losses)
Gross amount due from customers 2)
Gross amount due to customers 3)
2005
23,244 1)
6,416 1)
537
4,118 1)
1) A significant part of these amounts relate to defense contracts.
2) For all contracts in progress for which costs incurred plus recognized profits (less
recognized losses) exceeds progress billings.
3) For all contracts in progress for which progress billings exceed costs incurred plus
recognized profits (less recognized losses).
MOVEMENTS IN ALLOWANCES
FOR IMPAIRMENT OF RECEIVABLES
Opening balance
Additions
Utilized
Reversal of excess amounts
Reclassification
Translation difference for the year
Closing balance
C16 OTHER CURRENT
RECEIVABLES
Receivables from associated
companies and joint ventures
Prepaid expenses
Accrued revenues
Advance payments to suppliers
Derivatives with a positive value
Other
Total
2005
1,782
916
–1,185
–185
–60
114
1,382
2004
2,051
1,073
–951
–566
17
158
1,782
2005
2004
–
1,997
1,998
517
1,347
6,715
12,574
115
1,072
1,349
393
2,615
6,695
12,239
The major items within “Other” are value added tax and withholding
tax.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
67
C17 STOCKHOLDERS’ EQUITY
CAPITAL STOCK 2005
The capital stock of the Company is divided into two classes: Class A
shares (par value SEK 1.00) and Class B shares (par value SEK 1.00
being the same as the quota value). Both classes have the same rights
of participation in the net assets and earnings of the Company. Class
A shares, however, are entitled to one vote per share while Class B
shares are entitled to one tenth of one vote per share.
CHANGES IN STOCKHOLDERS’ EQUITY
The total number of treasury shares at December 31, 2005, is
268,065,241 (299,715,117 in 2004) Class B shares. The decrease in the
number of treasury shares is due to delivery and sale of shares in rela-
tion to the Stock Purchase Plans and the Stock Option Plans.
Dividend proposal
The Board of Directors will propose to the Annual General Meeting a
dividend of SEK 0.45 per share.
Additional
paid in
capital
Capital
stock
Hedge
reserve
Revaluation
of other
investments
in shares and
participations
Cumulative
translation
adjustments
Total
other Retained
earnings
reserves
Total
2005
January 1, 2005
Effect of changed accounting
principle, IAS 39, net
Adjusted opening balance
Changes in hedge reserve, net
Revaluation of other investments in shares
and participations, net
Changes in cumulative translation
adjustments
Net income 2005
Total income and expenses for the period
Sale of own shares
Stock purchase and stock options plans
Dividends paid
Total transactions with owners
December 31, 2005
2004
January 1, 2004
Changes in cumulative translation
adjustments
Net income 2004
Total income and expenses for the period
Sale of own shares
Stock purchase and stock options plans
Adjustment of cost for stock issue 2002
Total transactions with owners
December 31, 2004
16,132
24,731
–6,530
–6,530
46,112 80,445
–
16,132
–
–
24,731
–
1,155
1,155
–1,859
155
155
–
–
–6,530
–
1,310
–5,220
–1,859
179
1,489
46,291 81,934
–1,859
–
–
–
–
–150 1)
–
–150
–
–150
–
–
–
–
–
–
–
16,132
–
–
–
–
–
–
–
24,731
–
–
–1,859
–
–
–
–
–704
–
–
–150
–
–
–
–
5
4,037 2)
–
4,037
–
–
–
–
–2,493
4,037
–
2,028
–
–
–
–
–3,192
–
4,037
24,315 24,315
24,315 26,343
117
117
242
242
–3,959
–3,959
–3,600 –3,600
67,006 104,677
16,132
24,729
–5,395
–5,395
28,354 63,820
–
–
–
–
–
–
–
16,132
–
–
–
–
–
2
2
24,731
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–1,135
–
–1,135
–
–
–
–
–6,530
–1,135
–
–1,135
–
–
–
–
–6,530
–
–1,135
17,539
17,539
17,539 16,404
15
204
2
221
46,112 80,445
15
204
–
219
1) Due to sale, SEK 147 million is realized in Income statement.
2) Changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of SEK 1,084 million (SEK –376 million in 2004), net gain/loss
(–) from hedging of investments in foreign subsidiary companies of SEK –142 million (SEK –167 million in 2004) and SEK 127 million (SEK 47 million in 2004) of realized gains/
losses (–), net from sold/liquidated companies.
68
C18 POST-EMPLOYMENT
BENEFITS
In summary, during 2005 the funded status, the relation between the
defined benefit obligation (DBO) and plan assets has improved signifi-
cantly due to the establishment of a Swedish pension trust and the
value of the DBO has increased due to a change from 5 percent to 3.5
percent for the discount rate in Sweden.
The Ericsson Group participates in local pension plans in countries
in which we operate. There are principally two types of pension
plans:
• Defined contribution plans, where the Company’s only obligation is
to pay fixed pension premiums into a separate entity (a fund or insur-
ance company) on behalf of the employee. Under this type of plan,
no provision for pensions is recognized in the Company’s balance
sheet.
• Defined benefit plans, where the Company’s undertaking is to pro-
vide pension benefits that the employees will receive on retirement,
usually dependent on one or more factors such as age, years of
service and compensation. Defined benefit plans may be funded or
unfunded and can therefore be managed in two ways:
° by setting up a trust with assets to manage the company’s
contributions to the plan, in which case the liability recognized
on the balance sheet is the net of the benefit obligation and the
fair value of plan assets. Plans with net assets are recognized
as financial assets in the balance sheet.
the total benefit obligation is recognized as a liability on the
balance sheet with no assigned plan assets.
°
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
consolidation level at Alecta amounted to 128.5 percent at year-end
2005 (128.0 percent 2004). Ericsson has established a Swedish pension
trust for the purpose of funding benefit obligations in Sweden. SEK
8,338 million were transferred into the trust in January 2005. The cap-
ital injection turned the level of funding from an unfunded position at
the end of 2004 to a substantial funded status at the end of 2005. The
total value of Ericsson shares in the Swedish pension trust amounted
to SEK 13 million at year-end.
The following tables summarize the total pension cost for the
Group:
TOTAL ANNUAL PENSION COST
Sweden
UK
US Other
Total
2005
Pension cost for defined
benefit plans
Pension cost for post-
employment medical benefits
Pension cost for defined
contributions plans
Total
2004
Pension cost for defined
benefit plans
Pension cost for post-
employment medical benefits
Pension cost for defined
contributions plans
Total
417
71
57
307
852
–
–
44
–
44
929
1,346
–
71
83
184
257
564
1,269
2,165
686
71
–93
153
817
–
–
46
–
46
1,014
1,700
–
–97
71 –144
183
336
1,100
1,963
Costs for post-employment benefits within Ericsson are evenly distrib-
uted between defined contribution plans and defined benefit plans, with
a slight overweight towards defined contribution plans. For companies
with defined benefit plans, almost all companies with material plans
have trust funds which are fully or partly funded and recognize the net
of defined benefit obligations and plan assets as either provisions or
financial assets. The present value of the defined benefit obligation for
current and former employees is calculated using the Projected Unit
Credit Method (PUC). The calculations are based upon actuarial as-
sumptions and are prepared annually, as a minimum.
In Sweden, the total pension plans are a mixed solution, with some
parts being defined contribution plans and others defined benefit plans.
All plans for blue-collar workers are defined contribution plans. Salaried
employees’ plans are comprised of the defined benefit plan, ITP, supple-
mentary pension plan for salaried employees in manufacturing indus-
tries and trade, (retirement pension and collective family pension), which
are complemented by a defined contribution plan, ITPK, supplemen-
tary retirement benefits. Some parts of early-retirement plans are also
arranged as defined contribution plans. The collective family pension
within the ITP plan is financed via an insurance at the insurance com-
pany Alecta. The Swedish Financial Accounting Standards Council’s
interpretations committee has defined this plan as a multi-employer
defined benefit plan. For Ericsson, however, information was not avail-
able from Alecta that would have made it possible to report the collec-
tive family pension part as a defined benefit plan. Therefore, the plan
has been reported as a defined contribution plan. Fees during 2005 for
the collective family pension amount to SEK 350 million. The collective
ANNUAL PENSION COST FOR DEFINED BENEFIT PLANS
Sweden
UK
US Other
Total
2005
Service cost
Interest cost
Expected return on plan
assets
Amortization of unrecog-
nized past service cost
Amortization of actuarial
gains and losses
Curtailment cost
Settlement cost
Net pension cost
for the period
2004
Service cost
Interest cost
Expected return on plan
assets
Amortization of unrecog-
nized past service cost
Amortization of actuarial
gains and losses
Curtailment cost
Net pension cost
for the period
275
407
62
169
78
148
281
154
696
878
–267
–160
–128 –156
–711
–
2
–
–
–
–
–
–
–
3
–
–
7
7
–
14
7
12
–
14
417
71
101
307
896
306
380
53
152
82
153
170
118
611
803
–
–134
–108 –128
–370
–
–
–
–
–
–
–
6
6
–
–173
–
–14
–
–187
686
71
–46
152
863
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
69
CHANGE IN PLAN ASSETS
Sweden
UK
US Other
Total
2005
Fair value of Plan Assets
beginning of the year
Actual return on plan assets
Employer contributions
Employee contributions
Pension payments by fund/
insurance company
Settlement cost
Balances regarding
acquired and sold
companies
Other
Translation difference
for the year
Fair value of Plan Assets,
end of year
2004
Fair value of Plan Assets
beginning of the year
Actual return on plan assets
Employer contributions
Employee contributions
Pension payments by fund/
insurance company
Settlement cost
Balances regarding
acquired and sold
companies
Other
Translation difference
for the year
Fair value of Plan Assets,
end of year
– 2,014 1,417 2,333
555
212
12
267
352
30
124
43
22
471
8,338
–
5,764
1,417
8,945
64
–
–
–
–
–
–74
–
–126
–
–65
–63
–265
–63
–
–
–
108
38
–5
38
103
165
292
324
781
8,809 2,754 1,880 3,341 16,784
– 1,846 1,361 2,059
227
–
158
–
10
–
125
203
–
164
57
28
5,266
516
418
38
–
–
–
–
–
–45
–
–132
–
–53
–32
–230
–32
–
–
–
–
–
50
–
50
–36
–140
–86
–262
– 2,014 1,417 2,333
5,764
The tables below and on the next page present information about de-
fined benefit plans for Ericsson and summarize changes in the benefit
obligation, the plan assets and the funded status of defined benefit
plans and the amount recognized in the balance sheet as well as key
assumptions.
CHANGE IN DEFINED BENEFIT OBLIGATION, DBO 1)
Sweden
UK
US Other
Total
2005
DBO, beginning of the year
Service cost
Interest cost
Employee contributions
Pension payments
Actuarial gain/loss (–/+) 2)
Settlement cost
Curtailment cost
Balances regarding
acquired and sold
companies
Reclassifications
Other
Translation difference
for the year
DBO, end of the year
2004
DBO, beginning of the year
Service cost
Interest cost
Employee contributions
Pension payments
Actuarial gain/loss (–/+) 2)
Settlement cost
Curtailment cost
Balances regarding
acquired and sold
companies
Reclassifications
Other
Translation difference
for the year
DBO, end of the year
78
148
22
8,190 3,018 2,362 3,250 16,820
696
878
64
–406
3,300
–49
–
281
154
12
–161 –100
272
–148
–49
–
–
–
275
407
–
–71
2,830
–
–
62
169
30
–74
346
–
–
–
–
1
–
–
–
–
65
– –127
–37
91
65
–127
55
–
1,018
11,632 3,795 2,863 4,024 22,314
303
244
471
6,921 2,794 2,511 2,256 14,482
611
803
38
–365
1,084
–35
–187
82
153
–
–189
186
–
–173
306
380
–
–71
654
–
–
170
118
10
–60
157
–35
–14
53
152
28
–45
87
–
–
–
–
–
–
–
–
–
–
22
–
712
23
–
712
45
–
–368
8,190 3,018 2,362 3,250 16,820
–51 –230
–87
1) The Group participates in a number of post-employment medical benefit schemes.
The method of accounting, the assumptions and the frequency of valuations are
similar to those used for defined benefit schemes. Post-employment medical
benefit schemes are therefore included in the figures above.
2) Actuarial gains and losses for each plan are reported when the
accumulated amount exceeds the corridor. The income or expenses are then
recognized over the expected average remaining service period of the
employees.
70
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
ACCRUED/PREPAID PENSION COST
Sweden
UK
US Other
Total
AMOUNT RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET, 2004
2005
Fair value of plan assets
DBO
Funded status of the plan
Unrecognized actuarial
gain/loss (–/+)
Unrecognized past service cost
Accrued/Prepaid pension
cost (–/+)
2004
Fair value of plan assets
DBO
Funded status of the plan
Unrecognized actuarial
gain/loss (–/+)
Unrecognized past service cost
Accrued/Prepaid pension
cost (–/+)
8,809 2,754 1,880 3,341 16,784
11,632 3,795 2,863 4,024 22,314
–2,823 –1,041 –983 –683 –5,530
3,278
–
455
301
–
37 –133
92
–
3,483
92
–740 –946 –724 –1,955
– 2,014 1,417 2,333
5,764
8,190 3,018 2,362 3,250 16,820
–8,190 –1,004 –945 –917 –11,056
654
–
55
–
174
–
16
70
899
70
–7,536 –949 –771 –831 –10,087
AMOUNT RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET, 2005
Sweden
UK
US Other
Total
2005
Accrued/Prepaid pension cost
(–/+) beginning of the year
Annual pension cost
Benefits paid
by company, net
Employer contributions
Balances regarding
acquired and sold
companies
Reclassification
Other
Translation difference
for the year
Accrued/Prepaid pension
cost (–/+), end of year
–7,536
–417
71
8,338
–949 –771 –831 –10,087
–101 –307
–896
–71
–
352
35
43
36
212
142
8,945
–
–
–1
–
–
–
–
–
3
–46
127
42
–46
127
44
–
–72
–155
43
–184
455
–740 –946 –724 –1,955
Total accrued/prepaid pension cost, SEK –1,955 (–10,087) million are
reported gross by plan in the balance sheet. Plans with net assets are
reported as Other financial assets, non-current, total SEK 1,170 (0)
million and plans with net liabilities are reported as Post-employment
benefits, total SEK 3,125 (10,087) million.
Sweden
UK
US Other
Total
2004
Accrued/Prepaid pension cost
(–/+) beginning of the year
Annual pension cost
Benefits paid directly
by company
Employer contributions
Balances regarding
acquired and sold
companies
Reclassification
Other
Translation difference
for the year
Accrued/Prepaid pension
cost (–/+), end of year
–6,921
–686
–949 –1,151 –115 –9,136
47 –153
–863
–71
71
–
–
57
78
203
7
158
156
418
–
–
–
–
–
–
–
–
–
– –712
–9
–22
–
–712
–31
14
74
–7
81
–7,536 –949 –771 –831 –10,087
The principal actuarial assumptions used were as follows:
Sweden
UK
US
Other
2005
Discount rate
Expected return on
plan assets
Future salary increases
Health care cost inflation,
current year
2004
Discount rate
Expected return on
plan assets
Future salary increases
Health care cost inflation,
current year
3.5%
4.7%
5.5%
5.5%
3.2%
3.0%
7.0%
4.0%
8.0%
4.5%
6.7%
4.2%
n/a
n/a
10.0%
n/a
5.0%
5.3%
6.0%
6.0%
n/a
3.0%
7.0%
4.0%
8.0%
4.5%
6.2%
4.4%
n/a
n/a
10.0%
n/a
The developments of medium and long-term interest rates have
been closely monitored during the year. Consequently we have
adjusted the discount rate downwards in order to reflect the
applicable interest rate for our benefit obligations at the balance
sheet day.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
71
C19 OTHER PROVISIONS
2005
Opening balance
Additions
Costs incurred
Reversal of excess amounts
Balances regarding acquired and sold companies
Reclassification
Translation difference for the year
Closing balance
2004
Opening balance
Additions
Costs incurred
Reversal of excess amounts
Reclassification
Translation difference for the year
Closing balance
1) Both current and non-current provisions.
Warranty
commitments
Restruc-
turing
Customer
financing
Total other
Other
provisions 1)
6,424
2,858
–3,181
–1,390
6
3
101
4,821
4,736
4,202
–2,656
–
172
–30
6,424
3,598
1,323
–1,983
–480
–
–322
178
2,314
9,115
661
–5,651
–274
–238
–15
3,598
271
–
19
–315
–
–
55
30
296
228
–62
–191
–
–
271
14,485
5,564
–6,913
–2,608
–
224
751
11,503
13,454
7,971
–5,012
–1,867
341
–402
14,485
24,778
9,745
–12,058
–4,793
6
–95
1,085
18,668
27,601
13,062
–13,381
–2,332
275
–447
24,778
WARRANTY COMMITMENTS
Warranty provisions are based on quality statistics and are calculated
considering sales, contractual warranty periods and historical quality
data of products sold. The actual warranty costs have been lower than
anticipated therefore parts of the provisions have been reversed. The
actual utilization for 2005 was SEK 3.2 billion, compared to the ex-
pected SEK 2.5 billion. The expected utilization of warranty provisions
during year 2006 is SEK 2.9 billion.
RESTRUCTURING
Restructuring provisions amounting to SEK 2.0 billion were utilized
during 2005 compared to the expected SEK 2.0 billion.
Due to a more favourable outcome, parts of the provisions have
been reversed. However, the reversals were largely offset by additions
to provisions made in previous years.
Remaining restructuring provisions are mostly related to unutilized
leased real estate. The majority of these leases will expire in between
one and five years, and the last one in year 2028. The value of the real
estate commitments are calculated based on the net present value of
the future lease payments minus the forcasted sublease revenues. The
expected utilization of restructuring provisions during 2006 is
SEK 1.5 billion.
CUSTOMER FINANCING
Total provisions for off-balance sheet customer financing is the sum of
all individual provisions for each risk. The individual provisions are
based on a specific evaluation of each risk exposure.
OTHER
Other provisions include estimated obligations related to patent and
other litigations, contractual discounts and penalties of uncertain timing
or amount, supplier or subcontractor claims and/or dispute, as well as
provisions for unresolved income tax and value added tax, issues and
estimated losses on customer contracts. The actual utilization for 2005
was SEK 6.9 billion, compared to the estimated SEK 8.0 billion. Rever-
sals amount to SEK 2.6 billion due to a more favourable outcome. These
reversals are partly offset by increases to provisions made in previous
years reported under additions.
The expected utilization in 2006 is SEK 7,0 billion.
72
C20 INTEREST-BEARING
PROVISIONS AND LIABILITIES
Ericsson’s outstanding interest-bearing provisions and liabilities were
SEK 28.1 billion as of December 31, 2005 (33.6).
INTEREST-BEARING PROVISIONS AND LIABILITIES
Borrowings, current 1)
Total current borrowings
Borrowings, non-current
Post-employment benefits
Total non-current interest-bearing
provisions and liabilities
Total interest-bearing
provisions and liabilities
2005
10,784
10,784
14,185
3,125
2004
1,719
1,719
21,837
10,087
17,310
31,924
28,094 33,643
1)
Including note and bond loans of SEK 9,614 million 2005 and SEK 651
million 2004.
NOTES AND BOND LOANS
Issued-
mature
1999-2009
2001-2006
2001-2006
2001-2008
2003-2010
2004-2012
Total
Book
value
Maturity
date
Nominal Coupon Currency (SEK m.) (YY-MM-DD)
09-05-20
06-03-15
06-05-31
08-06-05
10-11-28
12-12-07
483 6.500%
FRN
1,000 1) 6.375%
226 1) 7.375%
471 2) 6.750%
FRN
450
USD
USD
EUR
GBP
EUR
SEK
15
3,187
119
9,496
3,167
4,671
450
21,890
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
LIABILITIES TO FINANCIAL INSTITUTIONS,
INTEREST RATE BY CURRENCY
Maturing >1<5 years Maturing >5 years
Book
value
(SEK m.)
226
192
39
40
497
Interest
rate (%)
3.9%
2.2%
9.2%
1.0%
–
Book
value
(SEK m.)
128
141
1,181
14
1,464
Interest
rate (%)
1.9%
2.0%
7.7%
0%
–
EUR
SEK
USD
Other currencies
Total
Current liabilities to financial institutions are mainly denominated in INR,
JPY and USD and have a weighted average maturity of 0.3 years. Cur-
rent maturities of non-current debt (excl. current maturities of notes
and bond loans) are mainly denominated in CAD and EUR and have a
weighted average maturity of 0.1 year.
C21 FINANCIAL RISK
MANAGEMENT AND FINANCIAL
INSTRUMENTS
FINANCIAL RISK MANAGEMENT
Ericsson’s financial risk management is governed by a policy approved
by the Board of Directors. The Finance Committee of the Board of Di-
rectors is responsible for approving certain matters regarding invest-
ments, loans, guarantees and customer financing commitments and is
continuously monitoring the exposure to financial risks.
The Board of Directors has established risk limits for defined expo-
1) The EUR 1,000 million and GBP 226 million bonds have interest rates linked to the
sures to foreign exchange and interest rate risks.
Company’s credit rating. The interest will increase/decrease 0.25 percent per
annum for each rating notch change per rating agency (Moody’s and Standard &
Poor’s). The interest rate applicable to these bonds cannot be less than the initial
interest rates in the loan agreements.
2) The EUR 471 million bond is callable after 2007; the fair value of the embedded
derivative is included in the book value of the bond.
All outstanding notes and bond loans are issued by the Parent Com-
pany under its Euro Medium Term Note program. Bonds issued at a
fixed interest rate are swapped to a floating interest rate using interest
rate swaps, resulting in a weighted average interest rate of 5.12 percent
at December 31, 2005. These bonds are revalued based on changes
in benchmark interest rates according to the Fair Value hedge method-
ology stipulated in IAS 39.
Ericsson has a treasury function with the principal role to ensure
that appropriate financing is in place through loans and committed
credit facilities, to actively manage the Group’s liquidity as well as fi-
nancial assets and liabilities, and to manage and control financial risk
exposures in a manner consistent with underlying business risks and
financial policies. Hedging activities and cash management are large-
ly centralized to the treasury function in Stockholm.
Ericsson also has a customer finance function with the main objec-
tive to find suitable third-party financing solutions for customers and
to minimize recourse to Ericsson. To the extent customer loans are not
provided directly by banks, the Parent Company provides or guarantees
vendor credits. The customer finance function monitors the exposure
from outstanding vendor credits and credit commitments.
No notes or bond loans have been redeemed or cancelled in
Ericsson classifies financial risks as:
2005.
• foreign exchange risk
• interest rate risk
• credit risk
• liquidity and refinancing risk
• market price risk in own and other listed equity instruments.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
73
Foreign exchange risk
Ericsson has significant revenues, costs, assets and liabilities in cur-
rencies other than SEK, which result in a substantial foreign exchange
rate exposure in the income statement, balance sheet and cash flows.
When managing foreign exchange risk, Ericsson distinguishes between
two types of exposure: transaction and translation exposure.
Transaction exposure
An analysis of Ericsson’s transaction exposures for 2005 shows the
following net exposures by currency:
ESTIMATED NET EXPOSURES BY CERTAIN MAJOR
CURRENCIES
(SEK billion)
USD and related currencies
EUR
JPY
2005
33
8
2
A change in the exchange rate of +/– 10 percent between SEK and USD,
and related currencies, would have an annualized impact on the oper-
ating income by SEK 3.3 billion before tax and hedging effects.
Foreign exchange risk is as far as possible borne by Swedish group
companies. Sales to foreign subsidiary companies are normally in-
voiced in the functional currency of the receiving entity. In order to
limit the exposure toward exchange fluctuations on future revenue or
expenditure, committed and forecasted net exposure by period of fu-
ture sales and purchases in major currencies were hedged, on average,
for the coming 6–9 months in 2005. Trade receivables and payables in
foreign currencies are generally fully hedged.
Currency forward contracts are primarily used for hedging future
revenues and expenditures on company level. External forward con-
tracts are designated as cash flow hedges of the net exposure for the
main currencies and companies of the Group.
Other foreign exchange exposures in balance sheet items are
hedged through offsetting balances or derivatives.
As of December 31, 2005, outstanding foreign exchange derivatives,
hedging transaction exposures, had a negative net market value of
SEK 2.6 (positive 4.0) billion. The negative market value is partly de-
ferred in hedge reserve to offset the gains on hedged future sales in
foreign currency. The remaining balance corresponds to appreciation
of Accounts Receivable balances being originated at higher rates com-
pared to the exchange rates prevailing when the commitments and
forecasts were made.
HEDGE RESERVE
(SEK billion pre-tax)
January 1, 2005
Revaluation of derivatives
Released to profit and loss
December 31, 2005
1.6
–4.0
1.4
–1.0
Translation exposure
Ericsson has many subsidiary companies operating outside Sweden.
The net results in foreign subsidiary companies and the value of such
2005
2004
SEK million unless
otherwise stated
Interest rate Derivatives
Basis Swap
Basis Swap
Basis Swap
Interest Rate Swap
Interest Rate Swap
Interest Rate Swap
Interest Rate Swap
Interest Rate Forwards
Foward Rate Agreement
Swaption
Other
Total Interest rate Derivatives
Foreign Exchange Derivatives
Foreign Exchange Forwards
Foreign Exchange Forwards
Foreign Exchange Forwards
Foreign Exchange Forwards
Total Foreign Exchange Derivatives
Derivatives Total
Trans-
action
currency
Nominal
amount in
transaction
currency
–383
3,855
–47
2,733
226
11,885
583
–2,105
25,500
471
Fair
value
Book
value
131
–267
46
475
188
270
215
–2
–6
–45
3
1,008
131
–267
46
475
188
270
215
–2
–6
–45
3
1,008
–5,537 –2,082
–42
–3,679
–224
–1,845
–204
–2,552
–1,544
–2,082
–42
–224
–204
–2,552
–1,544
Nominal
amount in
transaction
currency
Fair
value
Book
value
–
–
–
–
–
–
1,471
226
515
483
–2,010
22,000
471
–4,272
–4,093
–1,603
–
–
–
325
108
10
118
–18
4
–
–1
546
909
169
19
394
–18
4
7
–1
1,483
3,131
193
460
240
4,024
5,507
1,734
232
225
229
2,420
2,966
EUR
SEK
USD
EUR
GBP
SEK
USD
SEK
SEK
EUR
USD
EUR
SAR
Other
All derivatives are short term except for the Interest Rate Swaps and Swaptions hedging Longterm Borrowing and derivatives embedded therein
74
foreign investments are exposed to exchange rate fluctuations, which
affect the consolidated income statement and balance sheet when
translated to SEK.
Translation exposure in foreign subsidiary companies is hedged
according to the following policy established by the Board of Direc-
tors:
Equity in companies is translated using the current method, for
which translation effects are reported directly in stockholders’ equity,
and is hedged up to 20 percent in selected companies. The translation
differences reported in equity during 2005 were positive, SEK 4.0 billion,
including hedging losses of SEK 142 million.
Interest Rate Risk
Ericsson is exposed to interest rate risk through market value fluctua-
tions in certain balance sheet items and through changes in interest
expenses and revenues. The net cash position was SEK 53.4 (42.9)
billion at the end of 2005, consisting of cash and bank, and short-term
cash investments of SEK 81.5 (76.6) billion and interest-bearing provi-
sions and liabilities of SEK 28.1 (33.6) billion. Outstanding customer
financing credits, net of provisions, were SEK 4.9 (3.6) billion.
Ericsson seeks to avoid risk in the form of (i) a mismatch between
fixed and floating interest rates in interest-bearing balance sheet items
and (ii) significant fixed interest rate exposure in Ericsson’s net cash
position. As of December 31, 2005, 94 (94) percent of Ericsson’s inter-
est-bearing provisions and liabilities and 99 (99) percent of Ericsson’s
interest-bearing assets had floating interest rates, i.e. interest periods
of less than 12 months.
When managing the interest rate exposure Ericsson uses derivative
instruments, such as interest rate swaps.
Ericsson’s interest net and cash flows are exposed to interest rate
fluctuations. A sustained change in interest rates of +/– 0.25 percentage
points would, with the current net cash position, have an annual impact
on the interest net of SEK +/– 135 million.
Credit Risk
Credit risk is divided into three categories: credit risk in trade receiv-
ables, customer finance risk and financial credit risk.
Credit risk in trade receivables
Trade receivables amounted to SEK 41.2 (32.6) billion as of December
31, 2005. Provisions for expected losses are regularly assessed and
amounted to SEK 1.4 (1.8) billion as of December 31, 2005. Ericsson’s
nominal credit losses have, however, historically been low. The amounts
of trade receivables follow closely the distribution of Ericsson’s sales
and do not include any major concentrations of credit risk by customer
or by geography.
Customer finance risk
All major customer finance commitments are subject to approval by the
Finance Committee of the Board of Directors according to the credit
approval procedures.
As of December 31, 2005, Ericsson’s total outstanding exposure
relating to customer finance credits was SEK 7.0 (8.9) billion. As of that
date, Ericsson also had unutilized credit commitments of SEK 3.6 (2.2)
billion. The outstanding customer loans and financial guarantees relate
to infrastructure projects in different geographic markets and to a large
number of customers. As of December 31, 2005, there was a total of
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
76 customer loans originated by or guaranteed by Ericsson. The five
largest customer finance arrangements represented 60 percent of the
total credit exposure. Security arrangements for customer credits nor-
mally include pledges of equipment, pledges of certain of the borrow-
ers assets and pledges of shares in the operating company. Restructur-
ing efforts for cases of troubled debt may lead to temporary holdings
of equity interests.
The table below summarizes Ericsson’s outstanding customer fi-
nance credits as of December 31, 2004–2005.
OUTSTANDING CUSTOMER FINANCE CREDITS
(SEK billion)
On-balance sheet credits
Off-balance sheet credits
Total credits
Accrued interest
Less third-party risk coverage
Ericsson’s risk exposure
On-balance sheet credits, net value
Reclassifications 1)
On-balance sheet credits,
net book value
Credit commitments for
customer financing
2005
7.0
0.1
7.1
0.1
–0.2
7.0
5.0
–0.1
2004
8.4
0.6
9.0
0.2
–0.3
8.9
3.7
–0.1
4.9
3.6
3.6
2.2
1) Reclassification due to consolidation in accordance with SIC 12.
Of Ericsson’s total outstanding customer finance credit exposure as of
December 31, 2005, 58 percent related to Latin America, 14 percent
to Western Europe, 23 percent to Central and Eastern Europe, Middle
East & Africa, 1 percent to North America and 4 percent to Asia Pa-
cific.
The net effect of risk provisions for customer financing affecting
operating expenses, amounted to a positive impact of SEK 1.0 billion
in 2005, compared to a negative impact of SEK 0.2 billion in 2004. In
2005 and 2004, Ericsson incurred credit losses of SEK 0.4 billion and
SEK 1.8 billion.
Financial credit risk
Financial instruments carry an element of risk in that counterparts may
be unable to fulfill their payment obligations. This exposure arises in
the investments of cash and cash equivalents and from derivative posi-
tions with positive unrealized result against banks and other counter-
parties.
Ericsson mitigates these risks by investing cash primarily in well
rated commercial papers, treasury bills and floating rate notes with
short-term ratings of at least A-2/P-2 and long-term ratings of at least
A-/A3 and in liquidity funds with a rating of at least A. Separate credit
limits are assigned to each counterpart in order to minimize risk con-
centration. All derivative transactions are covered by ISDA netting
agreements to reduce the credit risk. No credit losses were incurred
during 2005, neither on external investments nor on derivative posi-
tions.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
75
The USD 1 billion committed credit facility has interest rates linked to
our credit rating.
In April 2005, Moody’s upgraded Ericsson’s long-term credit rating
to Baa3 with a positive outlook. In February 2005, Standard & Poor’s
upgraded Ericsson’s long-term credit rating to BBB– with a positive
outlook. Subsequent to the Marconi announcement in October 2005,
Standard & Poor’s changed the outlook to stable. Ericsson’s current
ratings are investment grade.
Financial Instruments Carried at other than Fair Value
In the following tables, carrying amounts and fair values of financial
instruments that are carried in the financial statements at other than
fair values are presented. For valuation principles, please see Note C1,
“Significant accounting policies”.
FINANCIAL INSTRUMENTS CARRIED
AT OTHER THAN FAIR VALUE
(SEK billion)
Cash and Bank, and
Term Deposits
Current maturities of
non-current borrowings
Notes and bonds
Carrying amount
2004
2005
Fair value
2004
2005
81.5
81.5
9.6
12.3
21.9
76.6
76.6
0.8
19.8
20.6
81.5
81.5
9.7
13.0
22.7
76.6
76.6
0.8
21.6
22.4
Financial instruments excluded from the tables, such as trade receiv-
ables and payables are carried at amortized cost which is deemed to
be equal to fair value. When a market price is not readily available and
there is insignificant interest rate exposure affecting the value, the car-
rying value is considered to represent a reasonable estimate of a fair
value.
Market Price Risk in Own Shares and Other Listed
Equity Investments
Risk related to our own share price
Ericsson is exposed to the development of its own share price through
stock option and stock purchase plans for employees. The obligation
to deliver shares under these plans is covered by holding Ericsson
Class B shares as treasury stock and warrants for issuance of new
Ericsson Class B shares. An increase in the share price will result in
social security charges, which represents a risk to both income and
cash flow. The cash flow exposure is fully hedged through the holding
of Ericsson Class B shares in treasury to be sold to generate funds to
cover also social security payments, and through the purchase of call
options on Ericsson Class B shares.
Risk related to the prices of listed equity investments
Through investments in equity of listed companies Ericsson is exposed
to market value fluctuations of such instruments. Such investments,
however, constitute a very limited part of Ericsson’s financial assets.
Liquidity Risk
Liquidity risk is that Ericsson is unable to meet its short-term payment
obligations due to insufficient or illiquid cash reserves.
Ericsson maintains sufficient liquidity through centralized cash man-
agement, investments in highly liquid interest-bearing securities, and
by having sufficient committed credit lines in place to meet potential
funding needs. The current cash position is deemed to satisfy all short-
term liquidity requirements.
During 2005, cash and bank, and short-term cash investments in-
creased by SEK 4.9 billion to SEK 81.5 billion mainly due to positive
cash flow, which was partly offset by repayment of non-current debt
and payment to the pension trust.
CASH AND SHORT-TERM CASH INVESTMENTS
Remaining time to maturity
>5
< 3
years
months
1.0
53.1
(SEK billion)
Total Group
1–5
years
12.2
< 1
year
15.2
2005
81.5
2004
76.6
Re-financing risk
Re-financing risk is the risk that Ericsson is unable to refinance out-
standing debt at reasonable terms and conditions, or at all, at a given
point in time.
REPAYMENT SCHEDULE OF LONG-TERM BORROWINGS
Current
maturities
of long-
term debt
9.8
–
–
–
–
–
9.8
Notes
and bonds
(non-current)
–
–
3.1
3.8
4.4
0.5
11.8
Liabilities
to financial
institutions
(non-current)
–
0.1
0.1
0.1
0.1
1.5
1.9
Total
9.8
0.1
3.2
3.9
4.5
2.0
23.5
(SEK billion)
2006
2007
2008
2009
2010
2011
Total
Debt financing is mainly carried out through borrowing in the Swedish
and international debt capital markets.
Bank financing is used for certain subsidiary funding and to obtain
committed credit facilities.
FUNDING PROGRAMS
Amount Utilized Unutilized
Euro Medium Term Note program
(USD m.)
Euro Commercial Paper program
(USD m.) 1)
Swedish Commercial Paper program
(SEK m.)
Long-term Committed Credit facility
(USD m.)
Short-term Committed
Credit facilities (SEK m.)
5,000
2,303
2,967
1,500
5,000
1,000
353
–
–
–
–
1,500
5,000
1,000
353
1) Currently unavailable due to low short-term rating.
76
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
guarantees for customer finance are shown above at their net value (i.e.
after provisions).
Other contingent liabilities assumed by Ericsson include guarantees
of loans to other companies of SEK 186 million in 2005. Ericsson has
SEK 760 million in 2005 issued to guarantee the performance of a third
party.
C26 STATEMENT OF CASH
FLOWS
Interest paid in 2005 was SEK 2,577 million (SEK 3,492 million in 2004)
and interest received was SEK 2,142 million (SEK 3,662 million in 2004).
Income taxes paid were SEK 865 million (SEK 2,944 million in 2004).
For more information regarding the disposition of cash and cash
equivalents and unutilized credit commitments, see Note C21 – “Finan-
cial Risk Management and Financial Instruments”.
Cash restricted due to currency restrictions or other legal restric-
tions in certain countries amounts to SEK 3,773 million (SEK 2,156
million in 2004).
C22 OTHER CURRENT
LIABILITIES
Income tax liabilities
Advances from customers
Liabilities to associated companies
Accrued interest
Accrued expenses, of which
employee related
other accrued expenses
Deferred revenues
Derivatives with a negative value
Other current liabilities
Total
2005
1,260
4,059
34
770
2004
1,686
3,390
7
846
20,379 18,292
6,224
12,396 12,068
2,929
316
5,532
40,825 32,998
3,558
3,607
7,158
7,983
C23 ACCOUNTS AND NOTES
PAYABLE – TRADE
Accounts and notes payable excluding
associated companies and joint ventures
Payables to associated
companies and joint ventures
Total
2005
2004
ACQUISITIONS/SALES OF SHARES AND OTHER INVESTMENTS
2004
2005
12,233 10,935
351
53
12,584 10,988
Purchase price for acquired
subsidiary companies
Other acquisitions/capital contributions
Sales
Acquisitions/sales, net
–578
–691
312
–957
–39
–1,739
229
–1,549
C24 ASSETS PLEDGED
AS COLLATERAL
Real estate mortgages
Chattel mortgages
Bank deposits
Total
2005
10
166
373
549
2004
–
7,209
776
7,985
The decrease of chattel mortages is attributable to the funding of the
Swedish pension trust. Bank deposits are collaterals related to legal
disputes which have been cleared in 2005 (SEK 373 million in 2004)
and collateral for subsidiary financing SEK 151 million in 2005 (SEK 180
million in 2004).
C25 CONTINGENT LIABILITIES
Guarantees for customer financing
Other contingent liabilities
Total
2005 2004
348
67
666
1,641
1,708 1,014
Guarantees for customer financing relate to arrangements where Eric-
sson is the guarantor for customers’ payment obligations under credit
facilities. A lender under these credit facilities is normally a bank, which
thus is the beneficiary of the Ericsson guarantee, covering the entire or
part of the outstanding principal amount and accrued interest. The
The purchase consideration in cash or cash equivalents for other ac-
quisition was SEK –691 million (SEK –1,739 million in 2004), a consider-
able amount is related to Ericsson’s increased ownership in the Italian
subsidiary company.
Of the consideration received for disposals SEK 312 million (SEK
229 million in 2004) were in the form of cash or cash equivalents. The
cash or cash equivalents in the balance sheets of sold subsidiary com-
panies were SEK 27 million (SEK 10 million in 2004).
Further, the cash and cash equivalents in the balance sheets of
acquired subsidiary companies were SEK 16 million (SEK 33 million in
2004).
Property, plant and equipment
Other non-current assets
Current assets
Cash
Total assets
Other provisions and
Post-employment benefits
Non-current liabilities
Current liabilities
Total liabilities
Sold
Acquired
subsidiary
subsidiary
companies companies
3
3
46
27
79
15
526
58
16
615
135
14
41
190
8
–
30
38
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
77
C27 LEASING
LEASING WITH THE COMPANY AS LESSEE
Assets under finance leases, recorded as property, plant and equip-
ment, consist of:
FINANCE LEASES
Acquisition costs
Real estate
Machinery
Other equipment
Accumulated depreciation
Real estate
Machinery
Other equipment
Accumulated write-downs
Real estate
Machinery
Other equipment
Net carrying value
2005
2004
1,948
–
5
1,953
–502
–
–1
–503
–417
–
–
–417
1,033
1,459
–
3
1,462
–148
–
–1
–149
–413
–
–
–413
900
As of December 31, 2005, future minimum lease payment obligations
for leases were distributed as follows:
2004
2,434
10
2,444
4,139
313
4,452
108
–
108
4,560
2,804
–366
2,438
3,009
260
3,269
95
–
95
3,364
5,802
5,518
7,004
4,483
35
–510
–121
–876
2006
2007
2008
2009
2010
2011 and later
Total
Future finance charges 1)
Present value of finance lease liabilities
Finance Operating
leases
2,134
1,762
1,559
1,294
1,115
2,943
10,807
n/a
10,807
leases
199
186
203
169
155
1,785
2,697
–1,130
1,567
10,845 10,490
1) Average effective interest rate on lease payables is 7.43 percent.
Expenses in 2005 for leasing of assets were SEK 2,686 million (SEK
2,961 million in 2004), of which variable expenses were SEK 11 million
(SEK 6 million in 2004). The leasing contracts vary in length from 1 to
23 years.
Most of the Company’s lease agreements contain no contingent
rents. In the few cases they occur it relates to charges for heating, linked
to the oil price index. Most of the leases of real estate contain terms of
renewal giving the right to prolong the agreement in question for a
predefined period of time. All of the financial leases of facilities contain
purchase options. Only a very limited number of the Company’s lease
agreements contain restrictions on stockholders’ equity or other means
of finance. The major agreement contains a restriction stating that the
Parent Company must maintain a stockholders’ equity of at least SEK
25 billion.
Acquisitions made by Ericsson in 2005 were:
• NetSpira Networks, S.L., a Spanish software company. The com-
pany’s technology will be integrated into Ericsson’s offering for mo-
bile data allowing operators to provide easily understandable charg-
ing for services such as Java downloads, web access and MMS.
• Axxessit AsA, a Norwegian based advanced technology company
that develops, produces and markets integrated access devices
and multi-service provisioning platforms for next generation access
and metro networks.
• Ericsson has also increased its ownership in the Italian subsidiary
company Ericsson S.p.A., which gives Ericsson a total ownership
as of December 31, 2005, of 99 percent.
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
2005
Property, plant and equipment
Depreciation
Write-downs/reversal of write-downs
Total
Intangible assets
Amortization
Capitalized development costs
Other
Total amortization
Write-downs
Capitalized development costs
Other
Total write-downs
Total
Total depreciation, amortization and
write-downs on property, plant and
equipment and intangible assets
Taxes
Write-downs on other investments in
shares and participations and capital
gains (–)/losses on sale of fixed assets,
excluding customer financing, net
Other non-cash items
Total adjustments to reconcile net
income to cash
78
LEASES WITH THE COMPANY AS LESSOR
Leasing income mainly relates to income from sublease of real estate.
These leasing contracts vary in length from 1 to 6 years.
At December 31, 2005, future minimum payment receivables were
distributed as follows:
2006
2007
2008
2009
2010
2011 and later
Total
Unearned financial income
Uncollectible lease payments
Net investments in financial leases
Finance Operating
leases
57
43
30
19
1
1
151
n/a
n/a
n/a
leases
–
–
–
–
–
–
–
–
–
–
Leasing income in 2005 was SEK 114 million (SEK 237 million in
2004).
C28 TAX ASSESSMENT VALUES
IN SWEDEN
Land and land improvements
Buildings
Total
2005
60
235
295
2004
60
235
295
C29 INFORMATION REGARDING
EMPLOYEES, MEMBERS OF THE
BOARD OF DIRECTORS AND
MANAGEMENT
AVERAGE NUMBER OF EMPLOYEES
Men Women
2005
Total Men Women
2004
Total
Western
Europe 1) 2)
Central and
Eastern Europe,
Middle East
and Africa 2)
North America
Latin America
Asia Pacific
Total
1) Of which
Sweden
2) Of which EU
25,188 8,516 33,704 24,511
7,860 32,371
898
3,258
992
3,129
2,549
568
6,544 2,553
851 3,395
4,156 2,544
1,116 4,522
4,121 3,406
3,117 2,015
469 2,484
9,097 6,624 2,346 8,970
40,668 13,527 54,195 39,100 12,642 51,742
15,378 5,120 20,498 15,048 5,384 20,432
8,118 33,157
25,712 8,687 34,399 25,039
Within the group of the 150 most senior executives the distribution between females
and males is 14 percent and 86 percent respectively.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
NUMBER OF EMPLOYEES
Employees by region
Western Europe 1) 2)
Central and Eastern Europe,
Middle East and Africa 2)
North America
Latin America
Asia Pacific
Total
1) Of which Sweden
2) Of which EU
As per December 31,
2005
35,679
4,360
3,911
3,382
8,723
56,055
21,178
36,482
Employees per segment
Systems
Other operations
Total
As per December 31,
2005
50,107
5,948
56,055
2004
32,826
3,527
4,139
2,549
7,493
50,534
21,296
33,625
2004
45,500
5,034
50,534
UNION REPRESENTATION
We respect the rights of our employees to form unions and collective
bargaining. We operate according to local legislative requirements and
other local standards and circumstances for each individual work-
place.
The majority of our employees in Sweden belong to the following
trade unions: Sif (the Swedish Union of Salaried Employees), the Swed-
ish Association of Graduate Engineers, the Swedish Union of Indus-
trial Supervisors and the Swedish Metal Worker’s Union. Many of our
employees located outside Sweden, in particular those located in
other European countries, also belong to trade unions.
REMUNERATION
WAGES AND SALARIES AND SOCIAL SECURITY EXPENSES
Wages and salaries
Social security expenses
Of which pension costs
2005
25,567
8,891
2 165
WAGES AND SALARIES PER GEOGRAPHICAL AREA
Western Europe 1) 2)
Central and Eastern Europe,
Middle East and Africa 2)
North America 3)
Latin America
Asia Pacific
Total
1) Of which Sweden
2) Of which EU
3) Of which United States
2005
17,706
1,301
3,184
1,007
2,369
25,567
10,721
17,779
1,823
2004
23,858
8,498
1,963
2004
16,030
1,055
3,158
784
2,831
23,858
9,923
16,095
1,926
Remuneration in foreign currency has been translated to SEK at average exchange
rates for the year.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
79
COMPENSATION POLICIES AND REMUNERATION TO
THE BOARD OF DIRECTORS, THE PRESIDENT AND
CEO AND THE GROUP MANAGEMENT
The following information covers the remuneration for the Board of
Directors, the President and CEO and the Group Management as re-
quired by applicable laws, rules and recommendations.
Members of the Board of Directors
• Members and Deputy Members of the Board who are Ericsson
employees received no remuneration or benefits other than their
entitlements as employees. However, a fee of SEK 1,000 per at-
tended meeting was paid to each employee representative on the
Board. Further, employee representatives being also members of a
committee of the Board received a fee of SEK 100 for each commit-
tee meeting.
Board
Emp-
loyee re-
member Commit- presen-
tative
tee fee
fee
Gender
Total
male 3,000,000
250,000
– 3,250,000
male
male
female
male
male
male
male
male
SEK
Board member
Michael
Treschow
Arne
Mårtensson
Marcus
Wallenberg
Nancy
McKinstry
Peter L.
Bonfield
Sverker
Martin-Löf
Eckhard
Pfeiffer
Ulf J
Johansson
Carl-Henric
Svanberg
Monica
Bergström
Anna
Guldstrand
Jan Hedlund
Per Lindh
Arne Löfving
Torbjörn
Nyman
Total
Social security fees
Total
female
female
male
male
male
male
600,000
125,000
–
725,000
600,000
125,000
–
725,000
600,000
125,000
– 725,000
600,000
250,000
–
850,000
600,000 350,000
–
950,000
600,000
250,000
–
850,000
600,000
125,000
–
725,000
–
–
–
–
–
–
–
–
–
– 12,000
12,000
– 11,000
800 12,000
800 12,000
– 12,000
11,000
12,800
12,800
12,000
–
1,300 12,000
13,300
7,200,000 1,602,900 71,000 8,873,900
2,880,468
11,754,368
The
The Group
President Management
The President and CEO and the Group Management
Salary and
benefits, SEK
Salary
Variable pay earned
2004 and paid 2005
Other benefits
Total received
18,071,501 25,631,501
5,109,883
5,145,310
22,167,646 64,354,342 86,521,988
Total
41,172,958 55,745,177
7,560,000
35,427
14,572,219
Comments to the table
• The Group Management included the following persons: Karl-Hen-
rik Sundström, Carl Olof Blomqvist, Marita Hellberg, Torbjörn Nils-
son, Bert Nordberg, Henry Sténson, Joakim Westh, Håkan Eriksson,
Kurt Jofs, Björn Olsson and Hans Vestberg. During the year, the
Group Management also included Mats Granryd (until July 17, 2005),
who is included in the table above.
• “Other benefits” include the value of stock options exercised during
2005 and the value of matching shares received during 2005 under
the Stock Purchase Plan 2001. Based on the share price at excercise
respectively at matching, the value for the Group Management was
SEK 2,141,997 for stock options excercised and SEK 473,612 for
matched shares. The number of options exercised is 110,000 and
the number of matched shares corresponds to 17,876 Ericsson B
shares. The President and CEO did not participate in any option plan
or in the Stock Purchase Plan 2001.
Total costs, SEK
Salary
Provisions for
variable pay earned
2005 to be paid 2006
Other benefits
Pension premiums
Social security fees
Total
The
The Group
President Management
14,572,219
Total
41,172,958 55,745,177
8,700,000
1,663,080
6,935,475
9,907,708
22,801,575 31,501,575
6,879,058
8,542,138
17,819,936 24,755,411
27,962,846 37,870,554
41,778,482 116,636,373 158,414,855
Comments to the table
• The Chairman of the Board received a Board fee of SEK 3,000,000.
The Chairman also received SEK 125,000 for each Board committee
he was serving on.
• The other Directors appointed by the Annual General Meeting re-
ceived a fee of SEK 600,000 each. In addition, each Director serving
on a Board committee has received a fee of SEK 125,000 for each
committee. However, the Chairman of the Audit Committee received
a fee of SEK 350,000 and the other two members of the Audit Com-
mittee received a fee of SEK 250,000 each.
• Members of the Board, who are not employees of the Company,
have not received any compensation other than the fees paid for
Board duties.
80
Comments to the table
• Other benefits include the compensation cost during 2005 for share
based programs. For the President and CEO the cost was SEK
1,627,653 and for the Group Management SEK 4,384,784, which
represent their part of total compensation costs as disclosed under
“Shares for all Long Term Incentive Plans”.
Stock option and stock purchase programs are a part of the total
remuneration package as a compensation for the services rendered
by employees. Ericsson shall recognize the value of services re-
ceived as compensation costs in the income statement at consump-
tion of the services.
• For the President and CEO, the above pension premium includes a
fee of SEK 6,404,358 corresponding to 35 percent of his pension-
able salary above 20 base amounts (1 base amount 2005 was SEK
43,300), for a premium based old age pension and a fee of SEK
454,317 for the ITP plan.
• Included in the above pension premiums are changes of commit-
ments made to the President and CEO and the Group Management
for benefit based temporary disability and survival’s pensions until
retirement age. The Company’s commitments per December 31,
2005, under IAS 19 amounted to SEK 4,108,800 for the President
and CEO and SEK 21,687,900 for the Group Management.
• Social security fees include payroll tax on pension premiums.
Outstanding stock options and matching rights
as per December 31, 2005
Number of B shares
1999 Stock Option Plan
Millenium Stock Option Plan
Stock Option Plan 2001 – May Grant
Stock Option Plan 2002
Stock Purchase Plan 2003,
LTI 2004 and LTI 2005
The
The Group
President Management
13,816
1,238,240
625,000
690,000
–
–
–
–
361,020
888,648
Comments to the tables
plans.
Term Incentive Plans.”
• For the definition of matching rights, see description under “Long-
• The number of options presumes full exercise under applicable
• For strike prices for option plans, see Long-Term Incentive Plans.
• The number of matching rights presumes maximum performance
matching under LTI 2004 and LTI 2005. The matching under the
Performance Matching Programs will start in 2007.
COMPENSATION OVERVIEW
The Remuneration Committee monitors pay trends within and outside
Sweden to find competitive and performance driven remuneration
packages for the top executives.
Fixed salary is set to be competitive. Its absolute level is determined
by the size and complexity of the job and year-on-year performance of
the individual job holder.
Performance is specifically reflected in the variable components -
both in an annual incentive and in a long-term incentive portion. Al-
though this may vary over time to take account of pay trends, cur-
rently the target level of the annual component for Swedish top
executives is around 20% of the total compensation (fixed salary, an-
nual incentive and long-term incentive). The long-term component is
also set to achieve a target of around 20% of total compensation. In
both cases the incentive pay is measured against the achievement of
specific business objectives.
Together, the incentive component is set to a target of around 40%
of total compensation and the remaining part of 60% for the fixed sal-
ary, reflecting the judgment of the Board of Directors as to the right
balance between fixed and variable pay and the market practice for
compensation of executives.
The annual short-term incentive is a cash program based on spe-
cific business targets derived from the annual business plan approved
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
by the Board of Directors. The exact nature of the targets will vary
depending on the specific job but may include financial targets at either
corporate level or at a specific business unit level, operational targets,
employee motivation targets and customer satisfaction targets.
Share-based long-term incentive plans are submitted each year for
approval by the shareholders at the Annual General Meeting. The value
for the receivers is determined by three specific variables, the individu-
als’ own investment in shares, a long-term financial target at corporate
level, and the share price development.
PENSION
Ericsson’s policy regarding pension is to follow the competitive practice
in the home country.
For the President and CEO and the Group Management a premium
based plan is applied. The pensionable salary consists of the annual
fixed salary and the target level of the variable pay.
For old age pensions, the company pays on salary portions in ex-
cess of 20 base amounts a percentage of the executive’s pensionable
salary, between 10 and 35 percent per year. For the Group Manage-
ment, the pension age is normally 60 years and premiums are paid up
to the retirement age. From 65 years, the old age pension includes the
ITP plan.
The President and CEO is included in the ITP plan. According to the
premium based plan, Ericsson pays for the President and CEO an an-
nual pension contribution of 35 percent of the pensionable salary above
20 base amounts. The President and CEO has the right to retire at 60
years of age.
NOTICE AND SEVERANCE PAY
For the President and CEO and the Group Management the following
applies:
The mutual notice period is 6 months. Upon termination of employ-
ment by the Company, severance pay amounting to a maximum of 18
months fixed salary is paid. Notice of termination given by the em-
ployee due to significant structural changes or other events occurred
that, in a determining manner, affect the content of work or the condi-
tion for the position, is equated with notice of termination served by the
company. The severance pay is reduced by 50 percent of the salary or
corresponding compensation which the employee would be entitled to
from another employer or from own or other business during the period
severance is paid from Ericsson.
BENEFITS
As with pensions, Ericsson follows the competitive practice of the home
country with respect to benefits. Plan designs vary widely around the
world according to the taxation and legal framework in different coun-
tries.
LONG-TERM INCENTIVE PLANS
The Stock Purchase Plan
The Stock Purchase plan is designed to offer an incentive for all em-
ployees to participate in the Company, which is consistent with our
industry and with our ways of working. Under the plans, employees can
save up to 7.5 percent of the gross salary, for purchase of class B shares
at the Stockholm Stock Exchange or ADRs at NASDAQ (contribution
shares). If the contribution shares are retained by the employee for three
years after the investment and the employment with the Ericsson Group
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
81
continues during that time, the employee’s shares will be matched with
a corresponding number of class B shares or ADRs free of consider-
ation. Employees in 86 countries participate in the plan.
The below table shows the periods for employees’ purchase of
shares (contribution period) and participation details.
Number of
Contribution participants
at launch
Take-up
rate – % of
all employees
Plan
Stock Purchase
Plan 2001
Stock Purchase
plan 2003 1st year
Stock Purchase
plan 2003 2nd year
Stock Purchase
plan 2005
period
February 2002 –
October 2002
August 2003 –
July 2004
August 2004 –
July 2005
August 2005 –
July 2006
27,000
11,000
15,000
16,000
36%
22%
30%
29%
The Key Contributor Program
The Key Contributor Program is designed to give recognition as a
method of retention to key employees. Under the program, about
10 percent of the employees (2004: up to 4,500 and 2005: up to 5,000)
have been selected to obtain one extra matching share in addition to
the ordinary one matching share for each contribution share purchased
under the Stock Purchase Plan during a twelve-month program period.
The first program was introduced in August 2004 and the second in
August 2005.
The Performance Matching Program for executives
The Performance Matching Program is designed to focus the manage-
ment on driving earnings and provide competitive compensation based
on Swedish practice. Under the program, executives (2004: up to 200
executives and 2005: up to 220 executives) have been selected to
obtain up to four or six extra shares (performance matching shares) in
addition to the ordinary one matching share for each contribution share
purchased under the Stock Purchase Plan during a twelve-month pro-
gram period. The performance matching is subject to the fulfillment of
a performance target. Several possible measures have been evaluated
but earnings per share (EPS) growth during a three-year period has
been found to best suit the company. The first program was introduced
in August 2004 and the second in August 2005.
The performance target for the first program is annual average EPS
growth between five (0 performance matching shares) and 25 percent
(maximum performance matching shares). The performance target for
the second program is annual average EPS growth between three
(0 performance matching shares) and 15 percent (maximum perfor-
mance matching shares). The Board may reduce the number of perfor-
mance matching shares to be matched if deemed appropriate by the
Board considering the company’s financial results and position, condi-
tions on the stock market and other circumstances at the time of match-
ing.
It is the Board of Directors’ intention to repeat the Stock Purchase
Plan, including the Key Contributor Program and the Performance
Matching Program for next year.
STOCK OPTION PLANS
Plan
1999 Stock Option Plan
Grant/Expiry date
1 March 00/28 Feb 07
Strike price
(SEK)
128.00
Millennium Stock Option Plan
17 Jan 00/17 Jan 07
93.80
Stock Option Plan 2001
– May Grant
Stock Option Plan 2001
– November Grant 1)
14 May 01/14 May 08
30.50
19 Nov 01/19 Nov 08
25.70
Stock Option Plan 2002 1)
11 Nov 02/11 Nov 09
7.80
1) For stock options exercised during 2005, the weighted average share price was SEK 25.37.
Number of
participants
at grant
1,800
Number of
participants
end 2005
1,070
8,000
2,892
15,000
8,526
900
609
12,800
9,120
Vesting period
from Grant date
30% after 3 years,
40% after 4 years,
30% after 5 years
1/3 after 1 year,
1/3 after 2 years,
1/3 after 3 years
1/3 after 1 year,
1/3 after 2 years,
1/3 after 3 years
1/3 after 1 year,
1/3 after 2 years,
1/3 after 3 years
1/3 after 1 year,
1/3 after 2 years,
1/3 after 3 years
82
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Shares for all Long-Term Incentive Plans
All plans, except the Millennium Option Plan, are funded with treasury
stock. Sale of shares is recognized directly in equity. The Millennium
Stock Option Plan is based on warrants, i.e. options entitling the hold-
ers to subscribe for Class B shares. The warrants are held by subsidiary
companies to Telefonaktiebolaget L M Ericsson, which have granted
options to their employees. Treasury stock for the 1999 Option Plan
was repurchased in year 2000 on the Stockholm Stock Exchange. Trea-
sury stock for all remaining plans was issued in a directed cash issue
of Class C shares at a nominal amount of SEK 1, and purchased under
a public offering at SEK 1 per share plus a premium corresponding to
the subscribers’ financing costs and then converted to Class B
shares.
For all plans, additional shares and warrants have been allocated
for financing of social security expenses. For the Millennium Stock
Option Plan, the warrants designated for social security have been
exchanged for a call option issued by a bank in order to hedge also
equity against potential social security payments. For all other plans,
treasury stock is sold on the Stockholm Stock Exchange to cover the
social security payments when arising due to exercise of options or
matching of shares. During 2005, 4,429,987 shares were sold at an
average price of SEK 25.9.
If all options outstanding as of December 31, 2005, were exercised,
all shares allocated for future matching under the Stock Purchase Plan
were transferred, and shares designated to cover social security pay-
ments were disposed of as a result of the exercise and the matching,
approximately 38 million Class B shares would be issued and approx-
imately 153 million Class B shares, held as treasury stock, would be
transferred. The total, approximately 191 million Class B shares, cor-
responds to 1.2 percent of the total number of shares outstanding,
15,864 million.
The below table shows the number of shares allocated for each plan
(options and matching rights) and changes during 2005.
Plan 2005 (million shares)
1999 Stock Option Plan
Millennium Stock Option Plan
Stock Option Plan 2001– May Grant
Stock Option Plan 2001– Nov Grant
Stock Option Plan 2002
Stock Purchase Plan 2001
Stock Purchase Plan 2003 and LTI 2004
LTI 2005
Out-
standing
Originally beginning
of 2005
0.9
34.2
27.9
1.6
41.4
19.7
16.5
–
designated 1)
1.4
71.6
44.9
2.6
53.9
28.0
151.7
31.5
Out-
Exer-
cised/
Number
of
Compen-
sation
costs
Granted matched Forfeited Expired standing options charged
end of exercis- during
2005
–
–
–
–
14
41 3)
178 3)
5 3)
during
2005
–
–
–
–
–
–
–
–
during
2005
–
–
–
0.1
7.1
19.4
0.6
0.0
during
2005
0.1
3.1
2.0
0.0
1.0
0.3
0.8
0.0
during
2005
–
–
–
–
–
–
18.2
5.9
2005
0.8
31.2
25.9
1.5
33.3
0
33.3 2)
5.9 2)
able
0.8
31.2
25.9
1.5
33.3
–
–
–
1) Adjusted for split, bonus issue and rights offering when applicable.
2) Presuming maximum performance matching under the Performance Matching Program.
3) Fair value is calculated as the share price on the investment date reduced by the net present value of the dividend expectations during the three year vesting period. Net present
value calculations are based on data from external party. For shares under the performance matching programs, the Company assesses the probability of meeting the
performance targets when calculating the compensation costs. Fair value of Class B share at each investment date during 2005 was: February 15 SEK 19.59, May 16 SEK 21.13,
August 15 SEK 26.09 and November 15 SEK 25.28.
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
83
Related party transactions
Sales
Royalty
Purchases
Related party balances
Receivables
Liabilities
2005
2004
880
9
364
132
50
725
7
254
130
29
OTHER RELATED PARTIES
Ericsson continued cooperation with Ericsson’s owners Investor AB
and AB Industrivärden in the venture capital vehicle Ericsson Venture
Partners.
C31 FEES TO AUDITORS
Price-
waterhouse-
Coopers
KPMG
Others
Total
2005
Audit fees
Audit related fees
Tax services fees
Other fees
2004
Audit fees
Audit related fees
Tax services fees
Other fees
2003
Audit fees
Audit related fees
Tax services fees
Other fees
58
24
43
–
125
57
10
31
–
98
50
1
46
4
101
6
–
1
1
8
6
6
2
–
14
6
4
2
–
12
3
–
1
–
4
1
–
–
–
1
1
–
–
1
2
67
24
45
1
137
64
16
33
–
113
57
5
48
5
115
During the period 2003–2005 PricewaterhouseCoopers and KPMG
provided the Company with certain audit related services and tax ser-
vices in addition to audit services. The audit related services provided
during the period include consultation on financial accounting, consul-
tation in connection with conversion to International Financial Report-
ing Standards (IFRS), services related to acquisitions and assessments
of internal control. The tax services include general expatriate services,
VAT refund services and Corporate tax compliance work.
Audit fees to other auditors consist of local statutory audits for minor
companies.
C30 RELATED PARTY
TRANSACTIONS
During 2005, various transactions were executed pursuant to contracts
based on terms customary in the industry and negotiated on an arm’s
length basis.
SONY ERICSSON MOBILE COMMUNICATIONS AB
(SEMC)
In October 2001, SEMC was organized as a joint venture between Sony
Corporation and Ericsson, and a substantial portion of Ericsson’s hand-
set operations was sold to SEMC. As part of the formation of the joint
venture, contracts were entered into between Ericsson and SEMC.
Major transactions are as follows:
sign.
• Sales. Ericsson reports sales regarding mobile phone platform de-
• Royalty. Both owners of SEMC, Sony Corporation and Ericsson,
receive royalties for SEMC’s usage of trademarks and intellectual
property rights.
• Purchases. Ericsson purchases mobile phones from SEMC to sup-
port contracts with a number of customers for mobile systems which
also include limited quantities of phones.
Related party transactions
Sales
Royalty
Purchases
Shareholder contribution
Related party balances
Receivables
Liabilities
Contingent liabilities
2005
2004
1,742
654
827
–
197
33
–
1,532
611
547
–
142
16
–
ERICSSON NIKOLA TESLA D.D.
Ericsson Nikola Tesla d.d. is a joint stock company for manufacturing
of telecommunications systems and equipment and an associated
member of the Ericsson Group. Ericsson holds 49.07 percent of the
shares.
Major transactions are as follows:
equipment from Ericsson.
• Sales. Ericsson Nikola Tesla d.d. purchases telecommunication
• Royalty. Ericsson receives royalties for Ericsson Nikola Tesla d.d.’s
• Purchases. Ericsson is purchasing development resources from
usage of trademarks and intellectual property rights.
Ericsson Nikola Tesla d.d..
84
C32 RECONCILIATION TO
ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED
IN THE UNITED STATES
As a reporting company with the US Securities and Exchange Com-
mission, the Company is required to reconcile certain financial informa-
tion to accounting principles generally accepted in the United States
(US GAAP). For additional information required by foreign registrants,
please refer to our annual report form 20-F, filed with the US Securities
and Exchange Commission.
The principal differences between IFRSs and US GAAP that affect
our net income, as well as our stockholders’ equity, relate to the treat-
ment of pensions, hedge accounting, restructuring, sale-lease back,
reversals of impairment losses, goodwill and capitalization of develop-
ment expenses.
NEW US GAAP STANDARDS
In 2005 no new FASB standards and pronouncements relevant to Er-
icsson were adopted.
The following FASB standards and pronouncements will be adopted
in 2006:
• SFAS 123R Share-Based Payments
• SFAS 151 Inventory Costs
• SFAS 154 Accounting Changes and Error Corrections
SIGNIFICANT DIFFERENCES BETWEEN IFRSs
AND US GAAP
For a full description of the adoption of IFRSs, see note C3.
Capitalization of development costs
According to IFRSs development costs are capitalized after the prod-
ucts have reached a certain degree of technological feasibility. Capi-
talization ceases and amortization begins when the product is ready
for its intended use. The Company has adopted an amortization period
for capitalized development cost of three to five years. Under US GAAP,
The Company applies US GAAP SFAS 86 “Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed” and
SOP 98-1, “Accounting for the costs of Computer Software Developed
or Obtained for Internal use”. According to SFAS 86, software develop-
ment costs are capitalized after the product involved has reached a
certain degree of technological feasibility similarly to IFRSs. However,
under US GAAP non-software related development costs may not be
capitalized as per IFRSs, and is therefore expensed under US GAAP.
Restructuring costs
Under IFRSs a provision for severance pay is recognized when a con-
structive obligation to restructure arises which requires that a detailed
formal plan has been communicated to those affected by it. Its imple-
mentation needs to be planned to begin as soon as possible and to be
completed in a timeframe that makes significant changes to the plan
unlikely. Under US GAAP provisions for severance pay is recognized
on the remaining service period when a company has a detailed formal
plan which has been communicated to those affected.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
If an entity under IFRSs has a contract that is onerous, the present
obligation under the contract shall be recognized and measured as a
provision. Under US GAAP, costs to terminate a contract before the
end of its term should be recognized as a liability and measured at fair
value when the entity terminates the contract in accordance with the
contract terms. A liability for costs that will continue to be incurred
under a contract for its remaining term without economic benefit to the
entity should be recognized and measured at its fair value when the
entity ceases to use the right conveyed by the contract.
Ericsson has identified a difference between US GAAP and IFRSs
of SEK 112 million related to leasehold property that has not yet been
vacated and thus not qualified as provisions in accordance with US
GAAP, and SEK 95 million related to severance pay not recognized per
US GAAP.
Pensions
Ericsson adopted IAS 19, Employee Benefits in January 1, 2004. At
adoption of IAS 19, actuarial gains and losses were recognized in the
opening balance.
For US GAAP, the Company adopted SFAS 87, “Employer’s Ac-
counting for Pensions” in 1989. The different transition dates for ac-
counting of defined benefit plans between US GAAP and IFRSs impact
the balances of unrecognized actuarial gains and losses, which impact
reported pension liabilities and costs. US GAAP requires recognition
of the unfunded accumulated pension benefit obligation on the balance
sheet. The minimum liability is the amount by which the plan is un-
funded on a basis that does not take future salary increases into con-
sideration. Different transition dates and additional minimum pension
liability according to US GAAP are the main differences for Ericsson
between IFRSs and US GAAP for accounting of defined benefit plans.
Sale-leaseback of real estate
During 2000 and 2001, the Company sold real estate assets, which
was leased back to subsidiary companies and reported as an operating
lease. Under IFRSs the gain on sale of property is credited to income,
if the rent to be paid is in par with market price. In accordance with US
GAAP the part of the gain exceeding present value of future lease pay-
ments is credited to income when incurred. The remaining part is rec-
ognized on a straight line basis during the lease period.
Financial instruments
Derivatives:
Ericsson adopted IAS 39 “Financial Instruments; Recognition and Mea-
surement” January 1, 2005. According to IAS 39, all derivatives should
be recognized at fair value on the balance sheet
Under US GAAP, the Company adopted SFAS 133, ‘‘Accounting for
Derivative Instruments and Hedging Activities’’, as amended, on Janu-
ary 1, 2001, for calculating income and equity. SFAS 133 requires rec-
ognition of all derivatives as either assets or liabilities measured at fair
value similarly to IAS 39.
As a result of different opening balances in the Hedge Reserve relat-
ing to cash flow hedging, the effect in the income statement differ
between IFRSs and US GAAP. The closing balances 2005 of the Hedge
Reserve were the same as cash flow hedge accounting and applied to
the same extent under US GAAP and IFRSs.
In the end of 2005 fair value hedge accounting was applied to the
same extent under both standards. Under SFAS 133 the shortcut
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
85
method is used, as critical terms of the hedging instruments and hedged
items are the same. Hereby all hedge relationships are assumed to be
100-percent effective and no ineffectiveness is recognized. Under IAS
39 a detailed hedge effectiveness testing is performed and actual inef-
fectiveness is identified and reported in the income statement.
Unrealized gains and losses on securities available-for-
sale
In accordance with IAS 39 available-for-sale investments that can be
reliably determined are measured at fair value. The unrealized move-
ments in fair value are recognized in equity until disposal or sale, at
which time, those unrealized movements from prior periods are recog-
nized in profit or loss. For losses other than temporary, that reduce the
carrying amount below acquisition cost should be recognized in profit
or loss. Investments in equity instruments that do not have a quoted
market price in an active market and whose fair value cannot be reliably
measured may be measured at cost.
Under US GAAP, the Company’s listed marketable securities are
classified as available-for-sale and measured at fair value in accordance
with SFAS 115 “Accounting for Certain Investments in Debt and Equity
Securities”. Investments in equity instruments not publicly traded are
carried at cost. Unrealized gains and temporary losses are reported as
a separate component of stockholders’ equity included in other com-
prehensive income. Other than temporary unrealized losses are charged
to income.
Goodwill
Ericsson adopted IFRS 3 “Business Combinations” January 1, 2004.
Under IFRS 3, goodwill is not subject to amortization, but requires an
impairment review at least annually. Under US GAAP, the Company
applies SFAS 142. According to SFAS 142 goodwill is not subject to
amortization subsequent to the date of adoption, but instead tested for
impairment at least annually similarly to IFRS 3. No need for impairment
was identified in 2005 in either of the two standards. The presented
difference pertains to different transition dates for IFRS 3 and
SFAS 142.
Reversals of impairment losses
IFRSs requires reversal of impairment losses when there has been a
change in economic conditions or in the expected use of an asset.
Under IFRSs Ericsson has reversed impairment losses for test plants.
This is prohibited under US GAAP which reduces the US GAAP net
income.
OTHER
Capitalization of interest expenses
Under IFRSs, an entity can choose to capitalize the borrowing costs
where they are directly attributable to the acquisition, construction or
production of a qualifying asset. The Company has chosen to expense
the interest costs incurred. Such costs should be capitalized in ac-
cordance with US GAAP, and depreciated as the assets concerned are
used. As amortization exceed the capitalization during the year, the net
income is reduced by SEK 28 million according to US GAAP.
Provision for social security cost on stock based
compensation
Under IFRSs, the Company accrues social security costs on stock
based compensation during the vesting period. Provisions are adjust-
ed for movements in share price. Under US GAAP, no social security
cost is recorded until the options are exercised or matching of shares
takes place, which increases net income by SEK 52 million.
FIN 45
In accordance with IFRSs, a liability should be recognized to the extent
a company expects a loss and economic outflow of resources as a
result of the guarantee commitment.
Under US GAAP, FIN 45 requires a liability to be recognized at the
time a company issues a guarantee for the fair value of the obligations
assumed under certain guarantee agreements. The provisions for initial
recognition and measurement of guarantee agreements are effective
on a prospective basis for guarantees that are issued or modified after
December 31, 2002.
Three main areas; product warranties, inventory guarantees and
performance guarantees, fall within FIN 45 for Ericsson. For perfor-
mance guarantees, the maximum potential amount of future payments
under the guarantees calculated at fair value per December 31, 2005
was SEK 759 million. Historically such guarantees have only been drawn
in rare cases, and there is no indication of changes in the future.
The application of FIN 45 did not have a material effect on the Com-
pany’s earnings and financial position under US GAAP during 2005.
FIN 46R
FIN 46R addresses the consolidation of entities for which control is
achieved through means other than through voting rights or agreements
(“variable interest entities” or “VIE”) by clarifying the application of Ac-
counting Research Bulletin No. 51, “Consolidated Financial Statements”
to certain entities in which equity investors do not have the character-
istics of a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without additional subordi-
nated financial support from other parties.
FIN 46R provides guidance on how to determine when and which
business enterprise (the “primary beneficiary”) should consolidate the
VIE. In addition, FIN 46R requires that both the primary beneficiary and
all other enterprises with a significant variable interest in a VIE make
additional disclosures. The application of FIN 46R during 2005 did not
have a material effect on the Company’s consolidated financial state-
ments under US GAAP.
86
Deferred tax effect related to intercompany profits in
inventory
According to IFRSs, deferred tax effect related to intercompany profits
in inventory is recognized at the buyer’s tax rate, whereas under
US GAAP the seller’s tax rate is used. The effect of this difference
decreased net income according to US GAAP in 2005 by SEK 35 mil-
lion.
Deferred income taxes
Deferred tax is calculated on US GAAP adjustments, and the US GAAP
balance sheet reflects the gross recognition of deferred tax assets and
liabilities.
Adjustment of net income, comprehensive income,
equity and balance sheet items
Application of US GAAP as described above would have had the fol-
lowing effects on consolidated net income. In arriving at the individual
items increasing or decreasing reported net income, consideration has
been given to the effect of minority interests.
Adjustment of Net Income
Net income attributable to stockholders
of the parent company per IFRSs
US GAAP adjustments before taxes:
Pensions
Sale-leaseback
Hedging
Capitalization of development costs
Restructuring costs
Unrealized gains and losses on
available-for-sale securities
Reversals of impairment losses
Other
Tax effect of US GAAP adjustments
Net income in accordance
with US GAAP
Earnings per share
in accordance with US GAAP
Earnings per share
per US GAAP, basic
Earnings per share
per US GAAP, diluted
Average number of shares,
basic per US GAAP (million)
Average number of shares, diluted
per US GAAP (million)
2005
2004
24,315
17,539
–64
191
408
–78
120
–
–380
56
–73
–245
352
–2,915
–76
–1,354
–82
–
82
1,085
24,495
14,386
1,55
0.91
1,54
0.91
15,843
15,829
15,907
15,855
Comprehensive Income
Comprehensive income includes net income and other changes in
equity, except those resulting from transactions with owners.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Net income in accordance
with US GAAP
Other comprehensive income
Translation adjustments
Translation adjustments for sold/
liquidated companies
Net gain on cash flow hedges
Hedging for investments
Unrealized gains and losses on
securities available-for-sale
Pensions
Deferred income taxes
Total other comprehensive income
Comprehensive income in
accordance with US GAAP
Adjustment of Stockholders’ Equity
Equity attributable to stockholders
of the parent company per IFRSs
US GAAP adjustments before taxes:
Pensions
Goodwill
Sale-leaseback
Derivatives
Capitalization of development costs
Restructuring costs
Unrealized gains and losses on
available-for-sale securities
Reversals of impairment losses
Other
Deferred tax effect of US GAAP
adjustments
Stockholders' equity in
accordance with US GAAP
2005
2004
24,495
14,386
4,052
–1,015
127
–2,991
–197
–208
–3,344
1,936
–625
47
1,010
–232
202
–329
160
–157
23,870
14,229
2005
2004
104,677
80,445
–2,458
2,705
–837
–
–154
208
–
–380
246
949
2,705
–1,028
1,604
–76
88
411
–
190
631
–919
104,638
84,369
Balance Sheet
Balance sheet items according to IFRSs and US GAAP:
IFRSs
US GAAP
Dec. 31 Dec. 31 Dec. 31 Dec. 31
2004
2005
53,435
50,676
158,153 136,886 158,153 139,428
208,829 186,186 211,042 192,863
2005
52,889
2004
49,300
104,677
850
21,345
81,957
80,445 104,638
850
22,680
82,874
1,057
35,347
69,337
84,369
1,057
36,880
70,557
208,829 186,186 211,042 192,863
Non-current assets
Current assets
Total assets
Stockholders’ equity
attributable to
stockholders of the
parent company
Minority interests
Non-current liabilities
Current liabilities
Total stockholders’
equity and liabilities
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
87
2004
2005
14,386
24,495
Consolidated
Net income
Net income per US GAAP
Adjustment for recognitions
of provisions per SFAS123
Net income, adjusted, per US GAAP
Earnings per share, diluted
Earnings per share per US GAAP
Earnings per share, adjusted,
per US GAAP
The fair value of each option grant is estimated on the date of the grant,
using the Black & Scholes’ option pricing model with the following
weighted-average assumptions:
–15
24,480
–80
14,306
1.54
1.54
0.90
0.91
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected life of option (in years)
1) No option programs were initiated during 2004 and 2005.
2005 1) 2004 1)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Stock Purchase Plans
For the stock purchase plans, Ericsson has applied SFAS 123 accord-
ing to US GAAP and IFRS 2 according to IFRSs. The stock purchase
plans have been expensed in the income statement according to both
IFRSs and US GAAP. The costs are based on the fair value at investment
date and charged against equity and accordingly we have not identified
any differences between IFRS and US GAAP.
Share Based Compensation
Stock Option Plan
Ericsson adopted IFRS 2 “Share-based Payments” in January 1, 2004
with the optional exception to apply IFRS 2 only to equity instruments
granted after November 7, 2002. For one employee option program,
granted after this date, and not yet vested by January 1, 2005, Ericsson
recognized a charge to income representing the fair value at grant date
of the outstanding employee options. The impact on the operating
profit was a charge of SEK 45 million in 2004 and SEK 14 million in
2005.
Up until 2003, the Company, as permitted under SFAS 123 “Ac-
counting for Stock Based Compensation”, applied Accounting Princi-
ples Board Opinion 25 (APB 25) and related interpretations in account-
ing for its stock option plans under US GAAP. No compensation
expense was reflected in the consolidated income statement as no
compensation expense arose when the strike price of the employee’s
stock options equaled the market value of the underlying stock at grant
date, as in the case of all options granted to Ericsson’s employees.
Ericsson adopted during 2003 SFAS 148 “Accounting for Stock-
Based Compensation-Transition and Disclosure, an amendment of
FASB Statement No. 123”. The adoption method chosen was the “Pro-
spective method”. This method states that the recognition provisions
shall be applied to all employee awards granted, modified, or settled
after the beginning of the fiscal year in which the recognition provisions
are first applied. As the Company has had no changes to it’s current
stock option plans nor any new stock option plans started after imple-
menting SFAS 148 there has been no effect to the income according
to US GAAP.
If the Company had chosen to adopt the optional recognition provi-
sions of SFAS 123 for its stock option plans, net income (loss) and
earnings (loss) per share in accordance with US GAAP would have been
changed to the amounts indicated below:
88
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
PARENT COMPANY
INCOME STATEMENT
Years ended December 31, SEK million
Net sales
Cost of sales
Gross margin
Selling expenses 1)
Administrative expenses
Operating expenses
Other operating revenues and costs
Operating income
Financial income
Financial expenses
Income after financial items
Transfers to (–)/from untaxed reserves
Changes in depreciation in excess of plan
Changes in other untaxed reserves
Taxes
Net income
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Note
P2
P3
P4
P4
P15
P15
P5
2005
1,096
–621
475
148
–796
–648
3,365
3,192
13,535
–2,700
14,027
10
–57
–47
–581
13,399
2004
2,598
–2,238
360
–613
–989
–1,602
2,890
1,648
11,008
–5,251
7,405
53
1,137
1,190
–1,435
7,160
1) Selling expenses included the net effect of risk provisions for customer financing of SEK 782 million in 2005 (SEK –343 million in 2004).
PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
89
PARENT COMPANY
BALANCE SHEET
December 31, SEK million
ASSETS
Fixed assets
Intangible assets
Tangible assets
Financial assets
Investments
Subsidiaries
Joint ventures and associated companies
Other investments
Receivables from subsidiaries
Customer financing, non-current
Deferred tax assets
Other financial assets, non-current
Current assets
Inventories
Receivables
Accounts receivable – trade
Customer financing, current
Receivables from subsidiaries
Other current receivables
Short-term cash investments
Cash and bank
Total assets
Note
2005
2004
P6
P7, P26
P8, P9
P8, P9
P8
P12
P8
P5
P8
P10
P11
P12
P13
P19
P19
18
318
40
344
53,066
4,474
18
54,413
1,231
877
357
114,772
48,860
4,474
12
48,535
1,964
2,527
451
107,207
60
40
27
1,285
21,076
3,656
64,172
10,790
101,066
215,838
194
683
15,667
8,203
63,924
7,772
96,483
203,690
90
December 31, SEK million
STOCKHOLDERS’ EQUITY, PROVISIONS AND LIABILITIES
Stockholders’ equity
Capital stock
Share premium reserve
Revaluation reserve
Statutory reserve
Restricted equity
Retained earnings
Net income
Non-restricted equity
Untaxed reserves
Provisions
Pensions
Other provisions
Non-current liabilities
Notes and bond loans
Liabilities to financial institutions
Liabilities to subsidiaries
Other non-current liabilities
Current liabilities
Current maturities of long-term borrowings
Current liabilities to financial institutions
Accounts payable – trade
Liabilities to subsidiaries
Other current liabilities
Total stockholders’ equity, provisions and liabilities
Assets pledged as collateral
Contingent liabilities
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Note
P14
P15
P16
P17
P18
P18
P12
P18
P18
P21
P12
P20
P22
P23
2005
2004
16,132
–
20
31,472
47,624
15,570
13,399
28,969
76,593
986
415
1,391
1,806
11,811
67
41,011
134
53,023
9,582
–
161
68,528
5,159
83,430
215,838
421
7,545
16,132
24,731
20
6,741
47,624
8,979
7,160
16,139
63,763
939
861
2,195
3,056
19,844
116
33,840
106
53,906
699
322
175
77,600
3,230
82,026
203,690
807
7,025
PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
91
PARENT COMPANY
STATEMENT OF CASH FLOWS
Years ended December 31, SEK million
OPERATIONS
Net income
Adjustments to reconcile net income to cash
Changes in operating net assets
Inventories
Customer financing, current and non-current
Accounts receivable–trade
Provisions and pensions
Other operating assets and liabilities, net
Cash flow from operating activities
INVESTMENTS
Investments in tangible assets
Sales of tangible assets
Acquisitions and sales of shares and other investments, net
Lending, net
Other
Cash flow from investing activities
Notes
P24
P24
2005
13,399
–5,966
7,433
–20
757
27
–1,250
7,276
14,223
–76
–
2,498
–4,127
124
–1,581
2004
7,160
1,129
8,289
–37
1,137
495
–975
–3,756
5,153
–50
70
9,136
–5,536
1,446
5,066
Cash flow before financing activities
12,642
10,219
FINANCING
Changes in current liabilities to financial institutions, net
Changes in current liabilities to subsidiaries
Proceeds from issuance of other non-current borrowings
Repayment of non-current borrowings
Sale of own stock
Dividends paid
Settled contributions from/to (–)subsidiaries
Other
Cash flow from financing activities
Net change in cash and cash investments
–322
–2,207
–
–699
119
–3,959
–2,299
–9
–9,376
3,266
–1,478
6,852
450
–12,263
15
–
–492
–
–6,916
3,303
Cash and cash investments, beginning of period
71,696
68,393
Cash and cash investments, end of period
P19
74,962
71,696
92
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
PARENT COMPANY
STATEMENT OF CHANGES
IN STOCKHOLDERS’ EQUITY
Years ended December 31, SEK million
Opening balance
Sale of own stock
Stock Purchase and Stock Option Plans
Contributions from/to subsidiaries
Tax on contributions
Dividends paid
Adjustment of accrued costs for stock issue 2002
Net income
Closing balance
Note
P14
2005
63,763
117
62
4,465
–1,254
–3,959
–
13,399
76,593
2004
61,257
15
27
–6,525
1,827
–
2
7,160
63,763
PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
93
94
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
NOTES TO THE PARENT COMPANY
FINANCIAL STATEMENTS
CONTENTS
P1 Significant Accounting Policies ................................................................................................................................................................................................ 96
P2 Segment Information ....................................................................................................................................................................................................................... 96
P3 Other Operating Revenues and Costs ................................................................................................................................................................................. 96
P4
Financial Income and Expenses .............................................................................................................................................................................................. 96
P5
Taxes ......................................................................................................................................................................................................................................................... 97
P6
Intangible Assets ................................................................................................................................................................................................................................ 97
P7
Tangible Assets ................................................................................................................................................................................................................................... 98
P8
Financial Assets .................................................................................................................................................................................................................................. 99
P9
Investments ........................................................................................................................................................................................................................................ 100
P10
Inventories ........................................................................................................................................................................................................................................... 102
P11 Accounts Receivable – Trade ................................................................................................................................................................................................. 102
P12 Receivables and Payables – Subsidiary companies ................................................................................................................................................ 102
P13 Other Current Receivables ....................................................................................................................................................................................................... 102
P14 Stockholders’ Equity .................................................................................................................................................................................................................... 102
P15 Untaxed Reserves .......................................................................................................................................................................................................................... 103
P16 Pensions ............................................................................................................................................................................................................................................... 103
P17 Other Provisions .............................................................................................................................................................................................................................. 104
P18
Interest-bearing Provisions and Liabilities ...................................................................................................................................................................... 104
P19 Financial Risk Management and Financial Instruments ......................................................................................................................................... 104
P20 Other Current Liabilities ............................................................................................................................................................................................................. 105
P21 Accounts Payable – Trade ........................................................................................................................................................................................................ 105
P22 Assets Pledged as Collateral .................................................................................................................................................................................................. 105
P23 Contingent Liabilities .................................................................................................................................................................................................................... 105
P24 Statement of Cash Flows ........................................................................................................................................................................................................... 106
P25 Leasing .................................................................................................................................................................................................................................................. 106
P26 Tax Assessment Values in Sweden ..................................................................................................................................................................................... 106
P27
Information Regarding Employees ...................................................................................................................................................................................... 106
P28 Fees to Auditors ...............................................................................................................................................................................................................................107
N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
95
STATEMENT OF CASH FLOWS
Cash and cash equivalents include financial instruments with maturity
up to 12 months from the balance sheet date.
P2 SEGMENT INFORMATION
NET SALES
Western Europe 1) 2)
Eastern Europe, Middle East & Africa
Latin America
Total
1) Of which Sweden
2) Of which EU
2005
41
1,047
8
1,096
41
41
2004
54
2,530
14
2,598
54
54
Parent Company sales are mainly related to business segment Systems.
P3 OTHER OPERATING
REVENUES AND COSTS
Royalties, license fees
and other operating revenues
Subsidiary companies
Other
Net losses (–) on sales of tangible assets
Total
P4 FINANCIAL INCOME
AND EXPENSES
Financial Income
Result from participations
in subsidiary companies
Dividends
Net gains on sales
Result from participations
in associated companies
Dividends
Net gains on sales
Result from other securities and
receivables accounted for as fixed assets
Dividends
Net gains on sales
Other interest income and
similar profit/loss items
Subsidiary companies
Other
Total
2005
2004
1,728
1,641
–4
3,365
1,683
1,237
–30
2,890
2005
2004
3,804
6,774
6,378
146
25
–
120
34
6
–
–
2
1,267
1,659
13,535
1,093
3,235
11,008
P1 SIGNIFICANT ACCOUNTING
POLICIES
The Parent Company, Telefonaktiebolaget LM Ericsson, has adopted
RR32 “Reporting in separate financial statements” from January 1,
2005. RR32 requires the Parent Company to use similar accounting
principles as for the Group, i.e. IFRS to the extent allowed by RR32. The
adoption of RR32 has not had any effect on reported profit or loss for
2004 and 2005.
The main deviations between accounting policies adopted for con-
solidation and accounting policies for the Parent Company are:
SUBSIDIARIES, ASSOCIATED COMPANIES AND JOINT
VENTURES
The investments are accounted for according to the acquisition cost
method. Investments are carried at cost and only dividends are ac-
counted for in the income statement. An impairment test is performed
annually and write-downs are made when permanent decline in value
is established.
CLASSIFICATION AND MEASUREMENT OF FINANCIAL
INSTRUMENTS
Short term cash investments, interest and foreign exchange derivatives
are carried at lowest of amortized cost and fair value.
Derivative instruments are used to hedge foreign exchange and
interest rate risk.
Foreign exchange derivatives are recognized in the balance sheet
at fair value to offset value changes in the hedged item. Effects from
foreign exchange derivatives hedging future transactions are deferred
to offset the hedged transaction. Interest rate derivatives hedging loans
or investments are valued in the same way as the underlying transaction.
Bonds issued by Ericsson are carried at amortized cost.
IAS 39 “Financial Instruments, Recognition and Measurement” will
be adopted, to the extent allowed by the Annual Accounts Act, from
January 1, 2006.
LEASING
The Parent Company has one rental agreement which is accounted for
as a finance lease in the consolidated statements and as an operating
lease in the Parent Company.
DEFERRED TAXES
The accounting of untaxed reserves in the balance sheet result in dif-
ferent accounting of deferred taxes as compared to the principles ap-
plied in the consolidated statements. Swedish GAAP and tax regula-
tions require a company to report certain differences between the tax
basis and book value as an untaxed reserve in the balance sheet of the
stand-alone financial statements. Changes to these reserves are re-
ported as an addition to, or withdrawal from, untaxed reserves in the
income statement.
PENSIONS
Pensions are accounted for in accordance with the recommendation FAR
4 “Accounting for pension liability and pension cost” from the Swedish
Insitute of Authorised Public Accountants. According to RR 32, IAS 19
shall be adopted regarding supplementary disclosures when applicable.
96
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Financial Expenses
Losses on sales of participations
in subsidiary companies
Write-down of investments
in subsidiary companies
Losses on sale of participations
in other companies
Write-down of participations
in other companies
Interest expenses and
similar profit/loss items
Subsidiary companies
Other
Other financial expenses
Total
Financial Net
2005
2004
–14
–295
A reconciliation between actual tax income (–expense) for the year and
the theoretical tax income (–expense) that would arise when applying
statutory tax rate in Sweden, 28 percent, on income before taxes, is
shown in the table:
–106
–861
Income before taxes
–7
–
–
–5
–1,115
–1,445
–13
–2,700
10,835
–1,178
–2,896
–16
–5,251
5,757
Tax rate in Sweden (28%)
Current income taxes related to prior years
Tax effect of expenses that are non-
deductible for tax purpose
Tax effect of income that are non-
taxable for tax purpose
Tax effect related to write-downs
of investments in subsidiary companies
Taxes
2005
13,980
2004
8,595
–3,914
326
–2,407
–
–35
–597
3,072
1,810
–30
–581
–241
–1,435
Interest expenses on pension liabilities are included in the interest expenses shown
above.
Tax effect of expenses that are not deductible refers mainly to net
losses on sales of shares and other non-tax deductible expenses.
Tax effect of income that is non-taxable refers mainly to dividends,
profit on sales of shares and foreign taxes.
P5 TAXES
INCOME STATEMENT
The following items are included in Taxes:
Current inome tax on contributions, net
Other current income taxes for the year
Current income taxes related to prior years
Deferred tax income/expense (–)
related to temporary differences
Taxes
2005
1,254
–511
326
2004
–1,827
–489
–
BALANCE SHEET
Deferred tax assets and liabilities
Tax effects of temporary differences have resulted in deferred tax assets
as follows:
Deferred tax assets
2005
877
2004
2,527
–1,650
–581
881
–1,435
Deferred tax assets refer mainly to costs related to customer financing
and provisions for restructuring costs.
Deferred tax income and expenses
The amounts of deferred tax income and expenses are shown in the
following table:
At December 31, 2005 unutilized tax loss carryforwards amounted
to SEK 0 million (SEK 3,828 million 2004). The tax effect of these tax
loss carryforwards are included in deferred tax assets.
Deferred tax income
Deferred tax expenses
Deferred tax income/expense, net
2005
2
–1,652
–1,650
2004
1,180
–299
881
P6 INTANGIBLE ASSETS
PATENTS, LICENSES, TRADEMARKS AND SIMILAR
RIGHTS
Deferred tax expenses refer mainly to utilized tax loss carryforwards
and reversal of temporary differences regarding provisions for cus-
tomer financing commitments and provision for restructuring costs.
Accumulated acquisition costs
Opening balance
Closing balance
Accumulated amortization
Opening balance
Amortization for the year
Closing balance
Net carrying value
2005
2004
222
222
–182
–22
–204
18
222
222
–160
–22
–182
40
N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
97
Total
590
76
–24
–
642
–246
–97
19
–324
318
672
50
–132
–
590
–167
–111
32
–
–246
344
P7 TANGIBLE ASSETS
Land and
buildings
Other
equipment, tools
and installations
Construction
in process
23
–
–
–
23
–2
–
–
–2
21
23
–
–
–
23
–
–
–
–2
–2
21
522
15
–24
67
580
–244
–97
19
–322
258
559
6
–49
6
522
–167
–111
32
2
–244
278
45
61
–
–67
39
–
–
–
–
39
90
44
–83
–6
45
–
–
–
–
–
45
2005
Accumulated acquisition costs
Opening balance
Additions
Sales/disposals
Reclassifications
Closing balance
Accumulated depreciation
Opening balance
Depreciation for the year
Sales/disposals
Closing balance
Net carrying value
2004
Accumulated acquisition costs
Opening balance
Additions
Sales/disposals
Reclassifications
Closing balance
Accumulated depreciation
Opening balance
Depreciation for the year
Sales/disposals
Reclassifications
Closing balance
Net carrying value
98
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
P8 FINANCIAL ASSETS
INVESTMENTS IN SUBSIDIARY COMPANIES, JOINT VENTURES AND ASSOCIATED COMPANIES
Opening balance
Acquisitions and stock issues
Shareholders’ contribution
Write-downs
Sales
Closing balance
OTHER FINANCIAL ASSETS
Accumulated acquisition costs
Opening balance
Additions
Sales/repayments/deductions
Reclassifications
Translation difference for the year
Closing balance
Accumulated write-downs/allowances
Opening balance
Write-downs/allowances for the year
Sales/repayments/deductions
Reclassifications
Translation difference for the year
Closing balance
Net carrying value
Subsidiary companies
2004
58,991
4,443
–7,162
–861
–6,551
48,860
2005
48,860
6,959
63
–106
–2,710
53,066
Joint ventures
2004
4,136
–
–
–
–
4,136
2005
4,136
–
–
–
–
4,136
Associated companies
2004
371
–
3
–
–36
338
2005
338
–
–
–
–
338
Other investments in shares
and participations
2004
2005
Customer financing,
non-current1)
2004
2005
Other financial
assets, non-current
2004
2005
18
13
–7
–
–
24
–6
–
–
–
–
–6
18
20
–
–2
–
–
18
–3
–5
2
–
–
–6
12
5,906
496
–3,763
–697
233
2,175
–3,942
–52
2,596
560
–106
–944
1,231
5,593
1,315
–738
–147
–117
5,906
–3,570
–547
109
4
62
–3,942
1,964
451
788
–650
–236
4
357
–
–
–
–
–
–
357
476
205
–228
–
–2
451
–
–
–
–
–
–
451
1) From time to time, customer financing amounts may include equity instruments or equity-related instruments in our customers due to reconstruction activities of troubled
receivables. We sometimes receive such instruments as security for our receivable and our policy is to sell them as soon as feasible.
N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
99
P9 INVESTMENTS
The following listing shows certain shareholdings owned directly and
indirectly by the Parent Company as of December 31, 2005. A complete
listing of shareholdings, prepared in accordance with the Swedish An-
nual Accounts Act and filed with the Swedish Companies Registration
SHARES OWNED DIRECTLY BY THE PARENT COMPANY
Office (Bolagsverket), may be obtained upon request to: Telefonak-
tiebolaget LM Ericsson, External & Management Information, SE-164 83
Stockholm, Sweden.
Domicile
Sweden
Sweden
Sweden
Sweden
Sweden
Sweden
Sweden
Sweden
Sweden
Austria
Denmark
Finland
France
Germany
Hungary
Ireland
Italy
The Netherlands
Norway
Russia
Switzerland
United Kingdom
United States
Argentina
Brazil
Mexico
Australia
China
China
China
India
Malaysia
Singapore
Taiwan
Thailand
Par value
in local
currency,
million
Carrying
value,
SEK m.
Percentage
of ownership
100
100
100
100
100
100
100
100
100
–
100
100
100
100
100
100
100
53 1)
100
100
100
100
100
–
100
95 2)
22 3)
100
–
100
100
100
25 4)
100
70
100
80
49 5)
–
50
361
360
30
100
14
105
162
5
–
4
90
13
26
20
2,552
2
–
222
156
5
–
74
–
–
5
–
n/a
–
20
2
65
5
725
2
–
240
90
–
–
20,645
7,216
335
152
102
6
131
324
5
2,028
665
216
196
524
343
120
15
3,151
3,200
237
5
–
758
218
9,531
10
368
1,550
59
100
2
475
37
147
4
1
20
17
153
53,066
Reg. No.
556056-6258
556251-3266
556090-3212
556028-1627
556329-5657
556030-9899
556381-7666
556381-7609
556326-0552
I
I
I
II
I
I
II
I
II
I
I
I
II
Type Company
Subsidiary companies
Ericsson AB
I
Ericsson Shared Services AB
I
Ericsson Enterprise AB
I
Ericsson Microwave Systems AB
I
Ericsson Sverige AB
I
AB Aulis
II
LM Ericsson Holding AB
II
Ericsson Gämsta AB
III
Ericsson Credit AB
III
Other (Sweden)
Ericsson Austria GmbH
Ericsson Danmark A/S
Oy LM Ericsson Ab
Ericsson Participations France SAS
Ericsson GmbH
Ericsson Hungary Ltd.
LM Ericsson Holdings Ltd.
Ericsson S.r.l.
Ericsson Holding International B.V.
Ericsson A/S
Ericsson Corporatio AO
Ericsson AG
Ericsson Holding Ltd.
Other (Europe, excluding Sweden)
Ericsson Holding II Inc.
Cía Ericsson S.A.C.I.
Ericsson Telecommunicações S.A.
Teleindustria Ericsson S.A.
Other (United States, Latin America)
Teleric Pty Ltd.
Ericsson Ltd.
Ericsson (China) Company Ltd.
Nanjing Ericsson Panda Communication Co. Ltd.
Ericsson India Private Ltd.
Ericsson (Malaysia) Sdn. Bhd.
Ericsson Telecommunications Pte. Ltd.
Ericsson Taiwan Ltd.
Ericsson (Thailand) Ltd.
Other countries (the rest of the world)
Total
II
I
I
I
I
I
I
I
I
II
I
I
I
100
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
SHARES OWNED DIRECTLY BY THE PARENT COMPANY (CONTINUED)
Type Company
Joint ventures and associated companies
I
I
Sony Ericsson Mobile Communications AB
Ericsson Nikola Tesla d.d.
Other
Total
Reg. No.
Domicile
556615-6658
Sweden
Croatia
SHARES OWNED BY SUBSIDIARY COMPANIES
Par value
in local
currency,
million
Carrying
value,
SEK m.
Percentage
of ownership
50
49
–
50
131
–
–
4,136
330
8
4,474
Company
Type
Subsidiary companies
I
II
I
I
I
I
II
I
I
I
I
I
I
I
I
I
I
I
I
I
I
Ericsson Network Technologies AB
Ericsson Cables Holding AB
Ericsson France SAS
LM Ericsson Ltd.
Ericsson Telecommunicazioni S.p.A.
Ericsson S.p.A
Ericsson Nederland B.V.
Ericsson Telecommunicatie B.V.
Ericsson España S.A.
Ericsson Telekomunikasyon A.S.
Ericsson Ltd.
Ericsson Canada Inc.
Ericsson Inc.
Ericsson NetQual Inc.
Ericsson IP Infrastructure Inc.
Ericsson Amplified Technologies Inc.
Ericsson Servicos de Telecomunicações Ltda.
Ericsson Australia Pty. Ltd.
Ericsson (China) Communications Co. Ltd.
Nippon Ericsson K.K.
Ericsson Consumer Products Asia Pacific Pte Ltd.
Reg. No.
Domicile
Percentage
of ownership
556000-0365
556044-9489
Sweden
Sweden
France
Ireland
Italy
Italy
The Netherlands
The Netherlands
Spain
Turkey
United Kingdom
Canada
United States
United States
United States
United States
Brazil
Australia
China
Japan
Singapore
100
100
100
100
99
99
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Key to type of company
1) Through subsidiary holdings, total holdings amount to 100% of Ericsson S.r.l.
I Manufacturing, distribution and development companies
2) Through subsidiary holdings, total holdings amount to 100% of Cia Ericsson S.A.C.I.
II Holding companies
III Finance companies
3) Through subsidiary holdings, total holdings amount to 100% of Ericsson Telecommunicações S.A.
4) Through subsidiary holdings, total holdings amount to 51% of Nanjing Ericsson Panda Communi-
cation Co. Ltd.
5) Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd.
N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
101
P13 OTHER CURRENT
RECEIVABLES
Receivables from associated
companies and joint ventures
Prepaid expenses
Accrued revenues
Derivatives with a positive value
Other
Total
2005
2004
171
741
820
1,516
408
3,656
24
543
893
6,144
599
8,203
P14 STOCKHOLDERS’ EQUITY
CAPITAL STOCK 2005
Capital stock at December 31, 2005, consisted of the following:
Class A shares 1)
Class B shares 1)
Number Aggregate
of shares par value
1,309
14,823
16,132
1,308,779,918
14,823,478,760
16,132,258,678
1) Class A shares (par value SEK 1.00) and Class B shares (par value SEK 1.00 being
the same as the quota value).
P10 INVENTORIES
Finished products
and goods for resale
Contract work in progress
Inventories, net
2005
2004
47
13
60
20
20
40
P11 ACCOUNTS RECEIVABLE
– TRADE
Trade receivables excluding
associated companies
Provision for impairment
of receivables
Trade receivables, net
Trade receivables from
associated companies
and joint ventures
Total
2005
2004
38
444
–13
25
–275
169
2
27
25
194
P12 RECEIVABLES AND
PAYABLES – SUBSIDIARY
COMPANIES
Non-current Receivables 1)
Financial receivables
Current Receivables
Commercial receivables
Financial receivables
Total
Non-current Liabilities 1)
Financial liabilities
Current Liabilities
Commercial liabilities
Financial liabilities
Total
2005
2004
54,413 48,535
1,013
20,063
21,076
874
14,793
15,667
41,011 33,840
85
135
68,393
77,515
68,528 77,600
1) Including non interest-bearing receivables and liabilities, net, amounting to
SEK –29,051 million (SEK –21,940 million in 2004). Interest-free transactions
involving current receivables and liabilities may also arise at times.
102
CHANGES IN STOCKHOLDERS’ EQUITY
Share Revalua-
tion Statutory restricted
equity
reserve
reserve
Total Disposi-
tion
reserve
20
–
–
–
–
–
–
–
20
20
–
–
–
–
–
–
20
Capital premium
reserve 1)
stock
2005
January 1, 2005
Sale of own stock
Stock purchase and stock option plans
Dividends paid
Transfer to statutory reserve
Contributions from/to (–)
subsidiary companies
Tax on contributions
Net income 2005
December 31, 2005
16,132
–
–
–
–
–
–
–
16,132
24,731
–
–
–
–24,731
–
–
–
–
2004
January 1, 2004
Sale of own stock
Stock purchase and stock option plans
Adjustment of accrued costs
for stock issue 2002
Contributions from/to (–)
subsidiary companies
Tax on contributions
Net income 2004
December 31, 2004
16,132
–
–
24,729
–
–
–
2
–
–
–
16,132
–
–
–
24,731
1) 1996 and prior years’ share premium are included in Statutory reserve.
P15 UNTAXED RESERVES
2005
Accumulated depreciation in excess of plan
Intangible assets
Tangible assets
Total accumulated depreciation in excess of plan
Other untaxed reserves
Reserve for doubtful receivables
Total other untaxed reserves
Total untaxed reserves
Changes in other untaxed reserves in 2004 consisted of: withdrawals
from reserve for doubtful receivables, SEK 363 million and withdrawals
of income deferred reserve SEK 774 million. Deferred tax liability on
untaxed reserves, not accounted for in deferred taxes, amounts to SEK
276 million in 2005 (SEK 263 million in 2004).
P16 PENSIONS
Cash of SEK 524 million was transferred into the Swedish pension trust
in January 2005, of which SEK 104 million is accounted for as prepaid
expenses.
Pension obligations are calculated annually, on the balance sheet
date, based on actuarial principles.
FPG/PRI pensions
Other pension commitments
Total
Pension trust plan assets
Reclassification
Total
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Other
Non-
retained restricted
equity
earnings
16,039
117
62
–3,959
–
4,465
–1,254
13,399
28,869
16,139
117
62
–3,959
–
4,465
–1,254
13,399
28,969
Total
63,763
117
62
–3,959
–
4,465
–1,254
13,399
76,593
13,535
15
27
13,635
15
27
61,257
15
27
6,741
–
–
–
24,731
–
–
–
31,472
47,624
–
–
–
–
–
–
–
47,624
6,741
–
–
47,622
–
–
100
–
–
–
–
–
–
–
100
100
–
–
–
2
–
–
–
2
–
–
–
6,741
–
–
–
47,624
–
–
–
100
–6,525
1,827
7,160
16,039
–6,525
1,827
7,160
16,139
–6,525
1,827
7,160
63,763
Additions/
Jan. 1 withdrawals (–)
Dec. 31
16
–4
12
927
927
939
–
–10
–10
57
57
47
16
–14
2
984
984
986
2004
419
442
861
–
–
861
2005
449
415
864
–553
104
415
N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
103
P17 OTHER PROVISIONS
2005
Opening balance
Additions
Costs incurred
Reversal of excess amounts
Reclassification
Closing balance
2004
Opening balance
Additions
Costs incurred
Reversal of excess amounts
Closing balance
Warranty
commitments
Restruc-
turing
Customer
financing
1
–
–
–
–
1
–
1
–
–
1
1,107
178
–305
–126
–91
763
1,465
357
–588
–127
1,107
478
39
–113
–94
–
310
1,431
103
–593
–463
478
Other
609
–
–
–292
–
317
287
477
–155
–
609
Total other
provisions
2,195
217
–418
–512
–91
1,391
3,183
938
–1,336
–590
2,195
P19 FINANCIAL RISK
MANAGEMENT AND FINANCIAL
INSTRUMENTS
CASH AND BANK AND SHORT-TERM CASH
INVESTMENTS
During 2005, cash and bank and short-term cash investments in-
creased by SEK 3.3 billion to SEK 75.0 billion mainly due to positive
cash flow, which was partly offset by repayment of long-term borrowings
and payment to the Swedish Pension Trust.
SEK billion
Bank deposits
Type of issuer/
counterpart
Governments
Banks
Corporations
Mortgage institutes
Liquidity funds
Total
Remaining time to maturity
< 1
> 5
year years years 2005 2004
4.0
< 3
months
6.3
1–5
6.3
–
–
–
3.5
0.2
32.0
0.2
4.5
3.1
–
11.4
0.7
–
46.7 15.2
–
–
9.7
2.4
–
12.1
–
–
9.6
6.6
8.8
0.2
1.0 54.1 37.2
3.3
8.4
3.7
4.5
1.0 75.0 71.7
–
–
RE-FINANCING RISK
Re-financing risk is the risk that Ericsson is unable to refinance out-
standing borrowings at reasonable terms and conditions, or at all, at a
given point in time.
P18 INTEREST-BEARING
PROVISIONS AND LIABILITIES
The Parent Company’s outstanding interest-bearing provisions and li-
abilities, excluding liabilities to subsidiaries, were SEK 21.9 billion as of
December 31, 2005.
INTEREST-BEARING PROVISIONS AND LIABILITIES
Current liabilities to
financial institutions
Current maturities of
long term borrowings 1)
Total current interest-bearing
provisions and liabilities
Notes and bond loans
Liabilities to financial
institutions
Pensions
Total non-current interest-bearing
provisions and liabilities
Total interest-bearing
provisions and liabilities
2005
2004
–
322
9,582
699
9,582
1,021
11,811 19,844
67
415
116
861
12,293
20,821
21,875
21,842
1) Including note and bond loans of SEK 9,535 million 2005 and SEK 651 million 2004.
LIABILITIES TO FINANCIAL INSTITUTIONS, INTEREST RATE BY
CURRENCY
Maturing >1<5 years
Interest
rate (%)
2.6%
–
Nominal
67
67
SEK
Total
104
REPAYMENT SCHEDULE OF LONG-TERM BORROWINGS
Current
maturities
of long
Notes
and bonds
term debt (non-current)
–
–
3.1
3.8
4.4
0.5
11.8
9.6
–
–
–
–
–
9.6
Liabilities
to financial
institutions
(non-current)
–
0.1
–
–
–
–
0.1
Total
9.6
0.1
3.1
3.8
4.4
0.5
21.5
SEK billion
2006
2007
2008
2009
2010
2011+
Total
Debt financing is mainly carried out through borrowing in the Swedish
and international debt capital markets.
FUNDING PROGRAMS
Euro Medium Term Note program
(USD m.)
Euro Commercial Paper program
(USD m.) 1)
Swedish Commercial Paper program
(SEK m.) 1)
Long-term Committed Credit facility
(USD m.)
Shot-term Committed Credit facilities
(SEK m.)
Amount Utilized Unutilized
5,000
2,303
2,697
1,500
5,000
1,000
183
–
–
–
–
1,500
5,000
1,000
183
1) Currently unavailable due to low short term rating.
FINANCIAL INSTRUMENTS CARRIED
AT OTHER THAN FAIR VALUE
In the following tables, carrying amounts and fair values of financial
instruments, that are carried in the financial statements at other than
fair values, are presented. For valuation principles, please see Notes
to the Parent Company Financial Statements – Note P1, “Significant
Accounting policies”.
FINANCIAL INSTRUMENTS CARRIED AT OTHER THAN FAIR
VALUE
SEK billion
Current maturities of
long term borrowings
Notes and bonds
Carrying amount
2004
2005
Fair value
2004
2005
9.6
11.8
21.4
0.7
19.8
20.5
9.7
13.0
22.7
0.7
21.6
22.3
Financial instruments excluded from the tables, such as trade receiv-
ables and payables are carried at fair value. When a market price is not
readily available and there is insignificant interest rate exposure affect-
ing the value, the carrying value is considered to represent a reasonable
estimate of a fair value.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
P20 OTHER CURRENT
LIABILITIES
Liabilities to associated
companies and joint ventures
Accrued interest
Accrued expenses, of which
employee related
supplier invoices
not received
other accrued expenses
Deferred revenues
Derivatives with a negative value
Other current liabilities
Total
2005
2004
74
737
7
798
246
203
44
–
112
3,570
376
5,159
–
207
254
1,564
197
3,230
P21 ACCOUNTS PAYABLE
– TRADE
Accounts and notes payable excluding
associated companies and joint ventures
Total
2005
2004
161
161
175
175
P22 ASSETS PLEDGED AS
COLLATERAL
Chattel mortgages
Bank deposits
Total
2005
–
421
421
2004
460
347
807
The chattel mortgage was collateral for pension commitments 2004.
The major item in bank deposits is for the internal bank’s clearing and
settlement commitments SEK 165 million in 2005 (SEK 149 million in
2004).
P23 CONTINGENT LIABILITIES
Guarantees for customer financing
Other contingent liabilities
Total
2005
67
7,478
7,545
2004
64
6,961
7,025
Other contingent liabilities include pension commitments SEK 6,918
million in 2005 (SEK 6,282 million in 2004), and subsidiary companies
borrowing from financial institutions SEK 98 million in 2005 (SEK 73
million in 2004).
In accordance with standard industry practice, Ericsson enters into
Commercial Contract Guarantees related to contracts for the supply of
telecommunication equipment and services. Total amount for 2005
was SEK 15,412 million (SEK 13,292 million in 2004). Potential payments
N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
105
due under these bonds are related to Ericsson’s performance under
applicable contracts.
LEASING WITH THE PARENT COMPANY AS LESSOR
At December 31, 2005, future minimum payment receivables were dis-
tributed as follows:
2006
2007
2008
2009
2010
2011 and later
Operating
leases
39
28
26
18
–
–
111
The operating lease income is mainly income from sublease of prop-
erty.
P26 TAX ASSESSMENT VALUES
IN SWEDEN
Land and land improvements
Total
2005
11
11
2004
11
11
P27 INFORMATION REGARDING
EMPLOYEES
AVERAGE NUMBER OF EMPLOYEES
2005
2004
Men Women Total Men Women Total
366
108
159 267
196
170
Western Europe 1) 2)
Eastern Europe,
Middle East and
Africa
705
Total
813
1) Of which Sweden 108
2) Of which EU
108
21 726
180 993
159 267
159 267
492
688
196
196
21
191
170
170
513
879
366
366
P24 STATEMENT OF CASH
FLOWS
Interest paid in 2005 was SEK 3,215 million (SEK 4,302 million in 2004)
and interest received was SEK 3,151 million (SEK 4,363 million in 2004).
Income taxes paid were SEK 65 million (SEK 259 million in 2004).
Major non-cash items in Investments are:
Acquisitions and sales of shares and other investments, net, SEK
3,214 million in 2005.
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
2005
2004
Tangible assets
Depreciation
Total
Intangible assets
Amortization
Total
Total depreciation and amortization
on tangible and intangible assets
Taxes
Write-downs and capital gains (–)/
losses on sale of fixed assets,
excluding customer financing, net
Additions to/withdrawals from (–)
untaxed reserves
Unsettled dividends
Total adjustments to reconcile net
income to cash
97
97
22
22
111
111
22
22
119
516
133
1,177
–6,643
1,009
47
–5
–1,190
–
–5,966
1,129
P25 LEASING
LEASING WITH THE PARENT COMPANY AS LESSEE
At December 31, 2005, future payment obligations for leases were
distributed as follows:
Operating
leases
1,253
1,096
972
796
727
1,703
6,547
2006
2007
2008
2009
2010
2011 and later
106
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
P28 FEES TO AUDITORS
Price-
waterhouse-
Coopers KPMG Others
Total
2005
Audit fees
Audit related fees
Tax services fees
Other fees
Total
2004
Audit fees
Audit related fees
Tax services fees
Total
2003
Audit fees
Audit related fees
Tax services fees
Other fees
Total
21
18
1
–
40
24
5
2
31
11
–
13
–
24
2
–
–
–
2
1
–
–
1
1
1
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23
18
1
–
42
25
5
2
32
12
1
13
–
26
ABSENCE DUE TO ILLNESS
percent of working hours
Absence due to illness for men
Absence due to illness for women
Employees up to 30 years old
Employees 30–49 years old
Employees 50 years or older
Long-term absence due to illness 1)
2005
1%
2%
–
2%
1%
0.5%
2004
1%
2%
–%
1%
1%
0.4%
1) Defined as absence during a consecutive period of time of 60 days or more.
REMUNERATION
WAGES AND SALARIES AND SOCIAL SECURITY EXPENSES
Wages and salaries
Social security expenses
Of which pension costs
2005
484
251
129
2004
453
311
214
WAGES AND SALARIES PER GEOGRAPHICAL AREA
Western Europe 1) 2)
Eastern Europe, Middle
East and Africa 2)
Total
1) Of which Sweden
2) Of which EU
2005
302
2004
314
182
484
302
302
139
453
314
314
Remuneration in foreign currency has been translated to SEK at average exchange
rates for the year.
COMPENSATION POLICIES AND REMUNERATION TO
THE BOARD OF DIRECTORS AND THE PRESIDENT
AND CEO
See Notes to the Consolidated Financial Statements, Note C29 – “In-
formation Regarding Employees, Members of the Board of Directors
and Management”.
LONG TERM INCENTIVE PLANS
The Stock Purchase Plan
Compensation costs for all employees of the Parent Company amounts
to SEK 8.9 million in 2005.
N O T E S T O T H E PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S
107
AUDITORS’ REPORT
To the Annual General Meeting of the shareholders of
Telefonaktiebolaget LM Ericsson (publ), corporate identity number
556016-0680
We have audited the annual accounts, the consolidated accounts, the
accounting records and the administration of the Board of Directors
and the President and CEO of Telefonaktiebolaget LM Ericsson (publ)
for the year 2005. The Board of Directors and the President and CEO
are responsible for these accounts and the administration of the Com-
pany, as well as for the application of the Annual Accounts Act when
preparing the annual accounts and the application of international fi-
nancial reporting standards (IFRSs) as adopted by the EU and the
Annual Accounts Act when preparing the consolidated accounts. Our
responsibility is to express an opinion on the annual accounts, the
consolidated accounts and the administration based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards in Sweden. Those standards require that we plan
and perform the audit to obtain reasonable assurance that the annual
accounts and the consolidated accounts are free of material misstate-
ment. An audit includes examining, on a test basis, evidence support-
ing the amounts and disclosures in the accounts. An audit also includes
assessing the accounting principles used and their application by the
Board of Directors and the President and CEO and significant estimates
made by the Board of Directors and the President and CEO when
preparing the annual accounts and consolidated accounts as well as
evaluating the overall presentation of information in the annual accounts
and the consolidated accounts. As a basis for our opinion concerning
discharge from liability, we examined significant decisions, actions
taken and circumstances of the Company in order to be able to deter-
mine the liability, if any, to the Company of any Board Member or the
President and CEO. We also examined whether any Board Member or
the President and CEO has, in any other way, acted in contravention of
the Companies Act, the Annual Accounts Act or the Articles of Asso-
ciation. We believe that our audit provides a reasonable basis for our
opinion set out below.
The annual accounts have been prepared in accordance with the
Annual Accounts Act and give a true and fair view of the company’s
financial position and results of operations in accordance with gener-
ally accepted accounting principles in Sweden. The consolidated ac-
counts have been prepared in accordance with international financial
reporting standards (IFRSs) as adopted by the EU and the Annual Ac-
counts Act and give a true and fair view of the Group’s financial position
and results of operations. The statutory Board of Directors’ report is
consistent with the other parts of the annual accounts and the con-
solidated accounts.
We recommend to the Annual General Meeting of shareholders that
the income statements and balance sheets of the Parent Company and
the group be adopted, that the profit of the Parent Company be dealt
with in accordance with the proposal in the Board of Directors’ report
and that the members of the Board of Directors and the President and
CEO be discharged from liability for the financial year.
Stockholm, February 24, 2006
Bo Hjalmarsson
Authorized Public Accountant
PricewaterhouseCoopers AB
Peter Clemedtson
Authorized Public Accountant
PricewaterhouseCoopers AB
Thomas Thiel
Authorized Public Accountant
108
A U D I T O R S ’ R E P O R T
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
INFORMATION ON THE COMPANY
GENERAL
Telefonaktiebolaget LM Ericsson (publ) is a limited liability company
organized under the Swedish Companies Act. The terms “Ericsson”,
“the Company”, “the Group”, “us”, “we”, “our” all refer to Telefonaktiebo-
laget LM Ericsson, the Parent Company and its subsidiaries. The com-
pany was incorporated on August 18, 1918, as a result of a merger
between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.
Our Class A and B shares are traded on Stockholmsbörsen (the Stock-
holm Stock Exchange, OMXS). Our Class B shares are also traded on
the London Stock Exchange (LSE). In the United States, our American
Depository Shares (ADS), each representing 10 underlying Class B
shares, are traded on NASDAQ.
Our registered address is Telefonaktiebolaget LM Ericsson, SE–
164 83 Stockholm, Sweden; our headquarters are located at Torsham-
nsgatan 23, Kista, Sweden. Our telephone number in Sweden is
+46 8 719 0000.
In the United States, our agent is Ericsson Inc., Vice President Legal
Affairs, 6300 Legacy Drive, Plano, Texas 75024. Our telephone number
in the U.S. is +1 972 583 0000.
Our web site is www.ericsson.com. Please note that information on
our web site does not form part of this document.
DOCUMENTS ON DISPLAY
We file annual reports and other information (normally in Swedish only)
for certain domestic legal entities with Bolagsverket (Swedish Compa-
nies Registration Office) pursuant to Swedish rules and regulations. You
may order any of these reports from their web site at www.bolagsverket.
se. If you access these reports, please be aware that the information
included may not be indicative of our published results in all aspects.
Only consolidated numbers for the group totals are included in our
reports.
We also file annual reports and other information with the Securities
and Exchange Commission (SEC) in the United States pursuant to the
rules and regulations that apply to foreign private issuers. Electronic
access to these documents may be obtained from the SEC’s website
at www.sec.gov/edgar/searchedgar/webusers.htm where they are
stored in the EDGAR database. You may read and copy any of these
reports at the SEC’s Public Reference Branch at 100 F Street, N.E.,
Washington, D.C. 20549, or obtain them by mail upon payment of their
prescribed rates. For further information, you can call the SEC at +1
800 732 0330.
HISTORY AND DEVELOPMENT
Our origins date back to 1876 when Lars Magnus Ericsson opened a
small workshop in Stockholm to repair telegraph instruments. That
same year in the United States, Alexander Graham Bell filed a patent
application for the telephone. Lars Magnus Ericsson soon recognized
the great potential of voice based telecommunications and realized that
the technology could be improved. He started to develop and sell his
own telephone equipment and within a few years reached an agreement
to supply telephones and switchboards to Sweden’s first telecom op-
erator. Stockholm soon had the highest telephone density in the
world.
Today, Ericsson is a leading provider of telecommunications equip-
ment and related services to mobile and fixed network operators glob-
ally. Over 1,000 networks in more than 140 countries utilize our network
equipment and we are one of the few companies worldwide that can
offer end-to-end solutions for all major mobile communication stan-
dards.
We invest heavily in R&D and actively promote standardization and
open systems. As a result, we have a long history of innovation and the
pioneering of “next generation” technologies for more efficient and
better quality telecommunications.
Telegraph to telephone
Milestones
1878
1923 Manual switching to automatic switching
1968 Electro-mechanical to computer control
1978 Analog switching to digital switching
1981 Fixed communications to mobile communications
1991 1G analog to 2G digital mobile technology
1998
1999 Narrowband circuit to broadband packet switching
1999
Introduction of fixed telephony softswitch
2001 2G narrowband to 3G wideband mobile technology
2003
2004 Mass commercial launch of WCDMA (3G) networks in Western
Integration of voice and data in mobile networks
Introduction of mobile softswitch
Europe
2005 Commercial launch of HSDPA mobile broadband networks in
North America
Also reflecting our ongoing commitment to technology leadership, we
have one of the industry’s most comprehensive intellectual property
portfolios containing over 20,000 patents.
Our vision – how we see the world
Our vision is to be the Prime Driver in an all-communicating world.
Core values – how we act
Professionalism, respect and perseverance are the cornerstones of the
Ericsson culture, guiding us in our daily work, both in how we relate to
people and how we conduct our business.
Results – how we measure our performance
We measure three fundamental metrics: customer satisfaction, em-
ployee satisfaction and financial returns. We believe that highly satisfied
customers, empowered employees and best-in-class operating mar-
gins help to assure an enduring capability for value creation and com-
petitive advantage.
BUSINESS STRATEGY AND LONG-TERM GOALS
Our overall goal is to be the preferred business partner to our custom-
ers, especially to the world’s leading network operators. In doing so,
we strive to be the market and technology leader by offering superior
end-to-end solutions mainly related to network infrastructure, network
management and other service offerings.
I N F O R M AT I O N O N T H E C O M PA N Y
109
We are a major supplier to most of the world’s leading mobile net-
work operators and many of the world’s leading fixed-line operators.
We believe that our ability to offer end-to-end solutions – systems, ap-
plications, services and core handset technology – together with our
in-depth knowledge of consumer requirements, make us well posi-
tioned to assist network operators with their network development and
operations. We are already a market leader in network systems integra-
tion and managed services. Through increased activities in profes-
sional services and service layer products, we aim for increased sales
in these growing segments.
Our strategy is to:
leadership;
• Lead market development through innovation and technological
• Leverage our economies of scale to develop superior products and
• Utilize operational excellence as a basis for sustainable and best-in-
services and thereby offer our customers competitive advantages;
class operating margins.
Innovation is an important element of our corporate culture and is key
to our competitiveness and future success. We have a long tradition of
developing innovative communication technologies, including tech-
nologies that help to establish industry standards. For example, we
helped pioneer the development of industry-wide wireless technologies
such as GSM, GPRS, EDGE, CDMA, WCDMA, HSDPA and Bluetooth.
We work closely with our customers to understand their businesses
and technology needs and provide tailored solutions to help them fulfill
their business objectives.
We will continue to devote significant resources to developing end-
to-end communications solutions that will stimulate network deploy-
ments for geographic coverage as well as traffic capacity and thereby
drive demand for our products and services.
Our expertise and experience in all major telecommunication stan-
dards along with our proven track record for quality and innovation have
allowed us to develop our business on a global basis. We have signifi-
cant sales in all of the largest geographic markets for telecommunica-
tions, with no individual country accounting for more than 12 percent
of sales.
We believe that our global presence and the economies of scale
associated with market share leadership give us competitive advan-
tages. Global presence is an important factor particularly when working
as a business partner to operators working in multiple markets or glob-
ally. We are utilizing our strong international presence and core compe-
tence in mobile and fixed communications to expand into growth areas
such as systems integration, service applications and managed ser-
vices. We also use our global reach to develop alliances with suppliers
and manufacturers in order to increase our combined effectiveness.
We will continue to improve our internal processes and support
systems to drive operational excellence as a competitive advantage. In
addition, we will continue to develop and maintain high levels of com-
petence in our employees to secure our leading market position and to
stay at the forefront of technological development.
110
BUSINESS OVERVIEW
Primary business offerings
We supply the network equipment and services that enable telecom-
munications. We offer end-to-end solutions for all major mobile com-
munication standards. We also provide our customers with services for
network operations and revenue generation. Through our Sony Erics-
son Mobile Communications joint venture we offer a range of mobile
handsets and other mobile devices, including those supporting multi-
media applications and other personal communication services. In
addition, the Company has products for special applications within
microwave (defense) systems, enterprise systems, network technolo-
gies (cables), mobile platforms and power modules.
For more Information on product offerings, see “Business Seg-
ments”
Customers
We are supplying equipment and services to almost all major network
operators globally. However, we derive most of our sales from large,
multi-year network build-out agreements with a limited number of sig-
nificant customers. Out of a customer base of more than 425 network
operators, the ten largest customers account for approximately 50
percent of our net sales, while the 20 largest customers account for
approximately 64 percent of our net sales. Our largest customer ac-
counted for approximately 9 percent of sales during 2005.
For more information, see “Risk Factors – Risks Associated with the
Industry and Market Conditions”.
Competitors
In our Systems segment, we compete mainly with large and well-es-
tablished communication equipment suppliers. Although competition
varies depending on the products, services and geographical regions,
our most significant competitors in wireless communication include
Alcatel, Lucent, Motorola, Nokia, Nortel and Siemens/NEC. With re-
spect to wireline communications equipment, the competition is also
highly concentrated and includes, among others, Alcatel, Cisco, Lucent,
Nortel and Siemens. We also compete with numerous local and re-
gional manufacturers and providers of communication equipment and
services. We believe the most important competitive factors in this in-
dustry include existing customer relationships, the ability to cost-ef-
fectively upgrade or migrate an installed base, technological innovation,
product design, compatibility of products with industry standards, and
the capability for end-to-end systems integration.
Competition in professional services not only includes many of our
traditional systems competitors but also a number of large companies
from other industry sectors, such as IS/IT, including IBM, EDS, Accen-
ture and electronics manufacturing services companies such as Flex-
tronics, as well as a number of smaller but specialized companies
operating on a local or regional basis. As this segment grows, we expect
to see additional competitors emerge, possibly including some network
operators attempting to expand into new segments.
In our Other Operations segment, our competitors vary widely de-
pending on the product or service being offered. We face significant
competition with regard to substantially all of these products and ser-
vices.
Within the Phones segment, the primary competitors include Nokia,
Motorola, Samsung, Siemens (BenQ) plus a number of other companies
such as LG Electronics, NEC and Sharp. Competition is intensifying
with consumer electronic companies, especially those based in Asia,
making significant market share gains. We believe that our mobile
phone joint venture with Japan’s SONY Corporation creates a distinct-
ive competitive advantage.
For more information, see “Risk Factors – Risks Associated with the
Industry and Market Conditions”.
Suppliers
We manufacture and assemble a large portion of our products in-house.
Most of our node production, i.e., assembly, integration and testing of
modular subsystems into complete system nodes such as radio base
stations, mobile switching centers etc., is done in-house. About half of
our module production, i.e., production of subsystems such as circuit
boards, radio frequency (RF) modules, antennas etc., is outsourced to
a group of electronics manufacturing services companies including
Elcoteq, Flextronics, Sanmina-SCI and Solectron, of which the vast
majority in low-cost countries. We also purchase customized and stan-
dardized equipment, components and services from several global
providers as well as from numerous local and regional suppliers. A
number of our suppliers design and manufacture highly specialized and
customized components for our end-to-end solutions as well as indi-
vidual nodes. We generally attempt to negotiate global supply agree-
ments with our primary suppliers. While we are not dependent on any
one supplier for the provision of standardized equipment or compo-
nents and seek to avoid single source supply situations, a need to swith
to an alternative supplier may require us to allocate additional resourc-
es to ensure that our technical standards and other requirements are
met. This process could take some time to complete. Accordingly, a
need to switch to an alternative supplier could potentially have an ad-
verse effect on our operations in the short term
For more information, see “Risk Factors – Risks Associated with the
Industry and Market Conditions”.
Seasonality
Our quarterly sales, income and cash flows from operations are sea-
sonal in nature and generally lower in the first and third quarters of the
year and highest in the fourth quarter. This is mainly a result of the
seasonal purchase patterns of network operators. Although demon-
strating a strong seasonal pattern historically, our seasonal sales vari-
ances have not conformed to the longer-term pattern during the market
downturn starting in 2001 and subsequent recovery during 2004. The
table below illustrates the long-term average seasonal effect on sales
for the period 1991 through 2005.
15-YEAR AVERAGE SEASONALITY
Sequential Change
Share of annual sales
First
quarter
–27%
21%
Second
quarter
17%
24%
Third
quarter
–5%
23%
Fourth
quarter
37%
32%
Compared to the 15-year historical pattern, the seasonality over the
last three years has generally been less pronounced with a more equal
distribution of sales between quarters. The table below illustrates the
average seasonal effect on sales for the years 2003, 2004 and 2005.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
MOST RECENT 3-YEAR AVERAGE SEASONALITY
Sequential Change
Share of annual sales
First
quarter
–24%
21%
Second
quarter
15%
25%
Third
quarter
–2%
24%
Fourth
quarter
26%
30%
BUSINESS SEGMENTS
Ericsson is a telecommunications company developing and selling a
variety of products aimed largely at customers in the telecommunica-
tions industry. When determining our operating segments, we have
looked at which market and to what type of customers our products
are aimed, and through what distribution channels they are sold as well
as to commonality regarding technology, research and development.
To best reflect our business focus and to facilitate comparability with
our peers, we consolidate the results of our operations into three busi-
ness segments:
1. Systems, consisting of a three-pronged business approach: Mobile
Networks, Fixed Networks and Professional Services;
2. Phones, carried out through the 50/50 joint venture with SONY Cor-
poration;
3. Other Operations, which comprise a number of smaller businesses
including Microwave Systems (Defense), Enterprise Systems, Net-
work Technologies (Cables), Mobile Platforms and Power Mod-
ules.
We group sales into five large geographical segments as shown be-
low:
2005 SALES BY REGION AND SEGMENT
SEK billion
Western Europe
CEMA 1)
Asia Pacific
North America
Latin America
Total
percent share
Other
Systems Operations
6.2
1.2
1.5
0.7
0.3
9.8
6%
35.7
38.8
29.9
18.8
18.8
142.0
94%
Total
41.9
39.9
31.4
19.4
19.1
151.8
100%
1) Central and Eastern Europe, Middle East and Africa.
Note: due to rounding, all rows and columns may not add up exactly to the totals.
Please also see “Notes to the Consolidated Financial Statements – Note
C4, Segment Information.”
Segment Systems
Mobile Networks
We provide mobile systems solutions to network operators that enable
reliable, efficient and cost effective wireless networking. Our systems
offerings include radio base stations, base station and radio network
controllers, mobile switching centers and service application nodes.
We are the market leader with approximately 30 percent global share
of the addressable market, i.e. open non-proprietary standards. Our
claim of market leadership in mobile systems is based on our reported
sales and how they relate to the publicly reported and estimated mobile
system sales of our main competitors. Statements from industry and
financial analysts also support our estimates. We have an even higher
share within the GSM/EDGE/WCDMA or GSM family. Our installed base
I N F O R M AT I O N O N T H E C O M PA N Y
111
of GSM radio base stations represents more than one-third of all GSM
radio base stations in service globally.
Each generation of wireless technology is associated with a group
of international standards for wireless communications networks. Tran-
sitioning from one generation to the next, such as from 2G to 3G, re-
quires network operators, equipment suppliers and mobile handset
manufacturers to adopt new and emerging technology standards. We
believe that the migration from voice services and basic mobile multi-
media services to mobile broadband is the primary technological shift
facing wireless network operators today. Our end-to-end solutions
offer operators a smooth network migration to 3G.
Our expertise in all 2G standards and our role in developing 3G
standards allow us to offer mobile telecommunications systems that
incorporate any of the major 2G (GSM, TDMA, CDMA), 2.5G (GPRS)
and 3G (EDGE, WCDMA, HSDPA, CDMA2000, TD-SCDMA) mobile
technology standards. As a result, we are able to offer tailored solutions
to a network operator, regardless of the existing network standard
used.
We offer a complete portfolio of radio base stations ranging from
small pico cells (i.e. small cells in a mobile network that boost capacity
and coverage within buildings) to high-capacity macro cell applications.
Radio base stations provide access and interconnection between mo-
bile handsets and the mobile network. A central feature of our 2G GSM
radio base stations and base station controllers is their ability to be
upgraded on a cost-effective basis to enable 2.5G/GPRS and 3G/EDGE
transmissions. Similarly, our WCDMA base stations can be upgraded
to HSDPA.
Other important elements of radio access networks are the control-
lers for radio base stations and radio access network, which manage
the traffic between the radio base stations and core networks. In 2G,
base station controllers in conjunction with mobile switching centers,
effect call handovers between radio base stations as subscribers move
between cell sites while engaged in a voice call or data transmission.
Similarly, in 3G networks, a radio network controller effects call hando-
ver in conjunction with mobility server nodes within the service layer.
The core network nodes interconnect radio access networks with
other parts of the network. Many of our core network switching systems,
controllers for base stations and radio networks are built upon common
platforms. Like our radio base station products, our mobile switching
products have industry-leading scalability and capacity.
Mobile network equipment and associated network rollout services
account for approximately three-quarters of our sales.
Fixed Networks
We are a supplier of broadband multi-service communications equip-
ment and services mainly to fixed network operators in Latin America
and Europe. We have a long history in fixed-line networking with an
installed base of access and transit lines equivalent to 180 million lines
or approximately 10 percent global market share of the installed base.
By successfully addressing three key operator needs: modernization
and expansion of the fixed telephony networks; introduction of IP-based
revenue generating services; and cost-efficient rollout of high capacity
broadband networks with service differentiation, we have been able to
secure a strong position in voice over packet, soft switching and public
Ethernet access.
Fixed network operators are moving from single-service networks
toward broadband packet-switched multi-service networks that have
112
the ability to simultaneously handle multiple services, such as voice,
data and images. Migration to an all-IP-based packet-switched network
is a necessary step in order to combine broadband Internet, voice and
image traffic into one multi-service network.
Our solution for such multi-service networks utilizes a layered soft-
switch service and control architecture, combined with broadband ac-
cess and core network routing and transmission elements. Organizing
a network into layers isolates the different functions, i.e., access, core
network and services and facilitates easier migration to an all-IP envi-
ronment. Due to our leadership in “next generation” mobile networks,
we are able to leverage our IP-based multimedia subsystem (IMS) de-
veloped for 3G networks for “next generation” fixed network applica-
tions. IMS is an open service layer platform that hosts IP based ser-
vices such as Voice over IP (VoIP), “push-to-talk” etc. Since our IMS
solution is common for both fixed and mobile networks, converged
services can be transparently provided independent of the type of ac-
cess.
Similar to our mobile network offering, we offer a suite of network
services and applications that enable network operators to provide a
range of services such as free-phone, virtual private network and oth-
er applications as well as billing.
Professional Services
As part of our Global Services business, our professional services
portfolio includes expertise in consulting, education, systems integra-
tion, managed services, network deployment and optimization and
technical support services.
Network operators are reducing operating expenses by optimizing
the operation and maintenance of their networks. As a result, many
network operators are increasingly outsourcing network design, op-
erations and maintenance activities. This trend also gives rise to new
business models such as managed capacity, where an operator buys
coverage, capacity and network performance, or hosted services,
where companies like Ericsson provide the network and/or service
capability according to agreed service levels. Under such business
models, operators gain flexibility in capital employed, resources and
time to market – all with an assured quality of service.
We offer some of the most comprehensive managed services ca-
pabilities within the telecom industry. Our offerings cover management
of day-to-day operations of a customer’s network, including a managed
capacity service for an efficient network build out and on-demand
capacity, as well as hosting of applications and content management.
Ericsson’s Internet Payment eXchange (IPX) service, which is the glob-
al payment and messaging delivery solution for SMS, MMS, Web and
WAP that facilitates payment and distribution of content by intercon-
necting content providers, media companies, governments and con-
sumer brands with operators.
The combination of our local expertise, global technology leadership,
business understanding, strong delivery capabilities and extensive
experience in managing multi-vendor networks makes Ericsson a lead-
ing provider of services to network operators.
With over 19,000 dedicated Global Services professionals represent-
ed in 140 countries, our services sales (including network rollout) account
for almost one-third of our Systems segment net sales. Sales of network
rollout services represent approximately 11 percent of our Systems seg-
ment net sales and are consolidated within either Mobile Networks or
Fixed Networks depending on which type of operator is involved.
Segment Phones
Phones
Sony Ericsson Mobile Communications (Sony Ericsson) delivers in-
novative and feature-rich mobile phones, accessories, PC-cards and
M2M (machine to machine) solutions, which allow us to provide end-to-
end solutions to our customers. The 50/50 joint venture, formed in
October 2001, combines the mobile communications expertise of Er-
icsson with the consumer electronic devices and content expertise of
SONY Corporation and forms an essential part of our end-to-end ca-
pability for mobile multimedia services.
Sony Ericsson is responsible for product design and development,
as well as marketing, sales, distribution and customer services. About
one-third of Sony Ericsson’s handsets are produced at their factory in
China. The remaining two-thirds of production is more or less equally
split between contract manufacturers (EMS) and other device manu-
facturers (ODM) at locations in several countries in Asia, Latin America
and Europe. Sony Ericsson’s global management is based in London
and R&D centers are located in Sweden, Japan, China, the U.S. and
the U.K.
Sony Ericsson has expanded their in-house production with the
aquisition of a controlling stake in Beijing Suohong Electronics Co, Ltd
(BSE).
Sales for Sony Ericsson are not included in our reported sales, as
their operating results are reported according to the equity method
under “Share in earnings of joint ventures and associated companies”
in the income statement.
Segment Other Operations
In addition to the areas previously described, Ericsson provide several
other business offerings. Although important, these business units are
relatively small compared to those consolidated within Systems. Sales
of these units are consolidated within Other Operations and in total
amount to 6 percent of net sales, with no single unit representing more
than 2 percent.
Ericsson Microwave Systems
Microwave Systems provide national security and public safety solu-
tions to defense, government and security agencies in Sweden and to
more than 20 countries around the world. The unit supplies advanced
airborne, terrestrial and marine radar systems, that are integrated with
command, control and communication functionality. Manufacturing is
centralized in Sweden (Gothenburg).
Ericsson Enterprise
Enterprise provides communications systems and services that enable
businesses, public entities and educational institutions to have seam-
less access to applications and services across multiple locations. We
address a wide variety of enterprise needs through segmented offerings
for both small and large enterprises. We focus on providing solutions
for Voice over IP (VoIP) based private branch exchanges (PBX), Wireless
Local Area Networks (WLAN), and Mobile Intranet solutions. With Mo-
bile Enterprise, users on the move are able to access a range of busi-
ness-critical communications and information applications from a va-
riety of devices over private or public, fixed or wireless networks.
Ericsson Enterprise operates mainly from Sweden but has a global
presence through the market units and other partners/distributors.
Manufacturing is outsourced.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
Ericsson Network Technologies
Our Network Technologies unit (Cables) provides a full range of cable
related solutions for telecom and power networks. Ericsson is a leading
player in the passive fiber access network field and our expertise in-
cludes integration of copper, fiber optic and wireless technologies. A
large portion of net sales from our Network Technologies group is
attributable to intersegment sales. Manufacturing is carried out in Swe-
den (Hudiksvall and Falun) and in China, India and Malaysia.
Ericsson Mobile Platforms
Ericsson Mobile Platforms is a leading platform supplier for GSM/GPRS,
EDGE and WCDMA platforms used in devices such as mobile handsets
and PC cards. Through Ericsson Mobile Platforms, Ericsson was one
of the first companies in the world to license open-standard end-to-end
interoperability tested GSM/GPRS, EDGE and WCDMA technology
platforms. The product offerings are based on our comprehensive intel-
lectual property portfolio and include: reference designs, platform
software, ASIC (application specific integrated circuit) designs and
development boards, development and test tools, training, support and
documentation. By licensing our technology and platforms, mobile
phone manufacturers will be able to launch new products faster, with
limited R&D investments and lower technology risks, allowing them to
focus on product differentiation in areas such as applications, indus-
trial design, manufacturing, distribution and branding - getting ad-
vanced and attractive products with short time to market. Ericsson
Mobile Platforms has operations at seven global locations, with main
operations in Sweden (Lund).
During the year, Ericsson Mobile Platforms successfully verified
seamless handover between EDGE and WCDMA in live commercial
networks, demonstrating key 3G capabilities of both packet data and
voice calls.
As per December 2005, more than 15 million WCDMA (3G) handsets
in the market were based on Ericsson Mobile Platforms’ technology.
Ericsson Power Modules
Ericsson Power Modules is a leading supplier of direct current DC/DC
converters and DC/DC regulators, mainly to the communications in-
dustry, for advanced applications such as multiplexors, switches, rout-
ers and radio base stations. In addition, the levels of technology, rug-
gedness and reliability of Ericsson Power Modules products mean that
they often provide excellent solutions for other demanding applications
in medical, avionics, computing, military, space, and industrial market
sectors. Manufacturing is centralized to Shanghai in China.
ORGANIZATION
Our operational organization is built around a structure of business
units responsible for the development and delivery of products and
services to market units that are responsible for local sales and cus-
tomer support. A number of group functions responsible for estab-
lishing of strategies, policies and directives and managing resource
allocation, coordination of operations, mergers and acquisitions and
perform tasks pertaining to certain group-wide matters that are not
naturally suitable for a specific operational unit.
Governance
A significant amount of authority and responsibility is assigned to the
management of our various operating units for tasks pertaining to
I N F O R M AT I O N O N T H E C O M PA N Y
113
daily operations. Governance of our operating units is carried out
through steering boards whose members are representatives of the
Group Management Team, the Extended Management Team and the
management of the particular operating unit.
For more information regarding our corporate governance, please
see the Corporate Governance Report or visit our web site http://www.
ericsson.com/ericsson/corpinfo/corp_governance/index.shtml.
Information on our web site does not form part of this document.
Changes in organization and management
Some organizational changes were made during 2005, where synergies
were found to promote a simpler structure with more efficient opera-
tions and fewer organizational layers. The changes include:
• A new Market Unit called Greater China was established. Taiwan,
previously part of Market Unit North East Asia, was grouped with
mainland China, Hong Kong and Macau, which previously made up
Market Unit China.
• Austria was moved from the Market Area Western Europe to the
Market Area Central & Eastern Europe, Middle East and Africa
(CEMA).
• As per January 2006, Pakistan will be moved from the Market Area
Asia Pacific to the Market Area Central & Eastern Europe, Middle
East and Africa (CEMA).
• Business Unit (BU) Mobile Systems CDMA was streamlined to im-
prove efficiency. As a result, the head office in San Diego was closed
and operations moved to other Ericsson sites.
• The Radio Network Development unit within R&D was split and
• As per January 2006, three development units, IP Networks, Core
transferred into BU Systems and BU Access respectively.
Network Evolution and Service Layer Development, will be trans-
ferred to BU Systems and BU Access to bring development closer
to the business, improving time to market and ensuring that Erics-
son’s products and solutions meet user needs.
• As per January 2006, certain assets and staff of Marconi will be
acquired and integrated within BU Transmission and Transport Net-
works, BU Global Services and BU Systems.
During 2005, the following changes in the Group Management Team
were made:
up the position as market unit head of India and Sri Lanka.
• Mats Granryd, previously head of BU Mobile Systems CDMA, took
• Hans Vestberg, head of business unit Global Services, was ap-
• As per January 2006, Sivert Bergman, head of business unit Trans-
pointed executive vice president.
mission and Transport, is appointed integration manager for the
Marconi acquisition and included in the Group Management Team.
For more information about management, please see “Notes to the
Consolidated Financial Statements – Note C29, Information Regarding
Employees, Members of the Board of Directors and Management”.
114
Business units within the Systems segment
Access
Our Access business unit’s main role is to continuously strengthen our
global leadership in 2G & 3G radio access networks by offering innova-
tive and cost-effective products and solutions that provide best-in-class
performance. Business unit Access’ responsibility covers a wide spec-
trum of activities, from product development to production and supply.
Business unit Access is our largest business unit and has manufactur-
ing in Sweden (Stockholm, Kumla and Gävle), Brazil, China and India.
Systems
Business unit Systems is a leading supplier of end-to-end telecom
grade network systems and multimedia services. The system offerings
include tailored mobile core and fixed network solutions and service
layer products. As a key player in the evolution to all-IP networks, we
are a leader in the convergence of fixed and mobile networks and
services. Business unit Systems has manufacturing in Sweden (Ka-
trineholm), Brazil, China and India.
Transmission and Transport Networks
The Transmission and Transport Networks business unit offers one of
the world’s most widely deployed microwave radio system (MINI-LINK)
together with metro optical networks in customized and managed trans-
port solutions. The products are essential elements of Ericsson’s end-
to-end solutions but are also often chosen by operators utilizing other
vendors’ network equipment. The unit’s operations include one of the
largest microwave production plant in the world in Borås, Sweden, as
well as a customer distribution center for all transmission and transport
products. The transmission and transport business unit operates in
Sweden, Norway and Italy.
Global Services
Our Global Services business unit includes both network rollout and
professional services. We enable operators to strengthen their com-
petitiveness by offering a complete range of advisory, systems integra-
tion, managed, hosting and support services as well as network rollout
services that address a major part of their network operations. The
business unit is represented in 140 countries with 19,000 employees
mainly based within the local Market Units.
Sales and Marketing
We use our own sales organization to market and sell our systems and
services to customers in over 140 countries via a worldwide sales and
support network consisting of 24 market units. Each market unit rep-
resents either a single country or a group of countries, depending on
the extent of our business activities in that region. The majority of these
market units operate through local subsidiaries that are present in each
country. We use our local presence to help our customers achieve
greater efficiencies and gain access to recognized world-class support
resources wherever they operate.
The market units utilize the product expertise of the central business
units within the Systems segment in tailoring and integrating our prod-
ucts for delivery to customers. The market units are also responsible
for after-sales support and rely in particular on the Global Services
business unit in fulfilling this function.
Our customers have different needs in interacting with Ericsson as
a supplier, ranging from support in identifying and capturing business
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
opportunities to “do-it-yourself” fulfillment. We use three different sales
approaches that acknowledge these different needs; Project Sales
(interactive relationship selling with high involvement of the customer
to identify and capture business opportunities, where the solution is
not known at the point of sales), System Sales (interactive relationship
selling of solutions configured for specific customer needs) and Prod-
uct Sales (the outcome of relationship sales and frame agreements
where customers may call of well-defined products and services elec-
tronically). System Sales has historically been our most common sales
approach to best meet our customers’ needs, however, as their needs
evolve the two other sales approaches will grow in importance.
Business units within the segment Other Operations
This segment principally consists of a number of operations deemed
too small to be reported as separate segments. Other Operations in-
clude Microwave Systems (defense), Enterprise, Network Technologies
(cables), Mobile Platforms, Power Modules and a few very small units.
For more information please see “Business Segments”.
Businesses in our Other Operations segment market their products
and services through their own specialized direct and indirect sales
channels. On occasion, these specialized sales and marketing teams
work with our market units in certain markets or when dealing with large
customers with whom we have a relationship.
Ericsson Group Functions
A number of Group Functions perform tasks pertaining to certain group-
wide matters that are not naturally referable to a specific operational
unit: Communications, Finance, Human Resources and Organization,
Legal Affairs, Operational Excellence, Research & Development, Sales
& Marketing and Strategy & Product Management.
Their responsibilities include the formulation of the Group’s strategy,
issuing of policies and directives, business control, resource allocation
and risk management. In addition, Group Functions are responsible for
the consolidation and reporting of financial performance, financing and
cash management, legal issues, communication with various stake-
holders including employees, investors, press and media as well as
coordination and administration of a number of Group-wide issues.
Other important Group-wide matters, such as Corporate Responsibil-
ity, are managed by Group Functions in conjunction with a network of
experts from various parts of the Company.
RESEARCH & DEVELOPMENT
A robust R&D program is key to our competitiveness and future success.
We spent SEK 24.5 billion on R&D and other technical expenses during
2005, which represents over 16 percent of sales. The vast majority of
our R&D is invested in product development of which the majority in
mobile communications network infrastructure. We have continued to
invest in strategically important areas of broadband access, core net-
working and service layer.
Our R&D organization develops world-class products and performs
world-leading research on behalf of the business units. About 16,500
(16,000) employees in 17 (16) countries worldwide are working with
R&D in an organization consisting of group functions, development
units and the Ericsson Research unit.
Ericsson Research conducts applied research in various strategic
areas to provide Ericsson with system concepts, technology, and meth-
odology to help secure our long-term, strategic position. World-class
innovations are achieved through cooperation within Ericsson and with
a variety of partners including customers, universities and research
institutes.
For more information regarding product and technology develop-
ment, please see “Risk Factors – Strategic and Operational Risks” and
“Board of Directors’ Report – Research and Development”.
INTELLECTUAL PROPERTY AND LICENSING
Through many years of involvement in the development of new tech-
nologies, we have built up a considerable portfolio of intellectual prop-
erty rights relating to telecommunications technologies, especially
mobile communications. As of December 31, 2005, we held over 20,000
(16,000) patents worldwide, including a substantial number of patents
essential to the 2G/2.5G standards of GSM, GPRS and CDMA, as well
as numerous patents essential to 3G standards, including EDGE, WCD-
MA, HSDPA, TD-SCDMA, CDMA2000 and OFDM. We also hold impor-
tant patents for many other areas, e.g. Voice over IP (VoIP), ATM, WAP,
WLAN, mobile platforms and Bluetooth.
Our intellectual property rights are valuable business assets. We
license these rights to many other companies including equipment
suppliers, handset manufacturers and wireless applications developers,
in return for royalty payments and/or access to additional intellectual
property rights. In addition, we acquire rights via licenses to utilize intel-
lectual property rights of third parties. We believe that we have access
to all related patents that are material to our business in part or in
whole.
For more information, see “Risk Factors – Strategic and Opera-
tional Risks”.
PROPERTY, PLANT AND EQUIPMENT
In 2000 and 2001, we disposed of the majority of the real estate prop-
erties that we owned. We believe the properties we now occupy are
suitable for our present needs in most locations. As of December 31,
2005, no material land, buildings, machinery or equipment were
pledged as collateral for outstanding indebtedness.
MANUFACTURING AND ASSEMBLY
Our Systems manufacturing consists of two basic production activities,
module and node. Module production is production of subsystems such
as circuit boards, radio frequency (RF) modules, antennas etc. How-
ever we outsource about half of our systems module production to
several electronic manufacturing service (EMS) companies. Most of our
node production, i.e., assembly, integration and testing of modular
subsystems into complete system nodes such as radio base stations,
mobile switching centers etc., is done in-house. We have 14 significant
manufacturing and assembly locations worldwide with a total of ap-
proximately 290,000 square meters of floor space. We lease all of these
facilities except one in China and one in Brazil.
The Systems segment consumes more than two-thirds of the total
floor space, with cables and power modules consuming most of the
rest. In Sweden, the majority of the floor space within our production
facilities is used for module production with the balance mostly used
for Systems’ node assembly and testing. Including the EMS production,
approximately 35–40 (40-45) percent of Systems’ module production
and 75–80 (75–80) percent of Systems’ node production is performed
in Sweden.
We intend to continue to outsource module production where ad-
I N F O R M AT I O N O N T H E C O M PA N Y
115
equate manufacturing capacity and expertise are available on favorable
terms. Such outsourcing of the major part of module manufacturing
provides us greater flexibility to adapt to economic and market chang-
es. However, the timing and level of outsourcing is a balance between
short-term demand and longer-term flexibility. Therefore, we generally
plan to use our own production capabilities to absorb temporary chang-
es in volumes.
We manage our own production capacity on a global basis by al-
locating production to sites where capacity is available and costs are
competitive. At year-end 2005, our overall utilization was close to 100
percent as we continuously adjust our production capacity to meet
expected demand.
The table below summarizes our major manufacturing and assembly
facilities as well as the total square meters of floor space at year-end.
PRIMARY MANUFACTURING AND ASSEMBLY FACILITIES
2004
2005
2003
Sites Sq Meters Sites Sq Meters Sites Sq Meters
310,000
22,100
9,500
0
341,600
277,415
15,840
15,200
0
308,455
256,615
15,840
15,200
5,364
293,019
10
1
3
0
14
10
1
3
0
14
9
1
3
1
14
Sweden
Brazil
China
India
Total
During 2005, a new 5,400 square meter facility in Jaipur, India, was started for
systems node assembly.
During 2005, an approximately 20,000 square meter production facility in Nynäshamn,
Sweden, was closed. The production was absorbed by other Swedish sites.
Sources and availability of materials
We purchase raw materials, electronic components, ready-made prod-
ucts and services from a significant number of domestic and foreign
suppliers. Variations in market prices for copper, aluminum, steel, sili-
con, precious metals, plastics and other raw materials have a very
limited effect on our total cost of goods sold. Our purchases mainly
consist of electronic components as well as ready-made products and
services. To a limited extent, we are involved in the production of certain
components such as power modules and cables, which are used in our
systems products as well as sold externally to other equipment manu-
facturers.
Based on our most recent sourcing agreements, the increase in oil
and copper prices during 2005 did not have a material impact on our
costs or affect the availability of the electronic components or ready-
made products and services that we require. To the extent possible,
we rely on alternative supply sources for the purchased elements of our
products to avoid sole source situations and to secure sufficient supply
at competitive prices. Assuming there will only be a moderate increase
in market demand, we do not foresee any supply constraints to meet
our expected production requirements during 2006.
HUMAN RESOURCES
We believe that every employee should be treated with respect and
dignity. We value the rich diversity and creative potential of people with
differing backgrounds and abilities. A culture of equal opportunities in
which personal success depends on personal merit and performance
is encouraged throughout our operations.
We have three core values: Professionalism, Respect and Persever-
ance. These values form the foundation of how we operate our business.
116
Our core values define how we treat each other, our customers and our
business partners and therefore how they define our culture. Charac-
teristics of our culture are exhibited by a passion to win; employee di-
versity, honesty, trust and support for each other; integrity and high
ethical standards; and leadership by example at all levels. We believe
the best way to further develop our business is to remain accountable
to ourselves and to our customers.
Every year we conduct an employee satisfaction survey to assess
our Human Capital Index and employee Empowerment Index.
We maintain an open management style that involves our employees
in both daily decisions that affect them as well as longer-term matters.
We are fully committed to keeping all employees informed about the
implications of major business changes and other relevant matters. Key
business priorities are communicated throughout the organization and
form part of the basis for employee compensation and incentive plans.
Details of these plans appear in “Notes to the Consolidated Financial
Statements – Note C29, Information Regarding Employees, Members
of the Board of Directors and Management”. We also have constructive
relationships with a variety of trade unions including formal recognition
and active dialogue where appropriate.
EMPLOYEES BY GENDER AND AGE AT YEAR END 2005
Under 25 years old
26-40 years old
41-55 years old
Over 55 years old
Percent of total
Percent
Female
469
Male of total
4%
1,652
62%
8,489 26,443
30%
12,871
3,675
4%
1,880
576
100%
76%
24%
EMPLOYEES RELATED TO COST OF SALES
AND OPERATING EXPENSES
Cost of Sales
Operating Expenses
Total
2005
2004
22,477 19,234
31,300
33,578
56,055 50,534
2003
2002
15,414 18,606
46,015
36,169
64,621
51,583
CORPORATE RESPONSIBILITY
Ericsson manages its CR activities through a cross-functional compe-
tence network from relevant parts of the organization. This enables us
to secure a focus for expertise globally as well as to facilitate coopera-
tion across Ericsson. The work of this network is guided by the CR
Steering Committee, which was established in 2005. The Chairman of
the steering committee reports to the CEO.
Ericsson’s approach in the area of CR is two-pronged:
• we strive to have the necessary controls in place in order to minimize
• we see an opportunity to link our products and services to an over-
risk
all business goal of sustainable, profitable growth
Ericsson supports the UN Global Compact and its ten principles. We
continue with our Supplier Code of Conduct program, in close coop-
eration with local Ericsson companies. A cross-functional committee
oversees our activities in this area.
Ericsson is a committed and responsible member of the global
society, and as such is committed to supporting the needs of local
communities. We have a number of local CR projects that are run by
the Ericsson Market Units. Ericsson Response is a global initiative to
rapidly provide specialists and communications equipment anywhere
in the world in response to human suffering caused by disasters.
Ericsson Response assists the disaster relief operations of the United
Nations World Food Programme (WFP), the UN Office for the Coordina-
tion of Humanitarian Affairs (OCHA) and the International Federation of
Red Cross and Red Crescent Societies (IFRC).
We are subject to certain environmental, health and safety laws and
regulations that affect our operations, facilities and products in each of
the jurisdictions in which we operate. It is our policy to comply with
environmental requirements and to provide workplaces for employees
that are safe, environmentally sound, and that will not adversely affect
the health or environment of communities in which we operate. We
believe that we are in compliance with environmental, health safety laws
and regulations required by our operations and business activities.
According to our environmental policy, Ericsson “shall meet or ex-
ceed legal and other requirements to protect the environment.” In order
to fulfil this statement Ericsson has extensive coverage and follow-up
of global environmental legislation.
We will be compliant to the EU Directive on the restriction of the use
of certain hazardous substances in electrical and electronic equipment
(RoHS) as of the required timeline of July 1, 2006.
From August 13, 2005, Ericsson complies with the EU WEEE direc-
tive on waste of electrical and electronic equipment in all member coun-
tries that have implemented the WEEE.
A Sustainability Report is published during the second quarter of
each year. Please see our web site at www.ericsson.com/about/re-
sponsibility.shtml for more information. Information on our web site
does not form part of this document.
PARENT COMPANY OPERATIONS
The business of the Parent company, Telefonaktiebolaget LM Ericsson,
consists mainly of corporate management, holding company functions
and internal banking activities. Parent company operations also include
customer credit management activities performed by Ericsson Credit
AB.
SUBSIDIARIES AND ASSOCIATED COMPANIES
For a listing of our significant subsidiaries, please see Notes to the
Parent Company Financial Statements – Note P9, “Investments”.
In addition to our joint venture with SONY Corporation, we are en-
gaged in a number of other minor joint ventures, cooperative arrange-
ments and venture capital initiatives.
For more information regarding risks associated with joint ventures,
strategic alliances and third party agreements, please see “Risk Factors
– Strategic and Operational Risks”.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
I N F O R M AT I O N O N T H E C O M PA N Y
117
FORWARD-LOOKING STATEMENTS
electromagnetic fields and cost of radio licenses for our custom-
ers;
• effectiveness of our strategies and their execution including partner-
• financial risks, including foreign exchange rate changes, interest rate
ships, acquisitions and divestitures;
changes, changes in tax liabilities, credit risks in relation to coun-
terparties, customer defaults under significant customer financing
arrangements and risks of confiscation of assets in foreign coun-
tries;
• reduction in the number of customers due to e.g. mergers, and the
negative business consequences of a loss of, or significant decline
in, our business with a major customer;
• impact of changes in product demand, price erosion, competition
from existing or new competitors or new technology and the risk
that our products and services may not sell at the rates or levels we
anticipate;
• our ability to develop commercially viable products, systems and
services, to acquire licenses of necessary technology, to protect our
intellectual property rights through patents and trademarks and to
defend them against infringement, and results of patent litigation;
• supply constraints, including component or production capacity
shortages, suppliers’ abilities to cost effectively deliver quality prod-
ucts on time and in sufficient volumes, and risks related to concen-
tration of proprietary or outsourced production in a single facility or
sole source situations with a single vendor; and
• our ability to recruit and retain qualified management and other key
employees.
Certain of these risks and uncertainties are described further in “Risk
Factors.” We undertake no obligation to publicly update or revise any
forward-looking statements included in this Annual Report, whether as
a result of new information, future events or otherwise, except as re-
quired by applicable law or stock exchange regulation.
This Annual Report includes “forward-looking statements” about future
market conditions, operations and results. Expressions such as “be-
lieve”, “expect”, “anticipate”, “intend”, “may”, “could”, “plan” and similar
words are intended to help identify forward-looking statements. For-
ward-looking statements may be found throughout this document, but
in particular in the sections captioned “Operational Review”, “Board of
Directors’ Report” and “Information on the Company” and include state-
ments regarding:
ratings;
• our goals, strategies and performance expectations;
• the markets we currently or soon intend to address;
• our liquidity, capital resources, capital expenditures and our credit
• the expected demand for our existing as well as new products and
• our joint venture and strategic cooperation activities;
• technology and industry trends including competition and our cus-
• our plans for new products and services including research and
tomer structure, and
services;
development expenditures.
Although we believe that the expectations reflected in such statements
are reasonable, we cannot assure you that these expectations will ma-
terialize. Because forward-looking statements are based on assump-
tions and estimates, and are subject to risks and uncertainties, actual
results could differ materially from those described or implied herein.
Important factors that could affect whether and to what extent any of
our forward-looking statements materialize include, but are not limited
to:
• our ability to respond to changes in the telecommunications market
and general market conditions in a cost effective and timely man-
ner;
• developments in political, economic and regulatory fields in the mar-
kets in which we operate, including allegations of health risks from
118
F O R W A R D - L O O K I N G S TAT E M E N T S
RISK FACTORS
You should carefully consider all the information in this annual
report and in particular the risks and uncertainties outlined below.
Any of the factors described below, or any other factors discussed
elsewhere in this report, could have a material negative effect on
our business, operational results, financial condition, liquidity and/
or our share price. Furthermore, our operational results may have a
greater variability than in the past and we may have more difficulty
in accurately predicting future developments.
RISK ASSOCIATED WITH THE INDUSTRY
AND MARKET CONDITIONS
We conduct business throughout the world and are subject to the ef-
fects of general global economic conditions as well as conditions
unique to a specific country and region. In particular, we are affected
by market conditions within the telecommunications industry.
We are subject to political, economic and regulatory
changes in the various countries in which we operate.
We conduct business in more than 140 countries, with a significant
proportion of our sales originating from emerging markets in Asia Pa-
cific, Latin America, Eastern Europe, the Middle East and Africa. We
expect that sales to such emerging markets will be an increasing portion
of total sales as developing nations and regions around the world in-
crease their investments in telecommunications. We already have ex-
tensive operations in many of these countries, which involve certain
risks, including volatility in gross domestic product, civil disturbances,
economic and political instability, nationalization of private assets and
the imposition of exchange controls.
Changes in regulatory requirements, tariffs and other trade barriers,
price or exchange controls or other governmental policies in the coun-
tries in which we conduct business could limit our operations and make
the repatriation of profits difficult. In addition, the uncertainty of the
legal environment in some regions could limit our ability to enforce our
rights.
We are subject to the market conditions affecting the
capital- and operating expenditures of our customers,
making demand for our products and services highly
unpredictable.
Adverse economic conditions could cause network operators to post-
pone investments or initiate other cost-cutting initiatives to improve
their financial position, which could result in significantly reduced cap-
ital expenditures for network infrastructure. Although the historical
compounded annual growth rate (CAGR) for telecommunications net-
work investments is 2–3 times the growth rate of global GDP, operator
spending for network equipment and associated rollout services de-
clined substantially during the years 2001–2003, before returning to
growth in 2004. During this period , our business, operating results and
share price suffered. We have reduced costs and improved efficiency
to restore profitability and establish better flexibility to cost effectively
accommodate fluctuations in demand. However, if demand were to fall,
or were to be significantly weaker than expected, we may experience
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
further material adverse effects and may incur operating losses in the
future.
Our business essentially depends upon the continued
growth of mobile communications.
Most of our business depends on continued growth in mobile com-
munications in terms of both number of subscriptions and usage per
subscriber, which in turn requires the continued deployment of our
network systems by customers. In particular, we are dependent on
operators in highly penetrated markets to successfully introduce ser-
vices that cause a substantial increase in usage for both voice and data.
In emerging markets, we are, to a certain extent, dependent on the
availability of lower-cost handsets in addition to affordable tariffs by
operators to support a continued increase of mobile subscribers. If
operators are not successful in their attempts to increase the number
of subscribers and/or stimulate increased usage, our business and
operational results could be materially adversely affected.
Changes in the regulatory environment for
telecommunications systems and services could
negatively impact our business.
Telecommunications is a regulated industry and regulatory changes
affect both our customers and us. For example, changes in regulations
that impose more stringent, time-consuming or costly planning, zoning
requirements or building approvals regarding the construction of base
stations and other network infrastructure could adversely affect the
timing and costs of new network construction or expansion and the
commercial launch and ultimate commercial success of these networks.
Similarly, tariff regulations that affect the pricing of new services offered
by operators could also affect their ability to invest in network infra-
structure, which in turn could affect the sales of our systems and ser-
vices.
License fees, environmental, health and safety, privacy and other
regulation changes may increase costs and restrict operations of net-
work operators and service providers. The indirect impact of such
changes could affect our business adversely even though the specific
regulations may not directly apply to our products or us.
Consolidation among network operators may increase
our dependence on a limited number of key customers.
The market for mobile network equipment is highly concentrated, with
the 10 largest operators representing more than 40 percent of the total
market. Network operators have undergone significant consolidation,
especially among companies operating in different countries. This trend
is expected to continue, while also intra-country consolidation is likely
to accelerate as a result of competitive pressure.
A market with fewer and larger operators will increase our reliance
on key customers and, due to the increased size of these companies,
may negatively impact our bargaining position and profit margins. More-
over, if the combined companies operate in the same geographic mar-
ket, less network equipment and associated services may be required.
Another possible consequence of customer consolidation is that it
R I S K FA C T O R S
119
Our current and historical operations are subject to a
wide range of environmental, health and safety
regulations.
We are subject to certain environmental, health and safety laws and
regulations that affect our operations, facilities and products in each of
the jurisdictions in which we operate. We believe that we are in compli-
ance with all material environmental, health and safety laws and regula-
tions related to our products, operations and business activities. How-
ever, there is a risk that we may have to incur expenditures to cover
environmental and health liabilities to maintain compliance with current
or future environmental, health and safety laws and regulations or to
undertake any necessary remediation. It is difficult to reasonably esti-
mate the future impact of environmental matters, including potential
liabilities due to a number of factors especially the lengthy time intervals
often involved in resolving them.
STRATEGIC AND OPERATIONAL RISKS
Our business is subject to a wide variety of factors that impact our
strategies and operating results. Any of these factors could have a
material adverse impact on our operating results. Furthermore, results
of operations for any period may not necessarily be indicative of results
to be expected in future periods. Consequently, our operating results
may fluctuate significantly from period to period which may lead us to
revise our estimates and/or strategies.
Most of our business is derived from a limited number
of customers.
We derive most of our business from large, multi-year network build-out
agreements with a limited number of significant customers. Although
no single customer currently represents more than 10 percent of sales,
the loss of, or a reduced role with, a key customer for any reason could
have a significant adverse impact on sales, profit and market share for
an extended period.
Some long-term frame agreements expose us to risks
related to agreed future price reductions or penalties.
Long-term agreements are typically awarded on a competitive bidding
basis. In some cases such agreements also include commitments to
future price reductions. In order to maintain gross margin even with
lower prices, we continuously strive to reduce the costs of our products
through design improvements and other changes in costs related to
e.g. component prices, productivity in production, etc. We can not
assure you that our cost reduction actions will be sufficient to maintain
our gross margin.
Frame agreements often also provide for penalties and termination
rights in the event of our failure to deliver ordered products on time or
if our products do not perform as promised, which may affect our re-
sults negatively.
could cause a delay in their network investments while they negotiate
merger/acquisition agreements, secure necessary approvals, or are
constrained by efforts to integrate the businesses.
Consolidation among equipment and services
suppliers may lead to increased competition and a
different competitive landscape.
Industry consolidation among equipment suppliers could potentially
result in stronger competitors that are competing as end-to-end sup-
pliers as well as competitors more specialized in particular areas. Con-
solidation may also result in competitors with greater resources, includ-
ing technical and engineering resources, than we have. This could have
a material adverse effect on our business, operating results, and finan-
cial condition.
We operate in a highly competitive industry, which is
subject to competitive pricing and rapid technological
change.
The markets for our products are highly competitive in terms of pricing,
functionality and service quality, the timing of development and intro-
duction of new products and services and terms of financing. We face
intense competition from significant competitors. Our competitors may
implement new technologies before we do, allowing them to offer more
attractively priced or enhanced products, services or solutions than we
provide. Some of our competitors may have greater resources in certain
business segments or geographic markets than we do. We may also
encounter increased competition from new market entrants, alternative
technologies or alternative telecommunications platforms. Our operat-
ing results significantly depend on our ability to compete in this market
environment, in particular on our ability to adapt to political, economic
or regulatory changes, to introduce new products to the market and to
continuously enhance the functionality while reducing the cost of new
and existing products.
Liability claims related to and public perception of the
potential health risks associated with electromagnetic
fields could negatively affect our business.
We are subject to claims that mobile handsets and other telecommu-
nications devices that generate electromagnetic fields expose users to
health risks. At present, a substantial number of scientific studies con-
ducted by various independent research bodies have indicated that
electromagnetic fields, at levels within the limits prescribed by public
health authority safety standards and recommendations, cause no
adverse effect to human health. However, any perceived risk or new
scientific findings of adverse health effects of mobile communication
devices and equipment could adversely affect us through a reduction
in sales. Although Ericsson’s products are designed to comply with all
current safety standards and recommendations regarding electromag-
netic fields, we cannot assure you that we will not become the subject
of product liability claims or be held liable for such claims or be required
to comply with future regulatory changes that may have an adverse
effect on our business. See also “Legal and Tax proceedings” in the
Board of Directors’ Report .
120
We expend significant resources on product and
technology R&D which may not be successful in the
market.
Developing new products or updating existing products and solutions
requires significant levels of financial and other commitments to re-
search and development, which may not always result in success. We
are also actively engaged in the development of technology standards
that we are incorporating into our products and solutions. In order to
be successful, those standards must be accepted by relevant stan-
dardization bodies and by the industry as a whole. Our sales and earn-
ings may suffer if we invest in development of technologies and technol-
ogy standards that do not function as expected, are not adopted in the
industry or are not accepted in the marketplace within the timeframe
we expect, or at all.
Please also see section “Research and Development” in the Board
of Directors’ Report and in Information on the Company.
We enter into joint ventures, strategic alliances and
third party agreements to offer complementary
products and services.
If our partnering arrangements fail to perform as expected, whether as
a result of having incorrectly assessed our needs or the capabilities of
our strategic partners, our ability to work with these partners or other-
wise, our ability to develop new products and solutions may be con-
strained and this may harm our competitive position in the market. Ad-
ditionally, our share of any losses from, or commitments to contribute
additional capital to, joint ventures may adversely affect our financial
position or results of operations.
In the case of our joint venture with Sony Corporation, if the joint
venture is unsuccessful for any reason, we may not be able to compete
as successfully in the mobile systems market or at all in the mobile
handset market.
Our solutions may also require us to license technologies from
other companies and successfully integrate such technologies with our
products. It may be necessary in the future to seek or renew licenses
relating to various aspects of these products. There can be no assur-
ance that the necessary licenses would be available on acceptable
terms, or at all. Moreover, the inclusion in our products of software or
other intellectual property licensed from third parties on a non-exclusive
basis could limit our ability to protect our proprietary rights in our prod-
ucts.
We cannot be certain that we will be successful in
integrating the recently acquired Marconi operations
with our existing operations
Our success depends in part upon the successful integration of the
Marconi operations that we recently acquired. Although we believe that
the consummation of the Marconi acquisition will result in significant
benefits and synergies, the integration of these operations will also
present significant challenges, including:
• realizing economies of scale and eliminating duplicative overheads;
• integrating internal communications networks, financial systems and
and
operational systems.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
We cannot assure you, with respect to our recent acquisition of the
Marconi assets, that we will realize any anticipated benefits or will suc-
cessfully integrate any of the acquired operations with our existing
operations.
The Marconi operations may not have the disclosure controls and
procedures or internal controls over financial reporting that are as thor-
ough or effective as those required by U.S security laws for public
companies. While we intend to implement appropriate controls and
procedures as we integrate the Marconi operations, we cannot provide
assurance as to the effectiveness of their disclosure controls and pro-
cedures or internal controls over financial reporting until we have fully
integrated them.
Our products incorporate intellectual property rights
(IPR) developed by us that may be difficult to protect or
may be found to infringe on the rights of others.
While we have been issued a large number of patents and other patent
applications are currently pending, there can be no assurance that any
of these patents will not be challenged, invalidated, or circumvented,
or that any rights granted under these patents will in fact provide com-
petitive advantages to us.
The European Union recently considered placing restrictions on the
patentability of software. Although the European Union ultimately re-
jected this proposal, we cannot guarantee that they will not revisit this
issue in the future. We rely on many software patents, and any limita-
tions on the patentability of software may materially affect our busi-
ness.
We utilize a combination of trade secrets, confidentiality policies,
non-disclosure and other contractual arrangements in addition to rely-
ing on patent, copyright and trademark laws to protect our intellectual
property rights. However, these measures may not be adequate to
prevent or deter infringement or other misappropriation. Moreover, we
may not be able to detect unauthorized use or take appropriate and
timely steps to establish and enforce our proprietary rights. In fact,
existing laws of some countries in which we conduct business offer only
limited protection of our intellectual property rights, if at all.
Many key aspects of telecommunications and data network technol-
ogy are governed by industry-wide standards, which are usable by all
market participants. As the number of market entrants as well as the
complexity of the technology increases, the possibility of functional
overlap and inadvertent infringement of intellectual property rights also
increases. Third parties have asserted, and may assert in the future,
claims against us alleging that we infringe their intellectual property
rights. Defending such claims may be expensive, time consuming and
divert the efforts of our management and/or technical personnel. As a
result of litigation, we could be required to pay damages and other
compensation, develop non-infringing products/technology or enter
into royalty or licensing agreements. However, we cannot be certain
that any such licenses, if available at all, will be available to us on com-
mercially reasonable terms.
Adverse resolution of litigation may harm our operating
results or financial condition.
We are a party to lawsuits in the normal course of our business. Litiga-
tion can be expensive, lengthy and disruptive to normal business op-
erations. Moreover, the results of complex legal proceedings are difficult
to predict. An unfavorable resolution of a particular lawsuit could have
R I S K FA C T O R S
121
a material adverse effect on our business, operating results, or financial
condition.
For additional information regarding certain of the lawsuits in which
we are involved, see “Legal and Tax Proceedings” in the Board of Direc-
tors’ Report.
We rely on a limited number of suppliers for the
majority of our components and electronic
manufacturing services.
Our ability to deliver according to market demands depends in large
part on obtaining timely and adequate supply of materials, components
and production capacity on competitive terms. Failure by any of our
suppliers could interrupt our product supply and could significantly
limit our sales or increase our costs. If we fail to anticipate customer
demand properly, an over/undersupply of components and production
capacity could occur. In many cases, some of our competitors also
utilize the same contract manufacturers, and we could be blocked from
acquiring the needed components or increasing capacity if they have
purchased capacity ahead of us. This factor could limit our ability to
supply our customers or could increase our costs. At the same time we
commit to certain capacity levels or component quantities, which, if
unused, will result in charges for unused capacity or scrapping costs.
We are dependent upon hiring and retaining highly
qualified employees.
While we have been forced to lay off a number of highly skilled employ-
ees over the past few years, we believe that our future success depends
in large part on our continued ability to hire, develop, motivate and
retain engineers and other qualified personnel needed to develop suc-
cessful new products, support our existing product range and provide
services to our customers. Competition for skilled personnel and high-
ly qualified managers in the telecommunications industry remains in-
tense. We are continuously developing our compensation and benefit
policies as well as other measures. However, we may not be as suc-
cessful at attracting and retaining such highly skilled personnel in the
future.
As a Swedish company operating globally, we have
substantial foreign exchange exposures.
With the majority of our cost base being Swedish krona (SEK) de-
nominated and a very large share of sales in currencies other than SEK,
and many subsidiaries outside Sweden, our foreign exchange exposure
is significant. Currency exchange rate fluctuations, affect our consoli-
dated balance sheet, cash flows and income statement when foreign
currencies are exchanged or translated to SEK. Our attempts to reduce
the effect of exchange rate fluctuations through a variety of hedging
activities may not be sufficient or successful, resulting in an adverse
impact on our results.
A stronger SEK exchange rate would generally have a negative affect
on our competitiveness compared to competitors with costs denomi-
nated in other currencies.
A significant interruption or other failure of our
information technology (IT) operations or
communications networks could have a material
adverse affect on our operations and results.
Our business operations rely on complex IT operations and communi-
122
R I S K FA C T O R S
cations networks which are vulnerable to damage or disturbance from
a variety of sources. Having outsourced a significant portion of our IT
operations, we depend partly on security and reliability measures of
external companies. Regardless of protection measures, essentially all
IT systems and communications networks are susceptible to disruption
from equipment failure, vandalism, computer viruses, security breach-
es, natural disasters, power outages and other events. Although we
have experienced disruptions from computer viruses, security breach-
es, power outages and equipment failures in the past, our operations
or results have not been materially affected to date. We will continue to
expend significant resources to manage and try to mitigate these risks
and we may incur additional costs to remedy damage caused by such
disruptions, especially for computer viruses and security breaches.
RISKS ASSOCIATED WITH OWNING ERICSSON
SHARES
Our share price has been and may continue to be
volatile.
Our share price has been volatile due in part to the high volatility in the
securities markets generally, and for telecommunications and technol-
ogy companies in particular, as well as developments from quarter to
quarter which impact our financial results. Factors other than our finan-
cial results that may affect our share price include but are not limited
to variations between our actual financial results and expectations of
financial analysts and investors as well as a result of announcements
by our customers, competitors or ourselves regarding capital spending
plans of network operators, financial difficulties for network operators
for whom we have provided financing or with whom we have entered
into material contracts, awards of large supply agreements or contracts
for network roll-out. Additional factors include but are not limited to:
speculation in the press or investment community about the level of
business activity or perceived growth in the market for mobile com-
munications services and equipment; technical problems, in particular
those relating to the introduction and viability of new network systems
like 3G; potential litigation involving ourselves or the markets in which
we operate. Even though we may not be directly involved, announce-
ments concerning bankruptcy or other similar reorganization proceed-
ings involving, or any investigations into the accounting practices of,
other telecommunications companies may materially adversely affect
our share price.
Currency fluctuations may adversely affect the trading
prices of our Class B shares and ADSs and the value of
any distributions we make thereon.
Because our shares are quoted in Swedish kronor (SEK) on the Stock-
holm Stock Exchange (our primary stock exchange) but on NASDAQ
and the London Stock Exchange in local currencies, i.e. USD and GBP,
fluctuations in exchange rates between SEK and these currencies in
which our Class B shares or ADSs are quoted may affect the value of
your investment. In addition, because we pay cash dividends in SEK,
fluctuations in exchange rates may affect the value of distributions if
arrangements with your bank, broker or depositary, in the case of ADSs,
call for distributions to you in currencies other than SEK.
E R I C S S O N A N N U A L R E P O R T 2 0 0 5
SHAREHOLDER INFORMATION
The Annual General Meeting of Shareholders will take place at the Globe
Arena, entrance from Globentorget, Stockholm, at 3.00 p.m. on Mon-
day, April 10, 2006.
Only those shareholders, who have been entered into the transcrip-
tion of the share register kept by VPC AB (the Swedish Securities Reg-
ister Centre) as of April 4, 2006, are entitled to participate in the Meet-
ing, provided notice of attendance has been given to the Company.
Shareholders, whose shares are registered in the name of a nomi-
nee, must be entered temporarily into the share register no later than
April 4, 2006, in order to be entitled to participate in the Meeting. The
shareholder is requested to inform the nominee well before April 4,
2006, when such registration must have been affected. Please observe
that this procedure may also be applicable for shareholders who are
using a custody account with a bank and/or trading via the Internet.
The personal data that Ericsson receives with the notice of attendance
will be computer processed for the purpose of the general meeting of
shareholders 2006 only.
NOTICE OF ATTENDANCE IN THE ANNUAL
GENERAL MEETING OF SHAREHOLDERS
In addition to the requirements listed above, shareholders shall give
notice of attendance no later than at 4 p.m. April 4, 2006,
at the Company’s web site www.ericsson.com/investors,
at telephone no.: +46 8 775 01 99 between 10 a.m. and 4 p.m.,
at fax no.: +46 8 775 80 18, or by post to:
Telefonaktiebolaget LM Ericsson
Group Function Legal Affairs
Box 47021
SE–100 74 Stockholm
Sweden
PROXY
Shareholders who are represented by proxy shall issue a power of
attorney for the representative. To a power of attorney issued by a legal
entity, a copy of the certificate of registration of the legal entity shall be
attached. The documents must not be older than one year. In order to
facilitate the registration at the Meeting, powers of attorney in its origi-
nal, certificates of registration and other documents of authority should
be sent to the Company at the address above so as to be available by
Friday, April 7, 2006.
DIVIDEND
The Board of Directors has decided to propose the Annual General
Meeting of Shareholders to resolve on a dividend of SEK 0.45 per share
for the year 2005 and April 13, 2006 as record day for dividend.
July 21, 2006
April 21, 2006
FINANCIAL INFORMATION FROM ERICSSON
• Interim report January–March 2006:
• Interim report January–June 2006:
• Interim report January–September 2006:
• Full year report January–December 2006:
• Annual report and Form 20-F for the US market 2006:
January/February, 2007
October 19, 2006
March, 2007
Annual reports and financial reports can be downloaded or ordered on
our web site: www.ericsson.com/investors or ordered via e-mail or
mail.
For printed publications, contact:
Strömberg Distribution i Huddinge AB
SE - 120 88 STOCKHOLM
Sweden
Phone: +46 8 449 89 57
E-mail: ericsson@strd.se
In the United States, Ericsson Transfer Agent Citibank:
Citibank Shareholder Services
Registered holders: +1 877 881 5969
Interested investors: +1 800 808 8010
E-mail: ericsson@shareholders-online.com
www.citibank.com/adr
Ordering a hard copy of the Annual Report:
http://www.sccorp.com/annualreport/ericsson.htm
Phone toll free: +1 866 216 0460
Contact information:
Investor Relations for Europe, Middle East, Africa and
AsiaPacific:
Telefonaktiebolaget LM Ericsson
SE-164 83 Stockholm
Sweden
Telephone: +46 8 719 00 00
E-mail: investor.relations.se@ericsson.com
Investor Relations for the Americas:
Ericsson
The Grace Building
1114 Ave of the Americas, Suite #3410
New York, NY 10036
USA
Telephone: +1 212 685 4030
E-mail: investor.relations@ericsson.com
S H A R E H O L D E R I N F O R M AT I O N
123
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
CORPORATE GOVERNANCE
REPORT 2005
INTRODUCTION
We are committed to meeting high standards of corporate governance
within the legal and regulatory frameworks that we are subject to. Our
internal rules for ethical behavior and other important rules for business
conduct have long since been established for all directors and employ-
ees through our group steering policies and directives. We believe our
management controls and procedures are generally in line with best
practices, although we continuously seek ways to make our corporate
governance even more effective and reliable.
We need the support and commitment of all our employees in order
to continue to adhere to high standards of corporate governance and
to maintain Ericsson’s reputation for integrity and good corporate citi-
zenship. Professionalism, respect and perseverance are our core val-
ues, which define how we treat each other, our customers and our
business partners. Our core values are the cornerstones of our ways
of working and prerequisites for true market leadership.
ERICSSON’S CORE VALUES
PROFESSIONALISM
through innovation
• Listen – lead
• Keep commitments
• Seek the truth –
– be responsive
know your
numbers
RESPECT
through a shared vision
• Build strength
• Qualify everyday
• Diversity as a strength
– generate energy
– provide equal
opportunities
– shape the future
PERSEVERANCE
• Lead change
• Always deliver
• Trusted global
– walk the extra mile
partner for more
than a century!
Our Code of Business Ethics and Conduct summarizes the policies and
directives which we expect all directors and employees of the Ericsson
group to follow. The fundamental purpose of the Code of Business
Ethics and Conduct is to reaffirm our commitment to a high level of
integrity in the conduct of business. As part of our commitment to
meeting high corporate governance standards, we hold corporate gov-
ernance workshops for executives.
The Code of Business Ethics and Conduct, which has been trans-
lated into more than twenty languages and communicated to all em-
ployees around the globe, has contributed to a higher awareness of the
importance of high ethical standards.
All employees are required to periodically review the Code of Busi-
ness Ethics and Conduct and must acknowledge that they have under-
stood and agree to comply with the principles outlined therein. Our
Code of Business Ethics and Conduct satisfies the applicable require-
ments of the Sarbanes-Oxley Act of 2002 and NASDAQ. The Code can
be found at:
www.ericsson.com/ericsson/corpinfo/doc/code_business_ethics.pdf.
Information on our website does not form part of this document.
We comply with the listing requirements of the stock exchanges we are
listed on, that is Stockholm Stock Exchange, the London Stock Ex-
change and NASDAQ. We also satisfy the applicable NASDAQ corpo-
rate governance requirements, subject to a few exemptions principally
reflecting mandatory Swedish legal requirements. These exemptions
have been granted by NASDAQ and are explained under “NASDAQ
Corporate Governance Exemptions” below. We also comply with the
applicable requirements of the Sarbanes-Oxley Act; including the cer-
tification of our Annual Report on the SEC’s Form 20-F by the Chief
Executive Officer and Chief Financial Officer.
The Swedish Code of Corporate Governance
Further, Ericsson applies the Swedish Code of Corporate Governance,
which is part of the Stockholm Stock Exchange’s listing requirements.
To ensure Ericsson’s compliance with the Code, our group steering
documents and procedures have been evaluated and adapted to reflect
also the requirements of the Code.
The Board of Directors has issued an Internal Control Report. In
accordance with a statement from the Swedish Corporate Governance
Board dated 15 December 2005, the 2005 Internal Control Report has
not been examined by the auditors and the report has been limited to
describing how the internal controls are organized. Consequently, the
report does not include a statement as to the effectiveness of the in-
ternal controls regarding the financial reporting. The Company is in the
process of implementation of detailed controls, documentation and
testing procedures based on the COSO framework for internal control,
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), to ensure compliance with the Sarbanes-Oxley
Act, Section 404 as from 2006, and when submitting the report for 2006
it will be possible to make an assessment on a consistent basis in ac-
cordance with an established framework.
The corporate governance, direction and management of Ericsson
is described in this Corporate Governance Report, including informa-
tion on how the Code of Corporate Governance has been applied and
information on how the Board of Directors ensures the quality of the
financial reports and communicates with the Company’s auditors.
The auditors have not reviewed Ericsson’s 2005 Corporate Gover-
nance Report.
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
1
MEETINGS WITH THE SHAREHOLDERS
In accordance with the Swedish Companies Act and Ericsson’s Articles
of Association, shareholders who exercise their voting rights at the
Annual General Meeting determine the composition of the Board of
Directors and all other issues voted on at General Meetings of Share-
holders.
At General Meetings of Shareholders each Class A-share carries
one vote, each Class B-share one tenth of one vote and each Class
C-share one thousandth of one vote. For more information on the shares
of Ericsson, please see “Share Information” in the Annual Report.
The Annual General Meeting shall be held within six months after
the end of the financial year and is normally held at the end of March
or beginning of April. In accordance with the Articles of Association, the
General Meetings of Shareholders are held in Stockholm.
A shareholder may attend and vote at the meeting in person or by
proxy. Proxies are not valid for more than a year from the date of issu-
ance. We publish notices to attend Annual and Extraordinary Meetings
of Shareholders. In such notices we provide information about the
agenda for the meeting as well as information on how to notify us of
attendance. In accordance with our Articles of Association, such no-
tices are published in Svenska Dagbladet, Dagens Nyheter and Post-
och Inrikes Tidningar. Notices are also published at the Company’s
website.
Under the Swedish Companies Act, resolutions at General Meetings
of Shareholders are normally passed by simple majority. However, the
Act requires special quorums and majorities in certain cases.
The Annual General Meeting offers shareholders the opportunity to
raise questions regarding the Company and the results of the year
under review. The members of the Board of Directors, the executive
management as well as the external auditors are normally all present
to answer such questions.
Shareholders and other interested parties may communicate di-
rectly with the Board of Directors or executive management indepen-
dent of the Annual General Meeting. All communications should be in
writing directed to the Board of Directors’ Secretariat. The sender
should indicate in the address whether the communication is intended
for the entire Board of Directors, an individual director or any of the
management team members. For contact details of the Board of Direc-
tors’ Secretariat, please see the Company’s website: www.ericsson.
com/ericsson/corpinfo/corp_governance/agm/index.shtml. Informa-
tion on our website does not form part of this document.
NOMINATION COMMITTEE
Members
The Nomination Committee, elected by the 2005 Annual General Meet-
ing, consists of Björn Svedberg (Chairman of the Committee, Investor),
Bengt Belfrage (Nordea Fonder), Christer Elmehagen (AMF Pension),
Curt Källströmer (Handelsbankens Pensionsstiftelse, Pensionskassa
and Personalstiftelse), and Michael Treschow (Chairman of the Board
of Ericsson).
The tasks of the Nomination Committee
The main task of the Nomination Committee is to propose candidates
for election to the Board of Directors including the Chairman and the
Deputy Chairmen of the Board, and, where applicable, candidates for
election of auditors. In addition, the Nomination Committee is to pro-
OUR CORPORATE GOVERNANCE STRUCTURE
Shareholders’ Meeting
Annual General Meeting/
Extraordinary General Meeting
Nomination
Committee
Unions
Board of Directors
9 Directors elected by the Shareholders’ Meeting
3 Directors and 3 Deputies appointed by the Unions
External
auditors
President and CEO
Management
2
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
pose a candidate for election of Chairman of the General Meeting of
Shareholders. The Nomination Committee also prepares proposals
concerning directors’ fees to directors not employed by Ericsson, audi-
tors’ fees and remuneration to the members of the Nomination Com-
mittee (if any), which fees are presented at the Annual General Meeting
for resolution. The directors’ fees are presented in “Notes to the Con-
solidated Financial Statements – Note C29, Information Regarding
Employees, Members of the Board of Directors and Management” in
the Annual Report.
Recommendations to the Nomination Committee may be submitted
to the Nomination Committee by e-mail or by postal mail to the ad-
dresses indicated at the Company’s website: www.ericsson.com/eric-
sson/corpinfo/corp_governance/agm/index.shtml. Information on our
website does not form part of this document.
The tasks of the Nomination Committee have been resolved by the
Annual General Meeting of the shareholders. The 2005 Annual Gen-
eral Meeting resolved that the Company should reimburse fair costs
reasonably related to the performance of the Nomination Committee’s
assignment and that the Nomination Committee should not receive any
remuneration.
It follows from the Swedish Code of Corporate Governance that,
when nominating persons for election to the Board of Directors, the
Nomination Committee is to determine whether, in its view, the persons
nominated for election are considered to be independent of the com-
pany and its senior management as well as of major shareholders in
the company.
BOARD OF DIRECTORS
General
According to Ericsson’s Articles of Association, the Board of Directors
shall consist of a minimum of five directors and a maximum of twelve
directors, with no more than six deputies. The directors shall be elect-
ed each year at the Annual General Meeting for the period up to and
including the following Annual General Meeting. A director may serve
any number of consecutive terms but is elected for one year at a time.
In addition, under Swedish law, unions have a right to appoint three
directors and their deputies to the Ericsson Board of Directors.
The Board of Directors is ultimately responsible for the organization
of the Company and the management of the Company’s operations.
The President and CEO is charged with the day-to-day management
of the Company in accordance with guidelines and instructions pro-
vided by the Board of Directors. The President and CEO shall ensure
that the Board regularly receives reports regarding the development of
the business of the Group, such as the development of the results, fi-
nancial position and liquidity as well as information regarding events of
importance to the Group.
According to the Swedish Companies Act, a member of the Board
of Directors and the President and CEO may not participate in decisions
regarding agreements between the individual concerned and the Com-
pany. Nor may a member of the Board of Directors or the President and
CEO participate in decisions regarding agreements between the Com-
pany and third parties where the individual concerned has a material
interest in the matter, which may conflict with the interests of the Com-
pany, or regarding agreements between the Company and a legal en-
tity, which the individual concerned may represent, either individually
ORGANIZATION OF THE BOARD WORK
Audit
Committee
(4 directors)
Board of Directors
12 directors
financial reporting
• Oversight over
• Oversight over
• Oversight over
internal control
auditing
Remuneration
Committee
(4 directors)
• Remuneration policy
• Incentive programs
• Executive
compensation
Finance
Committee
(4 directors)
• Financing
• Investing
• Customer credits
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
3
or together with any other person. Further, the Audit Committee has
implemented a procedure for the approval of related party transactions
in accordance with NASDAQ’s corporate governance rules.
The Annual General Meeting decides on compensation for the Direc-
tors of the Board elected by the Annual General Meeting who are not
employees of the Company.
Work of the Board of Directors
The Board schedules at least six meetings each year and in 2005, twelve
Board meetings were held. With very few exceptions, the Directors
participate in all of the Board of Directors’ meetings and are, to the
extent possible, also present at the General Meetings of Shareholders.
The Directors’ attendance at Board of Directors’ meetings and Com-
mittee meetings during 2005 is reflected in the table “Directors’ at-
tendance.”
Training sessions are scheduled on a revolving basis, normally twice
a year, in order to enhance the Directors’ knowledge of the operations
of the Group. In addition, specific training sessions are scheduled if and
when appropriate and in particular for newly elected Directors. The
training session in October 2005 mainly covered sales, processes and
procedures including pricing.
Certain matters addressed by the Board during 2005 include:
• Continued focus on development of operational excellence.
• Resolution to enter into an agreement with Marconi Corporation plc
to acquire strategic parts of Marconi’s telecommunications busi-
ness.
• Three Board Meetings have been dedicated to strategy discussions,
including discussion on development of “next generation” con-
verged networks.
• Resolution to acquire Axxessit AsA and Netspira Networks, S.L. to
• Intellectual property strategy.
expand the product portfolio.
COSO framework.
• Capital structure strategy.
• Enhancement of enterprise risk management model based on the
• Corporate governance, including adoption and implementation of
• Optimization of production resources.
• Large managed service contracts in Europe.
various corporate governance rules applicable to the Company.
The Board and its Audit Committee meet with the external auditors on
a regular basis. The Board normally meets with the auditors twice a
year and at least once without the President and CEO or any other
person from management being present. The Audit Committee meets
with the auditors at the Audit Committee meetings. During 2005, the
auditors were represented at all Audit Committee meetings, except for
one meeting per capsulam regarding approval of a related party trans-
action. The auditors present their observations from the audit of the
annual report as well as their reviews of interim reports and internal
controls.
Work Procedure
The Board of Directors has established its work procedure in accor-
dance with the requirements of the Swedish Companies Act. Through
the work procedure, the Board designates how various tasks will be
distributed among the Board and its Committees as well as between
the Board, its Committees and the President and CEO. The work pro-
cedure is reviewed, evaluated and adopted by the Board whenever
necessary, but at least once a year. The work of the Committees is
principally of a preparatory character, i.e. the Committees prepare mat-
ters for final resolution by the Board. However, the Board has authorized
each Committee to decide on certain issues in limited areas and may
also provide extended authorization to a Committee to decide on spe-
cific matters. The Board of Directors as well as each of the Committees
DIRECTORS’ ATTENDANCE
Michael Treschow
Arne Mårtensson
Marcus Wallenberg
Peter L. Bonfield
Sverker Martin-Löf
Eckhard Pfeiffer
Nancy McKinstry
Carl-Henric Svanberg
Ulf J. Johansson
Lena Torell
Jan Hedlund
Per Lindh
Torbjörn Nyman
Monica Bergström
Anna Guldstrand
Arne Löfving
4
Board meetings
Possible
12
12
12
12
12
12
12
12
8
4
12
12
12
12
12
12
Attended
12
12
12
12
12
12
11
12
8
4
12
12
12
12
11
12
Audit
Committee meetings
Possible
Attended
–
–
–
–
–
–
8
8
8
8
8
7
–
–
–
–
–
–
–
–
8
8
–
–
–
–
–
–
–
–
–
–
Finance
Committee meetings
Possible
Attended
13
13
13
13
13
13
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13
13
–
–
–
–
–
–
Remuneration
Committee meetings
Possible
Attended
8
8
–
–
–
–
–
–
–
–
–
–
8
7
–
–
6
6
2
2
–
–
8
8
–
–
–
–
–
–
–
–
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
have the right to engage external expertise in general or in respect of
specific matters, if and to the extent required or deemed appropriate.
Committees of the Board
The Board of Directors has established three Committees, i.e. the Audit,
the Finance and the Remuneration Committees. The Board appoints
Committee members from among its members.
The Audit Committee
General
The Audit Committee assists the Board in monitoring the integrity of
the financial statements, the compliance with legal and regulatory re-
quirements, the qualification, independence and performance of our
external auditors and the effectiveness of our systems of internal con-
trols for financial reporting.
The Audit Committee is primarily responsible for reviewing annual
and interim financial reports, overseeing the external audit process,
including audit fees and the internal audit function, and resolving mat-
ters arising during the course of reviews and audits. However, the Audit
Committee itself does not perform audit work. The Company has an
internal audit function, which reports to the Audit Committee and per-
forms independent audits.
Pursuant to the Board’s work procedure, the Audit Committee re-
views the audited financial statements with management and the ex-
ternal auditors, including conformity with generally accepted account-
ing principles. The Audit Committee also reviews with management the
reasonableness of significant estimates and judgments made in prepar-
ing the financial statements, as well as the quality of the disclosures in
the financial statements. In addition, the Audit Committee reviews mat-
ters arising from reviews and audits performed. The Audit Committee
has implemented approval procedures for audit and other services
performed by the external auditors in order to safeguard the auditors’
independence from the management and the Company. Further details
about these procedures are provided under “Audit Committee Pre-ap-
proval Policies and Procedures.”
In addition, the Audit Committee has implemented a pre-approval
process for transactions with related parties and a procedure for the
reporting of suspected violations, for example violations in relation to
accounting, internal accounting controls and auditing matters; a so
called whistle-blower procedure. Ericsson’s Group Security and Risk
Management function reviews and investigates reported suspected
violations and, when necessary, the reported suspected violations are
investigated together with the relevant Group Function. The Group
Security and Risk Management function summarizes suspected viola-
tions in reports including information on the relevant matter, the mea-
sures taken with respect to the matter, the responsible Group Function
and information on current status. The reports are presented at each
regular Audit Committee meeting. The Audit Committee has appointed
an external expert advisor, Mr. Peter Markborn, to assist and advise
the Committee.
Members of the Audit Committee
The Audit Committee consists of four members appointed by the Board
from among its members. Membership during 2005 included Sverker
Martin-Löf (Chairman of the Committee), Sir Peter L. Bonfield, Jan
Hedlund and Eckhard Pfeiffer.
Members of the Audit Committee must be independent from the
operational management, financially literate and familiar with the ac-
counting practices of an international company comparable to Ericsson.
At least one member must be an audit committee financial expert. The
Board of Directors has determined that each of Sverker Martin-Löf, Sir
Peter L. Bonfield and Eckhard Pfeiffer satisfy these requirements.
The work of the Audit Committee
The Audit Committee held eight meetings during 2005 and the Directors’
attendance at the meetings is reflected in the table “Directors’ atten-
dance.” The work of the Audit Committee during the year included re-
view of financial reports, the scope and execution of audits performed,
the independence of the external auditors, the internal audit function
and audit fees as well as the progress of the recent conversion to IFRS
reporting as from January 1, 2005. The Audit Committee together with
the external auditors reviewed each interim report prior to publishing.
The Committee has continuously followed the development of the rules
and regulations of the Sarbanes-Oxley Act of 2002 and the Swedish
Code of Corporate Governance and the Company’s implementation of
the said rules and regulations. Certain services other than audits have
been approved by the Audit Committee under the pre-approval policies
and procedures. Further, the Audit Committee has approved certain
related-party transactions in accordance with the pre-approval process
implemented by the Committee.
The Finance Committee
General
The Finance Committee is primarily responsible for handling matters
regarding acquisitions and divestments, capital contributions to com-
panies inside and outside the Ericsson group, raising of loans, issu-
ances of guarantees and similar undertakings and approvals of financ-
ing support to customers, as well as continuously monitoring the
group’s financial risk exposure. The Finance Committee has been au-
thorized by the Board of Directors to decide, with power to delegate
power to decide, on certain matters of the Board including direct or
indirect financing, provision of credits and the granting of security and
guarantees and certain investments, divestments and financial com-
mitments.
Members of the Finance Committee
The Finance Committee consists of four members appointed by the
Board from among its members. Membership during 2005 included
Marcus Wallenberg (Chairman of the Committee), Arne Mårtensson,
Torbjörn Nyman and Michael Treschow.
Work of the Finance Committee
The Finance Committee held thirteen meetings during the year and the
Directors’ attendance at the meetings is reflected in the table “Direc-
tors’ attendance.” The Committee resolved issues regarding customer
financing, guarantees, credit facility arrangements, conditional share-
holders’ contributions, acquisitions and divestments. After authoriza-
tion from the Board, the Committee resolved to appoint Hans Ragne-
malm member of the Board of Trustees of the Company’s Pension Trust.
The Finance Committee also monitored the financial risk exposure and
risk limits and reviewed the reporting to the Committee in this re-
spect.
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
5
The Remuneration Committee
General
The Remuneration Committee is primarily responsible for reviewing and
preparing for resolution by the Board of Directors proposals on salary
and other remuneration, including retirement compensation, to the
President and CEO. The Remuneration Committee has been given
authority to approve proposals on salary and other remuneration, in-
cluding retirement compensation for the Executive Vice Presidents and
other managers reporting directly to the President and CEO.
In addition, the Committee is responsible for strategies and gen-
eral guidelines with respect to employee compensation, including in-
centive plans and retirement compensation.
At the beginning of each year, the Committee approves any variable
pay to be made from the previous year’s plan and prepares for resolu-
tion by the Board any long-term incentive plan prior to being presented
at a meeting of shareholders.
During the year, the Committee meets for a strategic compensation
review with representatives of the Company. The Committee members
consider trends in compensation, legislative changes, disclosure rules
and the general global environment surrounding executive pay. The
outcome is to agree on the direction Ericsson will follow so that program
designs and pay policies all align with the business situation.
The Committee schedules a meeting during the fall of each year
entirely dedicated to long-term incentive plans to be presented to the
shareholders the following year.
At the end of the year, the Committee reviews salary survey data to
approve any increase of base pay for the following year for executives.
Increases, if any, are effective from the following January. The Remu-
neration Committee also prepares for resolution by the Board the tar-
gets for variable pay for the following year.
Members of the Remuneration Committee
The Remuneration Committee consists of four members appointed by
the Board from among its members. Membership during 2005 includ-
ed Michael Treschow (Chairman of the Committee), Nancy McKinstry,
Per Lindh, Lena Torell and Ulf J. Johansson. Ulf J. Johansson has been
a member since the Annual General Meeting 2005 when he replaced
Lena Torell, who was a member of the Remuneration Committee until
the Annual General Meeting 2005.
Work of the Remuneration Committee
The Remuneration Committee held eight meetings during 2005 and the
Directors’ attendance at the meetings is reflected in the table “Directors’
attendance.” The Committee reviewed and prepared for the Board a
proposal for a long-term incentive plan, which was resolved by the 2005
Annual General Meeting. The Committee approved a structure for vari-
able pay for the Group Management Team and the Extended Manage-
ment Team. The Committee has assigned an independent remuneration
expert, Mr. Gerrit Aronson, to help in obtaining an independent opinion
and advice on remuneration issues, including the pension benefits of
the President and CEO. The Committee also approved proposals for
salaries and incentive pay for 2005. For further information on compen-
sation, fixed and variable pay, please see “Notes to the Consolidated
Financial Statements – Note C29, Information Regarding Employees,
Members of the Board of Directors and Management” in the Annual
Report.
6
Remuneration of the Board
In accordance with the proposal of the Nomination Committee, the
Annual General Meeting of shareholders resolved on April 6, 2005, that
the directors’ fees should total SEK 8.8 million and that the directors’
fees should be distributed among the members of the Board elected
by the Annual General Meeting who are not employees of the Com-
pany as follows:
• The Chairman SEK 3 million;
• The Deputy Chairmen and the other Directors SEK 600,000 each;
• The Chairman of the Audit Committee SEK 350,000 and the other
• The members of the Finance Committee and the Remuneration
Audit Committee members SEK 250,000 each;
Committee SEK 125,000 each.
Review/self-evaluation
The Chairman of the Board is responsible for annually initiating and
leading a thorough evaluation of the Board work and the Board proce-
dure. The evaluation process may include written questionnaires, as
well as interviews and discussions. During 2005, the Chairman of the
Board had individual discussions with each Member of the Board of
Directors regarding the work procedure and the evaluation of the Board
work. In addition, all Directors have answered a written questionnaire.
The Chairman and the President and CEO are not present when their
respective performance is evaluated.
MEMBERS OF THE BOARD
Our Board of Directors consists of nine Directors elected by the share-
holders at the Annual General Meeting for the period until the close of
the next Annual General Meeting, and three employee representatives,
each with a deputy, appointed by the respective trade union. The Chair-
man of the Board is elected by the Annual General Meeting. The Pres-
ident and CEO of the Company may be elected director, as is the case
at present. However, the Swedish Companies Act prohibits the Presi-
dent of a public company to be elected Chairman of the Board.
Michael Treschow, Director (since 2002)
Chairman of the Board of Directors. Chairman of the Remuneration
Committee and member of the Finance Committee and the Nomination
Committee.
Chairman of the Confederation of Swedish Enterprise and Chairman
of the Board of Directors of AB Electrolux. Member of the Board of
Directors of ABB Ltd and B-Business Partners. Member of the Royal
Academy of Engineering Sciences.
Master of Science degree from the Institute of Technology in Lund,
Sweden.
Prior to his position as Chairman of the Board of Directors, Michael
Treschow was the President and CEO of the Electrolux Group, a position
to which he was appointed in 1997. Before joining Electrolux, Michael
Treschow was President and CEO of Atlas Copco AB. Earlier positions
mainly include positions with Atlas Copco.
Arne Mårtensson, Director (since 2003)
Deputy Chairman of the Board of Directors and member of the Finance
Committee.
Chairman of the Advisory Board of Stockholm School of Economics
and Chairman of the Board of Directors of Svenska Handelsbanken.
Member of the Board of Directors of Holmen, Industrivärden, Sandvik,
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
Skanska and V&S Vin & Sprit. Member of the International Business
Council of the World Economic Forum.
Econ Dr. h c. Graduate from Stockholm School of Economics and
PMD, Harvard Business School, USA.
Arne Mårtensson has previously been President and Group Chief
Executive of Svenska Handelsbanken and Executive Vice President
and head of Svenska Handelsbanken, Regional Unit Western Sweden.
Earlier positions include positions with Handelsbanken.
Arne Mårtensson has declined re-election at the Annual General
Meeting 2006.
Marcus Wallenberg, Director (since 1996)
Deputy Chairman of the Board of Directors and Chairman of the Finance
Committee.
Chairman of the Board of Directors of Skandinaviska Enskilda Bank-
en. Deputy Chairman of the Board of ICC (International Chamber of
Commerce) and Saab. Member of the Board of Directors of AstraZen-
eca PLC, AB Electrolux, Stora Enso Oy and the Knut and Alice Wal-
lenberg Foundation.
Bachelor of Science of Foreign Service degree from Georgetown
University, Washington D.C., USA.
In 1993 Marcus Wallenberg was employed by Investor AB as Ex-
ecutive Vice President and he was the President and CEO of the com-
pany between 1999 and 2005. Before joining Investor AB, Marcus
Wallenberg was a Director of Stora Feldmühle AG. Earlier positions
include positions with Skandinaviska Enskilda Banken, Citicorp and
Citibank.
Inc., Sony Corporation and T.S.M.C. Member of the International Advi-
sory Group of Citigroup and of the International Advisory Panel, Uni-
versity of London. Non-Executive Director of Actis Capital LLP and
HMG Department for Constitutional Affairs. Senior Executive Advisor
of Permira. Trustee of Cutty Sark Trust.
Honors degree in Engineering from Loughborough University,
Leicestershire, UK.
From 1996 to 2002, Sir Peter L. Bonfield was CEO and Chairman of
the Executive Committee of British Telecommunications plc. Before
assuming this position, Sir Peter L. Bonfield was Chairman and CEO of
ICL plc. Earlier positions include positions with STC plc and Texas In-
struments Inc.
Sverker Martin-Löf, Director (since 1993)
Chairman of the Audit Committee.
Chairman of the Board of Directors of Skanska, Svenska Cellulosa
Aktiebolaget SCA and SSAB. Vice Chairman of the Board of Directors
of Industrivärden. Member of the Board of Directors of the Confedera-
tion of Swedish Enterprise and Svenska Handelsbanken.
Doctor of Technology and Master of Engineering degree from the
Royal Institute of Technology, Stockholm, Sweden. Honorary Doctor at
Mid-Sweden University, Sweden.
Sverker Martin-Löf was employed by Svenska Cellulosa Aktiebo-
laget SCA from 1977 to 1983 and again from 1986 to 2002. From 1990
to 2002, Sverker Martin-Löf was the President and CEO of Svenska
Cellulosa Aktiebolaget SCA. Earlier positions include positions with
Sunds Defibrator and Mo och Domsjö AB.
Sir Peter L. Bonfield, CBE, FREng, Director (since 2002)
Member of the Audit Committee.
Eckhard Pfeiffer, Director (since 2000)
Member of the Audit Committee.
Vice Chairman of the Board of the British Quality Foundation. Mem-
ber of the Board of Directors of AstraZeneca PLC, Mentor Graphics
Chairman of the Board of Directors of Accoona Corporation. Mem-
ber of the Board of Directors of General Motors Corporation and Syntek
BOARD OF DIRECTORS
Name
Michael Treschow
Arne Mårtensson 1)
Marcus Wallenberg
Peter L. Bonfield
Sverker Martin-Löf 1)
Eckhard Pfeiffer
Nancy McKinstry
Carl-Henric Svanberg
Ulf J. Johansson
Jan Hedlund
Per Lindh
Torbjörn Nyman
Monica Bergström
Anna Guldstrand
Arne Löfving
Member
since
2002
2003
1996
2002
1993
2000
2004
2003
2005
1994
1995
2004
1998
2004
2003
Age
62
54
49
61
62
64
46
53
60
59
48
44
44
41
52
Number of
Number of
Position Class A shares Class B shares 2)
Options 3)
Chairman
Deputy Chairman
Deputy Chairman
Director
Director
Director
Director
Director & CEO
Director
Employee Representative
Employee Representative
Employee Representative
Deputy Employee Representative
Deputy Employee Representative
Deputy Employee Representative
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
820,000
13,400
704,000
–
52,000
30,400
–
15,635,599
2,176
1,497
203
7,612
2,848
3,986
6,031
–
–
–
–
–
–
–
–
–
–
–
–
–
900
–
1) Arne Mårtensson and Sverker Martin-Löf are also Directors of Industrivärden. Industrivärden is one of Ericsson’s largest shareholders, based on voting rights.
2) In accordance with the Code of Corporate Governance, the number of Class B shares includes holding by related natural and legal persons. Details available at www.fi.se.
3) Number of Class B shares assuming full exercise of options under applicable plan (including holding of options by related natural and legal persons in accordance with the Code
of Corporate Governance).
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
7
Capital AG. Board Advisor to Hitachi Data Systems. Member of the
Advisory Board of Deutsche Bank and the Advisory Council of Univer-
sity of Houston College of Natural Sciences and Mathematics.
Master of Business Administration (MBA) degree from Southern
Methodist University, Dallas, Texas, USA. Honorary Doctor of Engineer-
ing degree from the Stevens Institute of Technology, New Jersey,
USA.
Eckhard Pfeiffer was President and CEO of Compaq Computer Cor-
poration from 1991 to 1999. Prior to this, Eckhard Pfeiffer held other
management positions with Compaq. Before joining Compaq in 1983
he spent nineteen years with Texas Instruments.
Nancy McKinstry, Director (since 2004)
Member of the Remuneration Committee.
CEO and Chairman of the Executive Board of Wolters Kluwer n.v.
Member of the Board of Directors of MortgageIT, Inc. Member of the
Advisory Council of ABN AMRO Holding n.v. and the Advisory Council
of the University of Rhode Island. Member of the Board of Directors of
the American Chamber of Commerce in the Netherlands and Tias Busi-
ness School.
Master of Business Administration (MBA) degree in Finance and
Marketing from Columbia University, New York, USA, and a bachelor’s
degree (BA) in Economics from the University of Rhode Island, Kingston,
Rhode Island.
Currently Nancy McKinstry is CEO and Chairman of the Executive
Board of Wolters Kluwer n.v. From 2000 to 2003, Nancy McKinstry was
President and CEO of Legal, Tax and Business, North America, Wolters
Kluwer n.v. and a member of the Executive Board. In 1999–2000 Nan-
cy McKinstry was CEO and President of SCP Communications. Prior
to this she was President and CEO of CCH Legal Information Services
from 1996 to 1999. Earlier positions include positions with CCH Incor-
porated, Booz, Allen & Hamilton and New England Telephone Com-
pany.
Carl-Henric Svanberg, Director (since 2003)
President and CEO of Telefonaktiebolaget LM Ericsson and member
of the Board of Directors.
Member of the Board of Directors of Assa Abloy, the Confederation
of Swedish Enterprise and Hexagon.
Master of Science degree from Linköping Institute of Technology,
Sweden, and Bachelor of Science degree in Business Administration
from Uppsala University, Sweden.
Prior to assuming his position at Ericsson, Carl-Henric Svanberg
was the President and CEO of the Assa Abloy Group.
Ulf J. Johansson, Director (since 2005)
Member of the Remuneration Committee.
Chairman of the Board of Directors of AcandoFrontec AB, Eurostep
Group AB, Novo A/S and Novo Nordisk Foundation. Member of the
Board of Directors of Trimble Navigation Ltd. Member of the Royal
Swedish Academy of Engineering Sciences.
Doctor of Technology and Master of Science in Electrical Engineer-
ing from the Royal Institute of Technology, Stockholm, Sweden.
Ulf J. Johansson is a founder of Europolitan Vodafone AB where he
was the Chairman of the Board between 1990 and 2005. Earlier posi-
tions include President and CEO of Spectra-Physics and Executive Vice
President of Ericsson Radio System AB.
8
Jan Hedlund, Director (since 1994)
Member of the Audit Committee. Employee representative.
Appointed by the union Svenska Metallindustriarbetareförbundet.
Per Lindh, Director (since 1995)
Member of the Remuneration Committee. Employee representative.
Appointed by the union Sif.
Torbjörn Nyman, Director (since 2004)
Member of the Finance Committee. Employee representative.
Appointed by the union CF.
Monica Bergström, Deputy Director (since 1998)
Employee representative.
Appointed by the union Sif.
Anna Guldstrand, Deputy Director (since 2004)
Employee Representative
Appointed by the union CF.
Arne Löfving, Deputy Director (since 2003)
Employee representative.
Appointed by the union Svenska Metallindustriarbetareförbundet of
which he is Deputy Chairman of the Gothenburg division. Arne Löfving
is em ployee representative of the Board of Ericsson Microwave Sys-
tems.
At the Annual General Meeting on April 6, 2005, Ulf J. Johansson re-
placed Lena Torell as member of the Board. Lena Torell had been a
member of the Board since 2002.
Carl-Henric Svanberg is the only Director who holds an operational
management position at Ericsson. No Director has been elected pursu-
ant to an arrangement or understanding with any major shareholder,
customer, supplier or other person.
COMPANY MANAGEMENT
Operational Units
Our operations are carried out in three business segments; Systems,
Phones and Other operations. The largest segment, Systems, is orga-
nized in business units that are responsible for the provision of products
and services, and market units that are responsible for marketing, sales,
and customer support. For more information regarding our business
segments, please see “Information on the Company” in the Annual
Report. A significant amount of authority and responsibility for tasks
pertaining to daily operations is assigned to the management of our
various operating units. Governance of our operating units is carried
out by steering committees, with members who are representatives of
the Group Management Team, the Extended Management Team and
the management of the particular operating unit.
Group Functions
A number of Group Functions perform tasks pertaining to certain group-
wide matters that are not naturally referable to a specific operational
unit: Communications, Finance, Human Resources and Organization,
Legal Affairs, Operational Excellence, Research & Development, Sales
& Marketing and Strategy & Product Management.
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
Their responsibilities include the formulation of the Group’s strategy,
issuing of policies and directives, business control, resource allocation
and risk management. In addition, Group Functions are responsible for
the consolidation and reporting of financial performance, financing and
cash management, legal issues, communication with various stake-
holders including employees, investors, press and media as well as
coordination and administration of a number of Group-wide issues.
Other important Group-wide matters, such as Corporate Responsibil-
ity, are managed by Group Functions in conjunction with a network of
experts from various parts of the Company.
The President and Chief Executive Officer
– Operational Management
The Board of Directors appoints the President and CEO and the Ex-
ecutive Vice Presidents. Management of day-to-day operations is the
responsibility of the President and CEO and the Group Management
Team consisting of, apart from the President and CEO, the Chief Finan-
cial Officer, the Chief Technology Officer and head of Research & De-
velopment, the heads of Group Functions and the heads of Business
Units Access, Systems, Global Services and Transmission and Trans-
port Networks.
Compensation policies, other terms of employment for senior man-
agement and outstanding incentive schemes for senior management
are described in “Notes to the Consolidated Financial Statements –
Note C29, Information Regarding Employees, Members of the Board
of Directors and Management” in the Annual Report.
Carl-Henric Svanberg
President and CEO and member of the Board of Directors (since April
2003).
Member of the Board of Directors of Assa Abloy, the Confederation
of Swedish Enterprise and Hexagon.
Master of Science degree from Linköping Institute of Technology,
Sweden, and Bachelor of Science degree in Business Administration
from Upp sala University, Sweden.
Prior to assuming his position at Ericsson, Carl-Henric Svanberg
was the President and CEO of the Assa Abloy Group.
Karl-Henrik Sundström
Executive Vice President and Chief Financial Officer and head of Group
Function Finance (since April 2003).
Bachelor degree in Finance from Uppsala University, Sweden, and
Advanced Management Program, Harvard Business School, USA.
Prior to assuming his position as above, Karl-Henrik Sundström was
head of Business Unit Global Services.
GROUP MANAGEMENT TEAM
Name
Carl-Henric Svanberg
Karl-Henrik Sundström
Appointed
year
2003
2003
Age
53
45
Kurt Jofs
2004
47
Bert Nordberg
2004
49
Björn Olsson
2004
49
Carl Olof Blomqvist
1999
54
Joakim Westh
2004
44
Marita Hellberg
2003
50
Torbjörn Nilsson
1998
52
Henry Sténson
Håkan Eriksson
2002
2004
50
44
Hans Vestberg
2005
40
Sivert Bergman
2006
59
Position
President & CEO
Executive Vice President & CFO
and Head of Group Function Finance
Executive Vice President
and Head of Business Unit Access
Executive Vice President and
Head of Group Function Sales & Marketing
Executive Vice President and
Head of Business Unit Systems
General Counsel and
Head of Group Function Legal Affairs
Head of Group Function
Operational Excellence
Head of Group Function Human
Resources & Organization
Head of Group Function Strategy
& Product Management
Head of Group Function Communications
Chief Technology Officer and
Head of Research & Development
Executive Vice President and
Head of Business Unit Global Services
Head of Business Unit Transmission
& Transport Networks
Number of
Class A shares
–
Number of
Class B shares
15,635,599 1)
–
–
–
–
20,472
216,714
31,794
24,298
6,080
28,633
–
–
–
–
–
–
–
107,941
35,755
62,127
19,533
11,313
20,241
4,825
Options and matching rights are reported in Notes to the Consolidated Financial Statements – Note C29, Information Regarding Employees, Members of the Board of Directors
and Management in the Annual Report.
1) In accordance with the Code of Corporate Governance, the number of Class B shares includes holding by related natural and legal persons. Details available at www.fi.se.
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
9
Kurt Jofs
Executive Vice President and head of Business Unit Access (since
January 2004).
Board member of ATEA and Chairman of the Board of Peoples
Travel Group.
Master of Science degree, Royal Institute of Technology in Stock-
holm, Sweden.
Prior to assuming his position as above, Kurt Jofs has held senior
management positions in, among others, Linjebuss and ABB Ventilation
Products.
Bert Nordberg
Executive Vice President and head of Group Function Sales & Market-
ing (since January 2004).
Bachelor degree in Electronic Engineering, Malmö, Sweden, and
Engineer in the Marines, Berga, Sweden, and university courses in
International Management, Marketing and Finance, Insead University,
France.
Prior to assuming his position as above, Bert Nordberg was head
of Business Unit Systems.
Prior to assuming his position as above, Torbjörn Nilsson was head
of Group Function Marketing & Strategic Business Development.
Henry Sténson
Senior Vice President and head of Group Function Communications
(since May 2002).
Studied law, sociology and political science, Linköping University,
Sweden, and at the Swedish War Academy, Karlberg, Stockholm, Swe-
den.
Prior to assuming his position as above, Henry Sténson was head
of SAS Group Communication, SAS AB.
Hans Vestberg
Executive Vice President and head of Business Unit Global Services
(since February 2005).
Bachelor of Business Administration degree, University of Uppsala,
Sweden.
Prior to assuming his position as above, Hans Vestberg was Senior
Vice President and head of Business Unit Global Services (since Janu-
ary 2004) and prior to assuming that position, Hans Vestberg was head
of Market Unit Mexico.
Björn Olsson
Executive Vice President and head of Business Unit Systems (since
January 2004).
Master of Science degree in Industrial Engineering and Manage-
Joakim Westh
Senior Vice President and head of Group Function Operational Excel-
lence (since December 2004).
ment, Linköping Institute of Technology, Sweden.
Chairman of the Board of Directors of Absolent AB and member of
Prior to assuming his position as above, Björn Olsson was Chief
the Board of Directors of VKR Holding A/S.
Information Officer.
Carl Olof Blomqvist
Senior Vice President, general counsel and head of Group Function
Legal Affairs (since May 1999).
Master of Laws, LLM, University of Uppsala, Sweden.
Prior to assuming his position as above, Carl Olof Blomqvist was a
partner of Mannheimer Swartling law firm.
Håkan Eriksson
Senior Vice President and Chief Technology Officer and head of Group
Function Research & Development (since January 2004).
Master of Science degree in Electrical Engineering, Linköping Insti-
tute of Technology, Sweden.
Prior to assuming his position as above, Håkan Eriksson was Vice
President and head of Research & Development.
Marita Hellberg
Senior Vice President and head of Group Function Human Resources
& Organization (since September 2003).
Bachelor degree in Social Studies, University of Stockholm, Sweden,
and Advanced Management Program, Cedep, France.
Master of Science degree, Royal Institute of Technology, Stockholm,
Sweden, and Master of Science degree within Aeronautics & Astronau-
tics, MIT, Boston, USA.
Prior to assuming his position as above, Joakim Westh was head of
J. Westh Företagsutveckling AB and before that, Joakim Westh held
various senior management positions within Assa Abloy.
Sivert Bergman
Senior Vice President (since January 1, 2006) and head of Business
Unit Transmission and Transport Networks (since 2002).
Bachelor degree of electric engineering complemented with studies
in mathematics, Trollhättan, Sweden.
Prior to assuming his position in 2002, Sivert Bergman was Re-
search and Development Manager for transmission activities and head
of Business Unit Transmission Solutions.
During 2005, the officer below was also a member of the Group Man-
agement Team of the Company:
Mats Granryd
Former Senior Vice President and head of Business Unit Mobile Sys-
tems CDMA,
Prior to assuming her position as above, Marita Hellberg was Senior
Since July 18, 2005 Vice President and head of Market Unit India &
Vice President of Human Resources of NCC Group.
Sri Lanka and member of the Extended Management Team.
Torbjörn Nilsson
Senior Vice President (since October 1998) and head of Group Function
Strategy & Product Management.
Master of Science degree, Lund’s University, Sweden, and Master
of Business Administration, University of Stockholm, Sweden.
10
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
planning, scope and content of the annual audit. The auditors then
examine the year-end financial statements and report findings, includ-
ing an assessment of the accuracy and completeness of the accounts
as well as adherence to appropriate accounting procedures and prin-
ciples. In addition, the auditors, at least annually, provide information
to the Board about assignments performed in addition to auditing ser-
vices, the consideration paid for such services and other circumstanc-
es of relevance for determining the auditor’s independence. For further
information on the contacts between the Board and the auditors, please
see “Work of the Board of Directors” above.
All our quarterly reports are subject to review by our auditors.
Statutory auditors
Peter Clemedtson
Authorized Public Accountant, PricewaterhouseCoopers.
Elected 2004 (as successor for the remaining mandate period of
Carl-Eric Bohlin) until 2007.
Audit services performed in other large companies such as: Elec-
trolux, KMT, Medivir, OMX, SEB, SinterCast.
Bo Hjalmarsson
Authorized Public Accountant, PricewaterhouseCoopers.
Elected 2003 until 2007.
Audit services performed in other large companies such as: portfo-
lio companies to EQT, OMX, Sony Ericsson.
Thomas Thiel
Authorized Public Accountant, KPMG.
Elected 2003 until 2007.
Audit services performed in other large companies such as: Folksam,
Handelsbanken, Holmen, Peab, Ratos, SKF, Swedish Match.
In addition to the Group Management Team, there is an Extended
Management Team consisting of the officers of the Group Management
Team and:
Asia;
rope;
Lanka;
Europe;
global customer account executive Telecom Italia;
Eastern Europe, Middle East & Africa (CEMA) regions;
• Cesare Avenía, Vice President and head of Market Unit Italy and
• Rory Buckley, Vice President and head of Market Unit North East
• Ragnar Bäck, Chairman of the Market Units within the Central and
• Jan Campbell, Vice President and head of Market Unit Central Eu-
• Sandeep Chennakeshu, President Ericsson Mobile Platforms AB;
• Mats Granryd, Vice President and head of Market Unit India & Sri
• Jef Keustermans, Vice President and head of Market Unit Northern
• Kinson Loo, Vice President and global customer account executive
• Ingemar Naeve, Vice President and head of Market Unit Iberia and
• Anders Olin, Vice President and global customer account executive
• Mats Olsson, Vice President and head of Market Unit Greater Chi-
• Torbjörn Possne, Vice President and global customer account exec-
• Angel Ruiz, Vice President and head of Market Unit North Ameri-
• Jan Signell, Vice President and head of Market Unit South East Asia;
• Gerhard Weise, Vice President and head of Market Unit Mexico.
global customer account executive Telefónica;
utive Deutsche Telekom;
Hutchison;
Vodafone;
and
na;
ca;
During 2005, the officers below were also members of the Extended
Management Team of the Company:
Deputy auditors
Jeanette Skoglund
Authorized Public Accountant, PricewaterhouseCoopers.
Kristian Teär
Former Vice President and head of Market Unit South East Asia.
Elected 2003 until 2007.
Audit services performed in several large subsidiaries of global com-
Kristian Teär left the company on June 1, 2005.
panies such as TDC Song.
Mats Dahlin
Former Vice President and head of Business Unit Enterprise.
Robert Barnden
Authorized Public Accountant, PricewaterhouseCoopers.
Mats Dahlin left the company on April 30, 2005.
Elected 2004 (as successor for the remaining mandate period of
No member of the Extended Management Team has any business
activities which compete with or in any other way negatively affect
Ericsson’s business, and no member of the Extended Management
Team has been appointed on account of any arrangement or under-
standing with any major shareholder, customer, supplier or other per-
son.
AUDITORS
In Swedish companies, the external, independent auditors are elected
by the shareholders at the Annual General Meeting for a period of four
years. The auditors report to the shareholders at Shareholders’ Meet-
ings.
To ensure that the Board of Directors’ information and control re-
quirements are fulfilled, the auditors report to the Board regarding the
Peter Clemedtson) until 2007.
Audit services performed in other large companies such as: Acando-
Frontec, Nobia, SCA, Seco Tools, VSM Group.
Stefan Holmström
Authorized Public Accountant, KPMG.
Elected 2003 until 2007.
Audit services performed in other large companies such as: Atlas
Copco, Länsförsäkringar, Posten, Swedish Meat, V&S Vin & Sprit.
Fees paid to external auditors
Ericsson paid the fees (including expenses) listed in the table in “Notes
to the Consolidated Financial Statements – Note C31, Fees to auditors”
in the Annual Report for audit-related and other services.
The Audit Committee will review and pre-approve any services
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
11
other than audits to be performed by the external auditors, in order to
assure that the provision of such services does not impair the auditors’
independence. The scope of services other than audit services pro-
vided by the auditors during the period 2003 to 2005 is described in
“Notes to the Consolidated Financial Statements – Note C31, Fees to
auditors” in the Annual Report.
Audit Committee Pre-approval Policies and Procedures
The Audit Committee has particular responsibility for preparing recom-
mendations or proposals for resolution on the performance of, and
level of the audit fee payable to, the external auditors. The Audit Com-
mittee reviews the scope and execution of audits performed (external
and internal) and analyzes the result of and the costs for such audits.
Our Audit Committee has established pre-approval policies and pro-
cedures for other services than audits performed by the external audi-
tors. Under these policies and procedures, proposed such services
either (i) may be pre-approved by the Audit Committee without consid-
eration of specific case-by-case services (“general pre-approval”); or
(ii) require the specific pre-approval of the Audit Committee (“specific
pre-approval”). Tax, transaction, risk management, corporate finance,
attestation and accounting services and general services have received
a general pre-approval of the Audit Committee, provided that the esti-
mated fee level for the project does not exceed SEK 1 million. The Audit
Committee will be informed of services rendered in compliance with this
general pre-approval policy. All other audit, audit-related, tax and other
services must receive specific pre-approval. The Audit Committee has
delegated specific pre-approval authority to the Audit Committee Chair-
man for proposed services with an estimated fee level not exceeding
SEK 2.5 million per project. The Chairman reports any pre-approval
decisions to the Audit Committee at its next scheduled meeting. Pre-
approval authority may not be delegated to management. The policies
and procedures also include a list of prohibited services.
Applications to provide services that require specific approval by
the Audit Committee must be made by an auditor. Such an application
shall be submitted to the CFO and, if supported by the CFO, submitted
by the CFO to the Audit Committee for final approval.
Disclosure Controls and Procedures
Ericsson maintains disclosure controls and procedures that are de-
signed to ensure that information required to be disclosed pursuant to
the Securities Exchange Act of 1934, its listing agreement with Stock-
holm Stock Exchange and the ongoing listing requirements of the Lon-
don Stock Exchange and NASDAQ is recorded, processed, summa-
rized and reported within the time periods specified, and that such
information is accumulated and communicated to the management,
including the CEO and CFO, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclo-
sure controls and procedures, management recognizes that any con-
trols and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evalu-
ating the cost-benefit relationship of possible controls and procedures.
Also, we have investments in certain entities that we do not control or
manage. Accordingly, our disclosure controls and procedures with
respect to such entities are necessarily substantially more limited than
those we maintain with respect to our subsidiaries.
We have carried out an evaluation, under the supervision and with
12
the participation of management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls
and procedures as of the end of the period covered by this annual re-
port. Based on the foregoing, our CEO and CFO concluded that our
disclosure controls and procedures were effective at the reasonable
assurance level.
There have been no changes in our internal control over financial
reporting identified in connection with our evaluation thereof that oc-
curred during the period covered by this annual report that have mate-
rially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Our Disclosure Policies
The purpose of our financial disclosure policies is to help achieve a fair
market value for Ericsson shares through transparent, informative and
consistent communications with the investment community on a fair
and equal basis. Our aim is to communicate our strategy and results in
such a way that shareholders and potential investors can gain sufficient
understanding of how our Company works, our operational perfor-
mance, what our prospects are and the risks we face that these op-
portunities may not be realized.
To continue to achieve these goals, we apply the following principles
in our financial reporting and disclosure:
• Transparency: our disclosure is designed to enhance understanding
of the economic drivers and operational performance of our busi-
ness, in order to build trust and credibility
• Consistency: we aim to ensure that our disclosure is consistent and
comparable within each reporting period and between reporting
periods
• Simplicity: we try to disclose information in as simple a manner as
possible, consistent with allowing readers to gain the appropriate
level of understanding of our business operations and perfor-
mance
• Relevance: we aim to avoid information overload by focusing our
disclosure on what is relevant to Ericsson’s stakeholders, or as re-
quired by regulation or listing agreements
• Timely: we utilize well established disclosure controls and proce-
dures to ensure that all disclosures are complete, accurate and
performed on a timely basis
• Fair and equal: we publish all material information via press releases
• Best practice: we strive to ensure that our disclosure is in line with
to ensure simultaneous dissemination to all market participants
industry norms, and, if possible, lead the way to improved best in
class standards.
Our website (www.ericsson.com/investors) includes comprehensive
information about Ericsson, including an archive of our annual and in-
terim reports, on-demand-access to recent news and copies of pre-
sentations that senior management have given at industry conferenc-
es.
Independence requirements on the Board
The Ericsson Board of Directors is subject to a variety of independence
requirements, summarized below. The Board complies with these re-
quirements except for certain NASDAQ requirements which are con-
tradictory to Swedish Law and for which exemption has been granted,
see “NASDAQ Corporate Governance Exemptions” below.
The Stockholm Stock Exchange listing requirements
• Not more than one person from the senior management may be a
member of the board (applies also to senior management in the
company’s subsidiaries).
• A majority of the directors elected by the shareholders’ meetings
(employee representatives not included) are to be independent of
the company and its management. An overall assessment should
be made in each case in order to consider whether a director is
independent or not.
• At least two of the directors who are independent of the company
and its management shall also be independent of the company’s
major shareholders and one of these directors should have experi-
ence in the requirements placed on a listed company.
The Swedish Code of Corporate Governance
Independence requirements on the board of directors (excluding em-
ployee representatives):
member of the board.
• Not more than one person from the senior management may be a
• A majority of the directors elected by the shareholders’ meetings
• At least two of the directors who are independent of the company
are to be independent of the company and its management.
and its management shall also be independent of the company’s
major shareholders.
Independence requirements on the audit committee:
of the company and senior management.
• The majority of the audit committee members are to be independent
• At least one member of the committee is to be independent of the
• A board member who is part of senior management may not be a
company’s major shareholders.
member of the committee.
Independence requirements on the remuneration committee:
• The members of the committee are to be independent of the com-
pany and the senior management.
The NASDAQ Market Place Rules
Independence requirements on the board of directors:
• A majority of the members of the board of directors must be inde-
pendent within the meaning of the NASDAQ rules.
Ericsson has obtained an exemption from NASDAQ allowing for em-
ployee representative directors to be exempt from NASDAQ’s indepen-
dence requirements.
Sarbanes-Oxley Act of 2002 and corresponding NASDAQ rules
Independence requirements on the audit committee:
• All members of the audit committee must be independent within the
meaning of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 includes a specific exemption for non-
executive employee representatives.
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
NASDAQ Corporate Governance Exemptions
Pursuant to an amendment to NASDAQ’s Marketplace Rules adopted
in 2005, foreign private issuers such as Ericsson may follow home
country practice in lieu of certain of NASDAQ’s corporate governance
requirements.
Prior to the adoption of the 2005 amendment, NASDAQ’s Market-
place Rules provided that foreign private issuers may, upon application,
be exempt from certain of its corporate governance requirements when
these requirements were contrary to the laws, rules or regulations, or
generally accepted business practices of the issuer’s home jurisdic-
tion.
Ericsson has received (and is entitled to continue to rely thereon
under the 2005 amendment) exemptions from NASDAQ’s corporate
governance requirements under the Marketplace Rules as follows:
• from the requirement that the majority of the board consist of, and
that each of the audit and remuneration committees consist solely
of, independent directors, in order to allow for the required participa-
tion of employee representatives on the board and each committee
thereof as mandated by Swedish law;
• from the requirement that an issuer’s director nominees be selected,
or recommended for the board’s selection, by either a majority of
independent directors or a nomination committee comprised sole-
ly of independent directors, in order to allow for the fact that: (1) un-
der Swedish law, shareholders (not the board) have the authority to
nominate directors for election to the board; and (2) in line with
common market practice among Swedish public companies,
Ericsson’s Nomination Committee is elected by shareholders; and
• from the requirement that the independent directors of the board
have regularly scheduled meetings at which only independent direc-
tors are present (“executive sessions”), in order to allow for the fact
that under Swedish law: (1) employee representatives on the board
have the right to participate in all board and board committee meet-
ings; and (2) decisions may not be made by the board unless, where
possible, all of the directors have had the opportunity to participate
and have received satisfactory information in order to reach a deci-
sion.
In addition, Ericsson relies on the exemption provided by the 2005
amendment with respect to the requirement of NASDAQ’s Marketplace
Rules relating to quorums. NASDAQ requires that an issuer provide, as
specified in the issuer’s bylaws, for a quorum for any meeting of the
holders of its common stock, such quorum to be not less than 33.3
percent of the outstanding shares of the issuer’s voting common stock.
This is contrary to Swedish law followed by Ericsson under which:
(1) meetings of shareholders are convened in accordance with the rules
of the Swedish Company Act and the articles of association of the is-
suer; and (2) the quorum requirements for any specific meeting of share-
holders differ based on the subject matter to be decided upon at the
meeting.
C O R P O R AT E G O V E R N A N C E R E P O R T 2 0 0 5
13
I N T E R N A L C O N T R O L R E P O R T 2 0 0 5
INTERNAL CONTROL REPORT 2005
The Board of Directors’ Report on Internal Control over Financial
Reporting for year 2005
According to the Swedish Companies Act and the Swedish Code of
Corporate Governance, the Board of Directors is responsible for
ensuring that the Company has satisfactory internal control. This report
has been prepared in accordance with the Swedish Code of Corporate
Governance, section 3.7.2, and is thereby limited to internal control over
financial reporting. This report is not a part of the annual report.
The Swedish Corporate Governance Board has made a pronounce-
ment regarding the Board of Directors’ reporting on internal control
under the Code of Corporate Governance to the effect that, for 2005,
it is not necessary for the Board of Directors to make a statement of
how well the internal control over financial reporting has worked, and
the Internal Control Report for 2005 does not have to be examined by
the auditors. In accordance with this pronouncement, we do not make
any such statement in this report for 2005 and this report is not exam-
ined by the auditors.
INTERNAL CONTROL OVER THE FINANCIAL
REPORTING
Ericsson has integrated risk management and internal control in its
business processes. As defined in the COSO framework for internal
control, issued by the Committee Of Sponsoring Organizations of the
Treadway Commission (COSO), components of internal control are: a
control environment, risk assessment, control activities, information
and communication, and monitoring.
Control environment
The Company’s internal control structure is based on:
tees and the company president
• the division of work between the Board of Directors and its commit-
• the Company’s organization and mode of operations, with well-
• steering documents such as policies and directives, including a code
• a management system based on a number of well-defined planning,
defined roles and responsibilities and delegations of authority
of business ethics and conduct
operational and support processes.
The most essential parts of the control environment regarding the
financial reporting are included in steering documents related to
accounting and financial reporting. Such steering documents are
updated regularly for changes e.g. in laws, financial reporting standards
and listing requirements, such as IFRS and the Sarbanes-Oxley Act
(SOX) in the United States.
Risk assessment
Risks related to financial reporting are fraud and loss or embezzlements
of assets, undue favorable treatment of counter-parties at the expense
of the Company, and other risks of material misstatements in the
financial statements, e.g. related to recognition and measurement of
assets, liabilities, revenue and cost or insufficient disclosure. Ericsson
is managed through common processes, where risk management is
integrated in each process, applying various methods for risk assess-
ment and control, to ensure that the risks the Company is exposed to
are managed according to established policies. Accounting and
reporting policies and directives cover areas of particular significance
to support correct accounting, reporting and disclosure.
Control activities
The Company’s business processes include financial controls regarding
approval and accounting for business transactions. The financial closing
and reporting process has controls regarding recognition, measure-
ment and disclosure, including the application of critical accounting
policies and estimates, in consolidated companies as well as on group
level. All legal entities, business units and market units in Ericsson have
their own controller functions participating in planning and evaluation
of each unit’s performance. Their regular analysis of the financial reports
for their respective units, together with analysis performed at group
level, is an important element of the internal control to ensure that the
financial reports do not contain material errors.
For external financial reporting purposes, additional controls that all
disclosure requirements are fulfilled are performed by a Disclosure
Committee established by the Company management.
The Company has implemented controls to ensure that the financial
reports are prepared in accordance with IFRS. The Company also
largely completed implementation of detailed documentation of internal
controls related to accounting and financial reporting as well as moni-
toring of the performance and results of such controls to ensure that
Ericsson will be able to assess the effectiveness of the internal control
in such a way as to be compliant with SOX requirements. A thorough
review of materiality levels related to the financial reports has resulted
in implementation of detailed control documentation in a number of
subsidiaries with significant scale of operations. For other subsidiaries,
overall controls related to their control environment and compliance
with policies and directives related to the financial reporting are imple-
mented.
Information and communication
The Company has information and communication channels supporting
completeness and correctness of the financial reporting, e.g. by making
internal instructions and policies regarding accounting and financial
reporting known and accessible to all employees concerned, as well
as regular updates and briefing documents regarding changes in
accounting policies and reporting and disclosure requirements.
There is regular financial and management reporting by legal and
operational units to internal steering groups and Company management,
with analysis and comments of financial performance and risks. The
Board of Directors receives financial reports monthly. The Audit
Committee has established a routine for anonymous reporting by
employees any suspected violations of laws, regulations, policies or
directives, a so-called “whistleblower” procedure.
Monitoring
The Company’s financial performance is reviewed at each Board
meeting. The committees of the Board fulfill important monitoring
functions regarding remuneration, borrowing, investments, customer
I N T E R N A L C O N T R O L R E P O R T 2 0 0 5
1
financing, cash management, financial reporting and internal control.
The Audit Committee and the Board of Directors review all interim and
annual financial reports before they are released to the market.
The Company’s process for financial reporting is reviewed annually
by the Management and forms a base for the evaluation of the internal
management system and internal steering documents to ensure that
these cover all significant areas related to financial reporting. The
compliance with policies and directives is also monitored through
annual self-assessments and representation letters from heads and
controllers in all consolidated companies as well as from business units
and market units. The Company has an internal audit function, reporting
to the Audit Committee, which performs independent audits.
ASSESSMENT OF THE INTERNAL CONTROL OVER
FINANCIAL REPORTING
As the Company is listed in the United States, the requirements in SOX
section 404 regarding assessment of the effectiveness of internal con-
trols over financial reporting are applicable as from the fiscal year 2006.
The Company is in the process of implementation of detailed controls,
documentation and testing procedures according to the COSO frame-
work to ensure compliance with SOX 404 as from 2006.
Stockholm February 24, 2006
Telefonaktiebolaget LM Ericsson (publ)
Org. no. 556016-0680
THE BOARD OF DIRECTORS
2
I N T E R N A L C O N T R O L R E P O R T 2 0 0 5
CONTENTS
2005 MILESTONES
LARGEST CONTRACTS IN 129 YEAR HISTORY
Ericsson signs multi-year agreements to manage 3’s networks
in Italy and UK, covering more than eight million subscribers.
EXCLUSIVE SUPPLIER FOR THE “BRAINS” OF
‘‘NEXT GENERATION’’ NETWORK
Ericsson’s Softswitch selected to play a key strategic role in
the development of BT’s 21st Century Network.
FIRST MOBILE BROADBAND (HSDPA) NETWORKS
IN COMMERCIAL SERVICE
During 2005, Ericsson deployed HSDPA in 21 networks in
17 countries in Asia, the Middle East, Africa, Europe and
North America. This includes the world’s first commercial
HSDPA launch for Cingular in the US.
ERICSSON INSIDE
Ericsson’s 3G/WCDMA platforms are now in more than
15 million mobile phones, representing an industry-leading
market share.
EXPANDING OUR PRODUCT AND MARKET PORTFOLIO
Marconi aquisition strengthens Ericsson’s position in the
accelerating optical transmission and broadband access
markets.
BRINGING MULTIMEDIA CONTENT TO
OPERATORS AND CONSUMERS
Ericsson entered into distribution agreements with major
record labels and Napster to enhance the availability of mobile
music, and launched a mobile TV application to bring
interactive television to mobile devices.
ANNUAL REPORT 2005
1
OPERATIONAL REVIEW
25
SHARE INFORMATION
30
TWO-YEAR SUMMARY
32
LETTER FROM THE CHAIRMAN
33
BOARD OF DIRECTORS’ REPORT
(AUDITED CHAPTER)
41
CONSOLIDATED FINANCIAL STATEMENTS
(AUDITED CHAPTER)
45
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (AUDITED CHAPTER)
89
PARENT COMPANY FINANCIAL STATEMENTS
(AUDITED CHAPTER)
95
NOTES TO THE PARENT COMPANY FINANCIAL
STATEMENTS (AUDITED CHAPTER)
108
AUDITORS’ REPORT
109
INFORMATION ON THE COMPANY
118
FORWARD-LOOKING STATEMENTS
119
RISK FACTORS
123
SHAREHOLDER INFORMATION
CORPORATE GOVERNANCE REPORT 2005
INTERNAL CONTROL REPORT 2005
Project management Ericsson Investor Relations
Design and production Publicis Stockholm and Paues Media
Photography Andreas Lind and Dan Kullberg (page 24)
Reprographics C2
Printing Elanders, Falköping, Sweden
EN/LZT 108 8181 R1A
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ERICSSON ANNUAL REPORT 2005
Communication is
a basic human need.
Telefonaktiebolaget LM Ericsson
Group Function Communications
SE-164 83 Stockholm, Sweden
www.ericsson.com
Printed on Scandia 2000 and Ideal volym – totally chlorine free (TCF)
paper that meets international environmental standards.
ISSN 1100-8962
© Telefonaktiebolaget LM Ericsson 2006