Ericsson
Annual Report 2006

Plain-text annual report

dRIvINg ChANgE ANd CREATINg OPPORTUNITIES ERICSSON ANNUAL REPORT 2006 A N N U A L R E P O R T 2 0 0 6 Opportunity The broadband revolution is just beginning. Cutting-edge applications and innovative services are driving the need for higher-speed and higher-capacity networks, in line with our vision of an all-communicating world. Result As of year-end 2006, Ericsson had rolled out 46 HSPA broadband networks on five continents, bringing easy access to the Internet to more corners of the world than ever before. Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden www.ericsson.com Printed on Amber graphic and holmen Ideal volume – chlorine free paper that meets international environmental standards. EN/LZT 108 9051 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2007 CONTENTS Annual Report 2006 1 Operational review 25 Letter from the Chairman 26 Five-year summary 28 Board of directors' Report* 40 Consolidated financial statements* 44 Notes to the consolidated financial statements* 89 Risk factors* 94 Parent Company financial statements* 99 Notes to the Parent Company financial statements* 115 Auditors' Report 116 Information on the Company 129 Forward-looking statements 130 Share information 135 Shareholder information 136 Compensation Corporate Governance Report 2006 *Chapters covered by the Auditors' Report Annual publications The Ericsson Annual Report is intended to accurately describe Ericsson's financial and operational performance during 2006. This publication includes a Corporate Governance Report. The Ericsson Summary Annual Report is an extract of the full Annual Report. We issue a separate Corporate Responsibility Report. A summary is included on page 22 of this document. Our website www.ericsson.com is updated on a regular basis and contains a variety of useful information about the Company, including downloadable versions of each of the above reports. dRIvINg ChANgE ANd CREATINg OPPORTUNITIES dRIvINg ChANgE ANd CREATINg OPPORTUNITIES dRIvINg ChANgE ERICSSON ANNUAL REPORT 2006 ERICSSON SUMMARY ANNUAL REPORT 2006 ERICSSON CORPORATE RESPONSIBILIT Y REPORT 2006 Design and production Publicis Stockholm and Paues Media Photography Andreas Lind Reprographics C2, Jonas Skoglund, TBK Printing Sörmlands grafiska Quebecor AB/Printer Consult This is Ericsson Why invest in Ericsson? Founded in 876, Ericsson is a leading provider of communi­ Global leader cations networks, related services and handset technology We are a leading supplier of systems and services to most of platforms. Through our Sony Ericsson joint venture, we are the world's largest mobile and fixed network operators. Ericsson also a major provider of handsets. Our experience building has a long history of innovation and an industry­leading R&D networks in more than 75 countries gives us unique customer program that focuses on being first to market with new solu­ and consumer insights, and our extensive portfolio of telecom­ tions based on open standards. munication solutions and intellectual property offer a true business advantage. We are committed to working with our customers and partners to expand the borders of telecom­ munications for the benefit of people everywhere. Our vision Our vision is to be the prime driver in an all­communicating world. This means a world in which all people can use voice, data, images and video to share ideas and information whenever Solid financial performance 2006 is the third consecutive year in which Ericsson has reported good sales growth and best­in­class operating margin. Cash flow before financial investing activities was SEK ­2.6 billion. Excluding major acquisitions/divestitures, we generated however a healthy cash flow from operations of SEK 2.2 billion. The dividend has increased over each of the past two years and the Board has proposed a further  percent increase for 2006. and wherever they want. Long-term growth We are gaining market share in mobile and fixed networks as well as in services. Our professional services business is experiencing particularly strong growth and generating a return on capital employed well above the group average. Moreover, we anticipate that our Sony Ericsson joint venture, our industry­leading patent portfolio and our newly­formed multimedia business unit will increasingly contribute favorably to our overall financial performance. T h i S i S E R i C S S O n  FinanCial highlighTS Change from 2005 20052) 20043) 20034) 20024) SEK million net sales Operating income – operating margin net income Earnings per share, diluted, SEK Cash dividends per share, SEK 2006 177,783 35,828 20.2% 26,436 1.65 0.50) 7.% 8.3% 8.% 7.8% .% 5,82 33,084 2.8% 24,460 .53 0.45 3,972 26,706 20.2% 7,836 . 0.25 86,86 69,268 5,44 80,445 33,643 7,738 ­,239 ­9.5% ­0,844 ­0.69 0 45,773 ­2,299 ­4.6% ­9,03 ­.5 0 82,372 58,873 08,989 60,48 46,209 209,3 73,026 37,539 73,607 6,463 214,940 82,926 142,447 120,113 21,552 2.7% ­3.8% 6.8% 8.2% ­30.2% 209,336 86,84 33,332 0,622 30,860 40,728 ­9.6% 50,645 42,9 26,998 4,75 24.4% 23.7% 27.4% 56.2% 1.3 5.1 3.9 25.6% 26.7% 28.7% 49.0% .2 5.0 4. 25.5% 24.2% 26.4% 43.8% .2 5.7 4. .% ­6.2% ­5.9% 34.4% .0 6. 3.4 ­.9% ­26.7% ­.3% 36.4% .0 5. 3.0 63,781 19,094 98,694 3.8% ­9.8% 5.% 56,055 2,78 93,879 50,534 2,296 86,50 5,583 24,408 72,966 64,62 30,24 86,695 Net SaLeS: good growth, mainly driven by mobile networks, professional services and acquired Marconi sales. OperatING marGIN: Best­in­class operating margin reflects scale advantage and operational excellence. Net INcOme: SEK 26.4 billion is the highest in Ericsson's history. caSH dIVIdeNdS: SEK 0.50 proposal is double the level paid for 2004. Net caSH: Strategic acquisition of Marconi assets reduces net cash. ) For 2006, as proposed by the Board of Directors. 2) Ericsson has adopted the new option in iaS 9 as from January , 2006. 2005 has been restated accordingly. 3) 2004 has been restated in accordance with iFRS. 4) 2002 and 2003 have not been restated. The differences refer mainly to capitalized development costs, goodwill and pensions. Year-eNd pOSItION, SEK million Total assets Working capital Capital employed Stockholders’ equity interest­bearing liabilities and post­employment benefits net cash ratIOS EBiTDa Return on equity Return on capital employed Equity ratio Capital turnover inventory turnover accounts receivable turnover StatIStIcaL data, Year-eNd number of employees – Worldwide – Of which in Sweden Export sales from Sweden, SEK million Our 10 LarGeSt marketS 2006 % of total sales Net SaLeS (SEK billion) 45.8 5.8 32.0 7.7 SaLeS BY reGION 2006 Ericsson net sales (SEK billion) and change (%) year­over­year 177.8 Western Europe Central & Eastern Europe, Middle East and africa 51.9 +24% 50.3 +23% 15.9 -18% 16.5 -14% 43.2 +42% 2002 2003 2004 2005 2006 north america latin america asia Pacific 8 7 6 6 5 4 4 4 3 3 a S U a h i n C it a ly K U a i n p S u a s tr a li a d i a i n w S n e d e B r a z il i n d s i a e n o 2 F i n a n C i a l h i g h l i g h T S KEY aChiEvEMEnTS 2006 We were awarded contracts to build Our 3G (Wcdma/HSpa) solution was mobile networks in many areas of asia, selected by leading operators around the africa and the Middle East, bringing tele­ world including eMobile and Softbank (Japan), coms to millions of people for the first time. aT&T and T­Mobile (US) and Telstra (australia). Fixed-line operators, including T­Com and Telefonica, increasingly selected our broadband access and optical transmission solutions. We extended our lead in services, now supporting networks with one billion subscribers. We won 23 new ImS (iP Multimedia Subsys­ tem) contracts for fixed and mobile networks and led the industry forward by putting six new iMS networks into commercial operation. vodafone group named us Supplier of the Year and designated us as a preferred iMS supplier. We deployed our one mil- lionth microwave Mini­linK used to transport traffic in mobile and fixed networks. Our solution for fixed broad­ band access (vDSl2) was named Best access technology at Broadband World Forum 2006. We exceeded our goal to reduce r&d lead times by an additional 20 percent during the year. Our acquisition and successful integration of Marconi further strengthened our ability to deliver end­to­end solutions. K E Y a C h i E v E M E n T S 2 0 0 6 3 3 TO MY FEllOW ShaREhOlDERS, 2006 was a year of great change, enabling us to capture current greatest strengths and has made Ericsson a driving force opportunities and open the door to new ones. Our 7 percent behind the industry’s evolution for the past 30 years. sales growth outpaced the industry and extended our leading The world of communications is driven by consumers' position in systems and services. desire for mobility and broadband. Today, there are more than 2.7 billion mobile subscriptions in the world, and in a change creates Opportunities few years this figure is expected to pass four billion, fueled by Our market leadership and scale advantage have stimulated high­growth markets. as most of these markets have limited increased merger activity among our main competitors. We fixed­line networks, the mobile networks will be the way for believe that this is a positive development, as over the long many new subscribers to access the internet for the first time. term this will create fewer but stronger competitors and a We rolled out almost one half, and the vast majority in healthier market. Our customers' needs are also changing as terms of users, of all hSPa mobile broadband networks that they move toward all­iP networks and high­speed broadband. were put into commercial service during 2006, enabling our Our recent reorganization and the acquisitions of Marconi in customers to launch a new generation of mobile data services. 2006 and Redback networks in 2007 have put us in a stron­ The combination of rapid subscriber growth, increased usage, ger position than ever to address the evolving needs of the and new applications, such as internet surfing, music down­ world's leading operators. Our ability to lead the telecommu­ loads and mobile Tv, will require ongoing operator investments nications industry through times of change is one of our to improve network coverage, capacity and functionality. The number of Class B shares (and Class a shares, if applicable) includes holdings by related natural or legal persons. torbjörn Nilsson Senior Vice President and head of Group Function Strategy & Product Management (until December 31, 2006) Born: 953 Shares held: 69,54 Class B marita Hellberg Senior Vice President and head of Group Function Human Resources and Organization Born: 955 Shares held: 47,09 Class B Henry Sténson Senior Vice President and head of Group Function Communications Born: 955 Shares held: 42,574 Class B kurt Jofs Executive Vice President and head of Business Unit Access Born: 958 Shares held: 229,522 Class B carl Olof Blomqvist Senior Vice President, General Counsel and head of Group Function Legal Affairs Born: 95 Shares held: 6,080 Class a 46,49 Class B Joakim Westh Senior Vice President and head of Group Function Operational Excellence Born: 96 Shares held: 24,886 Class B 4 M E S S a g E F R O M T h E C E O the prime driver in an all-communicating World smarter and gain a better understanding of customer needs, By supporting operators to expand their mobile and fixed we have fostered an environment dedicated to serving our networks to reach a broader population, we are helping to customers better than anybody else. Ericsson is a company of improve quality of life, spur socio­economic development, outstanding talent. i take pride in our employees and the work and foster mutual understanding. By evolving and improving that we do around the world. as we close the book on 2006 the networks, and bringing new multimedia services to and enter 2007, i am excited about the prospects for telecom­ market, we are also creating a world in which all people can munications and the significance our industry plays in global have access to information, entertainment, social communi­ development. Supplying the technology and services that ties and more, whenever and wherever they want. at the enrich the everyday lives of billions of people around the world… same time, our Sony Ericsson joint venture is introducing what a fantastic company to work for! feature­rich and attractive mobile handsets to facilitate simple use of these services. Striving for Operational excellence These achievements would not have been possible without our focus on operational excellence. By identifying best practices in key dimensions of our operations and striving to work Carl­henric Svanberg President & CEO carl-Henric Svanberg President and CEO Born: 952 Shares held: 5,683,577 Class B Bert Nordberg Executive Vice President, head of Group Function Sales and Marketing Born: 956 Shares held: 43,87 Class B karl-Henrik Sundström Executive Vice President, Chief Financial Officer and head of Group Function Finance Born: 960 Shares held: 34,230 Class B Håkan eriksson Senior Vice President, Chief Technology Officer and head of Group Function R&D Born: 96 Shares held: 22,980 Class B Sivert Bergman Senior Vice President and head of Business Unit Broadband Networks Born: 946 Shares held: 7,260 Class B Björn Olsson Executive Vice President and head of Business Unit Systems Born: 956 Shares held: 40,76 Class B Hans Vestberg Executive Vice President and head of Business Unit Global Services Born: 965 Shares held: 27,364 Class B M E S S a g E F R O M T h E C E O 5 OUR BUSinESS FOCUS 2006  Reaching more people 2 increasing speed and capacity Our fixed and mobile broadband solutions dramatically Ericsson brought telecommunications to more people improve network speed and capacity. network evolutions in more parts of the world than ever before, deploying are enhancing quality of service and enabling operators to rural networks and boosting capacity in many high­ launch new data services for their subscribers. On the mobile growth markets. The number of global subscriptions side of the business, we have supplied 46 of the 96 3g/hSPa grew by a record 500 million, ending the year at 2.7 (high­speed packet access) networks launched to date. On billion. Our cost­efficient and scalable solutions require the fixed side, we delivered iP­DSl networks to more than fewer radio sites while maintaining high­quality network 00 customers around the world during 2006, putting Ericsson performance. in this way, we help our customers to among the global leaders in broadband access. reduce their operating costs, enabling them to expand coverage to reach more users in new geographic areas. Opportunities in a converging world Many of the world’s leading operators are beginning to con­ make Ericsson an attractive partner for operators seeking sup­ verge their mobile and fixed networks into one. For consumers port to reliably and cost­effectively evolve their networks to this means a richer experience with easier access to a wide accommodate multiple technologies. range of content and applications. For operators it means reduced costs and shorter time to market with new services. This, in turn, creates new opportunities for suppliers, like Ericsson, with both mobile and fixed expertise. During 2006, we complemented our established leadership in mobility by strengthening our fixed­line portfolio. Our tech­ nology leadership, global presence, consumer understanding and extensive experience in integrating and managing networks Same services on all devices iP Multimedia Subsystem (iMS) is the key that enables sub­ scribers to access the same content and services from a multitude of devices. We are the world's leading supplier of iMS with 34 contracts for commercial launch and more than 70 trials. 6 O U R B U S i n E S S F O C U S 2 0 0 6 3 Preparing for the future 4 Expanding our role By providing operators with innovative offerings and reducing their cost of operations, we support our operators in evolving With the introduction of broadband access, subscribers their businesses. We are taking increased responsibility as can enjoy a wide variety of multimedia applications. To a prime integrator and managed services partner for our accommodate this traffic, however, many operators will customers. Our 24,000 service professionals in more than have to overhaul their core networks as well. During 2006, 40 countries provide local competence and global expertise Ericsson took the lead in supporting operators to prepare in consulting, network rollout, systems integration, managed their networks for an all­iP environment by deploying services, education and support. in 2006, we provided 24­hour softswitch, iMS, and optical and microwave transport network support for one billion subscribers. solutions. We also worked with partners via Ericsson Mobility World to bring new multimedia content to the mobile environment. an impressive customer base We serve a broad base of more than 600 customers in over Winning New Business 75 countries, including the largest mobile operators in Europe, We continued to expand our addressable market and gain north america, latin america, asia, Middle East and africa. The market share, with 48 new and expanded agreements for world’s ten largest operators are all our customers and together supply of network equipment and/or services during the year. represent almost 50 percent of all mobile subscriptions worldwide. Recent acquisitions will enable us to expand our offerings diversity reduces risk The diversity of our customer base and the broad appeal of our offerings are reflected in the fact that, during 2006, no single customer accounted for more than 7 percent of group sales. Our sales were also evenly divided between emerging and developed markets. even further, enhancing our ability to attract new customers and to deliver increased value to the many we already serve. O U R B U S i n E S S F O C U S 2 0 0 6 7 Opportunity Our customer Telstra wanted to quickly bring reliable mobile broadband service to all Australians, no matter where they live. Result Ericsson worked together with Telstra to deploy 3G/HSPA mobile broadband in just ten months, the fastest rollout ever. The high- speed network reaches 98 percent of the population, benefiting – among other things – health care and education. 8 K a P i T E l R U B R i K ThE ERiCSSOn aDvanTagE We have been present in most of our markets for more than 00 years, building strong, long­term relationships with Dedication to long­term customer relationships the world’s leading operators. Our significant scale advantage, end­to­end offerings and a local presence in every major market enable us to serve as a true partner for cost­effective delivery of solutions and support to a diverse base of customers. as operators are increasingly reducing the number of different suppliers they rely on, the responsiveness of our employees and the power of our portfolio of products and services that have built a trust over many decades, will be key to our future success. Commitment to technology leadership Ericsson has earned a reputation for innovation and technology leadership by developing open standards and bringing reliable, cost­effective network solutions to market. Our early involvement in creating new technologies often enables us to be first to market with new solutions – a distinct competitive advantage for operators that choose us as their primary supplier. Our extensive portfolio of approximately 22,000 patents covers a variety of fixed and mobile technologies, including gSM and WCDMa – the technologies that connect more than 80 percent of the world’s mobile subscribers. Passion for operational excellence Our mission to take our customers forward in the best possible way requires simple, efficient and effective processes that consistently yield high­quality products and services with low cost of ownership. This, combined with our core values of professionalism, respect and perserverance, are key to our ways of working. During the past three years, our empha­ sis on operational excellence has enabled us to increase sales without increasing operating expenses at the same rate. Furthermore, we reduced R&D lead times in 2006 by more than 20 percent. as a result, we can bring products to market faster than ever at a lower R&D cost. T h E E R i C S S O n a D va n Ta g E 9 2 3 OUR PRODUCTS anD SERviCES Segment Systems: Mobile and fixed networks mobile access Ericsson is the global leader in the area of 2g (gSM) and 3g (WCDMa/hSPa) mobile networks. By deploying our scalable Ericsson Expander solutions in new coverage areas, operators can profitably serve low­spending users as the total cost of Ip core network (switching, routing, control and transport) The evolution to internet Protocol (iP) starts in the core. Our core network solutions include industry­leading softswitch, iP infrastructure, iMS, media gateways and microwave and optical transport solutions to provide cost­effective manage­ ment of voice and data traffic. Our acquisition of Redback networks will further strengthen our iP product portfolio. ownership is at least 30 percent lower. More than 40 percent multimedia services and applications of the operators who have begun rolling out mobile broad­ a broadband network with an iP core provides operators with band technology have chosen Ericsson’s WCDMa/hSPa almost everything they need to begin offering multimedia radio network. This evolution from gSM to hSPa means that services. The last pieces of the puzzle are multimedia applica­ tasks which once took minutes to accomplish in the mobile tions and devices to attract subscribers, increase usage and network (e.g. downloading a song) will now take seconds. generate revenues. gSM and WCDMa/hSPa share a common core network, While multimedia applications and content have flourished meaning that previous investments are preserved as opera­ in the world of fixed communications, operators are just now tors transition from voice­centric to multimedia networks. beginning to launch attractive features for the mobile sub­ We are now actively involved in the development of standards scriber. Our ability to understand the needs of consumers and for the long­Term Evolution (lTE) of 3g which will further enterprises, and our relationships with content and applica­ enhance the consumer experience. tion partners enable us to deliver such solutions and drive the Fixed broadband access future of mobile multimedia. The acquisition of Marconi strengthened our iP­DSl offer­ Working end-to-end ing for fiber­ and copper­based broadband access networks. Sony Ericsson’s cutting­edge multimedia handsets and our The expansion of our fixed broadband offering has been an handset technology platforms and global services team important step in reinforcing our ability to address network complete our end­to­end proposition. By ensuring that all ele­ operators as they begin integrating their fixed and mobile ments of the communication chain – the phone, the access networks. and core networks, the applications and the services – work together, we provide a powerful offering for our customers. Systems' sales by business activity Mobile networks 74% Fixed networks 7% Professional Services 9% mobile Networks Sales (SEK billion) 23.4 2.6 98.2 82. Fixed Networks Sales (SEK billion) 2.0 8.0 4.6 4.6 2003 2004 2005 2006 2003 2004 2005 2006 0 O U R P R O D U C T S a n D S E R v i C E S 150 120 90 60 30 0 12 10 8 6 4 2 0 tHe cONVerGed NetWOrk SERVICES MULTIMEDIA SERVICES & APPLICATIONS USERS MOBILE FIXED SWITCHING/ ROUTING CONTROL SWITCHING/ ROUTING TO INTERNET AND OTHER NETWORKS TRANSPORT ACCESS CORE NETWORK acceSS cOre NetWOrk mobile: radio base stations connect users to the mobile network. Fixed: aXe products provide traditional voice service. digital Subscriber Lines (dSL) and “fiber to the home” solutions connect users to the fixed or converged network. Switching/routing: routers, media gateways and aXe switches connect voice and broadband traffic between users and multimedia services. control: Softswitch and ImS control the traffic flow between users and manage the wide variety of content available through the networks. this is often referred to as the "brains" of the network. transport: Optical and microwave transmission connect all parts of the network, enabling the high-speed transport of voice and data. muLtImedIa SerVIceS aNd appLIcatIONS examples: - e-mail - Internet browsing - music - mobile tV and IptV - mmS for sharing video, images etc. - Location-based services - Business support systems, including charging and billing solutions O U R P R O D U C T S a n D S E R v i C E S  Our products and services continued Services as percent of Systems’ sales Services 2006 focus on their core business of attracting, serving and retain­ By outsourcing certain activities to Ericsson, operators can 32% ing customers. We realized the strategic importance of services early on, and by the end of the 990s we were the first supplier to form a services business unit. Today, our services orga­ nization leads the industry with 24,000 professionals in 40 countries. We use our experience, skills and scale to support customers in growing their business. professional services Managed services We provide high­quality operations of fixed and mobile net­ works at a predictable cost. in addition, as a leading provider of hosting solutions, we enable operators to launch multimedia services in a simple, fast and cost­effective manner. We are the industry leader in managed services, managing networks with more than 00 million subscribers. Systems integration Operators can minimize risk by engaging Ericsson to integrate equipment from multiple suppliers and handle technology change programs, as well as to design and integrate new solutions. More and more operators who face challenging technology transformations or introductions of multimedia services are asking us to serve as a prime integrator. Consulting and education as technologies and business models become more complex in the evolution towards broadband and all­iP, our customers rely on our consultants to support them in selecting technologies, identifying multimedia services for growth and developing the competence of their employees. Customer support having experienced professionals available around­the­clock to provide customer support is a crucial part of our service offer­ ing. giving advice on how to maximize efficiency in day­to­day operations ensures network uptime and lowers total cost. 2005 28% 2004 25% Services sales (SEK billion) 40.2 15.4 24.9 31.1 11.0 20.1 53.7 21.3 32.3 Network rollout 2004 2005 2006 Network rollout Professional Services note: due to rounding, the two parts of a column may not add up exactly to the total. Our ability to effectively roll out networks generates significant revenues. in 2006, we raised the bar on network rollout effi­ ciency, launching the world’s geographically largest national hSPa network for Telstra (australia) in only ten months. 2 O U R P R O D U C T S a n D S E R v i C E S ericsson’s state-of-the-art Network Operations centers (NOc) play a key role in managing the day-to-day operations of customer networks and in hosting content, applications and enablers. Seven global NOcs provide local managed-services solutions for operators and enterprises. Segment Other Operations Ericsson provides several other important and complementary technical solutions. The units included in Other Operations are small but strategically important. Ericsson Mobile Platforms is a leading supplier of technology platforms (gSM/gPRS, EDgE and WCDMa/hSPa) for mobile handsets and PC cards. During 2006, more than 7 million 3g/WCDMa handsets were based on our technology. We currently license these platforms to 9 handset providers, enabling them to launch new products faster, with lower technology risks. Ericsson network Technologies (Cables) is a leading provider of copper and fiber cables for telecommunications and power networks. Ericsson Enterprise provides communications systems and services that enable businesses, public entities and educational institutions to have seamless access to applications and services across multiple locations. Ericsson Power Modules is a leading supplier of DC/DC power converters and regulators, mainly to the communications industry. Ericsson Microwave Systems was sold to Saab aB in September 2006. O U R P R O D U C T S a n D S E R v i C E S 3 a RECORD YEaR FOR SOnY ERiCSSOn Sony Ericsson Mobile Communications is a 50/50 joint ven­ 3G phones ture, combining Ericsson’s technology leadership with Sony’s Some of Sony Ericsson’s best selling WCDMa phones during consumer electronics expertise to create a powerful partner­ 2006 were the K800, K60 and W850. The success of these ship that brings innovative products to market and provides feature­rich and attractively designed 3g models has enabled us with a valuable link to the consumer. Sony Ericsson to capture a market share in 3g that is almost a record year in 2006, Sony Ericsson Mobile Communications celebrated their 5th anniversary by delivering record­breaking results. double its position in the overall market. This is promising for the future as 3g phones are expected to represent a much larger share of the market in the years ahead. Sony Ericsson reported 46 percent unit growth, 5 percent sales Gaining share in a growing market growth and profits that more than doubled. The joint venture's Sony Ericsson’s ability to differentiate itself with attractive, success is partly attributable to its broadened portfolio, feature­rich phones has enabled the joint venture to enter including the introduction of the 3.2 mega pixel Cyber­shotTM 2007 with strong momentum. The popularity of Sony Ericsson’s imaging phone and a wide range of Walkman® music phones. high­end models has generated brand awareness across the a complete product portfolio While Sony Ericsson’s multimedia Cyber­shotTM and Walkman® line­up captured most of the headlines, the joint venture shipped more than 75 different phones in all during the year, including a wide variety of models in the mid­ and entry­level segments. Over recent years, Sony Ericsson has developed into a full portfolio player and this is reflected in their market share gain during 2006. portfolio, encouraging more users in all categories to choose Sony Ericsson as their brand of choice. With more than 980 million handsets sold industry wide in 2006 and the market expected to break the one billion mark in 2007, Sony Ericsson is well positioned to capitalize on continued market growth. Cyber­shot™ is a trademark of Sony Corporation WalKMan® is a registered trademark of Sony Corporation 1,298 Number of units shipped (million) Sales (million Euro) Income before taxes (million Euro) 74.8 51.2 42.3 27.2 22.9 4,673 4,176 10,959 7,268 6,525 512 486 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 4 a R E C O R D Y E a R F O R S O n Y E R i C S S O n -130 -291 Opportunity The evolution of mobile broadband is rapidly increasing the demand for feature-rich phones, providing easy access to the latest applications and content. Result During 2006, Sony Ericsson celebrated its five-year anni- versary with over 20 million Walkman® phones sold since releasing the first model in the fall of 2005. K a P i T E l R U B R i K 5 an all­COMMUniCaTing WORlD – more people communicating in more ways communication for all going mobile! in 2006, the number of 3g/WCDMa subscrip­ Following the record growth in new mobile subscriptions tions nearly doubled to approximately 00 million globally. during 2006, we expect that the total number of mobile sub­ We anticipate that this figure will grow significantly over the scriptions will surpass three billion already in 2007. This rapid next five years. The traffic increase in fixed broadband net­ growth is possible thanks to the introduction of cost­effective works will be greater still. solutions, such as Ericsson Expander. This far­reaching and scalable radio base station enables operators to profitably launch networks in sparsely populated or developing areas that typically generate aRPU (average revenue per user) well below USD 0. We also offer solutions that enable operators to enhance capacity without having to add new radio base stations. apart from being a case for good business, these solutions enhance quality of life by helping to eliminate the impact of distance and to establish the foundation for more advanced data services. taking broadband mobile multimedia Thanks to hSPa and the transformation to all­iP networks, the mobile broadband genie is out of the bottle and there is no end to what it can do: high­speed downloads of music, photos, streaming television and other multimedia applications. Operators are making great strides in this area as they seek to introduce attractive offerings and generate increased revenues in a very competitive marketplace. in 2006, the multimedia market was estimated to be approximately USD 25 billion and is expected to exceed USD 00 billion by 20. Our end­to­end approach includes our Consumer and During the past ten years, the internet has revolutionized Enterprise lab, through which we conduct more than 20,000 the world, connecting more than a billion homes and offices face­to­face interviews annually, providing valuable insights into one massive global network. in the early 990s, analog for ourselves and our customers. it also includes our access modems and narrowband dial­up connections made surfing to unique content through the more than 250,000 developers the web and downloading content possible but often frustrat­ linked to Ericsson Mobility World. These assets combined with ing due to slow response times over these connections. Then our network and handset technology expertise and our charging, came digital subscriber lines and broadband! messaging and provisioning solutions put us in a very strong Fixed broadband is today expanding its reach throughout position to support operators in launching the new services the world, and as it does, an exciting thing has happened… needed to capture the multimedia opportunity. broadband has broken away from the home and office and is In 1876, Lars magnus ericsson opens up a telegraph repair shop in Stockholm. this same year, alexander Graham Bell patents the telephone. By the turn of the century, ericsson is building fixed networks on five continents. In the 1920s, manual switching centers give way to automatic switching. the 1980s see the intro- duction of analog mobile networks. In the 1990s, fixed broadband is introduced as is atm switching, bringing with it the start of the Internet age. 6 a n a l l­ C O M M U n i C aT i n g W O R l D Mobile Subscriptions Broadband Lines High-growth market Mature markets 5000 4000 3000 2000 1000 0 ) n o i l l i m ( s n o i t p i r c s b u S d e t r o p e R Fiber/WLL Cable DSL 700 600 500 400 300 200 100 0 ) n o i l l i m ( s e n L i -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -11 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -11 With subscription penetration of approximately 40% there is still enormous potential for growth. Over the next 5 years, over 80% of new subscriptions are expected to come from emerging markets, with the most significant growth coming from India and china. Source: Ericsson today there are more than 270 million fixed broadband subscriber lines worldwide and this number is expected to more than double to almost 600 millions by 2011. Source: Ericsson Traffic in Mobile Access Networks Traffic in Fixed Access Networks 3 2.5 2 1.5 1 0.5 0 -05 Mobile data Voice IPTV Internet Voice 300 250 200 150 100 50 0 r a e y / e t y b a r e T n o i l l i M -06 -07 -08 -09 -10 -11 -05 -06 -07 -08 -09 -10 -11 r a e y / e t y b a r e T n o i l l i M the mobile Internet, tV, video, music and the rise of the mobile office are all expected to lead to significant traffic growth in the world's mobile networks. data is expected to surpass voice by the end of the decade. today operators are making the transition to all-Ip networks and are just beginning to launch IptV. the estimated increase in IptV usage assumes 4 hours daily use of IptV, by 50 million subscribers in 2011. Source: Ericsson Source: Ericsson the new millennium starts with extraordinary growth, as the Internet fuels a massive increase in data traffic. the first 3G mobile broadband networks are introduced. In 2002, the number of mobile subscriptions surpasses fixed. By 2006, Internet users exceed one billion and mobile subscriptions reach 2.7 billion. Operators begin conversion to lower-cost and higher-performance all-Ip networks. Over the next few years, more than four billion people will have access to fixed or mobile broadband networks for voice and data. this will bring us one step closer to our vision of an all-communicating world. a n a l l­ C O M M U n i C aT i n g W O R l D 7 lEaDing, Changing, gROWing Ericsson has led the evolution of telecommunications. From Business unit Global Services – Our expertise in network the introduction of fixed­line networks in the late 800s to rollout, consulting, education, integration, customer support fixed and mobile broadband today, we have built an unpar­ and managed services enables us to capitalize on the trend alleled track record that is a result of our ability to predict, among operators to outsource a broader range of activities to respond to and capitalize on change. network suppliers. as of January , 2007, we have realigned our organization to reflect market trends, strengthen our leadership and expand our market reach. Through efficiently applying our resources into three key business units we are sharpening our focus on the markets that we believe will enable us to capture emerging opportunities and best meet the needs of our global customer base. Business unit multimedia – Our applications and con­ tent management solutions help our customers to increase their sales. Ericsson Mobility World brings a broad array of music, images, games and global positioning applications to operators and to their subscribers. Ericsson Consumer and Enterprise lab and the complementary strengths of Sony Business unit Networks – With our robust portfolio of mobile Ericsson Mobile Communications further enhance our con­ and fixed broadband access technologies, core networks, sumer perspective for superior end­to­end offerings. transport and next­generation iP networks, we will effectively meet the coverage, capacity and network evolution needs of our customers. the prime driver in an all-communicating world make people's lives easier and richer provide affordable communication for all enable new ways for companies to do business eXceL in Network Infrastructure eXpaNd in Services eStaBLISH position in multimedia Solutions Operational excellence in everything we do 8 l E a D i n g , C h a n g i n g , g R O W i n g  networks “ Ericsson has been # in mobile networks for many years and has now re­emerged as a leading contender in fixed networks as well. This has enabled us to expand our business with existing customers and to enter into important new relationships with others. in the years ahead, fixed and mobile broadband will be deployed in more and more areas of the world and Ericsson networks will be a driving force behind this evolution.” kurt Jofs Executive Vice President and head of Business Unit Networks global Services “ Whether measured by numbers or by performance, we are the global leader in both professional services and network rollout. in 2006, operators spent an estimated USD 6­65 billion on services and the market has shown consistent growth over the years. Our ability to support our customers in growing their business and in significantly reducing network operations costs explains why our services are in such high demand. With our services offering, our custom­ ers gain significant efficiencies.” Hans Vestberg Executive Vice President and head of Business Unit Global Services Multimedia “ The future is here and now ­ it's about music on the move, mobile Tv, internet and e­mail access wherever you want it. Ericsson is helping to drive the multime­ dia experience by enabling our customers to develop successful businesses that energize consumers' lives by providing rich, exciting, differentiated content. Our innovative technology, application platforms, cutting­edge Sony Ericsson phones and relationships with leading content developers and application providers make us a valuable partner for operators and other industry players seeking to access more revenue streams.” Jan Wäreby Senior Vice President and head of Business Unit Multimedia l E a D i n g , C h a n g i n g , g R O W i n g 9 QUESTiOnS anD anSWERS Why is Ericsson expanding headcount? as a knowledge company, our employees are our greatest asset. During the year we added a net of 7,726 employees. This increase was primarily a result of the Marconi acquisition and the remaining additions were largely in Services to accommodate the 33 percent growth in that area. going forward we expect to increase our headcount in line with our business needs. We have already announced plans to hire 500 new research engineers over the next few years to further strengthen Ericsson’s technology leadership and accelerate research, especially in the area of iP­networks and multimedia technology. What is Ericsson's acquisition strategy? Over the past three years we have consistently grown our business faster than the market while maintaining best­in­class profitability. This has been achieved primarily through organic growth, complemented by bolt­on acquisitions that have brought us cutting­edge technology or expertise. going forward our strategy remains the same. What is Ericsson's most significant challenge going forward? Keeping pace with change, bringing cost­efficient, revenue­generating solutions to market, and meeting the needs of our customers better than our competitors are our primary challenges and key to our future success. although we have been a telecommunications leader for many decades, this industry is always evolving and we must evolve along with it if we are to stay in the lead. The last 20 years have seen tremendous growth in mobile subscriptions. looking to the future, the pace of new subscriber additions will eventually slow and growth will need to be driven in new ways. growing minutes of use and a rapid increase in both mobile and fixed broadband data traffic are changing our business. Our recent acquisitions have expanded our technology portfolio and our growing services business will play an even more important role in meeting the challenges in the future. 20 Q U E S T i O n S a n D a n S W E R S What is Ericsson’s intellectual Property position? With around 22,000 patents, we believe that we hold leading patent portfolios in a number of key technology standards including gSM, EDgE, WCDMa, hSPa and MBMS. We also hold strong portfolios of essential patents in a variety of other fixed and mobile technologies including voice over iP (voiP), aTM, WaP, WiMaX, Wlan and TD­SCDMa. These patents are very valuable, reducing our cost and creating an additional source of income for our Company. What does Ericsson mean by Operational Excellence? at Ericsson we use the term operational excellence to refer to our philosophy of striving to do things smarter today than yesterday and to do it in a smarter way than our competitors. By driving excellence and innovation in everything that we do, we create a competitive advantage. Much was achieved through operational excellence in 2006, including improved R&D lead times and the successful integration of Marconi operations. We also reorganized our operations into three business units, creating a more customer­oriented organization and paving the way for continuous efficiency improvements in the years ahead. how will Ericsson utilize its net cash of SEK 40.7 billion? Maintaining a strong cash position is essential to us and we intend to keep it at a robust level for the foreseeable future. Our cash provides us flexibility in this competitive and capital­intensive business. it will be used to fund organic growth, to execute large network projects, to provide selective customer financing, to make bolt­on acquisitions, and to pay the annual dividend to shareholders. The dividend payout has increased from SEK 0.25 for 2004, to SEK 0.45 for 2005 and the Board has proposed a dividend of SEK 0.50 for 2006. as we continue to generate free cash flow, the Board will propose appropriate dividend levels and determine how to best utilize our cash to maximize long­term shareholder value. Q U E S T i O n S a n D a n S W E R S 2 CORPORaTE RESPOnSiBiliTY – our contribution to a better world Corporate Responsibility is about building enduring value minimize risks – economic, environmental and social – for our Company and our stakeholders. Our goal is to generate positive business impacts and ensure that controls are in place to minimize risks. Generate positive business impacts Our approach ensures that controls are in place to deepen stakeholder trust and to minimize operational risks. • Our Code of Business Ethics outlines expectations Ericsson has on its employees. This Code is periodically reviewed, and in 2006 all employees were asked to review and acknowledge understanding of this Code. We are committed to solutions that increase our own and our customers’ positive impact on the planet. During 2006: • We introduced new “green site” concepts, promoting the use of a variety of renewable energy sources to power our • Ericsson was an early signatory to the Un global Compact principles which cover human rights, fair labor practices, envi­ ronment and anti­corruption. These principles are reflected in our Code of Conduct and are valid for all employees and all radio base stations. We announced our pioneering biofuel suppliers. project with pan african­operator MTn and the gSMa Development Fund in nigeria. • Ericsson Consumer and Enterprise lab conducted studies in Kenya and nigeria, deepening the industry's understanding of how mobile communications can serve as a major catalyst of socio­economic development in very low­income villages. • We are driving market penetration and subscriber growth in emerging economies by introducing new technologies and business models which lower operators’ costs of network rollout in rural and low­income areas. in this way, we are nar­ rowing the "digital divide" by increasing the accessibility and affordability of services. • Ericsson Response, our employee volunteer disaster relief program, provided on­the­ground support in Pakistan for nine months following the devastating earthquake. • as one of the founding partners of the KTh Center for Sustainable Communications in Sweden, we are exploring the role of advanced communication technologies in a sustainability context. • During 2006, we completed a pilot project using a risk­ based approach to the Code’s implementation to evaluate supplier performance and to reduce operational risks. • We joined the Business leaders initiative on human Rights (BlihR), a business­led initiative designed to help lead and develop the corporate response to human rights. • Ericsson is in compliance with the EU Directive on Restriction of the use of certain hazardous Substances in Electrical and Electronic Equipment (RohS). • We have begun global implementation of our Ecology Management Provision (first introduced in 2002), offering take­back of customers’ decommissioned equipment for all products, in all markets. • Ericsson’s goal is to exceed the European Union's WEEE (Waste Electrical and Electronic Equipment) Directive’s ambition of recycling or reusing 75 percent of equipment taken back and ensure that less than 25 percent ends up in landfill sites. 22 C O R P O R aT E R E S P O n S i B i l i T Y Opportunity Although telecommunications is an energy lean sector, network infrastructure and handsets consume energy during manufacturing and operation. Fossil fuel, when used to produce energy, generates carbon dioxide (CO2). Ericsson provides the technical solutions and expertise to support operators in optimizing energy efficiency in the network, reducing CO2 emissions as well as operating costs. Result In 2006, we improved the energy efficiency of our WCDMA radio base station portfolio by 35 percent, exceeding our 25 percent target. By 2008 we intend to reach a total of 50 percent improvement in energy efficiency compared to 2005 levels. We lower the CO2 emission by 2.2 million tons over the lifetime of our radio base stations delivered during 2006. This will also reduce our customers' operating cost significantly. K a P i T E l R U B R i K 23 ThE BOaRD OF DiRECTORS according to our articles of association, the Board of Under Swedish law, unions have the right to appoint three Directors shall consist of a minimum of five and a maximum additional directors and their deputies to the Board. of twelve directors, with no more than six deputies. Our Directors (as of December 3, 2006) are as follows: The directors shall be elected each year at the annual general Meeting for the period up to and including the following annual general Meeting. torbjörn Nyman (Born 96) appointed 2004 Member of the Finance Committee Employee Representative Shares held: 0,440 Class B Nancy mckinstry (Born 959) First elected 2004 Member of the Remuneration Committee Shares held: none carl-Henric Svanberg (Born 952) First elected 2003 President and CEO Shares held: 5,683,577 Class B anna Guldstrand (Born 964) appointed 2004 Deputy Employee Representative Shares held: 4,46 Class B, Options held: 900 per Lindh (Born 957) appointed 994 Deputy Employee Representative marcus Wallenberg (Born 956) First elected 996 Deputy Chairman of the Board of Directors Chairman of the Finance Committee Shares held: 70,000 Class B michael treschow (Born 943) First elected 2002 Shares held: 203 Class B Chairman of the Board of Directors kristina davidsson (Born 955) appointed 2006 Deputy Employee Representative Shares held: ,026 Class B Chairman of the Remuneration Committee Member of the Finance Committee and the nomination Committee Shares held: 770,000 Class B Sverker martin-Löf (Born 943) First elected 993 Deputy Chairman of the Board of Directors Chairman of the audit Committee Shares held: 52,000 Class B katherine Hudson (Born 947) Elected 2006 Shares held: 52,000 Class B ulf J. Johansson (Born 945) First elected 2005 Member of the audit Committee Shares held: 32,76 Class B Sir peter L. Bonfield (Born 944) First elected 2002 Member of the audit Committee Shares held: none Jan Hedlund (Born 946) appointed 994 Member of the audit Committee Employee Representative Shares held: ,603 Class B Börje ekholm (Born 963) Elected 2006 Member of the Remuneration Committee Shares held: 58,803 Class B monica Bergström (Born 96) appointed 998 Member of the Remuneration Committee Employee Representative Shares held: 3,694 Class B anders Nyrén (Born 954) Elected 2006 Member of the Finance Committee Shares held: 33,428 Class B The number of Class B shares (and options, if applicable) includes holdings by related natural or legal persons. 24 T h E B O a R D O F D i R E C T O R S Carl­henric Svanberg is the only Director who holds an operational management position at Ericsson. no Director has been elected pursuant to an arrangement or understanding with any major shareholder, customer, supplier or other person. For more information on the Board of Directors see our website; www.ericsson.com. (information on our website does not form part of this document). e r i c S S o n a n n U a L r e P o r t 2 0 0 6 Letter from the chairman of the board Dear Shareholder, five years ago, ericsson embarked on an important process of oversees with the assistance of change. it started with the formation of the Sony ericsson mobile external experts is fair, robust and communications joint venture, followed by an extensive revamp­ in line with industry norms. ing of ericsson’s entire operations. today these actions have the board is committed to resulted in a powerful and unique combination of scale and diver­ ensuring that ericsson’s gover­ sity. in 2006, ericsson reported record profits and Sony ericsson nance framework supports the marked its fifth anniversary with record shipments, sales and company’s main purpose of income. this transformation would not have been possible with­ shareholder value creation. out strong shareholder support, particularly the positive re­ enhancements made during the sponse to ericsson’s stock issue in 2002 that provided the finan­ year are described in the corpo­ cial security to successfully complete the change process. rate Governance report which i our ambition is to return value to shareholders in the most encourage you to read. along with sustainable way. this requires maintaining a strong balance the company’s executive manage­ sheet for the financial flexibility to capture opportunities and ment, we continue to foster erics­ further strengthen ericsson’s market position. organic growth is son’s culture of integrity, respect and professionalism; integral the company’s primary intention but acquisitions to speed time parts of effective governance. to market may be necessary. You can be assured that we will Your board of directors has been particularly busy during rigorously apply the management oversight needed to ensure 2006, meeting 10 times on a broad range of issues from acquisi­ acquisitions are in line with ericsson’s needs and means. tions to strategies to a new organization for the company. in today’s telecommunications market is both promising and addition we had a number of training sessions including r&d, challenging, offering opportunities that are bigger but also more human resources and corporate responsibility. We will demanding than in the past. the market is more global; with continue our work with a commitment to progressively enhance customers as well as competitors becoming more concentrated the company’s performance for the benefit of the employees, for and stronger. ericsson must continuously adapt to such market society in general and, of course, for all ericsson shareholders. dynamics if it is to continue its leadership and management has the telecom industry is one with long­term growth prospects done a good job to make sure ericsson is strategically, opera­ and one that has an increasingly positive effect on our daily lives. tionally and financially prepared for a new stage of development. as the world’s leading supplier of communications networks and the underlying strength of ericsson is the quality of the work­ services, ericsson has a vital role in the industry and i am proud force. their commitment to ericsson’s core values and willing­ to be associated with such an exciting company. i thank you for ness to embrace change underpins the outstanding results allowing me this privilege. achieved this year. on behalf of the board of directors, i would like to express our appreciation to all employees for their dedi­ Yours sincerely, cated efforts and special contributions. the ability to attract and retain the best talent at all levels of the company, especially in leadership roles, is crucial to ericsson’s growth and future performance. executive compensa­ tion is one of the most widely debated issues in business today and suitable remuneration is important to the company. erics­ son’s executive compensation must be competitive and reflect the high demands we put on the company’s leadership. We michael treschow believe the compensation plan that the remuneration committee Chairman of the Board L e t t e r f r o m t h e c h a i r m a n o f t h e b o a r d 25 ENXChairman_v21.indd 25 07-02-28 11.03.49 e r i C s s O N a N N u a L r e P O r T 2 0 0 6 five-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 liabilities and post-employment benefits 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 eBiTDa return on equity return on capital employed equity ratio Capital turnover inventory turnover Trade receivables turnover return on sales Payment readiness, seK million – as percentage of net sales Net cash, seK million Statistical data, year-end Number of employees – Of which in sweden export sales from sweden 2006 177,783 35,828 20.2% 165 26,436 214,940 82,926 142,447 7,881 120,113 782 2005 2) 2004 3) 2003 4) 2002 4) 151,821 33,084 21.8% 251 24,460 209,336 86,184 133,332 6,966 101,622 850 131,972 26,706 20.2% –540 17,836 186,186 69,268 115,144 5,845 80,445 1,057 117,738 –11,239 –9.5% –864 –10,844 182,372 58,873 108,989 6,505 60,481 2,299 145,773 –21,299 –14.6% –1,536 –19,013 209,113 73,026 137,539 9,964 73,607 2,469 21,552 30,860 33,643 46,209 61,463 1.65 1.65 0.50 1) 7.56 15,881 15,871 15,943 3,827 3,007 27,921 15.7% 24.4% 23.7% 27.4% 56.2% 1.3 5.1 3.9 21.3% 67,454 37,9% 40,728 63,781 19,094 98,694 1.53 1.53 0.45 6.41 15,864 15,843 15,907 3,365 2,804 24,454 16.1% 25.6% 26.7% 28.7% 49.0% 1.2 5.0 4.1 23.5% 78,647 51.8% 50,645 56,055 21,178 93,879 1.11 1.11 0.25 5.08 15,832 15,829 15,895 2,452 2,434 23,421 17.7% 25.5% 24.2% 26.4% 43.8% 1.2 5.7 4.1 22.9% 81,447 61.7% 42,911 50,534 21,296 86,510 –0.69 –0.69 0 3.82 15,826 15,823 15,841 3,493 3,753 28,553 24.3% 11.1% –16.2% –5.9% 34.4% 1.0 6.1 3.4 –6.2% 75,309 64.0% 26,998 51,583 24,408 72,966 –1.51 –1.51 0 4.65 15,820 12,573 12,684 2,738 5,514 33,455 23.0% –1.9% –26.7% –11.3% 36.4% 1.0 5.1 3.0 –11.7% 66,306 45.5% 4,751 64,621 30,241 86,695 1) for 2006, as proposed by the Board of Directors. 2) ericsson has adopted the new option in ias 19 from January 1, 2006. 2005 has been restated accordingly. 3) 2004 has been restated in accordance with ifrs. for more information about the transition to ifrs, see note C3 – “Transition to ifrss from swedish GaaP” in the annual report 2005. 4) 2002 and 2003 are in accordance with swedish GaaP. major differences compared to ifrs are retrospective capitalization of development costs, goodwill is no longer amortized but instead subject to impairment and that the effective pension costs for future salary increases are estimated and recognized during the time of service. 26 f i v e -y e a r s u m m a r y ENX3Xyear_v18.indd 26 07-02-26 21.14.32 e r i C s s O N a N N u a L r e P O r T 2 0 0 6 Working capital Equity ratio Current assets less current non-interest-bearing provisions and Defined as equity, expressed as a percentage of total assets. liabilities. Capital employed Capital employed is defined as total assets less non-interest- bearing provisions and liabilities. Earnings per share Capital turnover Net sales divided by average Capital employed. Inventory turnover Cost of sales divided by average inventory. see Notes to the Consolidated financial statements – Note C1, Accounts receivable turnover “significant accounting Policies”, for information on principles for Net sales divided by average accounts receivable. calculation of earnings per share. Cash dividends per share Return on sales Operating income plus financial income expressed as a percent- Defined as dividends paid divided by average number of shares, age of Net sales. basic. Payment readiness Stockholders’ equity (SEK per share) Defined as cash and cash equivalents and short-term invest- Defined as stockholders’ equity divided by the Number of shares ments less short-term borrowings plus long-term unused credit outstanding, basic, at the end of the period. commitments. Payment readiness is also shown as a percentage EBITDA earnings Before interest, Taxes, Depreciation and amortization. of Net sales. Net cash Return on equity Defined as cash and cash equivalents plus short-term cash investments less interest-bearing liabilities and post-employment Defined as Net income as a percentage of average stockholders’ benefits. equity (based on the amounts at January 1 and December 31). 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). Compound annual growth rate (CAGR) used to describe the growth rate over a period of time. ENX3Xyear_v18.indd 27 07-02-26 21.14.33 f i v e -y e a r s u m m a r y 27 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 board of directors’ report This Board of Directors’ Report contains a discussion and SalES dEvElopMEnT 2004 –2006 (SEK bIllIon) analysis of Ericsson’s consolidated financial statements and operational results. This report also includes forward-looking statements regarding a variety of matters including 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 implied by such forward-looking statements. For further discussion, please see “Forward-looking Statements” and “Risk Factors.” The terms “Ericsson”, “Group”, “the Company”, and similar all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. Unless otherwise noted, numbers in parenthesis refer to prior 200 150 100 50 0 2004 2005 2006 year, i.e. 2005. Summary number of contract announcements was lower this year than in the previous three years, the aggregate value of orders from ericsson performed well in 2006, increasing sales 17 percent these agreements along with existing ones lifted our order back- and generating operating income of seK 35.8 (33.1) billion and a log for systems to the highest level in four years. cash flow before financial investing activities of seK –2.6 (11.3) the sony ericsson Mobile communications joint venture billion. excluding the Marconi and Netwise acquisitions and the showed record performance, profitably gaining market share and divestiture of the defense business, the cash flow was seK 12.2 ending the year as the fourth largest mobile device supplier with billion. strong momentum toward their ambition of becoming a top three in addition to delivering solid financial results, ericsson also mobile phone supplier. made good progress in strategically important areas, strengthen- the company’s progress during 2006 indicates that the strat- ing the company’s position within the systems segment busi- egy of maintaining a healthy balance between profit and growth ness in a number of related areas such as mobile and fixed has already strengthened ericsson’s prospects for a number of broadband and professional services. services sales in particu- opportunities in growth areas such as services and next-genera- lar showed strong growth, and we believe that scale for contin- tion networks for fixed and mobile operators. ued profitable growth has now been established. the Marconi acquisition was completed with the acquired Market Environment and Trend Information operations integrated and profitability established before year 2006 was a record year in terms of new mobile subscriptions: end. the combined ericsson and Marconi business has secured some 500 (450) million new mobile subscriptions and approxi- several significant new contracts as a result of the expanded mately 980 (800) million mobile phones were sold. the network product line. equipment market also developed positively during 2006, par- ericsson’s leading systems position was further expanded ticularly for mobile systems, fixed broadband access and optical with a number of major contracts for new mobile network deploy- transmission. ments in all regions of the world, including in australia, brazil, price competition was especially intense this year regarding india, Japan and the United states. the development in china strategic pricing necessary to win certain new contracts. How- was unfavorably affected by the timing and operator investment ever, with the merger of several of our competitors, we expect requirements for 3G licenses. pricing going forward to be more in line with historical trends. during the year, 48 new or expanded agreements to supply the historical price/performance trend in both mobile phones network equipment and/or related services to operators around and network infrastructure has significantly expanded the ad- the world were publicly announced by the company. this com- dressable market with resulting unit volume increases more than pares with 78 in 2005, 59 in 2004 and 58 in 2003. although the offsetting lower average selling prices. 28 b o a r d o f d i r e c t o r s ’ r e p o r t ENXBoD_v61.indd 28 07-02-27 13.07.16 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 although GsM represents the majority of the systems market, at year-end, there were 146 (91) 3G/WcdMa networks in growth of GsM is slower than 3G/WcdMa, which is accelerating. commercial service, of which ericsson is a supplier to 91 (49). the market for new GsM networks is mainly in emerging markets, the High speed packet access (Hspa) enhanced version of 3G/ especially asia, africa and Latin america. if the current trend WcdMa is now commercially deployed within 96 networks in 51 continues, the market for 3G/WcdMa will surpass that of GsM countries. ericsson is a supplier of 46 of these networks, which within the next several years. represent the vast majority of Hspa users. the number of Wcd- the ongoing equipment supplier consolidation is a healthy Ma subscriptions almost doubled during 2006 to nearly 100 process, driven by the competitive need for critical mass in r&d, million and Hspa deployments are rapidly picking up speed. production and support. as a market leader, ericsson’s expan- However, the number of 3G/WcdMa networks in commercial sion strategy is based on organic growth supplemented with service is less than one fourth that of 2G/GsM – a significant complementary acquisitions. With ericsson’s scale advantage opportunity for 3G/WcdMa equipment suppliers when 2G net- within mobile systems exposed to potential reduction, the com- works are upgraded. pany will increasingly focus on innovation and operational excel- Within fixed networks, many operators are converting to an all- lence as well as expansion of fixed networks and professional ip (internet protocol) broadband environment. this will enable services sales along with new areas within multimedia. more efficient handling of fixed and mobile voice, data and image operator consolidation continues to be a key trend in a num- based communications as well as provide a platform for con- ber of regions. in the americas, significant operator consolida- verged services. While fixed network operators’ spending for tion has occurred with the number of operators reduced by more network equipment in total was up slightly in 2006, certain areas than half over the last several years. one result of this consolida- essential to next-generation networks – optical transmission, ip tion is that a number of operators in Latin america have chosen broadband access, ip routing and iMs/softswitch – showed the GsM/WcdMa technology track, where ericsson is the mar- stronger growth. the company believes the demand for ip broad- ket leader. in europe, we see an acceleration of cross-border band equipment will increase to meet the higher traffic require- expansion as operators there seek revenue growth and econo- ments and user expectations for broadband multimedia services. mies of scale. in other regions, operator consolidation is ongoing in addition to network deployment and systems integration with the emergence of a number of rapidly growing pan-regional services, the opportunity to supply network operation and host- operators. ing services is growing rapidly. the market for such managed increased usage driven by new mobile subscriptions, mainly services is expected to continue to show good growth prospects in emerging markets, and accelerating deployments of 3G net- going forward, as operators realize the competitive advantages works around the world generated growth in the mobile systems and cost savings made possible when outsourcing certain net- market. at year-end, the 2.7 billion mobile subscriptions world- work operations. With hosting services, smaller operators espe- wide represented a global subscription penetration of 41 (34) cially benefit by gaining access to service capabilities and con- percent. the company expects the number of mobile subscrip- tent far beyond what they could normally afford, while at the tions to exceed three billion before the end of 2007. this will drive same time lowering their risks and improving their time to market. a significant number of initial network build-outs and create opportunities for network deployment and professional services Goals, Strategy and Financial Results in addition to mobile network systems offerings. our ultimate goal is for the company to generate growth and a total voice traffic on mobile networks worldwide grew an competitive profit that is sustainable over the longer term. erics- estimated 30 (30) percent in 2006, driven by subscriber additions son’s ambition is to be the preferred business partner to custom- and increased average minutes of use (MoU). Western europe is ers, especially the world’s leading network operators. ericsson among the highest penetrated mobile markets in the world in strives to be the market and technology leader for the supply and terms of subscriptions. However, Western european usage is operation of network infrastructure. being a market leader allows significantly lower than the average for the rest of the world. in- the company to leverage economies of scale to develop superior creased tariff competition among operators is starting to stimu- products and services and thereby offer customers competitive late Western european usage to a level closer to the global aver- advantages. in addition, when our network equipment and asso- age. this is expected to require expansion of mobile network ciated services within systems are combined with our mobile capacity over the coming years. platform technology and the sony ericsson joint venture for mobile handsets, the scope of ericsson’s operations extends to complete end-to-end solutions. b o a r d o f d i r e c t o r s ’ r e p o r t 29 ENXBoD_v61.indd 29 07-02-27 13.07.16 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 Performance relative to financial objectives encouraging, growing at 30 percent, as the company continued the company performed in line with the following financial tar- to be awarded contracts for network operation and hosting gets: • increase sales at a faster rate than the market growth. the GsM/WcdMa mobile systems market grew an estimated 5 services. at year end 2006, ericsson-managed network opera- tions served approximately 100 (53) million users. based on ericsson’s reported sales combined with the pub- percent, while ericsson increased their mobile systems sales licly reported and estimated sales for ericsson’s main competi- by almost 10 percent; tors, we believe the mobile systems market grew approximately 5 • deliver best-in-class operating margin, i.e. better than the main (11) percent in reported currencies during 2006. during this competitors. With an operating margin of 16 percent for period, ericsson’s mobile systems sales increased by almost 10 ericsson systems segment and 20 percent for the Group, percent, measured in seK, indicating that ericsson grew faster ericsson operating margins were the highest among its main than the market. competitors; • Maintain “investment Grade” credit ratings; the successful integration of the Marconi operations signifi- cantly strengthened ericsson’s systems offering, especially to operators of fixed networks, where sales grew by 162 percent. However, the company did not meet the following target the company was awarded a number of contracts for broad- “Generate positive cash flow before financial investing activities” . band access and optical transmission equipment due to the However, excluding the major acquisitions/divestitures the cash competitiveness of the combined product offering. We are opti- flow was seK 12.2 billion. mistic regarding growth opportunities for ip routing, broadband in addition to these objectives, the shareholder-approved access, optical transmission and next-generation networks. the long-term variable pay programs for executives is based on a company continues to invest in these areas, with the acquisition certain eps growth over a three-year period for each program. of redback Networks expanding the scope of the product port- please see also Notes to the consolidated statements – Note folio to also include ip routing. c29, “information regarding employees, Members of the board of directors and Management”. segment other operations Sales sales and operating income developed positively within Mobile platforms and cables (ericsson Network technologies) and Group sales grew 17 percent mainly driven by higher systems overall sales within other operations increased by 6 (–4) percent sales, where services increased by 33 percent and the Marconi and operating income was seK 0.9 (0.3) billion. the divested acquisition added an estimated 7 percent. fluctuations in foreign defense business is reflected in sales and operating income of exchange rates had an insignificant effect on reported sales. other operations up until the divestiture in early september, segment systems 2006. sales up until date of divestment were approximately seK 1.4 billion, compared with full year 2005 of approximately seK 2 Within systems, unit volume increases drove mobile network billion. sales growth. sales of network deployment services related to systems grew 39 percent during 2006, reflecting increased segment phones demand for turn-key projects and our strong market position in see sony ericsson Mobile communications on page 33 under mobile systems. sales of professional services were particularly partnerships and Joint Ventures. SalES by SEGMEnT and GEoGRaphIc REGIon 2006 (SEK million) Western europe central and eastern europe, Middle east and africa asia pacific Latin america North america Total Systems 45,396 48,699 41,991 16,234 15,250 167,570 percent change other operations percent change 27% 23% 45% –14% –19% 18% 6,542 1,602 1,211 246 612 10,213 7% 36% –16% 2% –7% 6% Total 51,938 50,301 43,202 16,480 15,862 177,783 percent change percent of total 24% 23% 42% –14% –18% 17% 29% 28% 25% 9% 9% 100% 30 b o a r d o f d i r e c t o r s ’ r e p o r t ENXBoD_v61.indd 30 07-02-27 13.07.17 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 nET SalES and opERaTInG ExpEnSES 2004 –2006 son’s 50 percent share in earnings of the joint venture before tax (SEK bIllIon) CAGR: 16.1% 2005 to seK 0.2 billion in 2006. increased from seK 2.3 billion in 2005 to seK 5.9 billion in 2006. the financial net decreased slightly from seK 0.3 billion in 200 150 100 50 0 CAGR: 12.0% Sales Operating expenses CAGR sales CAGR opex 2004 2005 2006 income after financial items was seK 36.0 (33.3) billion. Net income attributable to the stockholders of the parent company increased to seK 26.3 (24.3) billion, with diluted earn- ings per share of seK 1.65 (1.53). Balance Sheet total assets amounted to seK 214.9 (209.3) billion at year-end. the main item contributing to the 3 percent increase was higher trade receivables reflecting the high business activity in the last quarter of the year in markets with longer payment terms. deferred tax assets decreased by seK 5.0 billion, due to Margins and operating expenses our ambition is for ericsson to generate a competitive return on utilization of tax loss carryforwards and timing differences. sales. With best-in-class operating margins of 20.2 (21.8) percent, seK 9.3 billion of non-current borrowings were repaid. the company continued to perform at industry-leading levels. Net cash decreased from seK 50.6 billion to seK 40.7 billion, sony ericsson contributed 3.3 (1.5) percentage points to the mainly as a result of the Marconi acquisition. the major part of operating margin, while Marconi negatively affected systems the acquired assets were intellectual property rights. margins until profitability was established at the end of the third equity increased to seK 120.9 (102.5) billion and the equity quarter. the lower gross margin of 41.2 (45.7) percent was mainly ratio improved to 56.2 (49.0) percent. a reflection of a business mix within systems that had a signifi- return on capital employed (roce ) was 27 percent com- cantly higher proportion of service sales as well as the impact of pared to 29 percent in 2005. the businesses acquired from Marconi, as both have a lower than group average gross margin. RETuRn on capITal EMployEd 2004 –2006 operating margins have remained robust, with Group sales showing a 16.1 percent compound annual growth rate (caGr) over the last three years while operating expenses have a caGr of only 12.0 percent. operating expenses, measured as a per- centage of net sales, increased from 27 percent in 2005 to 28 2004 2005 2006 percent 26.4 28.7 27.4 percent in 2006. the acquired Marconi operations had a nega- Cash flow before financial investing activities tive effect on operating expenses during the first nine months, cash flow before financial investing activities was seK –2.6 (11.3) until they were successfully integrated and streamlined. billion. seK 17.6 billion was used to acquire certain assets from cost savings programs have been carried out within a number Marconi. excluding major acquisitions/divestitures, the underly- of areas, such as creating scale advantages through the estab- ing cash flow was seK 12.2 billion. increases in working capital lishment of several shared service centers in a number of regions for work in progress in the field and trade receivables, reflecting which provide financial and human resource services to the sales the growth in large network roll-out projects, also had negative organization. the number of employees in support functions was effects. cash outlays regarding restructuring amounted to seK reduced through improved utilization of it applications. by focus- 2.3 (2.0) billion, where seK 0.8 (1.5) billion relates to restructuring ing on operational excellence (i.e. process efficiency), we have programs initiated during 2001–2003. been able to grow sales without having to increase s&a head- through the efforts to improve capital efficiency, inventory count and costs at a corresponding rate. turnover (ito) improved compared to 2005. days sales out- Other income statement items standing (dso) increased due to growth in emerging and other markets with longer payment terms. efforts to further improve share in earnings of joint ventures and associated companies capital efficiency will continue. before tax increased by seK 3.5 billion, mainly due to a larger contribution from sony ericsson Mobile communications. erics- b o a r d o f d i r e c t o r s ’ r e p o r t 31 ENXBoD_v61.indd 31 07-02-27 13.07.18 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 WoRKInG capITal EFFIcIEncy MEaSuRES ERIcSSon cREdIT RaTInGS yEaR End 2004 –2006 Target 2006 2005 2004 days sales outstanding (dso) inventory turnover (ito) payable days 1) <90 >5.5 >45 86 5.1 54 81 5.0 52 75 5.7 51 Moody’s standard & poor’s 1) payable days: accounts payable divided by cost of sales and multiplied by 365 Research and development 2006 2005 2004 baa2 bbb– baa3 bbb– ba2 bb+ days. Capital expenditures a robust r&d program is essential to ericsson’s competitiveness and future success. With most r&d invested in mobile communi- We continuously monitor the company’s capital expenditures cations network infrastructure, ericsson’s program is one of the and evaluate whether adjustments are necessary in light of mar- largest in the industry. the efficiency of the r&d activities has ket conditions and other economic factors. Most capital expendi- been improved, enabling a faster time to market for new prod- tures are normally investments in test equipment used to develop, ucts and increased investments in new areas such as multimedia manufacture and deploy network equipment. However, the in- solutions, while decreasing r&d as a percentage of sales. the crease in capital expenditures from 2005 to 2006 was mainly due company reduced r&d lead time by more than 20 percent this to investments for data and network operation centers, needed year and has an ambition to reduce r&d lead times by an addi- to support the rapidly growing services business. tional 30 percent over the next several years, as well as adding the following table summarizes annual capital expenditures as many as 500 research engineers in the areas of multimedia during the five years ended december 31, 2006: and ip technology. capITal ExpEndITuRES 2002–2006 R&d pRoGRaM SEK billion 2006 2005 2004 2003 2002 2006 2005 2004 capital expenditures of which sweden as percent of net sales 3.8 1.0 2.2 3.4 1.0 2.2 2.5 1.1 1.9 1.8 1.1 1.5 2.7 1.2 1.9 23.4 expenses (seK billion) as percent of sales 16.1% 17.7% employees within r&d at december 31 1) 17,000 16,500 16,000 22,000 20,000 16,000 patents 1) 27.9 15.7% 24.5 excluding acquisitions, capital expenditures in relation to sales 1) the number of employees and patents are approximate. are not expected to be significantly different in 2007, remaining at r&d expenses during 2007, excluding the effects of the acquisi- roughly two percent of sales. However, in addition to the normal tion of redback Networks, are expected to remain at roughly the capital expenditures there are commitments to repay seK 0.1 same level in absolute terms compared with 2006, including the billion of debt and to purchase redback Networks for Usd 1.9 additional research engineers and the amortization of the intan- billion, or seK 13.4 billion, as well as to acquire entrisphere. With gible assets acquired from Marconi. a net cash position at year-end of seK 40.7 billion, we expect the company to be able to cover all capital expenditure plans and partnerships and joint ventures customer financing commitments for 2007 by using funds gener- during 2006, sony ericsson Mobile communications ab re- ated from operations with no additional borrowings required. ported strong unit volume and sales increases, which caused in 2000 and 2001, we disposed of the majority of the real income before tax to improve significantly during the year. the estate properties that we owned. We believe the properties that improved performance is mainly a result of focusing on imaging, we now occupy are suitable for our present needs in most loca- music and enterprise phones, while increasing the number of tions. as of december 31, 2006, no material land, buildings, more affordable models. sony ericsson’s ambition is to achieve machinery or equipment were pledged as collateral for outstand- continued profitable growth by leveraging the opportunities ing indebtedness. Credit ratings created by the combination of technologies and expertise from the parent companies. the joint venture results are accounted for in accordance with the equity method. for more information, see Moody’s credit rating agency raised ericsson’s credit rating also Notes to the consolidated financial statements – Note c1, during 2006, while standard & poor’s (s&p) last upgraded their “significant accounting policies”. ratings in 2005. at year-end, their ratings of ericsson’s creditwor- thiness were baa2 (baa3) for Moody’s and bbb– for s&p, both considered to be “investment Grade”. 32 b o a r d o f d i r e c t o r s ’ r e p o r t ENXBoD_v61.indd 32 07-02-27 13.07.19 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 Sony ERIcSSon RESulTS 2004 –2006 1,250 employees when ownership was transferred. shipments (unit millions) sales (eUr m.) income before tax (eUr m.) Net income (eUr m.) ericsson’s share of earnings (seK billion) percent change 2006 2005 2004 74.8 10,959 1,298 997 46% 51% 154% 185% 51.2 7,268 512 350 42.3 6,525 486 316 in december, ericsson launched a tender offer to acquire redback Networks of the Us for Usd 1.9 billion. the tender offer was successfully concluded on January 25, 2007. 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 5.9 157% 2.3 2.1 launched for the remaining shares, and subsequently ericsson s.p.a. was delisted from the Milan stock exchange. in total seK for more information on transactions with sony ericsson, please 2.2 billion was paid out for the shares, of which seK 0.6 billion in see also Notes to the consolidated financial statements – Note 2005. in 2006, the remaining shares were purchased for seK 0.1 c30, “related party transactions”. billion, and the ownership in ericsson s.p.a. is now 100 percent. acquisitions and divestitures other than the transactions described above, there were no material acquisitions or divestitures completed during 2004, the acquisition of certain assets relating to broadband access, 2005 or 2006. optical and radio transmission systems, data networking and service layer from Marconi was completed on January 23, 2006, Material contracts and contractual obligations with a cash payment equivalent to seK 17.6 billion. With net primary contractual obligations are outlined in the following table. assets of seK 4.0 billion, most of the acquisition costs were operating leases are mainly related to offices and production related to intellectual property rights, e.g. patents, brands, trade facilities. purchase obligations are mainly related to outsourced marks, etc., which will be amortized over a ten year period. the manufacturing, r&d and it operations and to components for acquired businesses were consolidated into ericsson’s accounts our own manufacturing. except for those transactions previously as per January 1, 2006. described in this report, ericsson has not been a party to any during the year, the acquired Marconi businesses were material contracts over the last three years other than those streamlined and fully integrated within ericsson’s operations. entered into during the ordinary course of business. this resulted in a 24 percent reduction of the former Marconi workforce for an estimated annual cost savings of approximately conTRacTual oblIGaTIonS 2006 seK 2.0 billion, with full effect from the fourth quarter of 2006. restructuring charges were seK 2.2 billion, of which about one third was utilized during 2006, with the remainder expected to be utilized during the first half of 2007. of this charge, seK 1.4 billion relates to the layoff of 1,600 employees and seK 0.8 billion re- lates to the termination of it agreements and facilities contracts that are no longer needed but were pre-paid as part of the acqui- sition. during 2006, there were also several small acquisitions made to increase capacity mainly to support the growing systems integration business. to expand the systems product portfolio, the company also made several small technology acquisitions with Netwise of sweden, acquired for seK 0.3 billion, being the largest. ericsson’s defense business, ericsson Microwave systems ab, and its 40 percent holding in saab ericsson space was sold (SEK million) Total Long-term debt 1) 2) 12,020 capital lease obligations 3) 2,207 operating leases 3) 11,225 other non-current liabilities purchase obligations 4) commitments for customer financing 2) total 6,795 43,353 2,868 8,238 payment due by period <1 year 1–3 years 3–5 years >5 years 427 6,689 4,401 503 180 2,198 334 3,318 253 2,205 1,440 3,504 187 991 15 1,676 8,238 – – – 6,795 18,025 – 11,332 – 6,874 – 7,122 1) including interest payments. 2) see also Notes to the consolidated financial statements – Note c20, “financial risk Management and financial instruments”. 3) see also Notes to the consolidated financial statements – Note c27, “Leasing”. 4) the amounts of purchase obligations are gross, before deduction of any related to saab ab for seK 3.8 billion in cash with a capital gain of seK provisions. 3.0 billion. the ericsson defense business that saab acquired had sales of approximately seK 2 billion in 2005 and employed ENXBoD_v61.indd 33 07-02-27 13.07.20 b o a r d o f d i r e c t o r s ’ r e p o r t 33 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 critical accounting estimates corporate Governance the discussion and analysis of our results of operations and although internal policies and directives for governance and financial condition are based on our consolidated financial state- other important rules for managing the company’s business ments which have been prepared in accordance with ifrs. the activities have long been established, we have adapted our work preparation of these financial statements requires management procedures in line with relevant developments in sweden and the to apply accounting methods and policies that are based on United states regarding reporting, disclosure and other require- difficult, complex or subjective judgments or on estimates based ments for listed companies as well as changes in legislation, on past experience and assumptions determined to be reason- such as the swedish companies act and the Us sarbanes-oxley able and realistic based on the related circumstances. the ap- act. plication of these estimates and assumptions affects the report- in accordance with the swedish code of corporate Gover- ed amounts of assets and liabilities and contingent assets and nance, a separate corporate Governance report, including an liabilities at the balance sheet date and the reported amounts of internal control section, has been prepared. there have been no revenues and expenses during the reporting period. actual amendments or waivers to ericsson’s code of business ethics results may differ from these estimates under different assump- for any director or member of management. tions or conditions. please see Notes to the consolidated financial statements – Risk Management Note c2, ”critical accounting estimates and Judgments” for risk-taking is an inherent part of doing business. risks are man- more information about the accounting policies that we believe aged in our operational processes where risks are identified, have the most significant impact on ericsson’s reported results probability of occurrence assessed and potential consequences and financial position. new organization estimated. actions are then taken to reduce or mitigate the risk exposures and limit potential unfavorable consequences. We broadly categorize risks into operational risks and financial the development of broadband capabilities for both mobile and risks. our approach to risk management leverages the scale and fixed operators combined with the move toward next-generation diversity of our business activities and balances central coordina- networks are expected to create demand for richer multimedia tion with well-defined risk management responsibilities within services and accelerate growth opportunities. in this environ- each operational unit. ment, we see the possibility to further strengthen ericsson’s for more information on risk management, see also page 89, market and technology leadership by implementing a more cus- risk factors. tomer-oriented organization with three business units, each optimized for a specific, but related, market segment. Operational risk management Networks includes access, core and transport, as well as risk management has been integrated within the ericsson Group cables and power modules, previously reported within other Management system and each business process. the opera- operations. tional risk management framework applies universally across all Global Services, consisting of network rollout and profes- business activities and is based on the following principles: sional services, remains unchanged. each risk is owned and managed by an operational unit that is Multimedia includes Multimedia systems, as well as mobile held accountable, and monitored through unit steering boards platforms and enterprise solutions, both previously reported and Group Management. within other operations. risks are dealt with on three levels: in the strategy process, in the new organization is in effect as from January 1, 2007. annual target setting and within ongoing operations by transac- tion (customer bid/contract, acquisition, investment, product development project, etc). approval limits are clearly established with escalation accord- ing to a well-defined delegation of authority. certain risks, such as information security/it risks and physi- cal security as well as insurable risks are centrally coordinated. a crisis management council deals with ad hoc events of a serious nature, as necessary. 34 b o a r d o f d i r e c t o r s ’ r e p o r t ENXBoD_v61.indd 34 07-02-27 13.07.20 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 Financial risk management customer finance risk We have an established policy governing the Group’s financial at year-end 2006, gross exposure for customer financing risk management, which is carried out by the treasury function amounted to seK 4.1 (7.0) billion, of which less than one percent within the parent company and by a customer finance function. was off-balance sheet. operators in central and eastern europe, these are both supervised by the board of directors’ finance Middle east and africa represented half of the exposure, with committee. Latin america accounting for most of the rest. for further information on objectives, policies and strategies credit risks are covered by security arrangements in most for financial risk management, please see Notes to the consoli- customer financing agreements, normally in the form of pledges dated financial statements – Note c19, “interest-bearing Liabili- of equipment, pledges of certain of the borrower’s assets and/or ties” and Note c20, “financial risk Management and financial pledges of shares in the operating company. in addition to these instruments”. foreign exchange risks security arrangements provisions are made and reported as part of selling expenses. risk provisions amounted to 13 (29) percent of the gross exposure. With significant transaction volumes in currencies other than Unutilized outstanding customer financing commitments seK, the company has a net exposure to a number of currencies. amounted to seK 6.8 (3.6) billion at year-end. the duration of this exposure is also considerable, as many con- tracts have long lead times between order and delivery. a variety financial credit risk of hedging activities, covering on average the forthcoming 6–9 financial instruments carry an element of risk in that counterpar- months, are used to manage foreign exchange risks. ties may be unable to fulfill their payment obligations. all deriva- the largest foreign exchange exposure is to the Us dollar and tive transactions are covered by isda Master agreements to related currencies, which represented 49 (46) percent of sales in reduce the credit risk. during 2006, no credit losses were in- 2006. assuming that other foreign exchange exposures re- curred from such instruments. mained the same, a 10 percent plus/minus change in the Usd/ seK exchange rate would affect operating income by an esti- Liquidity and refinancing risk mated plus/minus seK 3.8 (3.3) billion before any hedging ef- We expect the company’s cash-generating capabilities and fects. However, these effects may be compensated over time strong cash position to satisfy any short-term liquidity require- with new contracts with adjusted prices and costs. ments. during 2006, there have not been any defaults in the interest rate risks payment of principal or interest, or any other material default relating to the indebtedness of ericsson or any of its subsidiaries. ericsson is exposed to interest rate risk through market value fluctuations of certain balance sheet items and through changes corporate Responsibility in interest expenses and income. assuming the net cash position effective management of social, environmental and ethical issues remained at seK 40.7 (50.6) billion, a sustained change in inter- can help to assure an enduring capability for value creation and est rates of plus/minus 0.25 percentage points would have an competitive advantage. ericsson supports the UN Global com- annual impact on the financial net of approximately plus/minus pact and its ten guiding principles. We see these principles not seK 72 (135) million. credit risk in trade receivables only as guiding principles, but also as a prerequisite for sound, long-term business and as such, we are committed to respon- sible business practices for sustainable economic growth that all at year-end 2006, trade receivables amounted to seK 51.1 (41.2) our stakeholders benefit from. our commitment to employees, billion, less allowances of seK 1.4 (1.4) billion. extended payment customers, shareholders and the broader global community is terms for trade credits and overdue amounts are regularly re- underscored by external recognition of our efforts. during 2006, viewed, and allowances are made to cover any potential losses. ericsson was again included in the ftse 4Good, the dow Jones Historically, credit losses have been minimal, mainly due to a sustainability index and the 100 Global Most sustainable corpo- customer base that largely consists of well established and finan- rations. cially sound network operators. ericsson publishes a separate corporate responsibility re- port annually, which provides comprehensive information about our corporate responsibility and related activities. b o a r d o f d i r e c t o r s ’ r e p o r t 35 ENXBoD_v61.indd 35 07-02-27 13.07.21 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 Human Rights Environment and Health ericsson believes that publicly available and affordable telecom- our most significant environmental impact relates to the energy munications is a fundamental prerequisite for social and eco- consumed by our products during their use phase, and we have nomic development. as one of the world’s largest providers of set ambitious targets in this area. by 2008, the company intends communications equipment and services, the company plays a to improve the energy efficiency of the 3G/WcdMa base station vital role in this process, especially in emerging markets. erics- portfolio by a total of 50 percent, compared with 2005 levels. son joined the business Leaders’ initiative on Human rights during 2006, the annual incremental improvement target of 25 (bLiHr), which aims to find practical applications of the Universal percent was significantly exceeded. declaration of Human rights within a business context and to the company is also working actively with green site solu- inspire other businesses to do likewise. ericsson’s participation tions, including solar, wind, fuel cell and biofuel technologies. in bLiHr reinforces a longstanding commitment to human rights ericsson recently teamed up with the GsM association’s devel- and corporate responsibility activities. opment fund in Nigeria to show that biofuel is a viable option for Community Involvement powering rural base stations. a second biofuel pilot, on a larger scale, is now starting in india. biofuel-powered networks have the company is committed to being a responsible member of the potential to bring socio-economic and environmental benefits the global society and of the local communities in which we oper- to a society, while lowering operators’ total cost of ownership. ate. employees are encouraged and empowered to make a posi- We believe that the company is in compliance with all material tive contribution to the world around them. their contributions environmental, health and safety laws and regulations required are of many kinds, determined by our employees according to by its operations and business activities. ericsson provides local needs. they may, for example, be in the fields of health care, public information on radio waves and health and supports inde- social and humanitarian aid, scholarships and other educational pendent research to further increase knowledge in this area. support, art and culture, the environment, children’s welfare as ericsson currently co-sponsors more than 45 different ongoing well as many other charitable activities. research projects related to electromagnetic fields (eMf), radio We believe that telecom by its very nature has a constructive waves and health, and has since 1996 supported more than 80 role to play in the proactive engagement in local economic, envi- studies with a total cost of more than eUr 40 million. public ronmental and social challenges. We are encouraging economic health authorities and independent expert groups have reviewed growth in emerging markets through our communications for all the total amount of research and they have consistently conclud- program, which we are convinced will contribute substantially to ed that the balance of evidence does not demonstrate any health poverty reduction. effects associated with radio wave exposure from either mobile ericsson response is a global initiative to rapidly provide it, phones or radio base stations. communication solutions and telecom experts anywhere in the from august 13, 2005, ericsson has complied with the eU world in response to human suffering caused by disasters. erics- directive on Waste electrical and electronic equipment (Weee). son response assists the disaster relief operations of the UN our global end-of-life treatment program is called the ecology office for the coordination of Humanitarian affairs (ocHa), UN Management provision, and was initiated three years before the World food programme (Wfp) and the international federation Weee requirements became law in the eU. this proactive ap- of red cross and red crescent societies (ifrc). during 2006, proach gives ericsson an effective tool to meet waste-manage- ericsson response continued its 2005 support for an additional ment challenges in all our markets around the world. from July 1, six months to the earthquake-hit pakistan. during the crisis in 2006, ericsson is in compliance with the eU directive on reduc- Lebanon, ericsson response supported the telecom sans fron- tion of Hazardous substances (roHs). tiers operations in the country through our office in Lebanon. Employees every year, an employee satisfaction survey is conducted with a high level of employee participation. in 2006, over 90 (92) per- cent of employees participated in this survey. the results show improvements in, among others, the areas of operational excel- lence, Work empowerment & company engagement, co-opera- tion, Learning and Leadership. employee headcount at year-end was 63,781 (56,055). Most 36 b o a r d o f d i r e c t o r s ’ r e p o r t ENXBoD_v61.indd 36 07-02-27 13.07.21 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 of the additions were due to the acquisition of Marconi and to commission opened a first-phase investigation. the complain- support the growing services business. during the year, 6,432 ants are still waiting for the commission’s decision to open a (2,377) employees departed while 14,158 (7,898) joined the com- second-phase investigation. pany. please see also Notes to the consolidated financial state- together with most of the mobile communications industry, ments – Note c29, “information regarding employees, Members ericsson has been named as a defendant in six class action of the board of directors and Management”. lawsuits in the United states, where plaintiffs alleged that ad- Executive Compensation verse health effects could be associated with the use of mobile phones. in 2006, plaintiffs voluntarily dismissed four of those the remuneration committee continues to be mindful of the lawsuits. the two remaining cases are currently pending in the debates around the world on executive salaries and benefits. We United states district court for the district of Maryland and the remain confident that current policies and practices concerning superior court of the district of columbia. authorization, compliance and control of senior executive com- in another suit filed in the Us, freedom Wireless inc., a tech- pensation within ericsson are appropriate and reasonable. prin- nology company, sued cingular Wireless LLc and ericsson, ciples for remuneration and other employment terms for top claiming the two defendants built their prepaid wireless tele- executives were approved by the annual General Meeting 2006, phone service on freedom Wireless’ patents that allow mobile and are further described in Notes to the consolidated financial telephone customers to purchase increments of airtime for any statements –Note c29, “information regarding employees, mobile phone. Members of the board of directors and Management”. ericsson is engaged in litigation with an australian company, as of december 31, 2006, there were no loans outstanding QpsX, in the federal court of australia. QpsX’s claim relates to from, and no guarantees issued to or assumed by ericsson for an alleged breach by ericsson of a patent license agreement. the benefit of any member of the board of directors or senior ericsson has contested the claim. management. please see also Notes to the consolidated finan- in december, 2006, the stockholm city court acquitted all cial statements – Note c29, “information regarding employees, current or former employees of the parent company who had all Members of the board of directors and Management”. been indicted by the swedish National economics crimes bu- legal and tax proceedings reau for evasion of tax control. the judgment has in part been appealed by the prosecutor. ericsson and sony ericsson Mobile communications are en- swedish fiscal authorities have disallowed, for income tax gaged in multiple patent litigations in the Us, UK, Germany and purposes, the parent company and the subsidiary companies the Netherlands, involving GsM/Gprs/edGe/WcdMa stan- ericsson telecom ab and ericsson radio systems ab (renamed dards against the Korean handset manufacturer samsung, in- ericsson ab) deductions for sales commission payments via cluding proceedings in the Us international trade commission external service companies to sales agents in certain countries. (itc) under section 337 of the tariff act of 1930. in itc, both Most of these taxes have been paid. the decision covering the sides’ complaints are based on respondents’ alleged unlawful fiscal year 1999 was appealed. in december, 2006, the county importation and sales within the United states of products, that – administrative court in stockholm rendered a judgment in favor according to the complainants – infringe several of their Us pat- of the fiscal authorities. ents. ericsson and sony ericsson, as well as samsung, seek exclusion orders to stop respondent’s importation of such prod- board of directors ucts into the Us. More information regarding the board of directors and its mem- in october 2005, ericsson filed a complaint to the european bers as well as the board and its committee activities can be commission requesting that it investigate and stop Us-based found in the corporate Governance report. Qualcomm’s anti-competitive conduct in the licensing of essen- tial patents for 3G mobile technology. at the same time, broad- Changes to the Board membership com, Nec, Nokia, panasonic Mobile communications and texas the board of directors is elected each year at the annual General instruments each filed similar complaints claiming Qualcomm is Meeting for the period until the next annual General Meeting. at violating eU competition law and failing to meet the commit- the annual General Meeting on april 10, 2006, Michael treshow ments Qualcomm made to international standardization bodies was re-elected chairman of the board and Marcus Wallenberg around the world that it would license its technology on fair, rea- deputy chairman. sverker Martin-Löf was also elected deputy sonable and non-discriminatory terms. in december, 2005, the chairman. sir peter L. bonfield, Ulf J. Johansson, Nancy McKin- b o a r d o f d i r e c t o r s ’ r e p o r t 37 ENXBoD_v61.indd 37 07-02-27 13.07.21 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 stry and carl-Henric svanberg were re-elected. börje ekholm, during the year. the quota value of these shares is seK 17.1 Katherine Hudson and anders Nyrén were elected as new mem- million, representing less than one percent of capital stock, and bers of the board of directors. compensation received amounted to seK 124.9 million. the Board compensation holding of treasury stock at december 31, 2006 was 251,013,892 class b shares. the quota value of these shares is seK 251.0 Members of the board, who are not employees of the company, million, representing 2 percent of capital stock, and related have not received any compensation other than the fees paid for acquisition cost amounts to seK 558.6 million. board duties as outlined in Notes to the consolidated financial statements – Note c29, “information regarding employees, post-closing events Members of the board of directors and Management.” Members and deputy Members of the board, who are employees, i.e. the Acquisition of Redback Networks ceo and the employee representatives, have not received any on december 20, 2006, ericsson and redback Networks inc. remuneration or benefits other than their normal employee en- (NasdaQ:rbaK) announced the signing of a definitive agree- titlements, with the exception of a small fee paid to the employee ment under which ericsson would acquire redback for Usd representatives for each board meeting attended. 25.00 per share, or an aggregate price of approximately Usd 1.9 parent company billion (seK 13.4 billion). the acquisition was completed on Janu- ary 25, 2007. the parent company business consists mainly of corporate redback has over 700 carrier customers in more than 80 management, holding company functions and internal banking countries and employs about 800 people, including 500 r&d activities. the parent company business also includes customer engineers. fifteen of the top 20 network operators worldwide use credit management performed on a commission basis by erics- redback’s technology, including broadband routers to manage son credit ab. ip-based data, voice and video services. redback has a strong the parent company is the owner of the majority of intellec- position in multi-service edge routing technology, which helps tual property rights and manages the patent portfolio, including carriers deliver broadband, telephony, tV and mobility services patent applications, licensing and cross-licensing of patents and over internet-based infrastructures. defending of patents in litigations. the combination of redback’s intelligent routing technology the parent company has 7 (8) branch offices. in total, the and ericsson’s leading iMs (ip Multimedia subsystem), optical Group has 51 (51) branch and representative offices. transport and broadband access puts ericsson in a leading Net sales for the year amounted to seK 0.6 (1.1) billion and position in end-to-end ip solutions for both fixed and mobile income after financial items was seK 13.6 (14.0) billion. exports operators. accounted for 100 percent of net sales in 2006 (96 percent in 2005). No consolidated companies were customers of the parent Acquisition of Entrisphere company’s sales in 2006 or 2005, while 29 percent (27 percent ericsson announced on february 12, 2007, the acquisition of in 2005) of the company’s total purchases of goods and services entrisphere, a company providing fiber access technology. entri- were from such companies. Net profits from disposals and write- sphere was founded in 2000 in santa clara, california, and em- downs of shares, including ericsson Microwave systems ab, ploys about 140 people, including important r&d resources. contributed seK 2.9 (6.6) billion to income. the entrisphere acquisition brings a leading ip-based broad- Major changes in the parent company’s financial position for band access platform ready for volume deployment compliant the year include decreases in current and non-current receiv- with both North american and international standards. ables from subsidiaries of seK 31.4 billion and decreases in cash since its first deployment of fiber access solution in 2003, and bank and short-term investments of seK 21.0 billion. current entrisphere has worked with major operators to deliver ip-based and non-current liabilities to subsidiaries decreased by seK 41.9 services to customers across North america. With its GpoN billion and current maturities of long-term borrowings decreased solution (Gigabit passive optical Network) already in service in by seK 9.7 billion. at year-end, cash and bank and short-term North america and the system being evaluated for deployment investments amounted to seK 54.0 (75.0) billion. by leading network operators around the globe, the acquisition in accordance with the conditions of the stock purchase forms an important cornerstone in ericsson’s full service broad- plans and option plans for ericsson employees, 17,051,349 band offering. shares from treasury stock were sold or distributed to employees 38 b o a r d o f d i r e c t o r s ’ r e p o r t ENXBoD_v61.indd 38 07-02-27 13.07.22 e r i c s s o N a N N U a L r e p o r t 2 0 0 6 proposed disposition of earnings the Group reports an equity ratio of 56.2 (49.0) percent and net the board of directors proposes that a dividend of seK 0.50 cash amounts to seK 40.7 (50.6) billion. (0.45) per share be paid to shareholders duly registered on the the board of directors has also considered the parent com- record date of april 16, 2007, and that the company retains the pany’s and the Group’s position in general. in this respect, the remaining part of non-restricted equity. the class b treasury board of directors has taken into account known commitments shares held by the parent company are not entitled to receive a that may have an impact on the financial positions of the parent dividend. company and its subsidiaries. assuming that no treasury shares remain within the company the proposed dividend does not limit the Group’s ability to on the record date, the board of directors proposes that earn- make investments or raise funds and it is our assessment that ings be distributed as follows: the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital amount to be paid to the shareholders seK 8,066,129,339 requirements for the parent company and the Group. amount to be retained by the parent company total non-restricted equity of the parent company seK 24,920,658,097 board assurance in accordance with section 3.6.2 of the swedish code of corpo- rate Governance, assurance is hereby given by the board of seK 32,986,787,436 directors and the president and ceo that, to the best of our knowledge, the annual accounts and the consolidated accounts as a basis for its proposal for a dividend, the board of directors have been prepared in accordance with generally accepted has made an assessment in accordance with chapter 18, sec- accounting principles (Gaap) for a publicly listed company, the tion 4 of the swedish companies act of the parent company’s information presented is consistent with actual conditions and and the Group’s need for financial resources as well as the par- nothing of material value has been omitted that would affect the ent company’s and the Group’s liquidity, financial position in picture of the company as presented in this annual report. other respects and long-term ability to meet their commitments. stockholm february 23, 2007 telefonaktiebolaget LM ericsson (publ) org. no. 556016-0680 sverker Martin-Löf Deputy chairman Michael treschow Chairman Marcus Wallenberg Deputy chairman Nancy McKinstry sir peter L. bonfield anders Nyrén börje ekholm Ulf J. Johansson Katherine Hudson torbjörn Nyman Monica bergström Jan Hedlund carl-Henric svanberg President and CEO ENXBoD_v61.indd 39 07-02-27 13.07.22 b o a r d o f d i r e c t o r s ’ r e p o r t 39 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 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 net income attributable to: stockholders of the parent company minority interest Other information average number of shares, basic (million) earnings per share, basic (seK) earnings per share, diluted (seK) notes c3, c4 c6 c12 c7 c7 c8 2006 2005 2004 177,783 –104,487 73,296 –27,921 –21,422 –49,343 5,941 5,934 35,828 1,954 –1,789 35,993 –9,557 26,436 151,821 –82,369 69,452 –24,454 –16,800 –41,254 2,491 2,395 33,084 2,653 –2,402 33,335 –8,875 24,460 131,972 –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 26,251 185 24,315 145 17,539 297 c9 c9 15,871 1.65 1.65 15,843 1.53 1.53 15,829 1.11 1.11 40 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 ENXCONSXStatsXnew_v20.indd 40 07-02-27 09.44.37 consolidated balance sheet December 31, SEK million ASSETS Non-current assets intangible assets capitalized development expenses Goodwill intellectual property rights e R i c s s o n a n n U a l R e P o R t 2 0 0 6 notes 2006 2005 1) c10 4,995 6,824 15,649 6,161 7,362 939 Property, plant and equipment c11, c26, c27 7,881 6,966 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 trade receivables 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 subsidiaries Non-current liabilities Post-employment benefits Provisions, non-current deferred tax liabilities borrowings, non-current other non-current liabilities Current liabilities Provisions, current borrowings, current trade payables other current liabilities Total equity and liabilities 2) c12 c8 c13 c14 c15 c20 c20 c16 c16 c17 c18 c8 c19, c20 c18 c19, c20 c22 c21 9,409 721 1,921 2,409 13,564 63,373 6,313 805 1,322 2,796 18,519 51,183 21,470 19,208 51,070 1,735 15,012 32,311 29,969 151,567 214,940 120,113 782 120,895 6,968 602 382 12,904 2,868 23,724 13,280 1,680 18,183 37,178 70,321 214,940 41,242 3,624 12,574 39,767 41,738 158,153 209,336 101,622 850 102,472 5,891 904 391 14,185 2,740 24,111 17,764 10,784 12,584 41,621 82,753 209,336 1) ericsson has adopted the new option in ias 19 to charge actuarial gains/losses directly to equity, as from January 1, 2006. earlier periods have been restated accordingly. for further information please see notes to the consolidated statements – note c17, “Post-employment benefits”. 2) of which interest-bearing liabilitites and post-employment benefits 21,552 (30,860). 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 ENXCONSXStatsXnew_v20.indd 41 07-02-27 09.44.37 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 consolidated statement of cash flows Years ended December 31, SEK million notes 2006 2005 2004 OPERATIONS net income attributable to stockholders of the parent company Adjustments to reconcile net income to cash Operating net assets inventories customer financing, current and non-current trade receivables 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 of subsidiaries and other operations divestments of subsidiaries and other operations Product development other investing activities Cash flow from operating investing activities 26,251 24,315 17,539 c25 6,245 32,496 10,845 35,160 10,490 28,029 –2,553 1,186 –10,563 –3,729 1,652 18,489 –3,827 185 –18,078 3,086 –1,353 –1,070 –21,057 –3,668 –641 –5,874 –15,574 7,266 16,669 –3,365 362 –1,210 30 –1,174 13 –5,344 –3,432 –65 –1,403 –1,990 1,340 22,479 –2,452 358 –1,648 14 –1,146 86 –4,788 c11 c26 c26 c10 Cash flow before financial investing activities –2,568 11,325 17,691 short-term investments Cash flow from investing activities Cash flow before financing activities Financing activities Proceeds from issuance of borrowings Repayment of borrowings sale of own stock and options exercised dividends paid Cash flow from financing activities effect of exchange rate changes on cash Net change in cash 6,180 –14,877 6,375 1,031 –26,050 –30,838 3,612 17,700 –8,359 1,290 –9,510 124 –7,343 –15,439 58 –11,769 657 –2,784 174 –4,133 –6,086 –288 11,326 1,100 –15,407 41 –292 –14,558 214 –22,703 Cash and cash equivalents, beginning of period 41,738 30,412 53,115 Cash and cash equivalents, end of period c20 29,969 41,738 30,412 42 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 ENXCONSXStatsXnew_v20.indd 42 07-02-27 09.44.38 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 consolidated statement of RecoGniZed income and eXPense Years ended December 31, SEK million Income and expenses recognized directly in equity: actuarial gains and lossed related to pensions including payroll tax Revaluation of other investments in shares and participations fair value remeasurement reported in equity transferred to income statement at sale Cash Flow hedges: fair value remeasurement of derivatives reported in equity transferred to income statement for the period transferred to balance sheet for the period changes in cumulative translation effects due to changes in foreign currency exchange rates tax on items reported directly in/or transferred from equity 2006 2005 1) 2004 1) stock- stock- stock- holders’ minority interest equity Total equity 2) holders’ minority interest equity total equity 2) holders’ minority interest equity total equity 2) 440 – 440 –3,221 – –3,221 –1,059 – –1,059 –2 – 1 – –1 – –3 –147 – – –3 –147 4,100 – 4,100 –3,961 – –3,961 –1,990 – –1,990 1,404 99 – 99 – – – 1,404 – – – – – – – – – – – – – – – – –3,028 –91 –3,119 4,118 147 4,265 –1,200 –65 –1,265 –769 – –769 1,523 – 1,523 384 – 384 Total transactions reported in equity –1,150 –90 –1,240 –287 147 –140 –1,875 –65 –1,940 net income 26,251 185 26,436 24,315 145 24,460 17,539 297 17,836 Total income and expenses recognized for the period 25,101 95 25,196 24,028 292 24,320 15,664 232 15,896 1) ericsson has adopted the new option in ias 19 to charge actuarial gains/losses to equity, as from January 1, 2006. earlier periods have been restated accordingly. for further information, please see notes to the consolidated statements – note c17, “Post-employment benefits”. 2) for further information, please see notes to the consolidated statements – note c16, “equity”. ENXCONSXStatsXnew_v20.indd 43 07-02-27 09.44.38 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 notes to the consolidated financial statements contents c1 significant accounting Policies...........................................................................................................................................................................................................45 c2 critical accounting estimates and Judgments......................................................................................................................................................................52 c3 segment information...................................................................................................................................................................................................................................54 c4 Revenues.............................................................................................................................................................................................................................................................. 57 c5 expenses by nature...................................................................................................................................................................................................................................... 57 c6 other operating income........................................................................................................................................................................................................................... 57 c7 financial income and expenses........................................................................................................................................................................................................ 57 c8 taxes........................................................................................................................................................................................................................................................................ 57 c9 earnings per share.......................................................................................................................................................................................................................................58 c10 intangible assets............................................................................................................................................................................................................................................59 c11 Property, Plant and equipment........................................................................................................................................................................................................... 61 c12 financial assets..............................................................................................................................................................................................................................................63 c13 inventories............................................................................................................................................................................................................................................................65 c14 trade Receivables.........................................................................................................................................................................................................................................65 c15 other current Receivables.....................................................................................................................................................................................................................65 c16 equity.......................................................................................................................................................................................................................................................................66 c17 Post-employment Benefits.....................................................................................................................................................................................................................68 c18 Provisions............................................................................................................................................................................................................................................................. 74 c19 interest-bearing liabilities.......................................................................................................................................................................................................................75 c20 financial Risk management and financial instruments..................................................................................................................................................75 c21 other current liabilities............................................................................................................................................................................................................................79 c22 trade payables.................................................................................................................................................................................................................................................79 c23 assets Pledged as collateral................................................................................................................................................................................................................79 c24 contingent liabilities...................................................................................................................................................................................................................................79 c25 statement of cash flows.........................................................................................................................................................................................................................79 c26 Business combinations............................................................................................................................................................................................................................80 c27 leasing................................................................................................................................................................................................................................................................... 81 c28 tax assessment Values in sweden................................................................................................................................................................................................. 81 c29 information Regarding employees, members of the Board of directors and management.............................................................. 81 c30 Related Party transactions.................................................................................................................................................................................................................... 87 c31 fees to auditors..............................................................................................................................................................................................................................................88 c32 events after the Balance sheet date..............................................................................................................................................................................................88 44 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 ENXCONSXNotsXnew_v72.indd 44 07-03-04 17.32.39 c1 significant accoUnting Policies the consolidated financial statements comprise telefonaktiebolaget lm ericsson, the Parent company, and its subsidiaries (“the company”) and the company’s interest in associated companies and joint ventures. the Parent company is domiciled in sweden at torshamnsgatan 23, 164 83 stockholm. the consolidated financial statements as at and for the year ended december 31, 2006, have been prepared in accordance with international financial Reporting standards (ifRs) as endorsed by the eU, RR 30:05 additional rules for group accountng and related interpretations issued by the swedish financial accounting standards council (Redovisingsrådet) and the swedish annual accounts act. for the company, there is no difference between ifRs and ifRs endorsed by the eU, nor is RR 30:05 or the swedish annual accounts act in conflict with ifRs. the financial statements were approved by the Board of directors on february 23, 2007. the balance sheets and income statements are subject to approval by the annual general meeting of share- holders. ifRs differ in certain respects from generally accepted accounting principles in the United states (Us gaaP). for a description of major differences with respect to ericsson’s financial statements, informa- tion will be provided in a separate note ”Reconciliation to accounting Principles generally accepted in the United states” in the annual report on form 20f. the 20f will be filed with sec in the second quarter of 2007. 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, as allowed by ifRs 1. in 2006, the following amendments to ifRs and new ifRic:s were adopted: • IAS.19.employee Benefits. as from January 1, 2006, the company has applied the option for recognition of actuarial gains and losses directly in equity. the option has been applied retrospectively as from January 1, 2004. in note c17 Post employment Benefits, the effect of the application of the option is disclosed. • IAS.21.the effects of changes in foreign exchange Rates. ias 21 has been amended in relation to the accounting treatment of net investments in a foreign operation. this amendment has not had a significant impact on the financial position or result. e R i c s s o n a n n U a l R e P o R t 2 0 0 6 • IAS.39.financial instruments: Recognition and measurement. an amendment to ias 39 requires a company to include liabilities resulting from financial guarantee contracts in the balance sheet at fair value. this amendment has not had a significant impact on the financial position or result. • IFRIC.4.determining whether an arrangement contains a lease. this interpretation has not had a significant impact on the financial position or result. • IFRIC.6.liabilities arising from Participating in a specific market – Waste of electric and electronical equipment. this interpretation has not had a significant impact on the financial position or result. Basis.of.presentation the financial statements are presented in millions of swedish kronor (seK). they are prepared on a historical cost basis, except for certain financial assets and liabilities that are stated at fair value; derivative financial instruments, financial instruments held for trading, financial instruments classified as available-for-sale and plan assets related to defined benefit plans. non-current assets and disposal groups held for sale are stated at the lower of carrying amount and fair value less cost to sell. Principles.of.consolidation. the consolidated financial statements are prepared in accordance with the purchase method. accordingly, consolidated stockholders’ equity includes equity in subsidiaries, associated companies and joint ventures earned only after their acquisition. Subsidiaries the consolidated financial statements include the accounts of the Parent company and all subsidiaries and the companys’ interest in associated companies and joint ventures. subsidiaries are all compa- nies in which ericsson has an ownership interest and directly or indirectly, including effective potential voting rights, has a voting majority or in which ericsson by agreement has control of or retains the majority of the residual or ownership risk of the entity. this means that the company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. at acquisitions, consolidation is performed from the date control is transferred. at divestments, deconsolidation is made from the date when control ceases. intra-group balances, and any unrealized income and expense arising from intra-group transactons, are fully eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. 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 corre- sponding influence is obtained through agreement, are accounted for according to the equity method. ericsson’s share of income before taxes is reported in item share in earnings of joint ventures and associated companies, included in operating income. taxes are included in item taxes. Unrealized internal profits in inventory as well 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 ENXCONSXNotsXnew_v72.indd 45 07-03-04 17.32.39 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 as other assets in associated companies and joint ventures purchased from subsidiary companies are eliminated in the consolidated accounts in proportion to ownership. losses in transac- tions with associated companies and joint ventures are eliminated in the same way as profit unless there is evidence of impairment. also when associated companies and joint ventures sell to the company, unrealized internal profits and losses occur. eliminations are made also for these profits and losses. Undistributed earnings of associated companies and joint ventures included in consolidated equity are reported as Retained earnings, subsequent to acquisition. Business.combinations at the acquisition of a business, an allocation is made of the cost of the business combination in which fair values are assigned to acquired assets, liabilities and contingent liabilities, 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. as from the acquisition date, goodwill acquired in a business combination is allocated to each of the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination. corporate assets are allocated to cash-generating units in proportion to each unit’s proportion of net sales. an annual impairment test for the cash-generating units to which goodwill has been allocated is performed in the fourth quarter, or when there is an indication of impairment. an impairment loss is recognized if the carrying amount of the cash-generating unit exceeds its recoverable amount. impairment losses are recognized in the income statement. impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of the goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit on a pro rata basis. the recoverable amount of an asset or a cash-generating unit is the greater of its value in use and its fair value less costs to sell. in assessing value in use, the estimated future cash flows are discount- ed to their present value. an impairment loss in respect of goodwill is not reversed. Translation.of.financial.statements.in.foreign.currency. for subsidiary companies, joint ventures and associated companies, the functional (business) currency is the currency in which the companies primarily generate and expend cash. their financial statements plus goodwill related to such companies are translated to seK by translating assets and liabilities at the closing rate on the balance sheet day and income statement items at average exchange rates, with translation adjustments reported directly in consolidated equity. When a company is disposed of, the corresponding accumulated translation adjustments are recognized in consolidated income. effective portions of foreign exchange gains and losses on hedge instruments 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 portions of foreign exchange gains and losses are reported in operating income. 46 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 Remeasurement.of.foreign.currency.items.in. individual.companies. in the financial statements, receivables and liabilities in foreign currencies are measured at year-end exchange rates. foreign exchange gains and losses are reported either as operational cost or in financial net. effects of hedging are reported in the income statement together with the foreign currency exchange gains/losses of the hedged item. the net difference between foreign exchange gains/losses on operating transactions and gains/losses on hedging through foreign exchange derivatives are reported as adjustments to cost of sales. 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. ias 39 was adopted as from January 1, 2005, with early adoption of the amendment related to cash flow hedge accounting of forecast intragroup transactions. Statement.of.cash.flows the cash flow statement is prepared according to the indirect method. cash flows from foreign subsidiaries are translated at the average exchange rate during the period. subsidiaries purchased and/or sold are reported as cash flow from operating investing activities, net of cash. cash and cash equivalents consist of cash, bank and short-term investments and are highly liquid financial instruments that have a remaining maturity of three months or less at the date of acquisition. 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 technolo- gies. 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 appropriate revenue recognition method. the contracts are of four main types: • delivery-type • construction-type • contracts for various types of services, for example multi-year managed services contracts • licenses large customer frame agreements may include different types of undertakings and may result in a mix of construction-type contracts, delivery-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. specific contractual performance and acceptance criteria impact the timing and amounts of revenue recognized. the profitability of contracts is periodically assessed and ENXCONSXNotsXnew_v72.indd 46 07-03-04 17.32.40 provisions for losses are immediately made, with full amounts, when losses are probable. for delivery-type contracts revenue is recognized when risks and rewards have been transferred to the customer, normally stipulated in contractual terms of trade. for 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, the company defers the recognition of revenue until all elements essential to the functionality have been delivered or fair values exist for the undelivered elements. Revenues from construction-type contracts are generally recognized 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 construction-type contracts generally define deliverables or milestones for progress billing to the customer, which also well reflect the degree of completion of the contract. in construction-type contracts where the milestone output method is applied, costs incurred pending the completion of milestones are reported as contract work in progress and included in inventory. such milestones are in most contracts frequent. the extent to which milestones have been met varies from period to period, and as a consequence the amount of contract work included in inventory may also vary significantly. Revenue for period service contracts and managed services contracts, covering longer periods is recognized pro rata over the contract period. Revenue for training, consulting, engineering, installation and similar services is generally recognized when the services are provided. licenses relate to mobile platform license revenues which are included in reported net sales based on the number of handsets or components produced by the customer. Revenue is recognized when the customer production has been made. license revenues related to third party contracts for utilization of our patents are reported as other operating revenues. for sales between consolidated companies, associated compa- nies, joint ventures and segments we apply arm’s length pricing. Earnings.per.share. Basic earnings per share are calculated by dividing net income attributable to shareholders of the parent company by the average number of shares outstanding (total number of shares less treasury stock) 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 dilutive potential ordinary shares. Potential ordinary shares are treated as dilutive when, and only when, this reduces earnings per share. e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Classification.and.measurement.of.financial. instruments ias 39 was adopted as from January 1, 2005, with early adoption of the amendment related to cash flow hedge accounting of forecast intragroup transactions. • short-term investments are measured at fair value through profit or loss. • investments in equity instruments are recognized at fair value. subsequent changes in fair value are recognized in equity, adjusted for impairment, which is recognized in the income statement. • loans and borrowings are recognized at fair value, net of transaction costs incurred. subsequently, loans and borrowings are measured using the amortized cost method less impairment. • all derivatives are recognized at fair value. 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 of a highly probable forecasted transaction. the effective portion of fair value changes of the derivative is recognized in equity until the hedged transaction affects the income statement, at which moment the accumulated deferred amount in equity is recycled to the income statement. ii) a cash flow hedge of a highly probable forecasted transaction that result in the recognition of a non-financial asset or liability. the effective portion of fair value changes of the derivative is recognized in equity until the hedged transaction affects the balance sheet, at which moment the accumulated deferred amount in equity is included in the initial measurement of the acquisition cost of the asset or liability iii) a hedge of a net investment in a foreign operation. the effective portion of fair value changes of the derivative is recognized in equity until the hedged investment affects the income statement, at which moment the accumulated deferred amount in equity is recycled to the income statement. • for derivatives assigned as fair value hedges, fair value changes of 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 company only applies fair value hedge accounting for hedging fixed interest risk on borrowings. • ericsson’s listed debt instruments (outstanding notes and bond loans) are measured at amortized cost, unless designated as a hedged item in a fair value hedge, when its hedged risk is measured at fair value. a financial instrument is recognized if the company becomes a party to the contractual provisions of the instrument. Regular purchases and sales of financial assets are recognized on settlement date. investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement. financial assets are derecognized when the rights to receive cash flows from the investments have expired or 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 ENXCONSXNotsXnew_v72.indd 47 07-03-04 17.32.40 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 have been transferred and the group has transferred substantially all risks and rewards of ownership. financial liabilities are derecognized when they are extinguished. foreign exchange gains and losses on operating assets and liabilities are reported as adjustments to cost of sales. the corre- sponding reporting for financial items is credited/charged to financial income and expenses respectively. gains and losses on derivatives held to offset balance sheet items 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. each balance sheet date, the company assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. in the case of equity securities with changes in fair value recognized in equity, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the security is impaired. if any such evidence exists for these financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the income statement. impairment losses recognized in the income statement on equity instruments are not reversed. Receivables.and.customer.financing. Receivables are initially recognized at fair value and subsequently measured at amortized cost, less allowances for impairment charges. impairment of receivables is assessed when there is objective evidence that the company will not be able to collect all amounts due according to the original contractual terms. significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. the amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate at inception. the amount of the provision is recognized in the income statement within selling expenses. When selling receivables, they are derecognized if substantially all the risks and rewards of ownership of the receivable have been trans- ferred. separate assets or liabilities are recognized if any rights and obligations are created or retained in the transfer. collectibility of the receivables are assessed for purposes of initial revenue recognition. in instances where the exposures are 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. 48 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 Financial.guarantees financial guarantee contracts are initially recognized at fair value (i.e usually the fee received). subsequently, these contracts are measured at the higher of • the amount determined as the best estimate of the expenditure required to settle the obligation according to the guarantee contract, and • the recognized fee less cumulative amortization when amortized over the guaranteed period using the straight line method. Inventories. inventories are measured 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. Intangible.assets.other.than.goodwill. these assets consist of capitalized development expenses and acquired intangible assets, such as patents, customer relations, brands and software, and are stated at cost less accumulated amortization/impairment. amortization and any impairment losses are included in Research and development and other technical expenses, mainly for capitalized development expenses and patents, selling and administrative expenses, mainly for customer relations and brands, 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. amortization of acquired intangible assets, mainly intellectual property rights, is made according to the straight-line method over the useful life, normally not exceeding ten years. the company has not recognized any intangible assets with indefinite lifetime other than goodwill. 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. an impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. the recoverable amount is the higher of its value in use and its fair value less costs to sell. in assessing value in use, the estimated future cash flows are discount- ed to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. corporate assets have been allocated to cash- generating units in relation to each unit’s proportion of total net sales. impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. an impairment loss is reversed if there has been a ENXCONSXNotsXnew_v72.indd 48 07-03-04 17.32.41 change in the estimates used to determine the recoverable amount, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of amortization, if no impairment loss had been recognized. Property,.plant.and.equipment. items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. depreciation is charged to income, generally on a straight-line basis, over the estimated useful life of each part of an item of property, plant and equipment. estimated useful lives are, in general, 40 years for buildings, 20 years for land improvements, 3 to 10 years for machinery and equipment, and up to 5 years for rental equipment. depreciation and any impairment are included in cost of sales, Research and development and other technical expenses and selling and administrative expenses. impairment testing is performed in the same manner as for intangible assets other than goodwill as well as recognition or reversal of impairment, see description under intangible assets other than goodwill above. Leasing. Leasing when the Company is the lessee leases on terms in which the company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset, although the depreciation period would not exceed the lease term. other leases are operating leases, and the leased assets under such contracts are not recognized on the balance sheet. costs under operating leases are recognized in the income statement on a straight-line bases over the term of the lease. lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Leasing when the Company is the lessor leasing contracts with the company as 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, a receivable is recognized at an amount equal to the net investment in the lease and revenue recognized in accordance with the revenue recognition principles. Under operating leases, an item of property, plant and equipment is reported and revenue as well as depreciation are recognized on a straight-line basis over the lease term. e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Income.taxes. income taxes in the consolidated financial statements include both current and deferred taxes. income taxes are reported in the income statement unless the underlying item is reported directly in equity. for those items the related income tax is also reported directly in equity. a current tax liability or asset is recognized for the estimated taxes payable or refundable for the current year or prior years. deferred tax assets are recognized for (i) deductible temporary differences between the book values of assets and liabilities and their tax values and (ii) unutilized tax loss carryforwards. a deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized. temporary differences related to the following are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences related to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. the valuation of deferred tax assets involves assumptions regarding the deductibility of costs not yet subject to taxation and regarding sufficient future taxable income to enable utilization of unused tax losses in different tax jurisdictions. all deferred tax assets are subject to annual review of probable utilization. the largest amounts of tax loss carryforwards are in sweden, with indefinite period of utilization. deferred tax is measured at the tax rate that is expected to be applied to the temporary differences when they reverse, based on the tax laws that have been enacted or substantively enacted by the reporting date. an adjustment of deferred tax asset/liability balances due to a change in the tax rate is recognized in the income statement unless it relates to a temporary difference earlier recognized directly in equity, in which case the adjustment is also recognized in equity. Provisions Provisions are made when there are legal or constructive obligations as a result of past events and when it is probable that an outflow of resources will be required to settle the obligations and the amounts can be reliably estimated. however, the actual outflow as a result of the obligation may differ from such estimate. the provisions mainly relate to warranty commitments, restruc- turing, 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 proceedings, lawsuits and other unresolved claims, including proceedings under laws and government regulations and other matters. these matters 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 possible to estimate reliably. We provide for the estimated future settlements related to patent infringements based on the probable outcome of each infringement. 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 ENXCONSXNotsXnew_v72.indd 49 07-03-04 17.32.41 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 the ultimate outcome or actual cost of settling an individual infringement may vary from our estimate. We estimate the outcome of any potential patent infringement 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 more 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 procee- dings. at various intervals, we give our suppliers and/or subcontractors forecasts of expected purchases and also sometimes commit to minimum purchase levels during a certain period. the agreements often include compensation 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 actual claims from these suppliers and/or subcontractors, we make provisions for estimated compensation to such suppliers and/or subcontractors. 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 subcontrac- tors are included in Research & development 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 or credited to the same account as the initial provision. 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 employee benefits. the related actuarial and investment risks fall on the employee. the expenditures for defined contribution plans are recognized as costs during the period when the employee provides service. Under a defined benefit plan it is the company’s obligation to provide agreed benefits to current and former employ- ees. the related 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 discount rate for each country is determined by reference to market yields on high-quality corporate bonds that have maturity dates approximating the terms of the company’s obligations. in countries where there is no deep market in such bonds, the market yields on government bonds are used. 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 actual result will differ from the estimated result. these differences are reported as actuarial gains and losses. they are for example caused by 50 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 unexpectedly high or low rates of employee turnover, changed life expectancy, salary changes, changes in the discount rate and differences between actual and expected return on plan assets. actuarial gains and losses are recognized in equity in the period in which they occur. the company’s net commitment for each defined benefit plan consists of the present value of pension commitments less the fair value of plan assets and is recognized net on the balance sheet. When the result is a benefit to the company, the recognized asset is limited to the total of any cumulative past service cost and the present value of any future refunds from the plan or reductions in future contribution to the plan. the net of return on plan assets and interest on pension liabilities is reported as financial income or expense, while the current service cost and any other items in the annual pension cost are reported as operating income or expense. Pension cost calculated according to ias 19 differs from pension cost calculated according to swedish gaaP. a special payroll tax is calculated on the difference between ias 19 and local practice. Payroll taxes are recorded as other current liabilities and are recognized as cost in the income statement. Payroll tax related to actuarial gains and losses are reported in equity together with the recognition of actuarial gains and losses. Share-based.employee.compensation. share based compensation only relates to remuneration to em- ployees, including key management personnel. Stock option plans ericsson has chosen not to 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 equity settled 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 fulfill 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. such social security charges are accrued during the vesting period. Stock purchase plans for stock purchase plans, compensation costs are recognized during the vesting period, based on the fair value of the ericsson share at the employee’s investment date. the fair value is based upon the share price at investment date adjusted for that no dividends will be received on matching shares prior to matching. the employees pay a price equal to the share price at investment date for the investment shares. the investment date is considered as the grant date. in the balance sheet the corresponding amounts are accounted for as equity. Vesting conditions are non-market based and affect the number of shares that ericsson will match. for shares under performance-based matching programs, the company ENXCONSXNotsXnew_v72.indd 50 07-03-04 17.32.42 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 charges 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, estimated such social security charges are accrued. Segment.reporting financial information is provided to the Board for both primary and secondary segments. these segments are subject to risks and returns that are different from those of other segments. Primary segments ericsson has the following business segments: • systems, addressing operators of mobile and fixed public telephone networks. in this segment is included since January 1, 2006, businesses acquired from marconi. • Phones, addressing distributors of mobile handsets to end users. financial information for this segment consists of our investment in and share in earnings of sony ericsson. • other operations, which consists of a number of different operations addressing different types of customers. each included operation represents, however, less than 10 percent of total net sales and is therefore considered too small to be reported separately. included operations are: network technologies, enterprise systems, mobile Platform technology, Power modules and other. as per september 1, 2006, the major part of the defense operations was sold and revenue and costs are included in other operations until that date. 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 commonality regarding technology, research and development. the systems segment is regarded as one business segment, where the business units access, systems, global services and Broadband networks represent different product lines. this is due to the close technical relation between included products – they are all integrated components in public telecommunications networks for fixed or mobile communication, subject to common technical systems standards ,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 from several product lines as well as installation. our second segment, Phones, is carried out through a joint venture with sony and develops and sells handsets for mobile telecommunications to distributors. our segment other operations is composed of a number of smaller operating units, each too small to be reported individually as a separate segment, and each with different characteristics in terms of products, customers and distribution channels. e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Secondary segments ericsson operates in five main geographical areas: (1) Western europe, (2) central and eastern europe, middle east and africa, (3) asia Pacific, (4) north america and (5) latin america. these areas represent our geographical segments. Borrowing.costs the company does not capitalize any borrowing costs. these costs are expensed as incurred. Non-current.assets.held.for.sale non-current assets held for sale are measured at the lower of carrying amount and fair value less cost to sell. at present, the amounts related to assets held for sale are insignificant. Government.grants. government grants are recognized when there is a reasonable assurance of compliance with conditions attached to the grants and that the grants will be received. for ericsson, government grants are linked to performance of research or development work or to subsidized capital expenditures as governmental stimulus to employment or investments in a certain country or region. government grants linked to research and development are normally deducted in reporting the related expense whereas grants related to assets are accounted for deducting the grant in arriving at the carrying amount of the asset. New.or.amended.standards.(IAS/IFRS) the new or amended standards relate to changes in disclosure or presentation and will therefore have no impact on financial result or position. • ifRs 7, financial instruments: disclosures, and a complementary amendment to ias 1, Presentation of financial statements – capital disclosures (effective from January 1, 2007). ifRs 7 introduces new disclosure requirements to improve the informa- tion about financial instruments. the amendment to ias 1 introduces disclosures about the level of an entity’s capital and how it manages capital. the company will apply ifRs 7 and the amendment to ias 1 from annual periods beginning January 1, 2007. • ifRs 8 operating segments. this standard prescribes measure- ment and presentation of segments and replaces ias 14 segment reporting. an entity shall apply this ifRs in its annual financial statements for periods beginning on or after January 1, 2009. the company plans to apply this new standard as from January 1, 2009. New.interpretations.(IFRIC:s). none of the new ifRic:s are expected to have a significant impact on financial result or position. the following ifRic:s shall be applied as from January 1, 2007: • ifRic interpretation 7 applying the Restatement approach under ias 29 financial Reporting in hyperinflationary economies. this interpretation provides guidance on how to apply the requirements of ias 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency. 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 ENXCONSXNotsXnew_v72.indd 51 07-03-04 17.32.42 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 • ifRic interpretation 8 scope of ifRs 2. this interpretation applies to transactions when the identifiable consideration received appears to be less than the fair value of the equity instruments granted. • ifRic interpretation 9 Reassessment of embedded derivatives. determines when an entity shall reassess the need for an embedded derivative to be separated. • ifRic interpretation 10 interim financial Reporting and impairment. an entity shall not reverse an impairment loss recognized in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. the following ifRic:s shall be applied as from January 1, 2008: • ifRic interpretation 11 ifRs 2—group and treasury share transactions. this interpretation addresses issues in relation to such transactions when grants to equity instruments of the entity are made to employees and treatment of these grants in individual companies. • ifRic interpretation 12 service concession arrangements. this interpretation gives guidance on the accounting by operators for public-to-private service concession arrangements. 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 and outcomes may occur within the next financial year that could require a material adjustment to the carrying amount of the asset or liability affected. 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 contracts. managerial judgment is applied regarding, among other aspects, 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, 2006 amount to seK 2.6 (2.5) billion or 12 (13) percent of gross inventory. of the total inventory of seK 21.5 (19.2) billion, seK 10.6 (11.6) billion is contract work in progress and seK 10.9 (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 technological obsolescence and estimates of net realizable values. 52 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 Deferred.taxes deferred tax assets are recognized for temporary differences between reported and taxable income and for unutilized tax loss carryforwards. 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 carryforwards and our ability to utilize tax losses is based upon our estimates of future taxable income in different tax jurisdictions and involves assumptions regarding the deductibility of costs not yet subject to taxation. at december 31, 2006, the value of unutilized tax loss carryfor- wards amounted to seK 23,1 (28,0) 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 accounting for these require management’s 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 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. impairment testing is performed thereafter whenever there is an indication of impairment. intangible assets not yet available for use are tested annually. the definition of amortization period as well as evaluation of future cash flows also requires management’s judgment. at december 31, 2006, the amount of capitalized development costs amounted to seK 5.0 (6.1) billion. Intellectual.property.rights.and.other.acquired. intangible.assets,.other.than.goodwill at initial recognition, future cash flows are calculated, ensuring that the initial carrying values do not exceed the discounted cash flows for the items of this type of assets. impairment tests are made sub- sequent to initial recognition whenever there is an indication of impairment. at initial recognition and subsequent measurement, management judgements are made, both for assumptions and outcomes of calculations. at december 31, 2006, the amount of intellectual property rights and other acquired intangible assets, other than goodwill amounted to seK 15.6 (0.9) billion. Provisions Valuation of receivables and exposures in customer financing We monitor the financial stability of our customers and the environ- ment in which they operate to evaluate the likelihood that the individual receivables will be paid. total allowances for doubtful ENXCONSXNotsXnew_v72.indd 52 07-03-04 17.32.43 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 accounts as of december 31, 2006, were seK 1.4 (1.4) billion or 2.7 (3.4) percent of our gross trade receivables. We regularly assess the credit risk, and based on these assess- ments 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, 2006, amounted to seK 3.0 (4.8) 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. expected return on plan assets consider long-term historical returns, allocation of assets and estimates of future long- term investment returns. at december 31, 2006, provisions for pensions and other post-employment benefits amounted to net seK 6.1 (5.4) 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 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, 2006, other provisions amounted to seK 8.6 (11.5) 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 actual 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 hedge accounting are not fulfilled. ENXCONSXNotsXnew_v72.indd 53 07-03-04 17.32.43 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c3 segment infoRmation BuSINESS.SEGmENTS.(PRImARy ). . . 2006. net sales inter-segment sales Total.net.sales. share in earnings of JV and associated companies Operating.income. operating margin (%) financial income financial expenses Income.after.financial.items. taxes Net.income. net income attributable to: stockholders of the parent company minority interest assets 1) 2) equity in joint ventures and associated companies Total.assets. Liabilities.3).4). . systems 167,570 141 167,711. 65 26,824. 16% . . 119,453 1,106 120,559. 60,003. . Phones other. operations Unallocated eliminations group – – –. 5,852 5,852. – . . – 8,041 8,041. –. 10,213 1,376 11,589. 17 895. 8% . . – – –. – 2,257.5). – . . 8,463 262 8,725. 3,962. 77,615 – 77,615. 30,080. – –1,517 –1,517. – –. – . . – – –. –. 177,783 – 177,783 5,934 35,828 20% 1,954 –1,789 35,993 –9,557 26,436 26,251 185 205,531 9,409 214,940 94,045 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 mainly 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, interest-bearing liabilities and post-employment benefits. 5) Unallocated operating income includes the effect of the divesture of the defense business by seK 2,963 million. Other.segment.items. Property, plant and equipment and intangible assets additions/capitalization depreciation amortization impairment, net of reversals Restructuring expenses gains/losses from divestments number of employees 1) of which related to the marconi acquisition seK 15.4 billion. GEOGRAPHICAL.SEGmENTS.(SECONDARy ). . . . . . . 2006. 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 20,888 1) –2,874 –3,991 –225 –2,908 – 59,484 – – – – – – – 1,207 –132 –209 –47 – 2,963 4,297 – –1 –37 – – –18 – – – – – – – – 22,095 –3,007 –4,237 –272 –2,908 2,945 63,781 . . . net sales 51,938 6,566 50,301 43,202 11,766 15,862 13,873 16,480 177,783. 55,888 . . total assets additions/ . capitalization of . PP&e and intangible assets number of . employees 158,773 125,578 8,598 24,394 9,088 10,893 10,231 12,282 214,940. 159,310 20,653 17,819 151 415 206 798 739 78 22,095. 20,709 38,432 19,094 6,325 10,388 3,938 4,138 2,582 4,498 63,781 39,818 54 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 ENXCONSXNotsXnew_v72.indd 54 07-03-04 17.32.43 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 BuSINESS.SEGmENTS.(PRImARy ). . . 2005. net sales inter-segment sales Total.net.sales. share in earnings of JV and associated companies Operating.income. operating margin (%) financial income financial expenses Income.after.financial.items. taxes Net.income. net income attributable to: stockholders of the parent company minority interest assets 1) 2) equity in joint ventures and associated companies Total.assets. Liabilities.3).4). . systems 141,986 113 142,099. 118 30,885. 22% . . 85,958 1,185 87,143. 60,670. . Phones other. operations Unallocated 5) eliminations group 5) – – –. 2,257 2,257. – . . – 5,044 5,044. –. 9,835 1,061 10,896. 20 283. 3% . . – – –. – –341. – . . 10,541 84 10,625. 6,461. 106,524 – 106,524. 39,733. – –1,174 –1,174. – –. – . . – – –. –. 151,821 – 151,821 2,395 33,084 22% 2,653 –2,402 33,335 –8,875 24,460 24,315 145 203,023 6,313 209,336 106,864 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 mainly 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, interest-bearing liabilities and post-employment benefits. 5) ericsson has adopted the option in ias 19 to recognize actuarial gains or losses directly to equity, and year 2005 figures have been restated accordingly. Other.segment.items Property, plant and equipment and intangible assets additions/capitalization depreciation amortization impairment, net of reversals number of employees 5,166 –2,676 –2,976 271 50,107 – – – – – 438 –127 –377 – 5,948 – –1 84 – – – – – – – 5,604 –2,804 –3,269 271 56,055 GEOGRAPHICAL.SEGmENTS.(SECONDARy ). . . . . . . 2005. Western europe – of which Sweden central and eastern europe, middle east and africa 1) asia Pacific 1) – of which China north america – of which United States latin america Total. – of which EU . . . . . . net sales . . . . . total assets 2) additions/ . capitalization of . PP&e and intangible assets number of . employees 41,940 6,110 40,911 30,463 11,544 19,432 17,904 19,075 151,821. 45,288 154,159 133,448 7,891 20,290 8,964 13,754 12,988 13,242 209,336. 154,075 4,565 3,502 113 285 123 552 453 89 5,604. 4,628 35,679 21,178 4,533 8,550 3,601 3,911 2,113 3,382 56,055 36,482 1) Restated for change of geographical segment for Pakistan. 2) ericsson has adopted the option in ias 19 to recognize actuarial gains or losses directly to equity, and year 2005 figures have been restated accordingly. ENXCONSXNotsXnew_v72.indd 55 07-03-04 17.32.44 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 BuSINESS.SEGmENTS.(PRIm.ARy ). . . 2004. net sales inter-segment sales Total.net.sales. share in earnings of JV and associated companies Operating.income. operating margin (%) financial income financial expenses Income.after.financial.items. taxes Net.income. net income attributable to: stockholders of the parent company minority interest assets 1) 2) equity in joint ventures and associated companies Total.assets. Liabilities.3).4). . systems 121,549 1,348 122,897. 90 23,187. 19% . . 66,973 961 67,934. 54,728. . Phones other. operations Unallocated eliminations group – – –. 2,143 2,143. – . . – 3,092 3,092. –. 10,423 966 11,389. 68 1,298. 11% . . – – –. 22 78. – . . 9,452 97 9,549. 6,627. 105,606 5 105,611. 43,329. – –2,314 –2,314. – –. – . . – – –. –. 131,972 – 131,972 2,323 26,706 20% 3,541 –4,081 26,166 –8,330 17,836 17,539 297 182,031 4,155 186,186 104,684 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 mainly 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, interest-bearing liabilities and post-employment benefits. – – – – 399 –209 –82 –61 – –1 11 –35 – – – – 4,297 –2,434 –4,452 –118 . . . . . . . . . . net sales additions/ . capitalization of . PP&e and . intangible assets 40,542 6,180 33,075 28,406 12,298 15,471 13,984 14,478 .131,972. 42,366 3,571 2,868 86 227 130 320 165 93 4,297 3,620 Other.segment.items. Property, plant and equipment and intangible assets additions/capitalization depreciation amortization impairment, net of reversals GEOGRAPHICAL.SEGmENTS.(SECONDARy ). . . . . . . 2004. 3,898 –2,224 –4,381 –22 Western europe – of which Sweden central and eastern europe, middle east and africa 2) asia Pacific 2) – 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. 2) Restated for change of geographical segment for Pakistan. 56 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 ENXCONSXNotsXnew_v72.indd 56 07-03-04 17.32.44 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 the gains on sales of investments and operations for 2006 mainly relate to the sale of ericsson microwave systems in the third quarter. c7 financial income and exPenses .. . 2006. 2005 2004 Financial.income income 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 . 369 293 354 1,585 1,954 2,360 2,653 3,187 3,541 –1,789 165 –2,402 251 –4,081 –540 c4 ReVenUes 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, determine the appropriate revenue recognition method. the contracts are of three main types: . . 2006. 2005 2004 142,191 125,856 110,985 127,639 107,844 14,552 32,380 3,212 87,666 18,012 23,319 19,301 23,477 1,686 2,488 177,783 151,821. 131,972 sales of equipment and network rollout of which: – delivery-type contracts – construction-type contracts service sales licenses Net.sales other revenues capital gains and other operating revenues interest income dividends 6,192 1,774 7 2,760 2,310 9 3,119 3,346 8 c8 taxes Income.Statement. c5 exPenses By natURe the following items are included in taxes: . . 2006. 2005 2004 goods and services amortization and depreciation impairments, net of reversals employee remunerations interest expenses taxes Expenses.incurred less: inventory changes 1) additions to capitalized development Expenses.charged.to.the.. Income.Statement 7,244 876 108,033 86,630 6,073 508 71,842 6,886 2,786 42,821 34,458 32,356 4,081 8,330 170,320 138,946 126,281 1,789 9,557 2,402 8,875 3,791 1,353 2,872 1,174 2,526 1,138 165,176 134,900 122,617 1) the inventory changes are based on changes of inventory values prior to allowances (gross value). c6 otheR oPeRating income . . 2006. 2005 2004 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 Total.other.operating.income 27 29 111 –158 –120 –229 3,038 205 510 –93 2,814 3,127 5,941 –149 –35 2,526 2,491 –273 119 2,498 2,617 .. 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 . 2006. 2005 2004 –4,565 –3,635 –2,324 –169 138 –637 –3,582 –4,753 –4,635 –1,241 –9,557 –625 –8,875. –734 –8,330 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: .. . 2006. 2005 2004 income after financial items 35,993 33,335 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 tax effect of changes in tax rates Taxes –10,078 –156 –9,334 –489 –7,327 –286 –169 138 –637 505 380 – –1,333 –515 –910 1,608 66 –9,557 944 1 –8,875. 855 –27 –8,330 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 ENXCONSXNotsXnew_v72.indd 57 07-03-04 17.32.44 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Balance.sheet. Tax loss carryforwards Deferred tax assets and liabilities tax effects of temporary differences, including unutilized tax loss carryforwards, have resulted in deferred tax assets and liabilities as follows: . . . 2006. 2005 deferred tax assets deferred tax liabilities 13,564 382 18,519 391 deferred tax assets relate to tax loss carryforwards of seK 6,756 million and temporary differences of seK 6,808 million, which are related to deferred tax on eliminated group adjustments seK 1,391 million, warranty commitments seK 787 million, obsolescence allowance seK 609 million, allowance for receivables seK 375 million and other provisions and accruals seK 3,646 million. 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 carryforwards are related to countries with long or indefinite periods of utilization, mainly sweden and the Us. of the total deferred tax assets for tax loss carryforwards, seK 6,756 million, seK 5,271 million relate to sweden with indefinite time of utilization. With our strong current financial position and profitability during 2006, we have been able to use part of our tax loss carryforwards during the year, and we are convinced that ericsson will be able to generate sufficient income in the coming years to utilize also remaining parts. deductible temporary differences and unused tax losses for which no deferred tax asset is recognized in the balance sheet amounted to approximately seK 80 million. Investments in subsidiaries due to losses in certain subsidiary companies, the book value of certain investments in those subsidiaries 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 reported. 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, 2006, these unutilized tax loss carryforwards amounted to seK 23,137 (28,034) million. the tax effect of these tax loss carryforwards are reported as an asset. the final years in which these loss carryforwards can be utilized are shown in the following table: year.of.expiration. tax loss carryforwards 2007 2008 2009 2010 2011 2012 or later Total. 33 100 128 388 350 22,138 23,137. . . tax. effect 6 32 41 125 114 6,438 6,756 Tax effects reported directly to stockholders’ equity tax effects reported to equity amount to seK –769 (1,523 )million, of which hedge accounting seK –676 million and actuarial gains/losses on pensions seK –93 million. c9 eaRnings PeR shaRe .. . 2006. 2005 2004 net income attributable to stockholders of the parent company (seK million) average number of shares outstanding, basic (millions) Earnings.per.share,.basic.(SEK) net income attributable to stockholders of the parent company (seK million) average number of shares outstanding, diluted (millions) 1) 26,251 24,315 17,539 15,871 15,843 15,829 1.11 1.65 1.53. 26,251 15,943 24,315 17,539 15,907 15,895 Earnings.per.share,.diluted.(SEK) 1.65 1.53. 1.11 1) includes the sum of the average number of ordinary shares outstanding and dilutive potential ordinary shares for ericsson’s stock option and purchase plans. the number of dilutive shares for option programs was 17.5 million and for stock purchase programs 54.7 million, as per december 31, 2006. 58 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 ENXCONSXNotsXnew_v72.indd 58 07-03-04 17.32.45 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c10 intangiBle assets . . . . 2006. Accumulated.acquisition.costs opening balance acquisitions Balances regarding divested/ acquired businesses sales/disposals translation difference for the year Closing.balance. Accumulated.amortization opening balance amortization for the year 2) sales/disposals translation difference for the year Closing.balance. Accumulated.impairment.losses opening balance impairment losses for the year Closing.balance. Net.carrying.value. Capitalized.development.costs . Goodwill. .Intellectual.property.rights . to be . marketed . acquired . costs for . internal use . internal . costs, for . internal use .. . .. Total. licenses . Patents and . . acquired . . trademarks . . and similar . research and . rights development . .. .. .. Total 11,983 1,353 – –948 – 12,388. –5,192 –2,195 948 – –6,439. –716 –242 –958. 4,991. 1,638 – – –36 – 1,602. –1,549 –49 36 – –1,562. –38 – –38. 2. 1,094 – – –24 – 1,070. –1,033 –33 24 – –1,042. –26 – –26. 2. 14,715. 1,353. 7,362 163 1,065 792 1,373 363 2,438 1,155 –. –1,008. –. 15,060. –7,774. –2,277. 1,008. –. –9,043. –780. –242. –1,022. 4,995. – – –701 6,824. 3,711 1) –173 –78 5,317. 11,937 1) –188 –6 13,479. – – – – –. – – –. 6,824. –882 –452 110 44 –1,180. – – –. 4,137. –603 –1,508 155 3 –1,953. –14 – –14. 11,512. 15,648 –361 –84 18,796 –1,485 –1,960 265 47 –3,133 –14 – –14 15,649 1) as per January1, 2006, ericsson acquired assets of marconi telecommunications operations. the acquisition consists of iPR, seK 11.7 billion, and brands and customer relationships, seK 3.6 billion. the remaining amortization period related to the intellectual property rights acquired from marconi is nine years. 2) no intangible assets other than goodwill have indefinite useful lives. amortization and impairment losses for capitalized development costs is reported as research and development and other technical expenses. the goodwill is allocated to the business segment systems, representing one cash-generating unit due to that the goodwill is related to acquisitions of internet protocol (iP) competence and know- how. iP technology is an integrated part of the products within systems and separate prices are not defined or invoiced to the customers for this technology. the estimates used for measuring the recoverable amounts for goodwill per cash-generating unit include mainly assumptions for the following key parameters: • sales growth, • development of operating margin, reduced with estimated tax expense, • capital expenditure requirements, including working capital the assumptions, approved by management, are based on available industry sources that provide estimates of the number of mobile subscribers. the number of global subscriptions is estimated to grow from 2.7 billion to more than 4 billion within five years. the minutes of usage per user will also continue to increase. impairment testing is based on the premise that changes for the main assumptions are in line with the development for the global subscriber growth, based on detailed assumptions for four years, with a slight decrease thereafter. the impairment test for goodwill has not resulted in any impairment. a number of tests of sensivity have been made, for example the effect of a growth of just one percent per year. none of these tests indicate impairment. the management’s view is that it is unlikely that an outcome for the key parameters will occur that would result in impairment. a pre-tax discount rate of 12 percent has been applied for the discounting of projected cash flows. ENXCONSXNotsXnew_v72.indd 59 07-03-04 17.32.45 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 . . . . 2005. Accumulated.acquisition.costs opening balance acquisitions Balances regarding divested/ acquired businesses sales/disposals translation difference for the year Closing.balance. Accumulated.amortization opening balance amortization for the year Balances regarding divested/ acquired businesses sales/disposals translation difference for the year Closing.balance. Accumulated.impairment.losses opening balance impairment losses for the year Closing.balance. Net.carrying.value. Capitalized.development.costs . Goodwill. .Intellectual.property.rights . to be . marketed . acquired . for internal . use . internal . costs, for . internal use .. . .. Total. licenses . Patents and . . . trademarks . acquired . . and similar . research and . rights development . 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. .. .. .. Total 2,140 553 11 –349 83 2,438 –1,378 –260 –7 212 –52 –1,485 –14 – –14 939 60 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 ENXCONSXNotsXnew_v72.indd 60 07-03-04 17.32.46 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c11 PRoPeRty, Plant and eqUiPment . . . 2006. Accumulated.acquisition.costs opening balance additions Balances regarding divested/acquired businesses sales/disposals Reclassifications translation difference for the year Closing.balance. Accumulated.amortization opening balance depreciation for the year Balances regarding divested/acquired businesses sales/disposals Reclassifications translation difference for the year Closing.balance. Accumulated.impairment.losses,.net opening balance impairment losses for the year Reversals of impairment losses Balances regarding divested/acquired businesses 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 3,512 772 624 –47 21 –331 4,551. –1,119 –206 – 40 28 45 –1,212. –359 – – – – 53 –306. 3,033. 5,200 931 8 –1,036 59 –157 5,005. –4,285 –706 156 1,043 2 111 –3,679. –145 –11 – – – 2 –154. 1,172. 17,146 1,264 –337 –2,448 552 –1,042 15,135. –13,106 –2,095 542 2,178 –30 773 –11,738. –165 –50 31 – – 6 –178. 3,219. 287 860 11 –45 –632 –24 457. – – – – – – –. – – – – – – –. 457. . .................... . .................... . .................... Total 26,145 3,827 306 –3,576 – –1,554 25,148 –18,510 –3,007 698 3,261 – 929 –16,629 –669 –61 31 – – 61 –638 7,881 contractual commitments for the acquisition of property, plant and equipment as per december 31, 2006, amounted to seK 190 (1,448) million. the reversal of impairment losses have been reported under cost of sales. ENXCONSXNotsXnew_v72.indd 61 07-03-04 17.32.46 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 . . . 2005. Accumulated.acquisition.costs opening balance additions Balances regarding divested/acquired businesses sales/disposals Reclassifications translation difference for the year Closing.balance. Accumulated.amortization opening balance depreciation for the year Balances regarding divested/acquired businesses sales/disposals Reclassifications translation difference for the year Closing.balance. Accumulated.impairment.losses,.net opening balance impairment losses for the year Reversals of impairment losses Balances regarding divested/acquired businesses 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 62 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 ENXCONSXNotsXnew_v72.indd 62 07-03-04 17.32.47 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c12 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 disposals Closing.balance goodwill, net, amounts to seK 18 (21) million. Joint ventures 2005. 2006. 5,038 5,852 –1,237 –422 –30 –1,160 – – – 8,041 3,092 2,257 –604 286 7 – – – – 5,038 associated companies. Total 2006. 2005. 2006. 2005 1,275 82 –4 –9 – –102 201 –8 –67 1,368 1,063 138 –21 92 – –32 33 2 – 1,275 6,313 5,934 –1,241 –431 –30 –1,262 201 –8 –67 9,409 4,155 2,395 –625 378 7 –32 33 2 – 6,313 ERICSSON’S.SHARE.OF.ASSETS,.LIABILITIES.AND.INCOmE.IN. ERICSSON’S.SHARE.OF.ASSETS,.LIABILITIES.AND.INCOmE.IN. jOINT.vENTuRE.SONy.ERICSSON.mOBILE.COmmuNICATIONS ASSOCIATED.COmPANy.ERICSSON.NIKOLA.TESL A.D.D..1) . 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. net income attributable to: stockholders of the Parent company minority interest assets pledged as collateral contingent liabilities 1,963 21,268 87 15,103 8,041 50,770 6,006 –1,237 4,769 4,615 154 18 56 . 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. net income attributable to: stockholders of the Parent company minority interest assets pledged as collateral contingent liabilities 1) ericsson’s share is 49 percent. 367 804 1 222 948 1,014 164 –19 145 145 – 4 39 Both these companies apply ifRs in the reporting to ericsson. ENXCONSXNotsXnew_v72.indd 63 07-03-04 17.32.47 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 OTHER.FINANCIAL.ASSETS . . Accumulated.acquisition.costs opening balance effect of changed accounting principle, ias 39 additions Balances regarding divested/acquired businesses disposals/repayments/deductions Reclassifications Revaluation translation difference for the year Closing.balance Accumulated.impairment.losses/allowances opening balance effect of changed accounting principle, ias 39 impairment losses/allowances for the year Balances regarding divested businesses disposals/repayments/deductions Reclassifications translation difference for the year Closing.balance Net.carrying.value other investments in shares and participations 2005. 2006. customer financing, non-current 2005. 2006. derivatives hedging non-current liabilities with a positive value 2005. 2006. other financial assets, non-current 2005 2006. 2,336 – 82 – –286 – – –133 1,999 2,318 256 26 – –467 –2 – 205 2,336 –1,531 – –8 – 155 – 106 –1,278 721 1) –1,775 155 –1 – 225 – –135 –1,531 805 2,372 – 1,760 – –1,755 –35 – –72 2,270 –1,050 – –84 – 727 31 27 4,330 – 689 – –2,215 –697 – 265 2,372 –2,180 – –128 – 807 559 –108 –349 2) –1,050 1,322 1,921 716 – – – – – –600 – 116 – – – – – – – – 116 – 937 – – – –401 180 – 716 – – – – – – – – 716 3,199 – 2,312 – 617 3) 1,888 –84 – –149 –1,191 – – 190 3,199 – – –136 3,447 – –81 – – – 46 –1,119 –1,076 – 12 – – – –55 –1,154 –1,119 2,080 2,293 1) fair value per december 31, 2006, for listed shares was seK 6 (8) million with a net carrying value of seK 6 (8) million. 2) impairment losses are included in selling expenses due to the close relation to operations. 3) additions include funded pension plans with net assets of seK 381 (453) million. for further information, see note c17, “Post-employment benefits”. 64 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 ENXCONSXNotsXnew_v72.indd 64 07-03-04 17.32.48 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c13 inVentoRies c14 tRade ReceiVaBles . . 2006. 2005 . . . 2006. 2005 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. 213 6,902 4,699 139 3,781 2,770 11,171 12,753 –597 –1,153 21,470 19,208 Reported amounts are net of obsolescence allowances of seK 2,578 (2,519) million. mOvEmENTS.IN.OBSOLESCENCE.ALLOwANCES . . . 2006. 2005 opening balance additions Utilized translation difference for the year Balances regarding acquired/divested businesses Closing.balance. . . 2,519 857 –693 –81 –24 2,578 3,146 785 –1,560 148 – 2,519 contract work in progress includes amounts related to construction- type contracts as well as other contracts with ongoing work in progress. the cost of inventories recognized as an expense and included in cost of sales was seK 54,479 (44,662) million. .CONSTRuCTION-TyPE.CONTRACTS.IN.PROGRESS .. . . . 2006. . 2005 for construction-type contracts in progress: 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) 12,255 23,244 1) 1,735 6,416 1) 1,537 537 785 4,118 1) 1) a significant part of these amounts relate to contracts in the defense business sold in september, 2006. 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). the aggregate amounts of costs incurred relate to all construction- type contracts that where not finalized as per december 31, 2006 and include all costs incurred since the start of these projects, includ- ing any costs incurred prior to January 1, 2006. net sales for construction-type contracts for 2006 amounts to seK 14 552 million, see note c4, “Revenues”. trade receivables excluding associated companies and joint ventures allowances for impairment of receivables trade receivables, net trade receivables related to associated companies and joint ventures Total 51,846 –1,372 50,474 42,198 –1,382 40,816 596 51,070 426 41,242 days sales outstanding were 86 (81) in december, 2006. Retention receivables recognized as revenues were seK 4,680 (3,940) million as of december 31, 2006. mOvEmENTS.IN.ALLOwANCES.. FOR.ImPAIRmENT.OF.RECEIvABLES . . . 2006. 2005 opening balance additions Utilized Reversal of excess amounts Reclassification translation difference for the year Closing.balance 1,382 686 –139 –527 56 –86. 1,372 1,782 916 –1,185 –185 –60 114 1,382 c15 otheR cURRent ReceiVaBles . . . 2006. 2005 Prepaid expenses accrued revenues advance payments to suppliers derivatives with a positive value other Total 2,212 1,124 666 3,802 7,208 15,012 1,997 1,998 517 1,347 6,715 12,574 the major item within “other” is value added tax. ENXCONSXNotsXnew_v72.indd 65 07-03-04 17.32.48 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c16 eqUity Capital.stock.2006. capital stock at december 31, 2006, consisted of the following: . . Parent.company. class a shares class B shares Total. Number. of.shares. 1,308,779,918 14,823,478,760 16,132,258,678. Capital stock 1,309 14,823 16,132 the capital stock of the company is divided into two classes: class a shares (quota value seK 1.00) and class B shares (quota value seK 1.00). 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. the total number of treasury shares at december 31, 2006, was 251,013,892 (268,065,241 in 2005, 299,715,117 in 2004) class B shares. the number of treasury shares decreased during 2006 due to delivery and sale of shares in relation to the stock Purchase Plans and the stock option Plans. RECONCILIATION.OF.NumBER.OF.SHARES . . . . Number. of.shares. number of shares, Jan 1, 2006 number of shares, dec 31, 2006 16,132,258,678 16,132,258,678 Capital stock 16,132 16,132 Dividend proposal the Board of directors will propose to the annual general meeting a dividend of seK 0.50 per share. Revaluation of other investments in shares and parti- cipations additional paid in capital capital stock cumu- lative trans- lation cash flow hedges ments earnings equity adjust- Retained holders’ minority Total interest Equity Stock- 2006 january.1,.2006 actuarial gains and losses related to pensions and payroll tax Revaluation.of.other.investments.. in.shares.and.participations fair value measurement reported in equity Cash.flow.hedges fair value remeasurement of derivatives reported in equity transferred to income statement for the period transferred to balance sheet for the period changes in cumulative translation effects due to changes in foreign currency exchange rates tax on items reported directly in/or transferred from equity Total.transactions.reported.. directly.in.equity Net.income Total.income.and.expenses.. recognized.for.the.period 16,132 24,731 – – – – – – – – – – – – – – – – – – – – sale of own shares stock Purchase and stock option Plans dividends paid stock issue, net Business combinations December.31,.2006. – – – – – 16,132. – – – – – 24,731. –704 –2,493 63,951 101,622 850 102,472 – – – – – 440 440 – 440 – –2 1 –1 – 4,100 – 4,100 – –1,990 – –1,990 – 99 – 99 – – – 4,100 – –1,990 99 5 – –2 – – – – –3,028 1) – –3,028 –91 –3,119 –628 –48 2) –93 –769 – –769 –2 1,581 –3,076 347 –1,150 –90 –1,240 – – – 26,251 26,251 185 26,436 –2 1,581 –3,076 26,598 25,101 95 25,196 – – – – – 3. – – – – – – – – – – 877. –5,569. 58 473 –7,141 – – 58 473 –7,141 – – 83,939. 120,113. – 58 – 473 –202 –7,343 70 70 –31 –31 782. 120,895 1) changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of seK –701 million (seK 1,084 million in 2005, seK –376 million in 2004), net gain/loss from hedging activities of foreign entities, seK 123 million (seK –142 million in 2005, seK –167 million in 2004) and seK –1 million (seK 127 million in 2005, seK 47 million in 2004) of realized gain/losses net from sold/liquidated companies. 2) deferred tax on gains on hedges on net investments in foreign entities, seK 171 million pre tax. 66 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 ENXCONSXNotsXnew_v72.indd 66 07-03-04 17.32.49 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Stock- Revaluation of other investments in shares and parti- cipations additional paid in capital capital stock cumu- lative trans- lation cash flow hedges ments earnings equity adjust- Retained holders’ minority Total interest Equity 2005 january.1,.2005 changes in accounting policy Adjusted.opening.balance actuarial gains and losses related to pensions and payroll tax Revaluation.of.other.investments.. in.shares.and.participations fair value measurement reported in equity transferred to income statement at sale Cash.flow.hedges fair value remeasurement of derivatives reported in equity transferred to income statement for the period changes in cumulative translation effects due to changes in foreign currency exchange rates tax on items reported directly in transferred from equity Total.transactions.reported.. directly.in.equity Net.income Total.income.and.expenses.. recognized.for.the.period 16,132 – 16,132 24,731 – 24,731 – 155 155 – 1,155 1,155 –6,530 –6,530 45,372 179 45,551 79,705 1,489 81,194 1,057 80,762 1,489 1,057 82,251 – – – – – – – – – – – – – – – – – – – – – – – – –3,221 –3,221 – –3,221 –3 –147 – – – –3,961 – 1,404 – – – – – – –3 –147 – – –3 –147 – –3,961 – –3,961 – 1,404 – 1,404 – – – 4,118 – 4,118 147 4,265 698 –81 906 1,523 – 1,523 –150 –1,859 4,037 –2,315 –287 147 –140 – – – 24,315 24,315 145 24,460 –150 –1,859 4,037 22,000 24,028 292 24,320 sale of own shares stock Purchase and stock option Plans dividends paid stock issue, net Business combinations December.31,.2005. – – – – – 16,132. – – – – – 24,731. – – – – – 5. – – – – – –704. – – – – – –2,493. 117 242 –3,959 – – 117 242 –3,959 – – 63,951. 101,622. – – –174 17 –342 117 242 –4,133 17 –342 850. 102,472 ENXCONSXNotsXnew_v72.indd 67 07-03-04 17.32.49 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Revaluation of other investments in shares and parti– cipations additional paid in capital capital stock cumu– lative trans– lation cash flow adjust– Retained holders’ minority Stock– hedges ments earnings equity Total interest Equity 2004 january.1,.2004 actuarial gains and losses related to pensions and payroll tax changes in cumulative translation effects due to changes in foreign currency exchange rates tax on items reported directly in/or transferred from equity Total.transactions.reported.. directly.in.equity Net.income Total.income.and.expenses.. recognized.for.the.period sale of own shares stock Purchase and stock option Plans dividends paid Business combinations adjustment of stock issue 2002 December.31,.2004. 16,132 24,729 – – – – – – – – – – – – – – – – – – 16,132. – – – 2 24,731. – – – – – – – – – – – – –. – –5,395 28,354 63,820 2,299 66,119 – – –1,059 –1,059 – –1,059 – –1,200 – –1,200 –65 –1,265 – – – – – 65 319 384 – 384 –1,135 –740 –1,875 –65 –1,940 – 17,539 17,539 297 17,836 –1,135 16,799 15,664 232 15,896 – 15 15 – 15 – – – – – – – – –. –6,530. 204 – – – 45,372. 204 – – 2 79,705. – –292 –1,182 – 204 –292 –1,182 2 1,057. 80,762 c17 Post-emPloyment Benefits in summary, during 2006 the overall funded ratio in our plans for post- employment benefits was kept on almost the same level as last year, 74.7 percent compared to 75.2 percent. the funded ratio is defined as total plan assets in relation to total defined benefit obligations (dBo). the slight decrease of this ratio is mainly due to the acquisi- tion of marconi. in the acquisition of marconi, ericsson took over the responsibility for pension plans with a total dBo amounting to seK 1,755 million (of which fully funded plans were seK 909 million) and plan assets amounting to seK 939 million. ericsson participates in a number of local post-employment benefit plans throughout the world. the plans benefit levels are in line with market practice in each country. there are principally two types of plans: • defined contribution plans, i.e. post-employment benefit plans where ericsson pays fixed contributions into separate entities and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in current and prior periods. in consequence, actuarial risks and investment risks fall on the employee. the expenditures for defined contribution plans are recognized as costs during the period when the employee provides service. • defined benefit plans, i.e. post-employment benefit plans where ericsson’s undertaking is to provide pre-determined benefits that the employees will receive on or after retirement. Benefit formulas are usually dependent on one or more factors such as age, years of service and salary. actuarial risks and investment risks fall on the employer. defined benefit plans may be funded or unfunded. Within ericsson, almost all plans are fully or partly funded. actuarial gains and losses may arise from either a change in actuarial assumptions or in deviations between estimated outcome and actual outcome. during 2004, iasB amended ias 19 and introduced a new alternative way in which actuarial gains and losses may be recog- nized. the amended ias 19 was endorsed by the eU in 2005. the new alternative permits immediate recognition of actuarial gains and losses directly in equity disclosed in a statement of recognized income and expense (soRie). ericsson has adopted the new method as from January 1, 2006. earlier reporting periods have been restated accordingly. as a one time effect, provisions for post- employment benefits increased by seK 3.5 billion at January 1, 2006. costs for post-employment benefits within ericsson are distributed between defined contribution plans and defined benefit plans, with at trend towards defined contribution plans. 68 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 ENXCONSXNotsXnew_v72.indd 68 07-03-04 17.32.50 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 almost all companies with material defined benefit plans have trust funds which fully or partly secure the obligations for pension. the net of dBo and plan assets is recognized as provisions for post- employment benefits in the balance sheet. Plans with a net surplus, i.e. where plan assets exceed dBo, are reported as financial assets. none of the company’s plans with net surplus are affected by a ceiling rule, which in some cases can limit the amount reported as assets. the net periodic pension cost and the present value of dBo for current and former employees are calculated using the Projected Unit credit method (PUc). the calculations are based upon actuarial assumptions and are prepared annually by certified actuaries. some of our defined benefit plans throughout the world have been closed for new entrance and will gradually be replaced by defined contribu- tion plans. in sweden, the total pension schemes are a mixed solution, with some parts being defined contribution plans and others defined benefit plans. all plans for blue-collar workers are defined contribu- tion plans. Plans for salaried employees consists of a defined contribution plan, itPK (supplementary retirement benefits), and a defined benefit plan, itP (occupational pension for salaried em- ployees in manufacturing industries and trade). thereof the retire- ment pension part of the itP-plan dBo is partly secured through the swedish pension trust. the disability- and survivors’ pension part of the itP-plan dBo is secured through an insurance solution with the insurance company alecta. this part of the plan is classified as a multi-employer defined benefit plan. it has not been possible, however, for ericsson to get sufficient information to account for the plan as a defined benefit plan. the plan has therefore been account- ed for as a defined contribution plan. fees during 2006 for the disability- and survivors’ pension amount to seK 389 million (seK 350 million in 2005). the collective consolidation level at alecta was 143.1 percent at year-end 2006 (128.5 percent in 2005). the collective consolidation level is calculated as the market value on alecta’s asset portfolio in relation to insurance obligations according to actuarial assumptions set by alecta, which do not comply with ias 19. substantially higher or lower surplus may give rise to future premium changes or refunds. the parties on the swedish labor market have agreed to launch a new itP-plan during 2007. the new plan is a defined contribution plan and will be open for new partici- pants in the itP-system, whereas current participants will continue in the old plan. a number of ericsson employees in sweden took the opportunity to join a voluntary career change program and left the company during the year. the effects of the program resulted in a curtailment gain amounting to seK 81 million. in relation to the divestment of the defense business, a number of pension obligations were settled with alecta. the settlement cost was offset by a curtailment gain. the net gain amounts to seK 57 million. the following tables summarize the total pension cost for the group: TOTAL.ANNuAL.PENSION.COST . 2006 Pension cost for defined benefit plans Pension cost for defined contributions plans Total. 2005 Pension cost for defined benefit plans Pension cost for defined contribution plans Total.. ANNuAL.PENSION.COST.FOR.DEFINED.BENEFIT.PL ANS . 2006 service cost interest cost expected return on plan assets Past service cost curtailments and settlements Total. 2005 service cost interest cost expected return on plan assets Past service cost curtailments and settlements Total. sweden UK eurozone Us other. Total 347 1,350 1,697. 417 929 1,346. 249 – 249. 71 – 71. 300 195 495. 200 198 398. 49 93 142. 101 83 184. 44 82 126. 107 59 166. 989 1,720 2,709 896 1,269 2,165 sweden UK eurozone Us other. Total 431 406 –352 – –138 347. 275 407 –267 2 – 417. 228 177 –169 31 –18 249. 62 169 –160 – – 71. 279 133 –103 – –9 300. 200 93 –93 – – 200. 47 146 –140 5 –9 49. 78 148 –128 3 – 101. 92 104 –145 13 –20 44. 81 61 –63 14 14 107. 1,077 966 –909 49 –194 989 696 878 –711 19 14 896 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 ENXCONSXNotsXnew_v72.indd 69 07-03-04 17.32.50 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 the tables below and on the following pages present information about defined 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 . 2006 opening balance service cost interest cost employee contributions Pension payments actuarial gain/loss (–/+) settlements curtailments Business combinations other translation difference for the year Closing.balance. 2005 opening balance service cost interest cost employee contributions Pension payments actuarial gain/loss (–/+) settlements curtailments Business combinations Reclassifications other translation difference for the year Closing.balance.1).2). sweden UK eurozone Us other. Total 11,632 431 406 – –69 –208 –209 –211 – – – 11,772. 8,190 275 407 – –71 2,830 – – – – 1 – 11,632. 3,795 228 177 54 –150 767 –18 – 909 29 –78 5,713. 3,018 62 169 30 –74 346 – – – – – 244 3,795. 2,475 279 133 4 –60 –244 – –9 781 – –118 3,241. 1,987 200 93 – –37 166 – – – –33 18 81 2,475. 2,863 47 146 – –189 –159 – –9 45 37 –382 2,399. 2,362 78 148 22 –161 –148 – – – – 91 471 2,863. 1,549 92 104 13 –69 –28 –48 –19 20 1 –128 1,487. 1,263 81 61 12 –63 106 –49 – 65 –94 –55 222 1,549. 22,314 1,077 966 71 –537 128 –275 –248 1,755 67 –706 24,612.1)2) 16,820 696 878 64 –406 3,300 –49 0 65 –127 55 1,018 22,314 1) of which wholly and partly funded plans seK 22,055 (20,488) million and unfunded plans seK 2,557 (1,826) million. 2) of which post-employment medical benefit schemes seK 579 (692) million. CHANGE.IN.PLAN.ASSETS . 2006 opening balance expected return on plan assets actuarial gain/loss (+/–) employer contributions employee contributions Pension payments settlements Business combinations other translation difference for the year Closing.balance. sweden UK eurozone Us other. Total 8,809 352 261 – – – –281 – – – 9,141. 2,754 169 26 191 54 –151 – 909 – –55 3,897. 1,821 103 38 99 4 –17 – – –11 –78 1,959. 1,880 140 –24 211 – –136 – 17 – –270 1,818. 1,520 145 56 61 13 –62 –48 13 –1 –117 1,580. 16,784 909 357 562 71 –366 –329 939 –12 –520 18,395 70 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 ENXCONSXNotsXnew_v72.indd 70 07-03-04 17.32.50 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 sweden UK eurozone Us other. Total – 267 204 8,338 – – – – – – 8,809. 2,014 160 107 352 30 –74 – – – 165 2,754. 1,389 93 182 102 – –15 – – – 70 1,821. 1,417 128 –4 43 22 –126 – – 108 292 1,880. 944 63 217 110 12 –50 –63 38 –5 254 1,520. 5,764 711 706 8,945 64 –265 –63 38 103 781 16,784 sweden UK eurozone 613 471 195 267 141 275 Us 116 124 other. 201 280 Total 1,266 1,417 sweden UK eurozone Us other Total 2,377 6,764 – 9,141. 2,357 6,452 – 8,809. 1,802 1,914 181 3,897. 1,433 635 686 2,754. 1,142 714 103 1,959. 1,323 398 100 1,821. 1,058 696 64 1,818. 1,528 336 16 1,880. 353 1,087 140 1,580. 393 1,001 126 1,520. 6,732 11,175 488 18,395 7,034 8,822 928 16,784 2005 opening balance expected return on plan assets actuarial gain/loss (+/–) employer contributions employee contributions Pension payments settlements Business combinations other translation difference for the year Closing.balance. ACTuAL.RETuRN.ON.PLAN.ASSETS . 2006 2005 ASSET.ALLOCATION . 2006 equities interest-bearing securities other Total. 2005 equities interest-bearing securities other Total. only a minor part of plan assets are invested in the company’s equity securities or in interest-bearing securities issued by the company. expected contributions to defined benefit plans during 2007 are slightly higher compared to 2006. ACCRuED/PREPAID.PENSION.COST . 2006 fair value of plan assets dBo deficit/surplus (–/+) Unrecognized past service cost Accrued/Prepaid.pension.cost,.net.(–/+). 2005 fair Value of plan assets dBo deficit/surplus (–/+) Unrecognized past service cost Accrued/Prepaid.pension.cost,.net.(–/+). sweden UK eurozone Us other Total 9,141 11,772 –2,631 – –2,631. 8,809 11,632 –2,823 – –2,823. 3,897 5,713 –1,816 – –1,816. 2,754 3,795 –1,041 – –1,041. 1,959 3,241 –1,282 – –1,282. 1,821 2,475 –654 – –654. 1,818 2,399 –581 6 –575. 1,880 2,863 –983 – –983. 1,580 1,487 93 77 170. 1,520 1,549 –29 92 63. 18,395 24,612 –6,217 83 –6,134 16,784 22,314 –5,530 92 –5,438 ENXCONSXNotsXnew_v72.indd 71 07-03-04 17.32.51 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 AmOuNT.RECOGNIZED.IN.THE.CONSOLIDATED.BAL ANCE.SHEET,.2006 . sweden UK eurozone Us other Total 2006 opening balance annual pension cost Recognized actuarial gain/loss (–/+) current period Benefits paid by the company employer contributions Business combinations other translation difference for the year Closing.balance. Plans with net surplus Provision.for.Post-employment.benefits. 2005 opening balance annual pension cost Recognized actuarial gain/loss (–/+) current period Benefits paid by the company employer contributions Business combinations Reclassification other translation difference for the period Closing.balance. Plans with net surplus Provision.for.Post-employment.benefits. 2,823 347 –470 –69 – – – – 2,631. – 2,631. 8,190 417 2,626 –71 –8,338 – – –1 – 2,823. – 2,823. 1,041 249 741 – –191 – – –24 1,816. – 1,816. 1,004 71 239 – –352 – – – 79 1,041. – 1,041. 654 300 –282 –43 –99 781 11 –40 1,282. 310 1,592. 598 200 –16 –23 –102 – –33 – 30 654. 86 740. 983 49 –135 –28 –211 28 – –111 575. 41 616. 945 101 –144 –35 –43 – – –3 162 983. – 983. –63 44 –84 –8 –61 7 1 –6 –170. 483 313. 249 107 –111 –13 –110 27 –94 –19 –99 –63. 367 304. ..... ..... ..... 5,438. 989. –230. –148 –562 816 12 –181 6,134 834 6,968 10,986 896 2,594 –142 –8,945 27 –127 –23 172 5,438 453 5,891 total accrued/prepaid pension cost, seK 6,134 (5,438) million are reported gross by plan in the balance sheet. Plans with net assets are reported as other financial assets, non-current, amounting to seK 834 (453) million and plans with net liabilities are reported as Post-employment benefits, total seK 6,968 (5,891) million. ACTuARIAL.GAINS.AND.LOSSES.REPORTED.. DIRECTLy.IN.EquIT y . . . 2006. 2005 cumulative loss at beginning of year Recognized gain/loss (–/+) during the year translation difference for the year effects related to the divested defense business cumulative loss at end of year 3,483 –230 8 –196 3,065 899 2,594 –10 3,483 THE.EFFECT.OF.A.ONE.PERCENTAGE.POINT.CHANGE.. IN.THE.ASSumED.TREND.RATE.OF.mEDICAL.COSTS . . . . 1.percent. .increase.. 1.percent decrease net periodic post-employment medical costs accumulated post-employment benefit obligation for medical costs 4 55 –3 –47 Actuarial assumptions the discount rate for each country is determined by reference to market yields on high-quality corporate bonds. in countries where there is no deep market in such bonds, the market yields on government bonds are used. muLTI-yEAR.SummARy. . . the overall expected long-term return on plan assets is a weighted . . 2006. 2005 2004 average of each asset-category’s expected rate of return. Plan assets dBo deficit/surplus (–/+) actuarial gains and losses (–/+) experience-based adjustments of pension obligations experience-based adjustments of plan assets 18,395 24,612 –6,217 16,784 5,764 22,314 16,820 –5,530 –11,056 232 –415 –56 –358 –706 –146 the expected return on interest-bearing investments are set in line with each country’s market yield. expected return on equities is derived from each country’s risk- free rate with the addition of a risk premium. the principal actuarial assumptions used were as follows: 72 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 ENXCONSXNotsXnew_v72.indd 72 07-03-04 17.32.51 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 sweden UK eurozone 1) Us other 1) 3.7% 4.0% 3.0% n/a 3.5% 3.2% 3.0% n/a 5.0% 6.2% 4.5% n/a 4.7% 7.0% 4.0% n/a 4.5% 5.75% 3.0% n/a 4.5% 6.25% 3.25% n/a 6.0% 8.0% 4.5% 10.0% 5.5% 8.0% 4.5% 10% 8.25% 9.5% 6.0% n/a 8.0% 8.0% 6.0% n/a sweden UK eurozone 1) 18 22 21 24 20 24 Us 18 20 other 1) 17 20 PRINCIPAL.ACTuARIAL.ASSumPTIONS . 2006 discount rate expected return on plan assets for the year future salary increases health care cost inflation, current year 2005 discount rate expected return on plan assets for the year future salary increases health care cost inflation, current year 1) Weighted average LIFE.ExPECTANCy.AFTER.AGE.65 (years). men Women 1) Weighted average ericsson has adopted the new option in ias 19 to charge actuarial gains and losses directly to equity as from January 1, 2006. the change in accounting policy was recognized retrospectively in accordance with the transitional provisions of the amendment, and earlier periods have been restated. the changes in accounting policy had the following impact on the consolidated financial statements: EFFECTS.OF.CHANGES.IN.ACCOuNTING.POLICy.IAS.19 Income.statement no restatement has been made in the income statement due to minor amounts. Recognized.income.and.expense income and expenses recognized directly in equity tax on items reported in/transferred from equity Total.recognized.income.and.expense.for.the.period Balance.sheet other financial assets, non current deferred tax assets stockholders’ equity Post-employment benefits other current liabilities 1) of which seK –1,059 million relate to 2004. 2) of which seK 319 million relate to 2004. dec 31, 2005 with corridor method effects from changes in accounting policy dec 31, 2005 with equity method 2,470 298 2,768 3,514 17,294 104,677 3,125 40,825 –4,280 1) 1,225 2) –3,055 –718 1,225 –3,055 2,766 796 –1,810 1,523 –287 2,796 18,519 101,622 5,891 41,621 ENXCONSXNotsXnew_v72.indd 73 07-03-04 17.32.52 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c18 PRoVisions . . 2006 Opening.balance. additions costs incurred Reversal of excess amounts Balances regarding divested/acquired businesses Reclassification translation difference for the year Closing.balance. 2005 Opening.balance. additions costs incurred Reversal of excess amounts Balances regarding divested/acquired businesses Reclassification translation difference for the year Closing.balance. 1) Both current and non-current provisions. 2) off-balance customer financing is included in other provisions. Warranty . . commitments Restruc- turing Total. other 1) 2). provisions . . . . 4,821. 2,561 –3,471 –1,100 224 15 –89 2,961. 6,424. 2,858 –3,181 –1,390 6 3 101 4,821. 2,314. 2,765 –2,308 –416 20 19 –117 2,277. 3,598. 1,323 –1,983 –480 – –322 178 2,314. 11,533. 5,420 –4,561 –3,231 –24 –121 –372 8,644. 14,756. 5,564 –6,894 –2,923 – 224 806 11,533. 18,668 10,746 –10,340 –4,747 220 –87 –578 13,882 24,778 9,745 –12,058 –4,793 6 –95 1,085 18,668 warranty.commitments Warranty provisions 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. the actual utilization for 2006 was seK 3.5 billion, compared to the expected seK 2.9 billion. however, due to more favorable outcomes in certain parts, reversals of seK 1.1 billion were made. the expected utilization of warranty provisions during year 2007 is seK 2.2 billion. Restructuring in the third quarter 2006, restructuring provisions were made for the career change offer in sweden, seK 0.6 billion , and for the marconi integration, seK 1.4 billion. in the fourth quarter, seK 0.8 billion were paid out of the restructuring provision made during the year. Restructuring provisions amounting to seK 2.3 billion were utilized during 2006, compared to the expected seK 1.5 billion. the reversal of seK 0.4 billion mainly relate to real estate provi- sions which have been reversed due to more favorable outcome of leasing commitments. Remaining restructuring provisions are mostly related to marconi restructuring activities and unutilized leased real estate. the majority of these real estate leases will expire in one to five years, and the last one in year 2028. the values of the real estate commitments are calculated based on the net present value of the future lease payments minus the forecasted sublease revenues. the expected utilization of restructuring provisions during 2007 is seK 1.6 billion and a major part of these relate to marconi restructuring. 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 disputes, off-balance customer financing, as well as provisions for unresolved income tax and value added tax issues and estimated losses on customer contracts. on a quarterly basis, management performs an analysis of all provisions to identify the need for new additions or reversals. management uses its best judgement to estimate provisions based on this analysis. the actual utilization for 2006 was seK 4.6 billion, compared to the estimated seK 7.0 billion. in certain circumstances provisions are no longer required, due to more favorable outcomes than anticipated, for instance when certain disputes in some cases have been resolved in a positive way. therefore excess amounts have been reversed with seK 3.2 billion 2006. the expected utilization in 2007 is seK 4.5 billion. 74 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 ENXCONSXNotsXnew_v72.indd 74 07-03-04 17.32.52 c19 inteRest-BeaRing liaBilities ericsson’s outstanding interest-bearing liabilities were seK 14.6 (25.0) billion as of december 31, 2006. INTEREST-BEARING.LIABILITIES . . . 2006. 2005 Borrowings,.current current part of non-current borrowings 1) other current borrowings total current borrowings Borrowings,.non-current notes and bond loans other borrowings, non-current total non-current interest- bearing liabilities Total.interest-bearing.liabilities 1) including notes and bond loans of seK 0 (9,614) million. NOTES.AND.BOND.LOANS 88 1,592 1,680 9,615 1,169 10,784 11,204 1,700 11,475 2,710 12,904 14,185 14,584 24,969 . issued-. maturing 1999-2009 2001-2008 2003-2010 2004-2012 Total. . . . . Book. . maturity. date value. nominal coupon currency. (SEK.m.). .(yy-mm-dd) . . . . 483 6.500% 226 1) 7.375% 471 2) 6.750% 450 3.935% . . . Usd gBP eUR seK 3,311 3) 09-05-20 3,044 3) 08-06-05 10-11-28 4,255 3) 12-12-07 4) 594 . 11,204 1) the gBP 226 million bond has interest rates linked to the 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 this bond 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. 3) interest rate swaps are designated as fair value hedges. 4) contractual repricing date 2007-06-07. all outstanding notes and bond loans are issued by the Parent company 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 4,70 percent at december 31, 2006. these bonds are revalued based on changes in benchmark interest rates according to the fair Value hedge methodology stipulated in ias 39. as the notes and bond loans are issued at par the effective interest rate is the same as the coupon rate. one note and one bond were redeemed during 2006. one Usd- fRn with a nominal amount of Usd 15 million and a eUR-bond with a nominal amount of eUR 1,000 million. e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c20 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 directors is responsible for approving certain matters regarding investments, 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 exposures to foreign exchange and interest rate risks. 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 financial 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 largely centralized to the treasury function in stockholm. ericsson also has a customer finance function with the main objective 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 commit- ments. ericsson classifies financial risks as: • foreign exchange risk • interest rate risk • credit risk • liquidity and refinancing risk • market price risk in own and other listed equity instruments. Foreign exchange risk ericsson has significant revenues, costs, assets and liabilities in currencies other than seK, which results 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 annualized transaction exposure shows that the predominant part is related to transactions in Usd (revenue) and seK (cost of sales). a change in the exchange rate of +/– 10 percent between seK and Usd, would have an estimated annualized impact on the operating income by seK 3.8 (3.3) billion before tax and hedging effects. however, these effects may be compensated over time with new contracts with adjusted prices and costs. foreign exchange risk is as far as possible concentrated to swedish group companies. sales to foreign subsidiaries are normally invoiced in the functional currency of the receiving entity. in order to limit the exposure toward exchange rate fluctuations on future revenue or expenditure, committed and forecasted net exposure by 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 ENXCONSXNotsXnew_v72.indd 75 07-03-04 17.32.53 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 OuTSTANDING.CuRRENCy.DERIvATIvES. . . . . . . . . maturity up to one year total currency derivatives with maturity up to one year maturity one to three years . currency eUR Usd other eUR Usd other . nominal currency 2,062 6,764 1,043 109 total currency derivatives with maturity one to three years maturity three to five years total currency derivatives with maturity three to five years Total.currency.derivatives. (of which is included in Cash flow hedge relations) OuTSTANDING.INTEREST.RATE.DERIvATIvES . . . eUR 471 . 2006. asset seK 370 2,281 456 3,107 90 63 58 211 17 17 3,335. 1,239 .. liability seK 1) 70 726 –40 756 0 29 –17 12 0 0 768. 158 . nominal currency 3,381 5,247 298 290 2005 asset seK 1) liability seK 116 607 46 769 –16 69 13 66 142 2,665 460 3,267 0 103 17 120 . 835. 113 3,387. 1,172 maturity up to one year total maturity up to one year maturity one to three years total maturity one to three years maturity three to five years total maturity three to five years maturity more than five years Total.interest.rate.derivatives. (of which is included in Fair value hedge relations) currency eUR noK seK other gBP noK Usd other eUR Usd seK seK . . nominal currency 2006. asset seK .. liability seK 1) 260 24,289 42,820 226 25,275 483 434 50 – 1,428 . 0 12 119 0 131 115 43 180 5 343 94 6 – 100 9 583.2). 385 2 23 63 4 92 0 –2 8 6 12 0 0 – 0 11 115. . nominal currency 1,412 2 23,186 226 942 530 360 2,105 . 2005 asset seK liability seK 1) 408 – 15 4 427 188 – 0 40 228 249 279 528 1 1,184. 761 0 2 20 4 26 0 – 0 133 133 – 15 –1 14 3 176 1) negative amounts relate to effects from one exposure of a derivative that is positive/negative while the total effect of the derivative is the opposite. 2) of which seK 116 million is reported as non-current assets. period of future sales and purchases in major currencies were hedged, on average, for the coming 6–9 months in 2006. trade receivables and payables in foreign currencies are generally fully hedged. internal currency forward contracts are primarily used for hedging future revenues and expenditures on subsidiary level. external forward contracts 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, 2006, outstanding foreign exchange derivatives hedging transaction exposures had a positive net market value of seK 2.3 (–2.6) billion. the market value is partly deferred in the hedge reserve in equity to offset the gains/losses on hedged future sales in foreign currency. the remaining positive balance corresponds to depreciation of trade receivable balances being remeasured at lower rates compared to the exchange rates prevailing when originated. translation exposure ericsson has many subsidiaries operating outside sweden. the net results in such companies and the value of such foreign equity invest- ments are exposed to exchange rate fluctuations, which affect the consolidated income statement and balance sheet when translated to seK. translation exposure in foreign subsidiaries is hedged according to the following policy established by the Board of directors: translation risk relating to equity in foreign companies is hedged 76 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 ENXCONSXNotsXnew_v72.indd 76 07-03-04 17.32.54 up to 20 percent in selected companies. the translation differences reported in equity during 2006 were negative, seK 3.1 billion, including hedging gains of seK 0.1 billion. Interest Rate Risk ericsson is exposed to interest rate risk through market value fluctuations in certain balance sheet items and through changes in interest expenses and revenues. the net cash position was seK 40.7 (50.6) billion at the end of 2006, consisting of cash and bank, and short-term cash investments of seK 62.3 (81.5) billion and interest- bearing liabilities and post-employment benefits of seK 21.6 (30.9) billion. (Please note that ericsson has adopted the new option in ias 19 to charge actuarial gains/losses directly to equity, as from January 1, 2006. earlier periods have been restated accordingly. for further information please see notes to the consolidated statements – note c17, “Post-employment benefits”.) outstanding customer financing credits, net of provisions, were seK 3.7 (4.9) 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, 2006, 100 (94) percent of ericsson’s interest-bearing 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 percent- age points would, with the current net cash position, have an annual impact on the interest net of approximately seK +/– 72 (+/–135) million . Credit Risk credit risk is divided into three categories: credit risk in trade receivables, customer finance risk and financial credit risk. credit risk in trade receivables trade receivables amounted to seK 51.1 (41.2) billion as of december 31, 2006. Provisions for expected losses are regularly assessed and amounted to seK 1.4 (1.4) billion as of december 31, 2006. erics- son’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 policy. as of december 31, 2006, ericsson’s total outstanding exposure related to customer finance credits was seK 4.1 (7.0) billion. as of that date, ericsson also had unutilized credit commitments of seK 6.8 (3.6) 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, 2006, there were a total of 66 customer loans originated by or guaranteed by ericsson. the five largest customer finance arrange- e R i c s s o n a n n U a l R e P o R t 2 0 0 6 ments represented 60 percent of the total credit exposure. security arrangements for customer credits normally include pledges of equipment, pledges of certain of the borrower’s assets and pledges of shares in the operating company. Restructuring efforts for cases of troubled debt may lead to temporary holdings of equity interests. the table below summarizes ericsson’s outstanding customer finance credits as of december 31, 2005 and 2006. OuTSTANDING.CuSTOmER.FINANCE.CREDITS (SEK.billion). . . 2006. 2005 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 . 4.1 0.0 4.1 0.1 –0.1 4.1 3.8 –0.1 3.7 6.8 7.0 0.1 7.1 0.1 –0.2 7.0 5.0 –0.1 4.9 3.6 1) Reclassification due to consolidation in accordance with sic 12. of ericsson’s total outstanding customer finance credit exposure as of december 31, 2006, 52 percent related to central and eastern europe, middle east & africa, 36 percent to latin america, 7 percent to Western europe, 4 percent to asia Pacific and 1 percent to north america. the net effect of risk provisions and reversals for customer financing affecting operating expenses, amounted to a positive impact of seK 1.1 billion in 2006, compared to seK 1.0 billion in 2005. in 2006 and 2005, ericsson incurred credit losses of seK 0.3 billion and seK 0.4 billion respectively. 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 in cash and cash equivalents and from derivative positions with positive unrealized result against banks and other counterparties. 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 concentration. all derivative transactions are covered by isda netting agreements to reduce the credit risk. no credit losses were incurred during 2006, neither on external investments nor on derivative positions. at december 31, 2006, the credit risk in financial cash instruments was equal to the instruments carrying value. credit exposure in derivative instruments was seK 3.9 (2.0) billion. 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 management, investments in highly liquid interest-bearing securities, 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 ENXCONSXNotsXnew_v72.indd 77 07-03-04 17.32.54 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 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 2006, cash and bank and short-term cash investments decreased by seK 19.2 billion to seK 62.3 billion, mainly due to repayment of non-current debt and investment in new business combinations. the decrease was partly offset by a positive operating cash flow. CASH.AND.SHORT-TERm.CASH.INvESTmENTS . . (SEK.billion). Remaining.time.to.maturity >5. < 3 years months 1–5 years < 1 year 2006. 2005 total group 33.0 9.0 20.3 – 62.3 81.5 the instruments are classified as held for trading and therefore short term investments. Refinancing risk Refinancing risk is the risk that ericsson is unable to refinance outstanding debt at reasonable terms and conditions, or at all, at a given point in time. REPAymENT.SCHEDuLE.OF.LONG-TERm.BORROwINGS.1) Nominal amount (SEK.billion) current maturities of long- term debt notes and bonds (non-current) liabilities to financial institutions (non-current) 2007 2008 2009 2010 2011 2012 Total. 0.1 – – – – – 0.1. – 3.0 3.3 4.3 – 0.5 11.1. – 0.1 0.1 0.1 – – 0.3. Total 0.1 3.1 3.4 4.4 – 0.5 11.5 1) excluding finance leases reported in note c27, “leasing”. 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.) swedish commercial Paper program (seK m.) long-term committed credit facility (Usd m.) short-term committed credit facilities (seK m.) 5,000 1,585 3,415 1,500 5,000 1,000 273 – – – – 1,500 5,000 1,000 273 the Usd 1 billion committed credit facility has interest rates linked to our credit rating. 78 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 moody’s credit rating agency raised ericsson’s credit rating during 2006, while standard & Poor’s (s&P) last upgraded their ratings in 2005. at year-end, their ratings of ericsson’s creditworthiness were Baa2 (Baa3) for moody’s and BBB– for s&P, both considered to be “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. assets valued at fair value through profit or loss have a net gain of seK 637 million. for further information about valuation principles, please see note c1, “significant accounting policies”. FINANCIAL.INSTRumENTS.CARRIED.. AT.OTHER.THAN.FAIR.vALuE . (SEK.billion). Carrying.amount. 2005. 2006. Fair.value 2005 2006. current maturities of non-current borrowings notes and bonds 0.1 11.2 11.3 9.6 12.3 21.9 0.1 11.7 11.8 9.7 13.0 22.7 financial instruments excluded from the tables, such as trade receivables 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 carrying 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 as treasury stock 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. ENXCONSXNotsXnew_v72.indd 78 07-03-04 17.32.55 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 other contingent liabilities assumed by ericsson include guaran- tees of loans to other companies of seK 95 (186) million. ericsson has seK 496 (760) million issued to guarantee the performance of a third party. c25 statement of cash floWs interest paid in 2006 was seK 1,353 million (seK 2,577 million in 2005, seK 3,492 million in 2004) and interest received was seK 1,539 million (seK 2,142 million in 2005, seK 3,662 million in 2004). taxes paid, including withholding tax, were seK 3,649 million (seK 2,010 million in 2005, seK 2,944 million in 2004). for more information regarding the disposition of cash and cash equivalents and unutilized credit commitments, see note c20 – “financial Risk management and financial instruments”. cash restricted due to currency restrictions or other legal restrictions in certain countries amounted to seK 5,794 million (seK 3,773 million in 2005, seK 2,156 million in 2004). ADjuSTmENTS.TO.RECONCILE.NET.INCOmE.TO.CASH . . 2006. 2005 2004 Property,.plant.and.equipment depreciation impairment losses/reversals of impairments Total. Intangible.assets amortization capitalized development costs intellectual Property Rights total amortization impairments capitalized development costs intellectual Property Rights total impairment losses Total. Total.depreciation,.amortization.. and.impairment.losses.on.property,.. plant.and.equipment.and.. intangible.assets. taxes dividends from joint ventures/ associated companies Undistributed earnings in joint ventures/associated companies impairment losses 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 3,007 2,804 2,434 30 3,037 –366 2,438 10 2,444 2,277 1,960 4,237 242 – 242 4,479 3,009 260 3,269 95 – 95 3,364 4,139 313 4,452 108 – 108 4,560 7,516 4,282 5,802 5,518 7,004 4,483 1,262 31 97 –4,233 –2,815 233 –2,154 –1,511 35 1,613 –121 538 6,245 10,845 10,490 c21 otheR cURRent liaBilities . . . 2006. 2005. income tax liabilities advances from customers liabilities to associated companies accrued interest accrued expenses, of which employee related other deferred revenues derivatives with a negative value other Total 1,969 1,441 31 365 1,260 4,059 34 770 19,040 20,379 7,983 10,998 12,396 3,558 3,607 7,954 41,621 4,583 883 8,866 37,178 8,042 the major items within other are value added tax payables and amounts withheld due to employees. c22 tRade PayaBles . . . 2006. 2005. Payables to associated companies and joint ventures other Total 730 351 17,453 12,233 18,183 12,584 c23 assets Pledged as collateRal . . . 2006. 2005 Real estate mortgages chattel mortgages Bank deposits Total – 114 171 285 10 166 373 549 there were no collaterals for subsidiary financing during 2006 (seK 151 million 2005). the remaining bank deposits relate to a capital insurance for the employees. c24 contingent liaBilities . . . . 2006. 2005 guarantees for customer financing other contingent liabilities total 30 1,362 1,392 67 1,641 1,708 guarantees for customer financing relate to arrangements where ericsson 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 guarantees for customer finance are shown above at their net value (i.e. after provisions). ENXCONSXNotsXnew_v72.indd 79 07-03-04 17.32.56 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c26 BUsiness comBinations mARCONI.BuSINESS Net.assets.acquired. Intangible.assets. intellectual property rights Brands customer relationships goodwill Other.assets.and.liabilities Book value fair value adjustments fair value . – – – – 11,748 2,901 718 – inventory 1,913 Property, plant and equipment 1,252 4,197 other assets –812 Post-employment benefits –2,557 other liabilities Total.purchase.price – less: cash and cash equivalents Cash.flow.effect – – – – – – – – – – 11,748 2,901 718 – 1,913 1,252 4,197 –812 –2,557 19,360 1,748 17,612 Divestments Net.assets.disposed.of. . 2006. 2005 2004 Property, plant and equipment other assets Provisions, including post- employment benefits other liabilities gains from divestments less: cash and cash equivalents Cash.flow.effect 253 2,946 –89 –2,079 2,945 890 3,086 3 76 –8 –30 16 27 30 – 186 – –131 –31 10 14 in 2006, divestments made by ericsson amounted to seK 3,086 million, primarily: • the defense business, ericsson microwave systems aB and its 40 procent holding in saab ericsson space, was sold to saab aB on september 1. ericsson microwave systems is a leading provider of radar, command and control systems for defense applications. DEFENSE.BuSINESS Net.assets.disposed.of. . Property, plant and equipment other assets Provisions, including post- employment benefits other liabilities gains from divestments less: cash and cash equivalents Cash.flow.effect 252 2,744 –88 –2,026 2,963 726 3,119 Acquisitions.and.divestments Acquisitions . intangible assets Property, plant and equipment goodwill other assets Provisions, including post-employment benefits other liabilities Purchase of minority holdings cash and cash equivalents Total.purchase.price less: cash and cash equivalents Cash.flow.effect . 2006. 2005 2004 15,648 1,257 163 4,422 –812 –2,689 89 1,781 19,859 404 15 512 124 –135 –55 345 16 1,226 85 149 387 651 – –879 1,255 33 1,681 1,781 18,078 16 1,210 33 1,648 in 2006, ericsson made acquisitions amounting to 18,078, primarily: • the acquisition of certain assets relating to broadband access, optical and radio transmission systems, data networking and service layer from marconi was completed on January 23, 2006, with a cash payment equivalent to seK 17.6 billion. With net tangible assets of approximately seK 4.0 billion, most of the acquisition costs were related to intellectual property rights, e.g. patents, brands, trade marks, etc., which will be amortized over a ten year period. the acquired businesses were consolidated into ericsson’s accounts as per January 1, 2006. during the year, the acquired marconi businesses were streamlined and fully integrated within ericsson’s operations. this resulted in a 24 percent reduction of the former marconi workforce for an estimated annual cost savings of approximately seK 2.0 billion, with full effect from the fourth quarter of 2006. Restructur- ing charges were seK 2.2 billion, of which about one third was utilized during 2006, with the remainder expected to be utilized during the first half of 2007. of this charge, seK 1.4 billion relates to the layoff of 1,600 employees and seK 0.8 billion relates to the termination of it agreements and facilities contracts that are no longer needed but were pre-paid as part of the acquisition. the countries affected were primarily the UK, germany, italy and the Us. Revenues and profit related to the marconi acquisition cannot be recognized separately, since the product portfolios of the marconi business and ericsson have been merged. total transaction cost was seK 160 million. • netwise aB, acquired on august 11, 2006, develops and markets software within the growing area of Presence management, team collaboration, integration of mobile phones, iP-telephony and multimedia. netwise has subsidiaries in sweden, norway, denmark, finland, germany and france. 80 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 ENXCONSXNotsXnew_v72.indd 80 07-03-04 17.32.57 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 c27 leasing Leasing.with.the.Company.as.lessee. 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 13 years. at december 31, 2006, future minimum payment receivables were assets under finance leases, recorded as property, plant and equipment, consist of: distributed as follows: 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 2006. 2005 1,767 – 5 1,772 –544 – –1 –545 –349 – – –349 878 1,948 – 5 1,953 –502 – –1 –503 –417 – – –417 1,033 as of december 31, 2006, future minimum lease payment obligations for leases were distributed as follows: . finance operating leases leases 2007 2008 2009 2010 2011 2012 and later Total. future finance charges 1) Present.value.of.finance.lease.liabilities. 180 182 152 138 115 1,440 2,207. –879 1,328. 1) average effective interest rate on lease payables is 6.61 percent. 2,198 1,830 1,488 1,228 977 3,504 11,225 n/a 11,225 expenses in 2006 for leasing of assets were seK 2,873 (2,686) million, of which variable expenses were seK 11 (11) million. the leasing contracts vary in length from 1 to 22 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 finance 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. . 2007 2008 2009 2010 2011 2012 and later Total. Unearned financial income Uncollectible lease payments Net.investments.in.financial.leases. finance operating leases leases – – – – – – –. – – –. 132 92 72 38 23 107 464 n/a n/a n/a leasing income in 2006 was seK 149 (114) million. c28 tax assessment ValUes in sWeden . . land and land improvements Buildings Total 2006. 2005 60 235 295 60 235 295 c29 infoRmation RegaRding emPloyees, memBeRs of the BoaRd of diRectoRs and management AvERAGE.NumBER.OF.EmPLOyEES . . . .. . . men. women. 2006. . Total. men Women . 2005 total 31,212. 8,516 33,704 8,697. 39,909 25,188 Western europe 1) central and eastern europe, middle east and africa north america latin america asia Pacific total 2) 1) Of which Sweden 5,120 20,498 14,517 4,792 19,309 15,378 2) Of which EU 32,007 8,925 40,932 25,713 8,688 34,401 1,058 4,319 4,121 3,117 2,765. 10,782 6,541 2,393 8,934 50,149. 14,337. 64,486 40,668 13,527 54,195 5,481 3,261 4,250 3,129 4,064 2,549 4,344. 3,252. 3,324. 8,017. 1,137. 998. 740. 992 568 Within the group of the 150 most senior executives, the distribution between females and males is 15.5 percent and 84.5 percent respectively. 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 ENXCONSXNotsXnew_v72.indd 81 07-03-04 17.32.57 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 NumBER.OF.EmPLOyEES . Employees.by.region. Western europe 1) central and eastern europe, middle east and africa north america latin america asia Pacific Total.2) 1) Of which Sweden 2) Of which EU . Employees.per.segment. systems other operations Total as per december 31, 2005 2006. 38,432 35,679 6,325 4,138 4,498 10,388 63,781 19,094 39,818 4,533 3,911 3,382 8,550 56,055 21,178 36,482 as per december 31, 2005 2006.. 59,484 4,297 63,781 50,107 5,948 56,055 EmPLOyEE.mOvEmENTS.2006 head count at year-end departed employees employees joining the company temporary employees Remuneration. 63,781 6,432 14,158 1,219 wAGES.AND.SAL ARIES.AND.SOCIAL.SECuRITy.ExPENSES. . . Wages and salaries social security expenses Of which pension costs 2006. 32,219 10,602 2,709 2005 25,567 8,891 2 165 amounts related to the President and ceo and the group manage- ment team are included. wAGES.AND.SAL ARIES.PER.GEOGRAPHICAL.AREA EmPLOyEES.By.GENDER.AND.AGE.AT.yEAR.END.2006.. . . . Under 25 years old 26–35 years old 36–45 years old 46–55 years old over 55 years old Percent of total .. . female Procent male av total 674 5,663 5,276 1,950 573 22% 2,369 18,507 18,755 7,820 2,194 78% 5% 38% 38% 15% 4% 100% NumBER.OF.EmPLOyEES.REL ATED.TO.COST.OF.SALES.. AND.OPERATING.ExPENSES. . cost of sales operating expenses Total . 2006. 2005 2004 27,682 22,477 19,234 36,099 33,578 31,300 63,781 56,055 50,534 Western europe 1) central and eastern europe, middle east and africa north america 3) latin america asia Pacific Total.2) 1) Of which Sweden 2) Of which EU 3) Of which United States 2006. 22,296 1,958 3,503 1,333 3,129 32,219 11,467 22,480 2,244 2005 17,706 1,317 3,184 1,007 2,353 25,567 10,721 17,781 1,823 Remuneration in foreign currency has been translated to seK at average exchange rates for the year. ELEmENTS.IN.TOTAL.REmuNERATION.FOR.THE.PRESIDENT.AND.CEO.AND.OTHER.TOP.ExECuTIvES . . fixed salary short-term Variable salary . Objective. competitive in the home country while tracking global compensation levels Performance related Performance period. n/a annual long-term Variable compensation Performance related 3 years Pension other Benefits competitive in the home country competitive in the home country n/a n/a 82 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 Conditions absolute level is determined by the size and complexity of the job and year-to-year performance of the individual jobholder cash program based on achievement of specific business objectives derived from the annual business plan approved 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 unit level – operational targets, employee motivation targets and customer satisfaction targets Payouts are determined by three specific variables; the individual’s own investments in shares, a long-term financial target at group level and the share price development. share-based long-term variable plans are submitted each year for approval by the shareholders at the annual general meeting defined contribution plan for old age pension in addition to the basic pension plans in the swedish labor market (the itP plan) ENXCONSXNotsXnew_v72.indd 82 07-03-04 17.32.58 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Compensation.policies.and.remuneration.to.the. Board.of.Directors,.the.President.and.CEO.and.Other. Top.Executives the following information covers the remuneration for the Board of directors, the President and ceo and the other top executives as required by applicable laws, rules and recommendations. Principles for remuneration and other employment terms for Top Executives the principles, approved by the annual general meeting 2006, cover remuneration and other employment terms for the President and ceo and other top executives. the Remuneration committee monitors pay trends within and outside sweden to find competitive and performance driven remuneration packages for the top executives. Notice and severance pay for the President and ceo and the other top executives the following applies: the mutual notice period is 6 months. Upon termination of employment by the company, severance pay amounting to a maximum of 18 months fixed salary is paid. notice of termination given by the employee due to significant structural changes or other events occurred that, in a determining manner, affect the content of work or the condition 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. PROPORTION.OF.FEmALES/mALES.IN.THE.BOARD.OF. the total remuneration includes fixed salary, variable components DIRECTORS.AND.OTHER.TOP.ExECuTIvES together, the variable components are set to a target of around 40 SEK. in the form of short-term variable salary and long-term variable compensation, pension and other benefits according to the table “elements in total remuneration for the President and ceo and other top executives”. Performance is especially reflected in the variable components – both in the annual variable part and in the long-term variable portion. although this may vary over time to take general trends in compensa- tion into account, the target level of the annual component for swedish top executives is currently about 20 percent of the total compensation (fixed salary, short-term variable salary and long-term variable compensation). the long-term component is also set to achieve a target of around 20 percent of the total compensation. in both cases the variable pay is measured against the achievement of specific business objectives. percent of the total compensation and the remaining part of around 60 percent for the fixed salary, 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. Pension the pension age is normally 60 years for the President and ceo and the other top executives. for the President and ceo and the other top executives a defined contribution plan is applied. they were also entitled to pension in accordance with the occupational pension plan for salaried staff on the swedish labor market (itP) from 65 years. from 2007, the pension age in the itP plan is lowered to 60 years. these pension plans are portable. in the defined contribution plan, the company pays for old age pension a contribution between 10 and 35 percent per year on salary portions in excess of 20 base amounts (one base amount 2006 was seK 44 500) of the executive’s pensionable salary. for the President and ceo the annual pension contribution is 35 percent of the pensionable salary above 20 base amounts. the pensionable salary consists of the annual fixed salary and the target level of the annual variable salary. . . Females. . males Board.of.Directors 2005-12-31 2006-12-31 Other.Top.Executives. 2005-12-31 2006-12-31 3 5 1 1 20% 31% 9% 8% 12 11 10 11 80% 69% 91% 92% COmPENSATION.TO.mEmBERS.OF.THE.BOARD.. OF.DIRECTORS.DuRING.2006 Board member commit- tee fee fee emp- loyee re- presen- tative. 250,000 350,000 125,000 250,000 125,000 – 250,000 125,000 125,000 – – – – – – – – – Total 4,000,000 1,100,000 875,000 1,000,000 875,000 750,000 1,000,000 875,000 875,000 – – – – – – – – – 400 900 1 100 – – 400 – 9,750,000. 1,602,800. – 10,000 10,000 10,000 4,000 10,000 9,000 6,000 – 10,400 10,900 11,100 4,000 10,000 9,400 6,000 59,000. 11,411,800 3,683,729 .. 15,095,529. . Board.member michael treschow 3,750,000 750,000 sverker martin-löf 750,000 marcus Wallenberg 750,000 Peter l. Bonfield 750,000 Börje ekholm 750,000 Katherine hudson 750,000 Ulf J. Johansson 750,000 nancy mcKinstry 750,000 anders nyrén carl-henric svanberg monica Bergström Jan hedlund torbjörn nyman Kristina davidsson anna guldstrand Per lindh arne löfving Total. social security fees Total.. . ENXCONSXNotsXnew_v72.indd 83 07-03-04 17.32.58 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 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 comments to the table • the chairman of the Board received a Board fee of seK 3,750,000. the chairman also received seK 125,000 for each Board committee on which he served. • the other directors appointed by the annual general meeting received a fee of seK 750,000 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 commit- tee received a fee of seK 350,000 and the other two members of the audit committee 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. • 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 attended 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 committee meeting. • arne löfving resigned from the Board of directors in august 2006 and was replaced by Kristina davidsson. COmPENSATION.PAID.TO.THE.PRESIDENT.AND.CEO.AND.OTHER. TOP.ExECuTIvES.DuRING.2006 Salary.and.. benefits,.SEK. salary Variable pay earned 2005 and paid 2006 other benefits Total.. the President other top executives. Total 15,271,483 44,170,661 59,442,144 8,700,000 71,127 23,423,344 32,123,344 878,977 24,042,610. 68,401,855. 92,444,465 807,850 comments to the table • other top executives included the following persons: Karl-henrik sundström, sivert Bergman, carl olof Blomqvist, marita hellberg, torbjörn nilsson, Bert nordberg, henry sténson, Joakim Westh, håkan eriksson, Kurt Jofs, Björn olsson and hans Vestberg. • “other benefits” include the value of matching shares received during 2006 under the stock Purchase Plan 2003. the value of matching shares for the President and ceo was seK 27,429 corresponding to 989 ericsson B-shares. for the other top executives the value for matched shares was seK 135,839, corresponding to 4,900 ericsson B shares. the above values are based on the share price at matching. • in addition to the above amounts, the company has paid fees for an external lawyer and compensated for individual taxes on this benefit, totally seK 7,458,949, for one person in the top executive group in connection with an alleged evasion of tax control. COmPENSATION.COSTS.INCuRRED.DuRING.2006.FOR.THE. PRESIDENT.AND.CEO.AND.THE.GROuP.mANAGEmENT.TEAm Total.. costs,.SEK. salary Provisions for variable pay earned 2006 to be paid 2007 other benefits Pension premiums social security fees Total. the President other top executives. Total 15,271,483 44,170,661 59,442,144 21,137,377 30,077,379 8,940,002 10,258,162 14,283,709 4,025,547 20,981,148 27,474,796 6,493,648 10,966,834 30,164,068 41,130,902 45,697,514. 126,711,416. 172,408,930 comments to the table • other benefits include the compensation cost during 2006 for share based programs. for the President and ceo the cost was seK 3,981,849 and for the other top executives seK 9,586,151, which represent their part of total compensation costs as disclosed under “shares for all plans”. 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 received as compensation cost in the income statement at consumption of the services. • for the President and ceo, the above pension premium includes a fee of seK 6,580,992 corresponding to 35 percent of his pensionable salary above 20 base amounts (one base amount 2006 was seK 44,500), for a premium-based old age pension and a fee of seK 373,656 for the itP plan. included in the pension premiums are also changes of commitments made to the President and ceo and the other top executives for benefit based temporary disability and survival’s pensions until retirement age. for the President and ceo, the change of these commitments was – seK 464,300, which amount has affected his total premiums for the year. • the company’s commitments for benefit-based pensions per december 31, 2006, under ias 19 amounted to seK 3,128,700 for the President and ceo, of which seK 89,200 refers to old age pensions in the itP plan and the remaining seK 3,039,500 to temporary disability and survival’s pensions until retirement age. for other top executives the company’s commitments amounted to seK 36,869,094, of which 17,040,094 refers to old age pensions in the itP plan. • social security fees include payroll tax on pension premiums. • for previous Presidents, the company has made provisions for defined benefit pension plans in connection with their active service periods within the company. • in addition to the above amounts, the company has incurred costs of seK 9,866,698 whereof social security fees of seK 2,407,749 for the above reported benefits for one person in the top executive group in connection with an alleged evasion of tax control. 84 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 ENXCONSXNotsXnew_v72.indd 84 07-03-04 17.32.59 OuTSTANDING.STOCK.OPTIONS.AND.mATCHING.RIGHTS. . Number.of.B.shares. As.per.December.31,.2006. other top executives the President 1999 stock option Plan millenium stock option Plan stock option Plan 2001 – may grant stock option Plan 2002 stock Purchase Plan 2003 (two-year), 2005 and 2006, and Performance matching Program 2004, 2005 and 2006 – – – – 13,816 1,238,240 625,000 690,000 705,378 1,621,974 comments to the tables • for the definition of matching rights, see description under “long- term variable compensation”. • the number of options presumes full exercise under applicable plans. the millenium stock option Plan expired on January 17, 2007 and the 1999 stock option Plan will expire february 28, 2007. • for strike prices for option plans, see “long-term variable compen- sation”. • the number of matching rights presumes maximum performance matching under long-term incentive Plans 2004, 2005 and 2006. the matching under the Performance matching Programs will start in 2007. Long-term.variable.compensation The Stock Purchase Plan the stock Purchase plan is designed to offer an incentive for all employees 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 market price on the stockholm stock exchange or adRs at nasdaq (contribution shares). if the contribu- tion shares are retained by the employee for three years after the investment and the employment with the ericsson group 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 in ongoing plans. e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Plan number of contribution participants at launch period take-up rate – % of all employees stock Purchase plan 2003 1st year stock Purchase plan 2003 2nd year stock Purchase plan 2005 stock Purchase plan 2006 august 2003 – July 2004 august 2004 – July 2005 august 2005 – July 2006 august 2006 – July 2007 11,000 15,000 16,000 17,000 22% 30% 29% 29% The Key Contributor Program the Key contributor Program is designed to give recognition to key employees as a method of retention. Under the program, about 10 percent of the employees (2004: up to 4,500, 2005: up to 5,000 and 2006: up to 6,040) 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 program was introduced in 2004 and has been repeated 2005 and 2006. The Performance Matching Program for executives the Performance matching Program is designed to focus the management on driving earnings and provide competitive compen- sation based on swedish practice. Under the program, executives (2004: up to 200 executives, 2005 and 2006: up to 220 executives) have been selected to obtain up to four or six extra shares (perfor- mance matching shares) 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 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 program was introduced in 2004 and has been repeated 2005 and 2006. in the 2006 program, the ceo is allowed to invest up to 9 percent of the salary in shares and may obtain up to eight performance matching shares in addition to the ordinary one matching share. the performance target for the 2004 program is annual average ePs growth between five (0 performance matching shares) and 25 percent (maximum performance matching shares). the performance target for the 2005 and 2006 programs is annual average ePs growth between three (0 performance matching shares) and 15 percent (maximum performance matching shares). the Board may reduce the number of performance matching shares, if deemed appropriate, considering the company’s financial results and position, conditions on the stock market and other circumstances at the time of matching. 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. 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 ENXCONSXNotsXnew_v72.indd 85 07-03-04 17.32.59 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 STOCK.OPTION.PL ANS Plan grant/expiry date 1999 stock option Plan 1 march 00/28 feb 07 exercise price 1) (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 2) 14 may 01/14 may 08 30.50 19 nov 01/19 nov 08 25.70 stock option Plan 2002 2) 11 nov 02/11 nov 09 7.80 number of participants at grant number of participants end 2006 1,800 1,007 8,000 2,591 15,000 7,698 900 527 12,800 6,881 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 1) market price at grant date – re-pricing is only permitted under limited circumstances principally relating to changes in the capital structure of ericsson. 2) for stock options exercised during 2006, the weighted average share price was seK 26.49. Shares for all 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 holders to subscribe for class B shares. the warrants are held by subsidiaries 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. treasury stock for all remaining plans was issued in a directed cash issue of class c shares at a nominal amount of seK 1, and pur- chased 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 expenses 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 2006, 2,075,564 shares were sold at an average price of seK 27.07. if all options outstanding as of december 31, 2006, were exercised, all shares allocated for future matching under the stock Purchase Plan were transferred, and shares designated to cover social security payments were disposed of as a result of the exercise and the matching, approximately 34 million class B shares would be issued and approximately 197 million class B shares, held as treasury stock, would be transferred. the total, approximately 231 million class B shares, corresponds to 1.5 percent of the total number of shares outstanding, 15,881 million. the below table shows the number of shares (representing options and matching rights but excluding shares for social security costs) allocated for each ongoing plan and changes during 2006. it also shows compensation costs charged for each plan. the total compensation costs charged for the long term Variable compensa- tion plans during 2006 amount to seK 389 million. 86 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 ENXCONSXNotsXnew_v72.indd 86 07-03-04 17.33.00 e R i c s s o n a n n U a l R e P o R t 2 0 0 6 Plan.(million.shares) out- standing originally beginning of 2006 designated 1) exer- cised/ compen- sation costs granted matched forfeited expired standing options charged end of exercis- during 2006 2006 number of during 2006 during 2006 during 2006 during 2006 out- able 1999 stock option Plan millennium stock option Plan 2001 stock option Plan – may grant 2001 stock option Plan– nov grant 2002 stock option Plan 2003 stock Purchase Plan (2-year plan) and 2004 Key contributor and Performance matching programs 2005 stock Purchase Plan, Key contributor and Performance matching programs 2006 stock Purchase Plan, Key contributor and Performance matching programs 1.4 71.6 44.9 2.6 53.9 0.8 31.2 25.9 1.5 33.3 – – – – – – – – 0.1 8.1 0.1 2.8 2.3 0.1 0.5 151.7 33.3 0.1 5.4 1.0 31.5 5.9 19.4 1.3 0.4 31.8 – 5.8 – – – – – – – – – – 0.7 28.4 23.6 1.3 24.7 0.7 28.4 23.6 1.3 24.7 – – – – – 27 2) 23.6 2) 5.8 2) – – – 245 3) 138 3) 6 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 2006 was: february 15 seK 25.67, may 15 seK 22.49, august 15 seK 20.32 and november 15 seK 26.14. c30 Related PaRty tRansactions during 2006, 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 handset 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: • Sales. ericsson reports sales regarding mobile phone platform design to semc. • 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 support contracts with a number of customers for mobile systems which also include limited quantities of phones. . . . 2006. 2005 Related.party.transactions. sales Royalty Purchases dividends Related.party.balances Receivables liabilities 2,486 1,478 173 1,160 1,742 654 827 – 479 108 197 33 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: • Sales..ericsson nikola tesla d.d. purchases telecommunication equipment from ericsson. • Royalty..ericsson receives royalties for ericsson nikola tesla d.d.’s usage of trademarks and intellectual property rights. • Purchases..ericsson purchases development resources from ericsson nikola tesla d.d.. • Dividends. Both owners of semc, sony corporation and ericsson, • Dividends. ericsson receives dividends from ericsson nikola tesla receive dividends. d.d.. ENXCONSXNotsXnew_v72.indd 87 07-03-04 17.33.00 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 c32 eVents afteR the Balance sheet date the process of establishing a purchase price allocation (PPa) for both acquisitions is in progress and ericsson will disclose preliminary PPas in the q1 2007 interim report. Acquisition.of.Redback.Networks on december 20, 2006, ericsson and Redback networks inc. (nasdaq:RBaK) announced the signing of a definitive agreement under which ericsson would acquire Redback for Usd 25.00 per share, or an aggregate price of approximately Usd 1.9 billion. on January 25, 2007, the completion of the acquisition was announced. Redback has over 700 carrier customers in more than 80 countries and employs about 800 people, including 500 R&d engineers. fifteen of the top 20 telephone carriers worldwide use Redback’s technology, including broadband routers to manage iP- based data, voice and video services. Redback has a strong position in multi-service edge routing technology, which helps carriers deliver broadband, telephony, tV and mobility services over internet-based infrastructures. the combination of Redback’s intelligent routing technology and ericsson’s leading ims (iP multimedia subsystem), optical transport and broadband access puts ericsson in a leading position in end-to- end iP solutions for both fixed and mobile operators. Acquisition.of.Entrisphere ericsson annonced on february 12, 2007, the acquisition of entrisphere, a company providing fiber access technology. entri- sphere was founded in 2000 in santa clara, california, and employs about 140 people, including important R&d resources. the entrisphere acquisition brings a leading iP based broadband access platform ready for volume deployment and compliant with both north american and international standards. e R i c s s o n a n n U a l R e P o R t 2 0 0 6 . . . 2006 2005 Related.party.transactions sales Royalty Purchases dividends Related.party.balances Receivables liabilities 867 7 465 98 86 82 880 9 364 – 132 50 Other.related.parties ericsson continued the cooperation with ericsson’s owners investor aB and aB industrivärden in the venture capital vehicle ericsson Venture Partners. for information regarding the management remuneration, see note c29, information regarding employees, members of the Board of directors and management. c31 fees to aUditoRs . . .. Price- waterhouse- coopers KPmg others. Total 2006 audit fees audit related fees tax services fees other fees . 2005 audit fees audit related fees tax services fees other fees . 2004 audit fees audit related fees tax services fees other fees . 98 14 19 1 132. 58 24 43 – 125. 57 10 31 – 98. 8 – 2 2 12. 6 – 1 1 8. 6 6 2 – 14. 3 – 1 1 5. 3 – 1 – 4. 1 – – – 1. 109 14 22 4 149 67 24 45 1 137 64 16 33 – 113 during the period 2004–2006 Pricewaterhousecoopers and KPmg provided the company with certain audit related services and tax services in addition to audit services. the audit related services provided during the period include consultation on financial accounting, consultation in connection with conversion to interna- tional financial Reporting 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. the increase of audit fees during 2006 is related to sox 404. 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 ENXCONSXNotsXnew_v72.indd 88 07-03-04 17.33.01 E r i c s s o N a N N U a L r E P o r t 2 0 0 6 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 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. our business, operational results, financial condition, liquidity and/ adverse economic conditions could cause network operators to or our share price. Furthermore, our operational results may have a postpone investments or initiate other cost-cutting initiatives to greater variability than in the past and we may have more difficulty improve their financial position, which could result in significantly in accurately predicting future developments. Risk associated with the industry and market conditions reduced capital expenditures for network infrastructure. if opera- tor spending for network equipment and associated rollout ser- vices declines substantially, our business and operating results would suffer. We have established better flexibility to cost effec- We conduct business throughout the world and are subject to tively accommodate fluctuations in demand. However, if demand the effects of general global economic conditions as well as were to fall, or were to be significantly weaker than expected, we conditions unique to a specific country and region. in particular, may experience material adverse effects and may incur operating we are affected by market conditions within the telecommunica- losses in the future. tions industry. We are subject to political, economic and regulatory risks in the various countries in which we operate. Our business essentially depends upon the continued growth of mobile communications. Most of our business depends on continued growth in mobile We conduct business in more than 140 countries, with a signifi- communications in terms of both number of subscriptions and cant proportion of our sales originating from emerging markets in usage per subscriber, which in turn requires the continued de- asia Pacific, Latin america, Eastern Europe, the Middle East and ployment of our network systems by customers. in particular, we africa. We expect that sales to such emerging markets will be an are dependent on operators in highly penetrated markets to increasing portion of total sales as developing nations and re- successfully introduce services that cause a substantial increase gions around the world increase their investments in telecommu- in usage for both voice and data. in emerging markets, we are, to nications. We already have extensive operations in many of these a certain extent, dependent on the availability of lower-cost countries, which involve certain risks, including volatility in gross handsets in addition to affordable tariffs by operators to support domestic product, civil disturbances, economic and political a continued increase of mobile subscribers. if operators are not instability, nationalization of private assets and the imposition of successful in their attempts to increase the number of subscrib- exchange controls. ers and/or stimulate increased usage, our business and opera- changes in regulatory requirements, tariffs and other trade tional results could be materially adversely affected. barriers, price or exchange controls or other governmental poli- cies in the countries 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 re- Changes in the regulatory environment for telecommunications systems and services could negatively impact our business. gions could limit our ability to enforce our rights. We also must telecommunications is a regulated industry and regulatory comply with the export control regulations of the countries in changes affect both our customers and us. for example, chang- which we operate. although we seek to comply with each of es in regulations that impose more stringent, time-consuming or these regulations, even unintentional violations thereof could costly planning, zoning requirements or building approvals re- have material adverse effects on our business, operational re- garding the construction of base stations and other network sults and reputation. 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 r i s k fa c t o r s 89 ENXRiskXfakt_v12.indd 89 07-02-27 09.22.03 E r i c s s o N a N N U a L r E P o r t 2 0 0 6 operators could also affect their ability to invest in network infra- structure, which in turn could affect the sales of our systems and services. We operate in a highly competitive industry, which is subject to competitive pricing and rapid technological change. License fees, environmental, health and safety, privacy and the markets for our products are highly competitive in terms of other regulation changes may increase costs and restrict opera- pricing, functionality and service quality, the timing of develop- tions of network operators and service providers. the indirect ment and introduction of new products and services and terms impact of such changes could affect our business adversely of financing. We face intense competition from significant com- even though the specific regulations may not directly apply to our petitors. our competitors may implement new technologies products or us. Consolidation among network operators may increase our dependence on a limited number of key customers. 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 busi- ness segments or geographic markets than we do. We may also the market for mobile network equipment is highly concentrated, encounter increased competition from new market entrants, with the 10 largest operators representing more than 40 percent alternative technologies or alternative telecommunications plat- of the total market. Network operators have undergone signifi- forms. our operating results significantly depend on our ability to cant consolidation, especially among companies operating in compete in this market environment, in particular on our ability to different countries. this trend is expected to continue, while also introduce new products to the market and to continuously en- intra-country consolidation is likely to accelerate as a result of hance the functionality while reducing the cost of new and exist- competitive pressure. ing products. 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. Moreover, if the combined companies oper- Liability claims related to and public perception of the potential health risks associated with electromagnetic fields could negatively affect our business. ate in the same geographic market, less network equipment and We are subject to claims that mobile handsets and other tele- associated services may be required. another possible conse- communications devices that generate electromagnetic fields quence of customer consolidation is that it could cause a delay in expose users to health risks. at present, a substantial number of their network investments while they negotiate merger/acquisi- scientific studies conducted by various independent research tion agreements, secure necessary approvals, or are constrained bodies have indicated that electromagnetic fields, at levels within by efforts to integrate the businesses. the limits prescribed by public health authority safety standards Consolidation among equipment and services suppliers may lead to increased competition and a different competitive landscape. 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 industry consolidation among equipment suppliers could poten- Ericsson’s products are designed to comply with all current tially result in stronger competitors that are competing as end-to- safety standards and recommendations regarding electromag- end suppliers as well as competitors more specialized in particu- netic fields, we cannot assure you that we or the jointly owned lar areas. consolidation may also result in competitors with sony Ericsson Mobile communications will not become the greater resources, including technical and engineering resources, subject of product liability claims or be held liable for such claims than we have. this could have a material adverse effect on our or be required to comply with future regulatory changes that may business, operating results, and financial condition. have an adverse effect on our business. see also “Legal and tax proceedings” in the Board of Directors’ report . 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 90 r i s k fa c t o r s ENXRiskXfakt_v12.indd 90 07-02-27 09.22.03 E r i c s s o N a N N U a L r E P o r t 2 0 0 6 we are in compliance with all material environmental, health and safety laws and regulations related to our products, operations and business activities. However, there is a risk that we may have We expend significant resources on product and technology R&D which may not be successful in the market. to incur expenditures to cover environmental and health liabilities Developing new products or updating existing products and to maintain compliance with current or future environmental, solutions requires significant levels of financial and other commit- health and safety laws and regulations or to undertake any nec- ments to research and development, which may not always essary remediation. it is difficult to reasonably estimate the future result in success. We are also actively engaged in the develop- impact of environmental matters, including potential liabilities ment of technology standards that we are incorporating into our due to a number of factors especially the lengthy time intervals products and solutions. in order to be successful, those stan- often involved in resolving them. dards must be accepted by relevant standardization bodies and Strategic and operational risks by the industry as a whole. our sales and earnings may suffer if we invest in development of technologies and technology stan- our business is subject to a wide variety of factors that impact dards that do not function as expected, are not adopted in the our strategies and operating results. any of these factors could industry or are not accepted in the marketplace within the time- have a material adverse impact on our operating results. further- frame we expect, or at all. more, results of operations for any period may not necessarily be Please also see section “research and Development” in the indicative of results to be expected in future periods. conse- Board of Directors’ report and in information on the company. quently, 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 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 We derive most of our business from large, multi-year network the capabilities of our strategic partners, our ability to work with build-out agreements with a limited number of significant cus- these partners or otherwise, our ability to develop new products tomers. although no single customer currently represents more and solutions may be constrained and this may harm our com- than 10 percent of sales, the loss of, or a reduced role with, a key petitive position in the market. additionally, our share of any customer for any reason could have a significant adverse impact losses from, or commitments to contribute additional capital to, on sales, profit and market share for an extended period. joint ventures may adversely affect our financial position or re- Some long-term frame agreements expose us to risks related to agreed future price reductions or penalties. sults 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 Long-term agreements are typically awarded on a competitive to compete as successfully in the mobile systems market or at all bidding basis. in some cases such agreements also include in the mobile handset market. commitments to future price reductions. in order to maintain our solutions may also require us to license technologies from gross margin even with lower prices, we continuously strive to other companies and successfully integrate such technologies reduce the costs of our products through design improvements with our products. it may be necessary in the future to seek or and other changes in costs related to e.g. component prices, renew licenses relating to various aspects of these products. productivity in production, etc. We can not assure you that our there can be no assurance that the necessary licenses would be cost reduction actions will be sufficient to maintain our gross available on acceptable terms, or at all. Moreover, the inclusion in margin. our products of software or other intellectual property licensed frame agreements often also provide for penalties and termi- from third parties on a non-exclusive basis could limit our ability nation rights in the event of our failure to deliver ordered prod- to protect our proprietary rights in our products. ucts on time or if our products do not perform as promised, which may affect our results negatively. ENXRiskXfakt_v12.indd 91 07-02-27 09.22.03 r i s k fa c t o r s 91 E r i c s s o N a N N U a L r E P o r t 2 0 0 6 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 assur- ance that any of these patents will not be challenged, invalidated, or circumvented, or that any rights granted under these patents for additional information regarding certain of the lawsuits in which we are involved, see “Legal and tax Proceedings” in the Board of Directors’ report. We rely on a limited number of suppliers for the majority of our components and electronic manufacturing services. will in fact provide competitive advantages to us. our ability to deliver according to market demands depends in the European Union recently considered placing restrictions large part on obtaining timely and adequate supply of materials, on the patentability of software. although the European Union components and production capacity on competitive terms. ultimately rejected this proposal, we cannot guarantee that they failure by any of our suppliers could interrupt our product supply will not revisit this issue in the future. We rely on many software and could significantly limit our sales or increase our costs. if we patents, and any limitations on the patentability of software may fail to anticipate customer demand properly, an over/undersupply materially affect our business. of components and production capacity could occur. in many We utilize a combination of trade secrets, confidentiality poli- cases, some of our competitors also utilize the same contract cies, non-disclosure and other contractual arrangements in manufacturers, and we could be blocked from acquiring the addition to relying on patent, copyright and trademark laws to needed components or increasing capacity if they have pur- protect our intellectual property rights. However, these measures chased capacity ahead of us. this factor could limit our ability to may not be adequate to prevent or deter infringement or other supply our customers or could increase our costs. at the same misappropriation. Moreover, we may not be able to detect unau- time we commit to certain capacity levels or component quanti- thorized use or take appropriate and timely steps to establish ties, which, if unused, will result in charges for unused capacity and enforce our proprietary rights. in fact, existing laws of some or scrapping costs. countries in which we conduct business offer only limited protec- tion of our intellectual property rights, if at all. Many key aspects of telecommunications and data network We are dependent upon hiring and retaining highly qualified employees. technology are governed by industry-wide standards, which are We believe that our future success depends in large part on our usable by all market participants. as the number of market en- continued ability to hire, develop, motivate and retain engineers trants as well as the complexity of the technology increases, the and other qualified personnel needed to develop successful new possibility of functional overlap and inadvertent infringement of products, support our existing product range and provide ser- intellectual property rights also increases. third parties have vices to our customers. competition for skilled personnel and asserted, and may assert in the future, claims against us alleging highly qualified managers in the telecommunications industry that we infringe their intellectual property rights. Defending such remains intense. We are continuously developing our compensa- claims may be expensive, time consuming and divert the efforts tion and benefit policies as well as other measures. However, we of our management and/or technical personnel. as a result of may not be as successful at attracting and retaining such highly litigation, we could be required to pay damages and other com- skilled personnel in the future. pensation, 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 As a Swedish company operating globally, we have substantial foreign exchange exposures. to us on commercially reasonable terms. With the majority of our cost base being swedish krona (sEk) Adverse resolution of litigation may harm our operating results or financial condition. denominated 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 fluc- We are a party to lawsuits in the normal course of our business. tuations affect our consolidated balance sheet, cash flows and Litigation can be expensive, lengthy and disruptive to normal income statement when foreign currencies are exchanged or business operations. Moreover, the results of complex legal translated to sEk. our attempts to reduce the effect of exchange proceedings are difficult to predict. an unfavorable resolution of rate fluctuations through a variety of hedging activities may not a particular lawsuit could have a material adverse effect on our be sufficient or successful, resulting in an adverse impact on our business, operating results, or financial condition. results. 92 r i s k fa c t o r s ENXRiskXfakt_v12.indd 92 07-02-27 09.22.04 E r i c s s o N a N N U a L r E P o r t 2 0 0 6 a stronger sEk exchange rate would generally have a nega- competitors or ourselves regarding capital spending plans of tive effect on our competitiveness compared to competitors with network operators, financial difficulties for network operators for costs denominated in other currencies. whom we have provided financing or with whom we have entered 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. 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 communications services and equipment; our business operations rely on complex it operations and technical problems, in particular those relating to the introduc- communications networks which are vulnerable to damage or tion and viability of new network systems like 3G; potential litiga- disturbance from a variety of sources. Having outsourced a tion involving ourselves or the markets in which we operate. Even significant portion of our it operations, we depend partly on though we may not be directly involved, announcements con- security and reliability measures of external companies. regard- cerning bankruptcy or other similar reorganization proceedings less of protection measures, essentially all it systems and com- involving, or any investigations into the accounting practices of, munications networks are susceptible to disruption from equip- other telecommunications companies may materially adversely ment failure, vandalism, computer viruses, security breaches, affect our share price. natural disasters, power outages and other events. although we have experienced disruptions from computer viruses, security breaches, power outages and equipment failures in the past, our operations or results have not been materially affected to date. Currency fluctuations may adversely affect the trading prices of our Class B shares and ADSs and the value of any distributions we make thereon. We will continue to expend significant resources to manage and Because our shares are quoted in swedish kronor (sEk) on the try to mitigate these risks and we may incur additional costs to stockholm stock Exchange (our primary stock exchange) but on remedy damage caused by such disruptions, especially for com- NasDaQ and the London stock Exchange in local currencies, i.e. puter viruses and security breaches. UsD and GBP, fluctuations in exchange rates between sEk and Risks associated with owning Ericsson shares Our share price has been and may continue to be volatile. 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, our share price has been volatile due in part to the high volatility broker or depositary, in the case of aDss, call for distributions to in the securities markets generally, and for telecommunications you in currencies other than sEk. and technology companies in particular, as well as developments from quarter to quarter which impact our financial results. fac- tors other than our financial 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 inves- tors as well as a result of announcements by our customers, ENXRiskXfakt_v12.indd 93 07-02-27 09.22.04 r i s k fa c t o r s 93 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 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 notes p2 p3 p4 p4 p15 p15 p5 2006 562 –285 277 –206 –1,072 –1,278 4,378 3,377 12,811 –2,549 13,639 –631 543 –88 2005 1,096 –621 475 148 –796 –648 3,365 3,192 13,535 –2,700 14,027 10 –57 –47 –1,189 12,362 –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 1,262 million in 2006 (seK 782 million in 2005 and seK –343 million in 2004). 94 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 ENXPCXStats_v25.indd 94 07-02-27 10.45.55 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 trade receivables customer financing, current receivables from subsidiaries current income taxes other current receivables short-term investments cash and bank Total assets e r i c s s o n a n n U a l r e p o r t 2 0 0 6 notes 2006 2005 p6 p7, p26 2,800 300 18 318 p8, p9 p8, p9 p8 p12 p8 p5 p8 p10 p11 p12 p13 p19 p19 51,124 4,469 19 16,978 1,562 403 401 78,056 53,066 4,474 18 54,413 1,231 877 357 114,772 91 60 68 366 27,099 19 5,399 43,372 10,614 87,028 165,084 27 1,285 21,076 34 3,622 64,172 10,790 101,066 215,838 ENXPCXStats_v25.indd 95 07-02-27 10.45.55 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 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 December 31, SEK million Stockholders’ equity, provisions and liabilities Stockholders’ equity capital stock 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 trade payables liabilities to subsidiaries other current liabilities Total stockholders’ equity, provisions and liabilities assets pledged as collateral contingent liabilities notes 2006 2005 p14 p15 p16 p17 p18 p18 p12 p18 p21 p12 p20 p22 p23 16,132 20 31,472 47,624 20,625 12,362 32,987 80,611 1,074 419 1,195 1,614 11,204 – 32,369 145 43,718 – 509 35,261 2,297 38,067 165,084 277 7,670 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 96 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 ENXPCXStats_v25.indd 96 07-02-27 10.45.55 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 parent company statement of cash flows Years ended December 31, SEK million notes 2006 2005 2004 Operations net income Adjustments to reconcile net income to cash p24 Changes in operating net assets inventories customer financing, current and non-current trade receivables provisions and pensions other operating assets and liabilities, net Cash flow from operating activities Investing activities investments in tangible assets sales of tangible assets investments in intangible assets investments in shares and other investments Divestments of shares and other investments lending, net other investing activities Cash flow from investing activities p24 p24 12,362 13,399 7,160 –1,574 10,788 –31 446 358 –401 –4,827 6,333 –132 57 –3,092 –541 5,654 22,836 59 24,841 –5,966 7,433 –20 757 27 –1,250 7,276 14,223 –76 – – –6,972 9,470 –4,127 124 –1,581 1,129 8,289 –37 1,137 495 –975 –3,756 5,153 –50 70 – 2,740 6,396 –5,536 1,446 5,066 Cash flow before financing activities 31,174 12,642 10,219 Financing activities changes in current liabilities to financial institutions, net changes in current liabilities to subsidiaries proceeds from issuance of borrowings repayment of borrowings sale of own stock and options exercised Dividends paid settled contributions from/to (–)subsidiaries other Cash flow from financing activities Net change in cash and cash investments – –34,265 – –9,511 63 –7,141 –1,296 – –52,150 –20,976 –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 short-term investments, beginning of period 74,962 71,696 68,393 Cash and short-term investments, end of period p19 53,986 74,962 71,696 ENXPCXStats_v25.indd 97 07-02-27 10.45.56 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 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 parent company statement of chanGes in stocKholDers’ eqUity December 31, SEK million Opening balance adjustment for ias 39, net Adjusted opening balance sale of own stock stock purchase and stock option plans contributions from/to (–) subsidiaries tax on contributions Dividends paid Revaluation of other investments in shares fair value measurement reported in equity Cash Flow hedges transferred to balance sheet for the period net income Closing balance for further information, please see “notes to the parent company financial statements, note p14, stockholders´ equity”. notes p14 2006 76,593 –17 76,576 58 67 –1,955 548 –7,141 –3 99 2005 63,763 – 63,763 117 62 4,465 –1,254 –3,959 – – 12,362 80,611 13,399 76,593 98 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 ENXPCXStats_v25.indd 98 07-02-27 10.45.56 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 notes to the parent company financial statements contents p1 significant accounting policies.......................................................................................................................................................................................................100 p2 segment information..............................................................................................................................................................................................................................100 p3 other operating revenues and costs......................................................................................................................................................................................100 p4 financial income and expenses.................................................................................................................................................................................................... 101 p5 taxes.................................................................................................................................................................................................................................................................... 101 p6 intangible assets........................................................................................................................................................................................................................................102 p7 tangible assets...........................................................................................................................................................................................................................................102 p8 financial assets..........................................................................................................................................................................................................................................103 p9 investments....................................................................................................................................................................................................................................................104 p10 inventories.......................................................................................................................................................................................................................................................106 p11 trade receivables.......................................................................................................................................................................................................................................106 p12 receivables and liabilities – subsidiary companies.....................................................................................................................................................106 p13 other current receivables.................................................................................................................................................................................................................106 p14 stockholders’ equity...............................................................................................................................................................................................................................106 p15 Untaxed reserves.....................................................................................................................................................................................................................................108 p16 pensions...........................................................................................................................................................................................................................................................108 p17 other provisions.........................................................................................................................................................................................................................................109 p18 interest-bearing liabilities...................................................................................................................................................................................................................109 p19 financial risk management and financial instruments.............................................................................................................................................. 110 p20 other current liabilities.........................................................................................................................................................................................................................111 p21 trade payables..............................................................................................................................................................................................................................................111 p22 assets pledged as collateral............................................................................................................................................................................................................ 112 p23 contingent liabilities............................................................................................................................................................................................................................... 112 p24 statement of cash flows.................................................................................................................................................................................................................... 112 p25 leasing............................................................................................................................................................................................................................................................... 112 p26 tax assessment Values in sweden............................................................................................................................................................................................. 113 p27 information regarding employees............................................................................................................................................................................................... 113 p28 related party transactions................................................................................................................................................................................................................ 113 p29 fees to auditors...........................................................................................................................................................................................................................................114 ENXPCXNotes_v43.indd 99 07-02-27 10.53.15 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 regulations 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 reported 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 authorized public accountants. according to rr 32:05, ias 19 shall be adopted regarding supplementary disclosures when applicable. Statement.of.cash.flows cash and short-term investments include financial instruments with maturity up to 12 months from the balance sheet date. p2 segment information Net.SaLeS . . . 2006 2005 2004 Western europe 1) 2) eastern europe, middle east & africa latin america total 1) of which sweden 2) of which eU – 543 19 562 – – 41 1,047 8 1,096 41 41 54 2,530 14 2,598 54 54 parent company sales are mainly related to business segment systems. p3 other operating reVenUes anD costs . . . 2006 2005 2004 royalties, license fees and other operating revenues subsidiary companies other net losses (–) on sales of tangible assets total 2,018 2,362 –2 4,378 1,728 1,641 –4 3,365 1,683 1,237 –30 2,890 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p1 significant accoUnting policies the parent company, telefonaktiebolaget lm ericsson, adopted rr32 “reporting in separate financial statements” from January 1, 2005. the adoption of rr32 has not had any effect on reported profit or loss for 2004 and 2005. the amended rr32:05 (from 2006) requires the parent company to use the same accounting principles as for the group, i.e. ifrs to the extent allowed by rr32:05. the main deviations between accounting policies adopted for consolidation 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 accounted 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 ias 39 financial instruments: recognition and measurement was adopted from January 1, 2006, except regarding financial guarantees where the exception allowed in rr32:06 was chosen. the comparison figures are accounted for according to the annual accounts act. the main deviations are: • short-term investments, interest and foreign exchange derivatives • foreign exchange derivatives are recognized in the balance sheet are carried at lowest of amortized cost and fair value. 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 the parent company are carried at amortized cost. there were no material effects on the opening balances January 1, 2006, as the derivatives had a negative fair value in the closing balance December 31, 2005. restatement of opening balances has been performed. remeasured opening balances include other current receivables and liabilities, current maturities of long-term borrowings and notes and bond loans, other investments in shares and stockholders’ equity. all remeasured balances, except for other investments in shares, are derivatives. 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 results in different accounting of deferred taxes as compared to the principles applied in the consolidated statements. swedish gaap and tax 100 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 ENXPCXNotes_v43.indd 100 07-02-27 10.53.15 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p4 financial income anD expenses p5 taxes Income.Statement. . . 2006 2005 2004 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 4,830 3,673 3,804 6,774 6,378 146 1,258 – – – 25 – 6 – 120 34 – 2 1,267 1,611 1,439 1,659 12,811 13,535 1,093 3,235 11,008 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 –222 –14 –295 –556 –106 –861 – –7 – –3 – –5 –1,067 –652 –49 –2,549 –1,115 –1,445 –13 –2,700 10,262 10,835 –1,178 –2,896 –16 –5,251 5,757 interest expenses on pension liabilities are included in the interest expenses shown above. the following items are included in taxes: . . . 2006 2005 2004 current income tax on contributions, net –548 –291 other current income taxes for the year current income taxes related to prior years 124 Deferred tax income/expense (–) related to temporary differences taxes –474 –1,189 1,254 –511 326 –1,827 –489 – –1,650 –581 881 –1,435 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 following table: . . . 2006 2005 2004 income before taxes 13,551 13,980 8,595 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 –3,794 –3,914 –2,407 124 326 – –123 –35 –597 2,761 3,072 1,810 –157 –1,189 –30 –581 –241 –1,435 Balance.sheet. Deferred tax assets and liabilities tax effects of temporary differences have resulted in deferred tax assets as follows: . . . . 2006 2005 Deferred tax assets 403 877 Deferred tax assets refer mainly to costs related to customer financing and provisions for restructuring costs. ENXPCXNotes_v43.indd 101 07-02-27 10.53.15 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 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p6 intangiBle assets PateNtS,.LICeNSeS,.traDemarkS.aND.SImIL ar.rIghtS . . . 2006. 2005 accumulated.acquisition.costs opening balance acquisitions Closing.balance accumulated.amortization opening balance amortization for the year Closing.balance Net.carrying.value 222 3,092 3.314 –204 –310 –514 2,800 222 – 222 –182 –22 –204 18 acquisitions for the year relate mainly to marconi trademarks. the useful life and amortization period for the trademarks has been set to 10 years. p7 tangiBle assets . 2006 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. 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. land and buildings other equipment and installations construction in process and advance payments 23 – – – 23. –2 – – – –2. 21. 23 – – – 23. –2 – – –2. 21. 580 29 –128 95 576. –322 –92 70 – –344. 232. 522 15 –24 67 580. –244 –97 19 –322. 258. 39 103 – –95 47. – – – – –. 47. 45 61 – –67 39. – – – –. 39. total 642 132 –128 – 646 –324 –92 70 – –346 300 590 76 –24 – 642 –246 –97 19 –324 318 102 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 ENXPCXNotes_v43.indd 102 07-02-27 10.53.16 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p8 financial assets INveStmeNtS.IN.SuBSIDIary.ComPaNIeS,.joINt.veNtureS.aND.aSSoCIateD.ComPaNIeS . opening balance acquisitions and stock issues shareholders’ contribution Write-downs reclassifications sales Closing.balance other.FINaNCIaL.aSSetS . accumulated.acquisition.costs opening balance effect of changed accounting principle, ias 39 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 2005. 2006. Joint ventures 2005. 2006. associated companies 2005 2006. 53,066 538 –1,435 –556 3 –492 51,124 48,860 6,959 63 –106 – –2,710 53,066 4,136 – – – – – 4,136 4,136 – – – – – 4,136 338 – – – –3 –2 333 338 – – – – – 338 other investments in shares and participations 2005. 2006. customer financing, non-current1) 2005. 2006. other financial assets, non-current 2005 2006. 24 3 1 – – – 28 –6 –3 – – – –9 19 18 – 13 –7 – – 24 –6 – – – – –6 18 2,175 – 1,185 –1,502 –35 –58 1,765 –944 –32 718 31 24 –203 1,562 5,906 – 496 –3,763 –697 233 2,175 –3,942 –52 2,596 560 –106 –944 1,231 357 – 114 –70 – – 401 – – – – – – 401 451 – 788 –650 –236 4 357 – – – – – – 357 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. ENXPCXNotes_v43.indd 103 07-02-27 10.53.16 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 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p9 inVestments the following listing shows certain shareholdings owned directly and indirectly by the parent company as of December 31, 2006. a complete listing of shareholdings, prepared in accordance with the swedish annual accounts act and filed with the swedish companies registration office (Bolagsverket), may be obtained upon request to: telefonaktiebolaget lm ericsson, external & management informa- tion, se-164 83 stockholm, sweden. ShareS.owNeD.DIreCtLy.By.the.PareNt.ComPaNy. type company reg. no. Domicile percentage of ownership par value in local currency, million carrying value, seK m. 556056-6258 556251-3266 556090-3212 556329-5657 556404-4286 556030-9899 556381-7666 556381-7609 556326-0552 i i i ii i i ii ii ii i i i ii Subsidiary.companies ericsson aB i ericsson shared services aB i ericsson enterprise aB i ericsson sverige aB i netwise 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 corporatia ao ericsson ag ericsson holding ltd. other (europe, excluding sweden) ericsson holding ii inc. cía ericsson s.a.c.i. ericsson telecommunicações s.a. ericsson telecom s.a. de c.V. 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 . . 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 . 100 100 100 100 99 100 100 100 100 – 100 100 100 100 100 100 100 53 1) 100 100 100 100 100 – 100 12 2) 9 3) 100 – 100 100 100 25 4) 100 70 100 80 49 5) – . 50 361 360 100 2 14 105 162 5 – 4 90 13 26 20 1,301 2 – 222 156 5 – 74 – – 13 n/a n/a – 20 2 65 5 725 2 – 240 90 – –. 20,645 5,716 335 102 305 6 131 324 5 1,152 665 216 196 524 796 120 15 3,151 3,200 237 5 – 758 218 9,531 10 123 1,550 60 100 2 475 37 147 4 1 20 17 225 51,124 104 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 ENXPCXNotes_v43.indd 104 07-02-27 10.53.16 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 ShareS.owNeD.DIreCtLy.By.the.PareNt.ComPaNy.(CoNtINueD) type company reg. no. Domicile percentage of ownership par value in local currency, million carrying value, seK m. joint.ventures.and.associated.companies i i sony ericsson mobile communications aB ericsson nikola tesla d.d. other total. . 556615-6658 sweden croatia . . 50 49 – . 50 65 – –. 4,136 330 3 4,469 ShareS.owNeD.By.SuBSIDIary.ComPaNIeS. type company reg. no. Domicile percentage of ownership 556000-0365 556044-9489 Subsidiary.companies i ii 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 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. sweden sweden france ireland italy the netherlands the netherlands spain turkey United Kingdom canada United states United states United states United states Brazil australia china Japan singapore 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Key to type of company i manufacturing, distribution and development companies ii holding companies iii finance companies 1) through subsidiary holdings, total holdings amount to 100% of ericsson s.r.l. 2) through subsidiary holdings, total holdings amount to 100% of cia ericsson s.a.c.i. 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. ENXPCXNotes_v43.indd 105 07-02-27 10.53.17 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 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p10 inVentories . . . 2006. 2005 finished products and goods for resale contract work in progress Inventories,.net 91 – 91 47 13 60 p11 traDe receiVaBles . . . 2006. 2005 trade receivables excluding associated companies and joint ventures allowances for impairment of receivables trade receivables, net trade receivables from associated companies and joint ventures total p12 receiVaBles anD liaBilities – sUBsiDiary companies . . . 2006. 2005 Non-current.receivables.1) financial receivables Current.receivables trade receivables financial receivables total 52 38 –12 40 –13 25 Non-current.Liabilities.1) financial liabilities 28 68 2 27 Current.Liabilities trade payables financial liabilities total 16,978 54,413 614 1,013 26,485 20,063 21,076 27,099 32,369 41,011 236 135 35,025 68,393 35,261 68,528 1) including non interest-bearing receivables and liabilities, net, amounting to seK –33,457 million (seK –29,051 million in 2005). interest-free transactions involv- ing current receivables and liabilities may also arise at times. p13 other cUrrent receiVaBles . . . 2006. 2005 receivables from associated companies and joint ventures prepaid expenses accrued revenues Derivatives with a positive value other total 65 575 416 3,789 554 5,399 171 741 820 1,516 374 3,622 p14 stocKholDers’ eQUity Capital.stock.2006. capital stock at December 31, 2006, consisted of the following: class a shares 1) class B shares 1) total. number of shares 1,308,779,918 14,823,478,760 16,132,258,678. capital stock 1,309 14,823 16,132 1) class a shares (quota value seK 1.00) and class B shares (quota value seK 1.00). 106 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 ENXPCXNotes_v43.indd 106 07-02-27 10.53.17 ChaNgeS.IN.StoCkhoLDerS’.equIty share revalua- capital premium reserve 1) stock tion statutory restricted equity reserve reserve total Disposi- tion reserve e r i c s s o n a n n U a l r e p o r t 2 0 0 6 fair value other Non- retained restricted equity reserves earnings total 2006 January 1, 2006 effect of changed accounting principle, ias 39, net 2) adjusted.opening.balance. sale of own stock stock purchase and stock option plans contributions from/to (–) subsidiary companies tax on contributions Dividends paid revaluation.of.other.investments.. in.shares fair value measurement reported in equity Cash.Flow.hedges transferred to balance sheet for the period 16,132 – 16,132. – – – – – – – net income 2006 December.31,.2006. – 16,132. 16,132. – – – – 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. – – –. . – – – – – – – – – – – – – –. . 24,731. . – – – –24,731 – – – –. . – – 20. 20. – – – – – – – 20. 20 31,472 47,624 100 – 28,869 28,969. 76,593 – 20. – – 31,472. – – 47,624. – – 100. – –94 –94. – 77 28,946. 58 –17. –17 28,952. 76,576 58 58 – – – – – – – – – – – – – – – – – – – – 67 67 67 –1,955 548 –7,141 –1,955 –1,955 548 –7,141 548 –7,141 – –3 – 99 – – –3 –3 99 99 – 31,472. – 47,624. 6,741. – – – 24,731 – – – 31,472. 47,624. – – – – – – – 47,624. – 100. 100. – – – – – – – 100. – 2. 12,362 32,885. 12,362 12,362 32,987. 80,611 –. – – – – – – – –. 16,039. 117 62 –3,959 – 4,465 –1,254 13,399 28,869. 117. 62. 16,139. 63,763 117 62 –3,959. –3,959 – –. 4,465. 4,465 –1,254. –1,254 13,399. 13,399 28,969. 76,593 1) 2005 and prior years’ share premium are included in statutory reserve. 2) the total net of seK –17 million includes cash flow reserve related to the marconi trademarks acquisition seK –15 million, fair value of bond loans of seK –7 million and revaluation of other investments in shares of seK 5 million. ENXPCXNotes_v43.indd 107 07-02-27 10.53.17 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 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p15 UntaxeD reserVes . 2006. 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. change in depreciation in excess of plan of intangible assets relates mainly to marconi trademarks. changes in other untaxed reserves related to additions to reserve for doubtful receivables, seK 57 million in 2005. Deferred tax liability on untaxed reserves, not accounted for in deferred taxes, amounts to seK 301 million in 2006 (seK 276 million in 2005). p16 pensions the parent company has two types of plans: • Defined contribution plan: post-employment benefit plan where the parent company pays fixed contributions into separate entities and have no legal or constructive obligation to pay further contributions if the entities do not hold sufficient assets to pay all employee benefits relating to employee service. the expenses for defined contribution plans are recognized during the period when the employee provides service. • Defined benefit plans, post-employment benefit plans where the parent company’s undertaking is to provide predetermined benefits that the employee will receive on or after retirement. the fpg/pri plan for the parent company is partly funded. pension obligations are calculated annually, on the balance sheet date, based on actuarial principles. . additions/ Jan. 1 withdrawals (–) Dec. 31 16 –14 2. 984 984. 986. 618 13 631. –543 –543. 88. 634 –1 633 441 441 1,074 ChaNge.IN.PL aN.aSSetS . . . 2006. 2005 opening.balance payments to/from pension fund return on plan assets reclassification Closing.balance 553 – 28 –104 477 – 524 29 –104 449 in 2005, seK 524 million was transferred into the swedish pension trust, of which seK 104 million is accounted for as prepaid expense in 2006 and 2005. only an immaterial part of plan assets is invested in the group’s equity securities or in interest-bearing securities issued by the group. the parent company utilizes no assets held by the pension trust. return on plan assets for 2006 is 7.1 (5.5) percent. 74 (73) percent of plan assets are invested in interest-bearing securities and 26 (27) percent are invested in shares. aCtuaL.returN.oN.PL aN.aSSetS . . . 2006. 2005 closing balance pension obligation less fair value of plan assets excess from plan assets not accounted for Closing.balance.provision.for.pensions 896 –488 11 419 864 –449 – 415 PeNSIoN.oBLIgatIoN.–.DeFINeD.BeNeFIt.PL aNS PeNSIoN.CoSt . . . 2006. 2005 . . . 2006. 2005 opening.balance pension cost interest cost pensions paid closing balance pension obligation 1) of which funded total 864 52 34 –54 896 –477 419 861 24 33 –54 864 –449 415 1) including fpg/pri obligation of seK 479 million (seK 449 million) which are covered by the swedish law on safeguarding of pension commitments. the fpg/pri obligation is calculated based on a discount rate of 3.64 percent and the remaining obligation with the rate of 3.5 percent. life expectancy after the age of 65 is 22 years for women and 18 years for men. Defined.benefit.plans costs excluding interest interest cost return on plan assets total.cost.defined.benefit.plans Defined.contribution.plans pension insurance premium total.cost.defined.contribution.plans yield tax payroll tax credit insurance premium total.pension.cost 52 34 –28 58 95 95 – 35 –1 187 24 33 –29 28 59 59 3 39 – 129 108 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 ENXPCXNotes_v43.indd 108 07-02-27 10.53.18 p17 other proVisions .. . 2006 opening balance additions costs incurred reversal of excess amounts Closing.balance. 2005 opening balance additions costs incurred reversal of excess amounts reclassification Closing.balance. p18 interest-Bearing liaBilities the parent company’s outstanding interest-bearing liabilities, excluding liabilities to subsidiaries, were seK 11.2 billion as of December 31, 2006. INtereSt-BearINg.LIaBILItIeS . . . . 2006. 2005 Borrowings,.current. current maturities of long-term borrowings total.current.borrowings Borrowings,.non-current 11,20.4 2) 11,811 notes and bond loans other borrowings, non-current 67 – total.non-current.interest-bearing.liabilities 11,204 11,878 11,204 21,460 total.interest-bearing.liabilities – 2) 9,582 1) – 9,582 1) including note and bond loans of seK 9,535 million 2005. 2) including effect of changed accounting principle, ias 39, as of January 1, 2006. current maturities of long-term borrowings seK 79 million and notes and Bond loans seK 468 million. e r i c s s o n a n n U a l r e p o r t 2 0 0 6 Warranty commitments restruc- turing customer. financing . other. total.other provisions 1 – – – 1. 1 – – – – 1. 763 44 –433 –146 228. 1,107 178 –305 –126 –91 763. 310 – – –122 188. 478 39 –113 –94 – 310. NoteS.aND.BoND.LoaNS 1,391 683 –436 –443 1,195 2,195 217 –418 –512 –91 1,391 317 639 –3 –175 778. 609 – – –292 – 317. Book value issued mature 1999-2009 2001-2008 2003-2010 2004-2012 total. nominal coupon currency (seK m.) (yy-mm-DD) 483 6.500% 226 1) 7.375% 471 2) 6.750% 450 3.935% . . UsD gBp eUr seK . 3,311 3) 3,044 3) 4,255 3) 594 11,204. 09-05-20 08-06-05 10-11-28 12-12-07 4) 1) the gBp 226 million bond has interest rates linked to the 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 this bond 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. 3) interest rate swaps are designated as fair value hedges. 4) contractual repricing date June 7, 2007. all outstanding notes and bond loans are issued under the 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 4.70 percent at December 31, 2006. these bonds are revalued based on changes in benchmark interest rates according to the fair Value hedge methodology stipulated in ias 39. the effective interest rate is the same as the coupon rate as the notes and bond loans are issued at par. one bond and one note were redeemed during 2006: one UsD- frn with a nominal amount of UsD 15 million and a eUr-bond with a nominal amount of eUr 1,000 million. ENXPCXNotes_v43.indd 109 07-02-27 10.53.18 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 109 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p19 financial risK management anD financial instrUments Financial.risk.management ericsson’s financial risk management is governed on a group level. for further information please see note c20. outStaNDINg.DerIvatIveS.. . . . . . . . currency . nominal currency 2006. asset seK .. liability seK . nominal currency 2005 asset liability seK seK . Currency.derivatives maturity up to one year total currency derivatives with maturity up to one year maturity one to three years UsD eUr other UsD eUr other 5,229 2,060 453 1,043 total currency derivatives with maturity one to three years maturity three to five years total currency derivatives with maturity three to five years total.currency.derivatives. eUr 471 . . Interest.Derivatives. maturity up to one year total maturity up to one year maturity one to three years total maturity one to three years maturity three to five years total maturity three to five years maturity more than five years total.interest.rate.derivatives. (of which is included in Fair value hedge relations) total.outstanding.derivatives. (of which internal counterparts) . eUr noK seK other gBp noK UsD other eUr UsD seK seK . . . 260 24,289 42,820 226 25,275 483 434 50 – 1,428 . . 2,269 371 469 3,109 63 91 58 212 17 17 3,338. . 0 12 119 0 131 115 43 180 5 343 94 6 – 100 9 583.4). 385 3,921. . 16 2,402 286 291 2,979 29 – 9 38 – 3,017. . 2 23 63 4 92 0 –2 3) 8 6 12 0 0 – 0 11 115. 3,132. 2,258 315 1,971 1 14 2, 338 149 441 2,928 98 2 37 137 – 2,663 184 464 3,311 103 0 17 120 – . 3,065. 3,431. . 1,412 2 23,186 226 942 530 360 2,105 . . . 408 – 15 4 427 188 – 0 40 228 249 279 528 1 1,184. 761 4,249.1). 2,194 . 0 2 20 4 26 0 – 0 133 133 – 15 –1 3) 14 3 176 3,607.2) 22 1) closing balance at December 31, 2005, was seK 3,710 million. opening balance has been adjusted with seK 539 million related to ias 39. 2) closing balance at December 31, 2005, was seK 3,592 million. opening balance has been adjusted with seK 15 million related to ias 39. 3) negative amounts relate to effects from one exposure of a derivative that is positive/negative while the total effect of the derivative is the opposite. 4) of which 116 million is reported as non-current assets. 110 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 ENXPCXNotes_v43.indd 110 07-02-27 10.53.18 CaSh,.CaSh.equIvaLeNtS.aND.Short-term.. INveStmeNtS . . 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 2006 2005 < 3 months 1–5 10.6 – – – 10.6 6.3 1.7 12.1 0.4 – 1.1 25.9. – 6.2 2.2 0.5 – 4.5 9.4 3.6 1.7 – 8.9. 19.2. 6.6 6.2 – 0.2 27.7 – 6.2 54.1 – 3.3 2.2 – 4.5 1.1 – –. 54.0. 75.0 the instrument are classified as held for trading and are therefore short term investments. During 2006, cash and bank, and short-term investments decreased by seK 21 billion to seK 54 billion mainly due to repay- ment of loans and investments in companies. rePaymeNt.SCheDuLe.oF.LoNg-term.BorrowINgS nominal amount Sek.billion 2007 2008 2009 2010 2011 2012 and later total. notes and bonds (non-current) – 3.0 3.3 4.3 – 0.5 11.1. total – 3.0 3.3 4.3 – 0.5 11.1 . . 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.) swedish commercial paper program (seK m.) long-term committed credit facility (UsD m.) shot-term committed credit facilities (seK m.) amount Utilized Unutilized 5,000 1,585 3,415 1,500 5,000 1,000 273 – – – – 1,500 5,000 1,000 273 the UsD 1.0 billion committed credit facility has interest rates linked to our credit rating. moody’s credit rating agency raised ericsson’s credit rating during 2006, while standard & poor’s (s&p) last upgraded their ratings in 2005. at year-end, their ratings of ericsson’s creditworthi- ness were Baa2 (Baa3) for moody’s and BBB– for s&p, both considered to be “investment grade”. e r i c s s o n a n n U a l r e p o r t 2 0 0 6 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. assets valued at fair value through profit and loss has a net gain of seK 637 million. for further information about valuation principles, please see note c1, “significant accounting policies”. FINaNCIaL.INStrumeNtS.CarrIeD.at.other.. thaN.FaIr.vaLue . Sek.billion. current maturities of long term borrowings notes and bonds Carrying.amount. 2005. 2006. Fair.value 2005 2006. – 11.2 11.2 9.6 11.8 21.4 – 11.7 11.7 9.7 13.0 22.7 financial instruments excluded from the tables, such as trade receivables 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 carrying value is considered to represent a reasonable estimate of a fair value. p20 other cUrrent liaBilities . . . 2006. 2005 liabilities to associated companies and joint ventures accrued interest accrued expenses, of which employee related supplier invoices not received Deferred revenues Derivatives with a negative value other current liabilities total 7 306 74 737 296 246 202 201 874 411 2,297 44 112 3,570 376 5,159 p21 traDe payaBles .. . . 2006. 2005 trade payables excluding associated companies and joint ventures total 509 509 161 161 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 111 ENXPCXNotes_v43.indd 111 07-02-27 10.53.19 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p22 assets pleDgeD as collateral . Bank deposits total . . 2006. 2005 277 277 421 421 the major item in bank deposits is the internal bank’s clearing and settlement commitments of seK 162 million in 2006 (seK 165 million in 2005). p23 contingent liaBilities . . . 2006. 2005 guarantees for customer financing other contingent liabilities total 23 7,647 7,670 67 7,478 7,545 other contingent liabilities include pension commitments of seK 6,909 million in 2006 (seK 6,918 million in 2005), and subsidiary companies’ borrowing from financial institutions of seK 51 million in 2006 (seK 98 million in 2005). 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 2006 was seK 16,027 million (seK 15,412 million in 2005). potential payments due under these bonds are related to ericsson’s performance under applicable contracts. p24 statement of cash floWs interest paid in 2006 was seK 1,887 million (seK 3,215 million in 2005 and seK 4,302 million in 2004) and interest received was seK 3,123 million (seK 3,151 million in 2005 and seK 4,363 million in 2004). income taxes paid were seK 364 million (seK 65 million in 2005 and seK 259 million in 2004). major non-cash items in investments are: investments in shares and other investments of seK 3,214 million in 2005. aDjuStmeNtS.to.reCoNCILe.Net.INCome.to.CaSh . . 2006. 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 92 92 310 310 402 825 97 97 22 22 111 111 22 22 119 516 133 1,177 –2,889 –6,643 1,009 88 – 47 –5 –1,190 – –1,574 –5,966 1,129 p25 leasing Leasing.with.the.Parent.Company.as.lessee at December 31, 2006, future payment obligations for leases were distributed as follows: . . operating .leases . . 2007 2008 2009 2010 2011 2012 and later 1,039 925 736 602 443 940 4,685 Leasing.with.the.Parent.Company.as.lessor at December 31, 2006, future minimum payment receivables were distributed as follows: . . operating leases . . 2007 2008 2009 2010 2011 2012 and later 32 16 14 – – – 62 the operating lease income is mainly income from sublease of property. 112 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 ENXPCXNotes_v43.indd 112 07-02-27 10.53.19 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p26 tax assessment ValUes in sWeDen . . . 2006. 2005 Compensation.policies.and.remuneration.to.the. Board.of.Directors.and.the.President.and.Ceo see notes to the consolidated financial statements, note c28 – “information regarding employees, members of the Board of Directors and management”. land and land improvements total 11 11 11 11 Long.term.incentive.plans p27 information regarDing employees average.NumBer.oF.emPLoyeeS . . . . . 2005 men. women. total. men Women total .. 2006. 165. Western europe 1) 2) eastern europe, middle east and africa 520. total 685. 1) of which sweden 165. 2) of which eU 165. aBSeNCe.Due.to.ILLNeSS 129. 294 108 159 267 17. 537 146. 831 129. 294 129. 294 705 813 108 108 21 180 159 159 726 993 267 267 percent.of.working.hours. . . 2006. 2005 absence due to illness for men absence due to illness for women employees 30–49 years old employees 50 years or older long-term absence due to illness 1) 0% 2% 1% 1% 0.4% 1% 2% 2% 1% 0.5% 1) Defined as absence during a consecutive period of time of 60 days or more. remuneration. wageS.aND.SaL arIeS.aND.SoCIaL.SeCurIty.exPeNSeS. . . . 2006. 2005 Wages and salaries social security expenses of which pension costs 570 264 187 484 251 129 wageS.aND.SaL arIeS.Per.geograPhICaL.area . . . 2006. 2005 Western europe 1) 2) eastern europe, middle east and africa 2) total 1) of which sweden 2) of which eU 350 302 220 570 350 350 182 484 302 302 remuneration in foreign currency has been translated to seK at average exchange rates for the year. The Stock Purchase Plan compensation costs for all employees of the parent company amount to seK 17.1 million in 2006 (seK 8.9 million in 2005). p28 relateD party transactions During 2006, 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. a substantial portion of ericsson’s handset operations was sold to semc. as part of the formation of the joint venture, contracts were entered into between the parent company and semc. for the parent company the transactions are royalty and license fees for semc’s usage of trademarks and patents and received dividends. . . . 2006. 2005 related.party.transactions. royalty/licenses Dividends related.party.balances receivables payables ericsson.Nikola.tesla.d.d. 1,478 1,160 70 1 654 – 171 66 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. the parent company holds 49.07 percent of the shares. for the parent company the transactions are royalty for ericsson nikola tesla d.d.’s usage of trademarks and received dividends . . . . 2006. 2005 related.party.transactions royalty Dividends other.related.parties 7 98 9 – for information regarding the management remuneration, see note c28 to the consolidated financial statements, “information regarding employees, members of the Board of Directors and management”. 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 113 ENXPCXNotes_v43.indd 113 07-02-27 10.53.19 e r i c s s o n a n n U a l r e p o r t 2 0 0 6 p29 fees to aUDitors . . 2006 audit fees audit related fees tax services fees other fees total. 2005 audit fees audit related fees tax services fees total. 2004 audit fees audit related fees tax services fees total. price- waterhouse- coopers Kpmg others. total 41 8 1 1 51. 21 18 1 40. 24 5 2 31. 2 – – – 2. 2 – – 2. 1 – – 1. – – – – –. – – – –. – – – –. 43 8 1 1 53 23 18 1 42 25 5 2 32 114 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 ENXPCXNotes_v43.indd 114 07-02-27 10.53.20 e r i C s s o N a N N u a L r e p o r t 2 0 0 6 auditors’ report To the Annual General Meeting of the shareholders as well as evaluating the overall presentation of information in the of Telefonaktiebolaget LM Ericsson (publ), Corporate identity number 556016-0680 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 We have audited the annual accounts, the consolidated ac­ Company in order to be able to determine the liability, if any, to counts, the accounting records and the administration of the the Company of any Board Member or the president and Ceo. Board of directors and the president and Ceo of telefonaktiebo­ We also examined whether any Board Member or the president laget LM ericsson (publ) for the year 2006. (the Company’s and Ceo has, in any other way, acted in contravention of the annual accounts are included in the printed version on pages 28– Companies act, the annual accounts act or the articles of asso­ 114). the Board of directors and the president and Ceo are ciation. We believe that our audit provides a reasonable basis for responsible for these accounts and the administration of the our opinion set out below. Company as well as for the application of the annual accounts the annual accounts have been prepared in accordance with act when preparing the annual accounts and the application of the annual accounts act and give a true and fair view of the international financial reporting standards iFrss as adopted by Company’s financial position and results of operations in accor­ the eu and the annual accounts act when preparing the consoli­ dance with generally accepted accounting principles in sweden. dated accounts. our responsibility is to express an opinion on the consolidated accounts have been prepared in accordance the annual accounts, the consolidated accounts and the admin­ with international financial reporting standards, iFrss, as istration based on our audit. adopted by the eu and the annual accounts act and give a true We conducted our audit in accordance with generally ac­ and fair view of the group’s financial position and results of cepted auditing standards in sweden. those standards require operations. the Board of directors’ report is consistent with the that we plan and perform the audit to obtain reasonable assur­ other parts of the annual accounts and the consolidated ac­ ance that the annual accounts and the consolidated accounts counts. are free of material misstatement. an audit includes examining, We recommend to the annual general meeting of share­ on a test basis, evidence supporting the amounts and disclo­ holders that the income statements and balance sheets of the sures in the accounts. an audit also includes assessing the parent Company and the Group be adopted, that the profit of the accounting principles used and their application by the Board of parent Company be dealt with in accordance with the proposal directors and the president and Ceo and significant estimates in the Board of directors’ report and that the members of the made by the Board of directors and the president and Ceo Board of directors and the president and Ceo be discharged when preparing the annual accounts and consolidated accounts from liability for the financial year. stockholm, February 23, 2007 Bo Hjalmarsson peter Clemedtson thomas thiel Authorized Public Accountant Authorized Public Accountant Authorized Public Accountant PricewaterhouseCoopers AB PricewaterhouseCoopers AB ENXAudit_v9.indd 115 07-02-27 10.56.33 a u d i t o r s ’ r e p o r t 115 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 information on the company History and development few companies worldwide that can offer end-to-end solutions for our origins date back to 1876 when Lars magnus ericsson all major mobile communication standards. opened a small workshop in Stockholm to repair telegraph in- We invest heavily in r&D and actively promote standardization struments. that same year in the United States, alexander and open systems. as a result, we have a long history of innova- Graham Bell filed a patent application for the telephone. Lars tion and pioneering of future technologies for more efficient and magnus ericsson soon recognized the great potential of voice- higher quality telecommunications. based telecommunications and realized that the technology also reflecting our ongoing commitment to technology lead- could be improved. he started to develop and sell his own tele- ership, we have one of the industry’s most comprehensive intel- phone equipment and within a few years reached an agreement lectual property portfolios containing approximately 22,000 to supply telephones and switchboards to Sweden’s first telecom patents. operator. Stockholm soon had the highest telephone density in the world. Technical milestones today, ericsson is a leading provider of telecommunications 1878 telegraph to telephone equipment and related services to operators of mobile and fixed 1923 manual switching to automatic switching networks worldwide. over 1,000 networks in more than 175 1956 first mobile phone system countries utilize our network equipment and we are one of the 1968 electro-mechanical to computer control GeneraL factS on the company Legal name: telefonaktiebolaget Lm ericsson (publ) mation on our web site does not form part of this docu- Organization number: 556016-0680 ment. Legal form of the Company: a Swedish limited liability com- Agent in the US: ericsson inc., Vice president Legal affairs, pany organized under the Swedish companies act. the 6300 Legacy Drive, plano, texas 75024. telephone num- terms “ericsson”, “the company”, “the Group”, “us”, “we”, ber +1 972 583 0000. “our” all refer to telefonaktiebolaget Lm ericsson and its Shares: our class a and B shares are traded on Stockholms- subsidiaries. börsen (the Stockholm Stock exchange). our class B Country of incorporation: Sweden. the company was incorpo- shares are also traded on the London Stock exchange rated on august 18, 1918, as a result of a merger between (LSe). aB Lm ericsson & co. and Stockholms allmänna telefon in the United States, our american depository shares aB. (aDS), each representing 10 underlying class B shares, are Domicile: our registered address is telefonaktiebolaget Lm traded on naSDaQ. ericsson, Se–164 83 Stockholm, Sweden. our headquar- Parent Company operations: the business of the parent com- ter is located at torshamnsgatan 23, Kista, Sweden. pany, telefonaktiebolaget Lm ericsson, consists mainly of our telephone number is +46 8 719 0000. corporate management, holding company functions and our web site is www.ericsson.com. please note that infor- internal banking activities. parent company operations 116 i n f o r m at i o n o n t h e c o m pa n y ENXInfoXComp_v25.indd 116 07-02-27 11.02.22 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 1978 analog switching to digital switching Our vision – how we see the world 1981 fixed communications to mobile communications our vision is to be the prime Driver in an all-communicating world 1991 1G analog to 2G digital mobile technology 1998 integration of voice and data in mobile networks Core values – how we act 1999 narrowband circuit to broadband packet switching professionalism, respect and perseverance are the corner- 1999 introduction of fixed telephony softswitch stones of the ericsson culture, guiding us in our daily work, both 2001 2G narrowband to 3G wideband mobile technology in how we relate to people and how we conduct our business. 2003 introduction of mobile softswitch 2004 mass commercial launch of WcDma (3G) networks in Results – how we measure our performance Western europe We measure three fundamental metrics: customer satisfaction, 2005 commercial launch of hSDpa mobile broadband net- employee satisfaction and financial returns for our owners. We works in north america believe that highly satisfied customers, empowered employees 2006 Global commercial launches of hSpa mobile broadband and best-in-class operating margins help to assure a competitive networks advantage and an enduring capability for value creation. also include customer credit management activities per- www.bolagsverket.se. if you access these reports, please be formed by ericsson credit aB. aware that the information included may not be indicative of Subsidiaries and associated companies: for a listing of our our published consolidated results in all aspects. other than significant subsidiaries, please see notes to the parent information related to the parent company, only consolidated company financial Statements – note p9 “investments”. in numbers for the Group totals are included in our reports. addition to our joint venture with Sony corporation, we are We also file annual reports and other information with the Secu- engaged in a number of other minor joint ventures, co- rities and exchange commission (Sec) in the United States operative arrangements and venture capital initiatives. for pursuant to the rules and regulations that apply to foreign more information regarding risks associated with joint ven- private issuers. electronic access to these documents may tures, strategic alliances and third party agreements, please be obtained from the Sec’s website www.sec.gov/edgar/ see “risk factors – Strategic and operational risks”. searchedgar/webusers.htm where they are stored in the Documents on display: We file annual reports and other infor- eDGar database. you may read and copy any of these mation (normally in Swedish only) for certain domestic legal reports at the Sec’s public reference room at 100 f Street, entities with Bolagsverket (Swedish companies registration n.e., Washington, D.c. 20549, or obtain them by mail upon office) pursuant to Swedish rules and regulations. payment of Sec’s prescribed rates. for further information, you may order any of these reports from their web site you can call the Sec at +1 800 732 0330. i n f o r m at i o n o n t h e c o m pa n y 117 ENXInfoXComp_v25.indd 117 07-02-27 11.02.22 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 Business strategy and long-term goals We work closely with our customers to understand their busi- our ultimate goal is for the company to generate growth and a nesses and technology needs and provide tailored solutions to competitive profit that is sustainable over the longer term. erics- help them fulfill their business objectives. son’s strategy is to be the preferred business partner to our We will continue to devote significant resources to develop customers, especially to the world’s leading network operators. end-to-end communications solutions that will stimulate in doing so, we strive to be the market and technology leader by network deployments for geographic coverage as well as traffic offering superior end-to-end solutions mainly related to network capacity and thereby drive demand for our products and ser- infrastructure, network management and other service offerings. vices. We are a major supplier to most of the world’s leading mobile our expertise and experience in all major telecommunication network operators and many of the world’s leading fixed-line standards along with our proven track record for quality and operators. We believe that our ability to offer end-to-end solu- innovation have allowed us to develop our business on a world- tions – systems, applications, services and core handset tech- wide basis. nology – together with our in-depth knowledge of consumer We believe that our widespread geographical presence and requirements, make us well positioned to assist network opera- the economies of scale associated with market share leadership tors with their network development and operations. We are give us competitive advantages. Global presence is an important already a market leader in network systems integration and factor, particularly when working as a business partner to opera- managed services. through increased activities in professional tors working in multiple markets or globally. We are utilizing our services, service layer products and multimedia, we aim for strong international reach and core competence in mobile and increased sales in these growing segments. fixed communications to expand into growth areas such as sys- our strategy is to: • excel in network infrastructure; • expand in service; • establish a position in multimedia solutions in order to make people’s lives easier and richer, provide tems integration, service applications and managed services, as well as to develop alliances with suppliers and manufacturers in many countries in order to increase our combined effectiveness. We will continue to improve our internal processes and sup- port systems to drive operational excellence as a competitive affordable communication for all and enable new ways for com- advantage. in addition, we will continue to develop and maintain panies to do business. this is performed with operational excel- high levels of competence in our employees to secure our lead- lence in everything we do as a base. ing market position and to stay at the forefront of technological development. 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 technologies that form the base for industry standards. for example, we helped pioneer the development of industry- wide mobile technologies such as GSm, GprS, eDGe, cDma, WcDma, hSpa, and Bluetooth. 118 i n f o r m at i o n o n t h e c o m pa n y ENXInfoXComp_v25.indd 118 07-02-27 11.02.22 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 eriCSSOn’S OrgAnizAtiOn CEO Group Functions Segment Systems Research Business Unit Access Business Unit Global Services Business Unit Systems Business Unit Broadband Networks Market Units Global Customer Accounts Multi-Country Accounts C U S T O M E R S Segment Other Operations Cables Defense Divested Sept 1, 2006 Enterprise Mobile Platforms Power Modules Segment Phones Sony Ericsson Mobile Communications JV Organization Governance Group Functions a number of Group functions perform tasks pertaining to certain a significant amount of authority and responsibility is assigned to group-wide matters that are not naturally referable to a specific the management of our various operating units for tasks pertain- operational unit: communications, finance, human resources ing to daily operations. Governance of our operating units is and organization, Legal affairs, operational excellence, carried out through steering boards whose members are repre- research & Development, Sales & marketing and Strategy & sentatives of the Group management team, the extended product management. management team and the management of the particular oper- their responsibilities include the formulation of the Group’s ating unit. strategy, issuing of policies and directives, business control and for more information regarding our corporate governance, resource allocation. in addition, Group functions are responsible please see the corporate Governance report or visit our web for the consolidation and reporting of financial performance, site www.ericsson.com/ericsson/corpinfo/corp_governance/ financing and cash management, legal issues, communication index.shtml. with various stakeholders including employees, investors, press information on our web site does not form part of this docu- and media as well as coordination and administration of a num- ment. ber of group-wide issues. other important group-wide matters, such as corporate responsibility, are managed by Group func- tions in conjunction with a network of experts from various parts of the company. i n f o r m at i o n o n t h e c o m pa n y 119 ENXInfoXComp_v25.indd 119 07-02-27 11.02.23 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 Business segments Secondary segments We supply the network equipment and services that enable We group sales into five geographical segments as shown below: telecommunications. We offer end-to-end solutions for all major mobile communication standards. We also provide our custom- 2006 SALeS By regiOn AnD Segment ers with services for network system integration, managed ser- vices and other professional services. through our Sony erics- son mobile communications joint venture we offer a range of mobile handsets and other mobile devices, including those sup- porting multimedia applications and other personal communica- tion services. in addition, the company has products for special applications within mobile platforms, enterprise systems, cables and power modules. Primary Segments SeK billion Western europe cema 1) asia pacific north america Latin america total percent share other Systems operations 45.4 48.7 42.0 15.3 16.2 167.6 94% 6.5 1.6 1.2 0.6 0.2 10.2 6% total 51.9 50.3 43.2 15.9 16.5 177.8 100% 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. ericsson is a telecommunications company developing and please also see “notes to the consolidated financial Statements selling a variety of products aimed largely at customers in the – note c3, Segment information.” telecommunications industry. When determining our operating segments, we have looked at which market and to what type of Seasonality customers our products and services are aimed, and through our quarterly sales, income and cash flows from operations are what distribution channels they are sold as well as to commonal- seasonal in nature and generally lower in the first and third quar- ity regarding technology, research and development. to best ters of the year and highest in the fourth quarter. this is mainly a reflect our business focus and to facilitate comparability with our result of the seasonal purchase patterns of network operators. peers, we consolidate the results of our operations into three although demonstrating a strong seasonal pattern historically, business segments: • Systems, consisting of a three-pronged business approach: mobile networks, fixed networks and professional Services; • phones, carried out through the 50/50 joint venture with Sony our seasonal sales variances 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 1992 corporation; through 2006. • other operations, which comprise a number of smaller busi- nesses, including mobile platforms, enterprise Systems, cables, power modules and the Defense business (Divested to Saab aB September 1, 2006). 15-yeAr AverAge SeASOnALity first Second fourth quarter quarter quarter quarter third Sequential change Share of annual sales –27% 21% 17% 24% –4% 24% 36% 31% 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 2004, 2005 and 2006. mOSt reCent 3-yeAr AverAge SeASOnALity first Second fourth quarter quarter quarter quarter third Sequential change Share of annual sales –19% 21% 17% 25% –5% 24% 27% 30% 120 i n f o r m at i o n o n t h e c o m pa n y ENXInfoXComp_v25.indd 120 07-02-27 11.02.23 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 Segment Systems mobile networks networks, a radio network controller effects call handover in conjunction with mobility server nodes within the service layer. We provide mobile systems solutions to network operators that the core network nodes interconnect radio access networks enable reliable, efficient and cost effective mobile networks. our with other parts of the network. many of our core network systems offerings include radio base stations, base station and switching systems, controllers for base stations and radio net- radio network controllers, mobile switching centers and applica- works are built upon common platforms. Like our radio base tion nodes. We are the market leader with approximately 35 station products, our mobile switching products have industry- percent global share of the addressable GSm/WcDma track leading scalability and capacity. within the global mobile systems market, i.e. open non-propri- mobile network equipment and associated network rollout etary standards. our claim of market leadership in mobile sys- services account for 74 percent of our Systems sales. tems is based on our reported sales and how they relate to the publicly reported and estimated mobile system sales of our main fixed networks competitors. Statements from industry and financial analysts also We are a supplier of broadband communications equipment and support our estimates. services mainly to fixed network operators in Latin america and each generation of mobile technology is associated with a europe. We have a long history in fixed-line networking with an group of international standards for mobile communications installed base of access and transit lines equivalent to 180 million networks. transitioning from one technology generation to the lines or approximately 10 percent global market share of the next, such as from 2G to 3G, requires network operators, equip- installed base. By successfully addressing three key operator ment suppliers and mobile handset manufacturers to adopt new needs: modernization and expansion of the fixed telephony net- and emerging technology standards. We believe that the migra- works; introduction of ip-based revenue generating services; and tion from voice services and basic mobile multimedia services to cost-efficient rollout of high capacity broadband networks with mobile broadband is the primary technological shift facing service differentiation, we have been able to secure strong mar- mobile network operators today. our end-to-end solutions offer ket positions in voice over packet, soft switching and public operators a smooth network migration to 3G. ethernet access. our expertise in all 2G standards and our role in developing fixed network operators are moving from single-service net- 3G standards allow us to offer mobile telecommunications sys- works toward broadband packet-switched multi-service net- tems that incorporate any of the major 2G (GSm, tDma, cDma), works that have the ability to simultaneously handle multiple 2.5G (GprS) and 3G (eDGe, WcDma, hSpa, cDma2000, tD- services, such as voice, data and images. migration to an all-ip- ScDma) mobile technology standards. as a result, we are able based packet-switched network is a necessary step in order to to offer tailored solutions to a network operator, regardless of the combine broadband internet, voice and image traffic into one existing network standard used. broadband network. We offer a complete portfolio of radio base stations ranging our solution for such multi-service networks utilizes a layered from small pico cells (i.e. small cells in a mobile network that softswitch service and control architecture, combined with boost capacity and coverage within buildings) to high-capacity broadband access and core network routing and transmission macro cell applications. radio base stations provide access and elements. organizing a network into layers isolates the different interconnection between mobile handsets and the mobile net- functions, i.e., access, core network and services, and facilitates work. a central feature of our 2G GSm radio base stations and easier migration to an all-ip environment. Due to our leadership base station controllers is their ability to be upgraded on a cost- in next-generation mobile networks, we are able to leverage our effective basis to enable 2.5G/GprS and 3G/eDGe transmis- ip-based multimedia subsystem (imS) developed for 3G mobile sions. Similarly, our WcDma base stations can be upgraded to networks also for next-generation fixed network applications. hSpa. imS is an open service layer platform that hosts ip based ser- other important elements of radio access networks are the vices such as Voice over ip (Voip), “push-to-talk” etc. Since our controllers for radio base stations and radio access network, imS solution is common for both fixed and mobile networks, which manage the traffic between the radio base stations and converged services can be transparently provided independent core network. in 2G, base station controllers in conjunction with of the type of access. mobile switching centers, effect call handovers between radio fixed network equipment and associated network rollout base stations as subscribers move between cell sites while services account for 7 percent of our Systems sales. engaged in a voice call or data transmission. Similarly, in 3G i n f o r m at i o n o n t h e c o m pa n y 121 ENXInfoXComp_v25.indd 121 07-02-27 11.02.23 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 professional Services With respect to fixed communications equipment, the competi- our professional services portfolio includes expertise in consult- tion is also highly concentrated and includes, among others, ing, education, systems integration, managed services and alcatel/Lucent, cisco, huawei, nokia/Siemens and nortel. We customer support services. also compete with numerous local and regional manufacturers network operators are reducing operating expenses by opti- and providers of communication equipment and services. We mizing the operation and maintenance of their networks. as a believe the most important competitive factors in this industry result, many network operators are increasingly outsourcing for include existing customer relationships, the ability to cost-effec- example network design, operations and maintenance activities. tively upgrade or migrate an installed base, technological innova- When outsourcing, operators gain flexibility in capital employed, tion, product design, compatibility of products with industry resources and time to market – all with an assured quality of standards, and the capability for end-to-end systems integration. service. competition in professional services not only includes many We offer some of the most comprehensive managed services of our traditional systems competitors but also a number of large capabilities within the telecom industry. our offerings cover companies from other industry sectors, such as iS/it, for exam- management of all aspects of day-to-day operations of a cus- ple iBm, eDS, accenture and electronics manufacturing services tomer’s network as well as hosting of applications and content companies as well as a large number of smaller but specialized management. ericsson’s internet payment eXchange (ipX) ser- companies operating on a local or regional basis. as this seg- vice, which is the global payment and messaging delivery solu- ment grows, we expect to see additional competitors emerge, tion for SmS, mmS, Web and Wap that facilitates payment and possibly including some network operators attempting to expand distribution of content by interconnecting content providers, into new segments. media companies, governments and consumer brands with for more information, see “risk factors – risks associated operators. with the industry and market conditions”. the combination of our local expertise, global technology leadership, business understanding, strong delivery capabilities Organization within Systems and extensive experience in managing multi-vendor networks our organization in Systems is built around a structure of busi- makes ericsson a leading provider of services to network opera- ness units responsible for the development and delivery of tors. products and services to market units that are responsible for professional services account for 19 percent of our Systems local sales and customer support. sales. Customers Business units Access We are supplying equipment, integrated solutions and services our access business unit’s main role is to continuously strength- to almost all major network operators globally. We derive most of en our world leadership in 2G & 3G radio access networks by our sales from large, multi-year network build-out agreements offering innovative and cost-effective products and solutions that with a limited number of significant customers. out of a customer provide best-in-class performance. Business unit access’ base of more than 425 network operators, the ten largest cus- responsibility covers a wide spectrum of activities, from product tomers account for 44 percent of our net sales, while the 20 development to production and supply. Business unit access largest customers account for 63 percent of our net sales. our has manufacturing in Brazil, china, india and Sweden. largest customer accounted for less than 7 percent of sales during 2006. Systems for more information, see “risk factors – risks associated Business unit Systems is a leading supplier of end-to-end tele- with the industry and market conditions”. com grade network systems and multimedia services. the sys- Competitors tem offerings include tailored mobile core and fixed network solutions and service layer products. as a key player in the evolu- in Systems, we compete mainly with large and well-established tion to all-ip networks, we are a leader in the convergence of communication equipment suppliers. although competition fixed and mobile networks and services. Business unit Systems varies depending on the products, services and geographical has manufacturing in Brazil, china, india and Sweden. regions, our most significant competitors in mobile communica- tion include alcatel/Lucent, nortel, huawei, and nokia/Siemens. Broadband Networks 122 i n f o r m at i o n o n t h e c o m pa n y ENXInfoXComp_v25.indd 122 07-02-27 11.02.23 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 the Broadband networks business unit offers one of the world’s our customers have different needs in interacting with erics- most widely deployed microwave radio systems (mini-LinK) son as a supplier, ranging from support in identifying and captur- together with metro optical networks in customized and man- ing business opportunities to “do-it-yourself” fulfillment. We use aged transport solutions. the products are essential elements of three different sales approaches that acknowledge these differ- ericsson’s end-to-end solutions but are also often chosen by ent needs; project Sales (interactive relationship selling with high operators utilizing other vendors’ network equipment. the broad- involvement of the customer to identify and capture business band networks business unit has one of the largest microwave opportunities, where the solution is not known at the point of production plants in the world in Sweden, as well as manufactur- sales), System Sales (interactive relationship selling of solutions ing in italy and norway. Global Services configured for specific customer needs) and product Sales (the outcome of relationship sales and frame agreements where customers may call–off well-defined products and services elec- We enable operators to strengthen their competitiveness by tronically). System Sales has historically been our most common offering a complete range of consulting, education, systems sales approach to best meet our customers’ needs, however, as integration, managed services and customer support services as their needs evolve, the two other sales approaches will grow in well as network rollout services that address a major part of their importance. network operations. the business unit is represented in 140 countries with 24,000 employees mainly based within the local Research & development market units. Market units a robust r&D program is key to our competitiveness and future success. We spent over 15 percent of sales on r&D and other technical expenses during 2006. the vast majority of our r&D is We use our own sales organization to market and sell our sys- invested in product development of which the majority in mobile tems and services to customers in over 175 countries via a communications network infrastructure. We have continued to worldwide sales and support network consisting of 24 market invest in strategically important areas of broadband access, units. each market unit represents either a single country or a converged networks, service layer and multimedia. group of countries, depending on the extent of our business our r&D organization develops world-class products and activities in that region. We have significant sales in all of the performs world-leading research. about 17,100 (16,500) em- largest geographic markets for telecommunications, with no ployees in 17 (17) countries worldwide are working in r&D in an individual country accounting for more than 8 percent of sales. organization consisting of development units, ericsson research, We strongly believe that affordable and generally available standardization and ipr & licensing. the development units drive telecommunication services are a prerequisite for social and r&D operational excellence to increase efficiency and decrease economic development which improves the welfare of all people leadtime. in any given country. as one of the world’s largest providers of ericsson research conducts applied research in various communications equipment and services, ericsson has imple- strategic areas to provide ericsson with system concepts, tech- mented a strict trade compliance program throughout the group nology, and methodology to help secure our long-term, strategic in order to comply with foreign and domestic laws and regula- position. World-class innovations are achieved through coopera- tions, trade embargos and sanctions in force. in no way should tion within ericsson and with a variety of partners including cus- our business activities be construed as supporting a particular tomers, universities and research institutes. Standardization political agenda or regime. bodies establish the standards that lead the industry, and the majority of our market units operate through local subsid- ericsson is a leading player in all major standardization organiza- iaries that are present in each country. We use our local pres- tions. ence to help our customers achieve greater efficiencies and gain for more information regarding product and technology de- access to recognized world-class support resources wherever velopment, please see “risk factors – Strategic and operational they operate. the market units utilize the product expertise of the risks” and “Board of Directors’ report – research and Develop- central business units within the Systems segment in tailoring ment”. and integrating our products for delivery to customers. the mar- ket units are also responsible for after-sales support and rely in particular on the Global Services business unit in fulfilling this function. i n f o r m at i o n o n t h e c o m pa n y 123 ENXInfoXComp_v25.indd 123 07-02-27 11.02.24 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 Intellectual property rights and licensing duced in their factory in china. the remaining two-thirds of pro- through many years of involvement in the development of new duction is more or less equally split between contract manufac- technologies, we have built up a considerable portfolio of intel- turers (emS) and other device manufacturers (oDm) at locations lectual property rights (ipr) relating to telecommunications tech- in several countries in asia, Latin america and europe. Sony nologies. as of December 31, 2006, we held approximately ericsson’s global management is based in London and r&D 22,000 (20,000) patents worldwide, including a substantial num- centers are located in china, Japan, Sweden, the UK and the US. ber of patents essential to the 2G/2.5G standards of GSm, GprS Within the segment phones, the primary competitors include and cDma, as well as numerous patents essential to 3G stan- nokia, motorola, Samsung and a number of other companies dards, such as eDGe, WcDma, hSpa, mBmS, tD-ScDma, such as LG electronics, nec and Sharp. We believe that our cDma2000 and next Generation ofDm/Lte. We also hold im- mobile phone joint venture with Japan’s Sony corporation portant patents for many other areas, e.g. WimaX, Voice over ip creates a distinctive competitive advantage. (Voip), atm, Wap, WLan, mobile platforms and Bluetooth. With Sales for Sony ericsson are not included in our reported sales, the acquisition of marconi, our optical backbone network and as their operating results are reported according to the equity transport technology portfolios were strengthened. method under “Share in earnings of joint ventures and associ- our intellectual property rights are valuable business assets. ated companies” in the income statement. We license these rights to many other companies including equipment suppliers, handset manufacturers and mobile applica- Segment Other Operations tions developers, in return for royalty payments and/or access to additional intellectual property rights. in addition, we acquire Units within the segment other operations rights via licenses to utilize intellectual property rights of third this segment principally consists of a number of operations parties. We believe that we have access to all related patents that deemed too small to be reported as separate segments. other are material to our business in part or in whole. operations include mobile platforms, enterprise, network for more information, see “risk factors – Strategic and op- technologies (cables), power modules and microwave Systems erational risks”. Segment Phones (Defense) (divested to Saab aB as per September 1, 2006). Businesses in our other operations segment market their products and services through their own specialized direct and Sony ericsson mobile communications aB (Sony ericsson) deli- indirect sales channels. on occasion, these specialized sales vers innovative and feature-rich mobile phones, accessories and and marketing teams work with our market units in Systems in pc-cards, which allow us to provide end-to-end solutions to our certain markets or when dealing with large customers with whom customers. the 50/50 joint venture, formed in october 2001, we have a relationship. combines the mobile communications expertise of ericsson with in our other operations segment, our competitors vary widely the consumer electronic devices and content expertise of Sony depending on the product or service being offered. We face corporation and forms an essential part of our end-to-end capa- significant competition with regard to substantially all of these bility for mobile multimedia services. products and services. Sony ericsson is responsible for product design and develop- Sales of these units are consolidated within other operations ment, as well as marketing, sales, distribution and customer and in total amount to 6 percent of total net sales, with no single services. about one-third of Sony ericsson’s handsets are pro- unit representing more than 2 percent. 124 i n f o r m at i o n o n t h e c o m pa n y ENXInfoXComp_v25.indd 124 07-02-27 11.02.24 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 ericsson microwave Systems ericsson mobile platforms the defense business of microwave Systems was divested to ericsson mobile platforms is a leading platform technology sup- Saab aB on September 1, 2006. the remaining activities, plier for GSm/eDGe and WcDma/hSpa platforms used in de- national security and public safety solutions, were transferred to vices such as mobile handsets and pc cards. through ericsson segment Systems. Up until September 1, 2006, microwave mobile platforms, ericsson was one of the first companies in the Systems provided national security and public safety solutions to world to license open-standard end-to-end interoperability test- defense, government and security agencies in Sweden and to ed GSm/eDGe and WcDma technology platforms. the product more than 20 countries around the world. the unit supplied offerings are based on our comprehensive intellectual property advanced airborne, terrestrial and marine radar systems, which portfolio and include: reference designs, platform software, aSic were integrated into command, control and communication (application specific integrated circuit) designs and development functionality. ericsson enterprise boards, development and test tools, training, support and docu- mentation. By licensing our technology and platforms, mobile phone manufacturers can launch new products faster, with lim- enterprise provides communications systems and services that ited r&D investments and lower technology risks, allowing them enable businesses, public entities and educational institutions to to focus on product differentiation in areas such as applications, have seamless access to applications and services across mul- industrial design, manufacturing, distribution and branding – tiple locations. We address a wide variety of enterprise needs getting advanced and attractive products with short time to through segmented offerings for both small and large enterprises. market. ericsson mobile platforms has operations at nine global We focus on providing solutions for Voice over ip (Voip)-based locations with main operations in Sweden. private branch exchanges (pBX), Wireless Local area networks (WLan), and mobile intranet solutions. With mobile enterprise, ericsson power modules users on the move are able to access a range of business-critical ericsson power modules is a leading supplier of miniaturized and communications and information applications from a variety of high density direct current Dc/Dc converters and Dc/Dc regula- devices over private or public, fixed or mobile networks. ericsson tors, mainly to the communications industry, for advanced enterprise operates mainly from Sweden, but has a global pres- applications such as multiplexors, switches, routers and radio ence through the market units and other partners/distributors. base stations. in addition, the levels of technology, ruggedness manufacturing is outsourced. and reliability of these products mean that they often provide ericsson cables excellent solutions for other demanding applications in medical, avionics, computing, military, space, and industrial market sec- our cables unit provides a full range of cable related solutions for tors. manufacturing is centralized to china. telecom and power networks. ericsson is a leading player in the passive fiber access network field and our expertise includes integration of copper, fiber optic and mobile technologies. about a third of the sales from our cables group is attributable to inter- segment sales. manufacturing is carried out in china, india, malaysia and Sweden. ENXInfoXComp_v25.indd 125 07-02-27 11.02.24 i n f o r m at i o n o n t h e c o m pa n y 125 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 Changes in organization and management organizational changes made during 2006: • as per January 2006, pakistan was moved from the market area asia pacific to the market area central & eastern europe, middle east and africa (cema). • as per January 2006, three development units, ip networks, core network evolution and Service Layer Development, were transferred to business unit Systems and business unit access to bring development closer to the business, improving time to the unit is headed by Joakim Westh head of Group function operational excellence. product management is moved to business unit networks. • as per January 24, 2007 ericsson completed the cash tender offer for US-based redback networks. changes in the Group management team made 2006: • as per January 2006, Sivert Bergman, head of business unit Broadband networks, was appointed integration manager for market and ensuring that ericsson’s products and solutions the marconi acquisition and included in the Group manage- meet user needs. ment team. • as per January 2006, certain assets and staff of marconi were acquired and integrated within business unit transmission and transport networks, business unit Global Services and busi- ness unit Systems. • as per January 2006, business unit transmission and trans- port networks was renamed to business unit Broadband networks. organizational changes made during 2006 with effect 2007: • a new organization is effective as from January 1, 2007 con- sisting of networks, Global Services and multimedia. changes in the Group management team made 2006 with effect 2007: • as per January 2007, Kurt Jofs, executive Vice president and head of business unit access is appointed head of the new business unit networks. • as per January 2007, Jan Wäreby, is appointed Senior Vice president and head of business unit multimedia and included in the Group management team. • as per January 2007, Joakim Westh, head of Group function operational excellence, also assumes responsibility for • Business unit networks includes mobile and fixed access, Strategy management. core and transmission networks, as well as next-generation • as per January 2007, Sivert Bergman, head of business unit ip-networks. the former business units Systems, access Broadband networks, leaves the Group management team as and Broadband networks are integrated into the new unit, marconi now is fully integrated. as well as ericsson power modules and ericsson cables. the unit is headed by Kurt Jofs, executive Vice president • as per January 2007, torbjörn nilsson, head of Group function Strategy and product management leaves the Group manage- and previously head of business unit access. the new unit ment team. has approximately 21,500 employees. • Business unit Global Services is intact with approximately for more information about management, please see “notes to 24,000 employees. the consolidated financial Statements – note c29, information • Business unit multimedia provides solutions for charging regarding employees, members of the Board of Directors and solutions, mobile tV, radio, video, music, gaming, and print management”. over fixed and mobile networks and other new multimedia applications. the business unit includes multimedia systems, Human resources previously reported under segment Systems and business We believe that every employee should be treated with respect units ericsson mobile platforms and enterprise, previously and dignity. We value the rich diversity and creative potential of reported under segment other operations as well as people with differing backgrounds and abilities. a culture of ericsson consumer and enterprise Lab. the unit is headed equal opportunities in which personal success depends on by Jan Wäreby, Senior Vice president and head of business personal merit and performance is encouraged throughout our unit multimedia. the new unit has approximately 4,000 operations. employees. • as from January 1, 2007 Group function Strategy and product management is split and moved to Group function opera- We have three core values: professionalism, respect and perseverance. these values form the foundation of how we operate our business. our core values define how we treat each tional excellence and business unit networks. Strategy is other, our customers and our business partners and therefore moved to Group function operational excellence and re- they define our culture. characteristics of our culture are exhib- named Group function Strategy and operational excellence. ited by a passion to win; employee diversity, honesty, trust and 126 i n f o r m at i o n o n t h e c o m pa n y ENXInfoXComp_v25.indd 126 07-02-27 11.02.25 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 PrimAry mAnUfACtUring AnD ASSemBLy fACiLitieS Sweden china italy Brazil Germany india other total 2006 Sites Sq meters 2005 Sites Sq meters 2004 Sites Sq meters 2003 Sites Sq meters 8 3 2 1 1 1 2 18 231,500 20,860 20,100 18,400 13,900 5,364 8,100 317,560 9 3 0 1 0 1 0 14 256,615 15,200 0 15,840 0 5,364 0 293,019 10 3 0 1 0 0 0 14 277,415 15,200 0 15,840 0 0 0 308,455 10 3 0 1 0 0 0 14 310,000 9,500 0 22,100 0 0 0 341,600 During 2006, manufacturing and assembly facilities related to marconi added an aggregate of 39,000 square meters in italy, Germany and USa. During 2006, our Defense unit was divested and related leased facility was transferred. support for each other; integrity and high ethical standards; and our production facilities is used for module production with the leadership by example at all levels. We believe the best way to balance mostly used for node assembly and testing. including further develop our business is to remain accountable to our- the emS production, approximately 35–40 (35–40) percent of selves and to our customers. Systems’ module production and 75–80 (75–80) percent of every year we conduct an employee satisfaction survey to Systems’ node production is performed in Sweden. assess our human capital index and employee empowerment We intend to continue to outsource module production where index. adequate manufacturing capacity and expertise are available on We maintain an open management style that involves our favorable terms. Such outsourcing of the major part of module employees in both daily decisions that affect them as well as manufacturing provides us greater flexibility to adapt to econom- longer-term matters. We are fully committed to keeping all em- ic and market changes. however, the timing and level of out- ployees informed about the implications of major business sourcing is a balance between short-term demand and longer- changes and other relevant matters. Key business priorities are term flexibility. therefore, we generally plan to use our own communicated throughout the organization and form part of the production capabilities to absorb temporary changes in volumes. basis for employee compensation and incentive plans. Details of We manage our own production capacity on a global basis by these plans appear in notes to the consolidated financial State- allocating production to sites where capacity is available and ments – note c29, “information regarding employees, members costs are competitive. at year-end 2006, excluding marconi of the Board of Directors and management”. We also have con- operations, our overall utilization was close to 100 percent as we structive relationships with a variety of trade unions, including continuously adjust our production capacity to meet expected formal recognition and active dialogue where appropriate. demand. Supply Manufacturing and assembly the table “primary manufacturing and assembly facilities” above summarizes our major manufacturing and assembly facili- ties as well as the total square meters of floor space at year-end. Systems’ manufacturing consists of two basic production activi- Suppliers ties, module and node. however, we outsource about half of our most of our node production, i.e., assembly, integration and systems module production to several electronics manufacturing testing of modular subsystems into complete system nodes such service (emS) companies. most of our node production is done as radio base stations, mobile switching centers etc., is done in- in-house. We have 18 significant manufacturing and assembly house. about half of our module production, i.e., production of locations worldwide with a total of approximately 320,000 square subsystems such as circuit boards, radio frequency (rf) mod- meters of floor space. We lease all of these facilities except one ules, antennas etc., is outsourced to a group of electronics man- in china and one in Brazil as well as some former marconi facili- ufacturing services companies including celestica, elcoteq, ties in Germany, italy and the US. flextronics, Jabil and Solectron, of which the vast majority is in the Systems segment consumes more than two-thirds of the low-cost countries. We also purchase customized and standard- total floor space, with cables and power modules consuming ized equipment, components and services from several global most of the rest. in Sweden, the majority of the floor space within providers as well as from numerous local and regional suppliers. i n f o r m at i o n o n t h e c o m pa n y 127 ENXInfoXComp_v25.indd 127 07-02-27 11.02.25 e r i c S S o n a n n U a L r e p o r t 2 0 0 6 a number of our suppliers design and manufacture highly spe- cialized and customized components for our end-to-end solu- tions as well as individual nodes. We generally attempt to negoti- ate global supply agreements with our primary suppliers. While we are not dependent on any one supplier for the provision of standardized equipment or components and seek to avoid single source supply situations, a need to switch to an alternative sup- plier may require us to allocate additional resources 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 adverse effect on our operations in the short term. for more information, see “risk factors – Strategic and opera- tional risks”. Sources and availability of materials We purchase raw materials, electronic components, ready-made products and services from a significant number of domestic and foreign suppliers. Variations in market prices for copper, alumi- num, steel, precious metals, plastics and other raw materials have a limited effect on our total cost of goods sold. our pur- chases 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 manufacturers. Based on our most recent sourcing agreements, the increase in oil and metal prices during 2006 had only a limited negative effect on our costs and did not affect the availability of the elec- tronic 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 mar- ket demand, we do not foresee any supply constraints to meet our expected production requirements during 2007. 128 i n f o r m at i o n o n t h e c o m pa n y ENXInfoXComp_v25.indd 128 07-02-27 11.02.25 e r i C s s o n a n n U a l r e P o r t 2 0 0 6 forward-looking statements this annual report includes “forward-looking statements” about • effectiveness of our strategies and their execution including future market conditions, operations and results. expressions partnerships, acquisitions and divestitures; such as “believe”, “expect”, “anticipate”, “intend”, “may”, “could”, “plan” and similar words are intended to help identify forward- • financial risks, including foreign exchange rate changes, inter- est rate changes, changes in tax liabilities, credit risks in rela- looking statements. forward-looking statements may be found tion to counterparties, customer defaults under significant throughout this document, but in particular in the sections cap- customer financing arrangements and risks of confiscation of tioned “operational review”, “Board of directors’ report” and assets in foreign countries; “information on the Company” and include statements regarding: • our goals, strategies and performance expectations; • the markets we currently or soon intend to address; • our liquidity, capital resources, capital expenditures and our credit ratings; • the expected demand for our existing as well as new products • 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, competi- tion from existing or new competitors or new technology and the risk that our products and services may not sell at the rates and services; or levels we anticipate; • our joint venture and strategic cooperation activities; • technology and industry trends including competition and our • our ability to develop commercially viable products, systems and services, to acquire licenses of necessary technology, to customer structure; and • our plans for new products and services including research protect our intellectual property rights through patents and trademarks and to defend them against infringement, and and development expenditures. results of patent litigation; although we believe that the expectations reflected in such state- • supply constraints, including component or production capac- ity shortages, suppliers’ abilities to cost effectively deliver ments are reasonable, we cannot assure you that these expecta- quality products on time and in sufficient volumes, and risks tions will materialize. Because forward-looking statements are related to concentration of proprietary or outsourced produc- based on assumptions and estimates, and are subject to risks tion in a single facility or sole source situations with a single and uncertainties, actual results could differ materially from vendor; and those described or implied herein. important factors that could • our ability to recruit and retain qualified management and other affect whether and to what extent any of our forward-looking key employees. 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 manner; • developments in political, economic and regulatory fields in the markets in which we operate, including allegations of health 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 required by applicable law or stock ex- risks from electromagnetic fields and cost of radio licenses for change regulation. our customers; ENXForwXlook_v9.indd 129 07-02-27 14.16.06 f o r w a r d - l o o k i n g s tat e m e n t s 129 e r i C S S o n a n n U a L r e P o r t 2 0 0 6 Share information Stock exchange trading exchange and decreased by approximately 27 percent on naS- ericsson’s Class a and Class B shares are traded on the Stock- DaQ as compared to 2005. holm Stock exchange (Stockholmsbörsen) and the Class B shares are also traded on the London Stock exchange. Share price trend in the United States, the Class B shares are traded on naS- in 2006, ericsson’s total market value increased by about 1 per- DaQ in the form of american Depositary Shares (aDS) evidenced cent to approximately SeK 446 billion (SeK 441 billion in 2005). by american Depositary receipts (aDr) under the symbol eriC. the omX SP index on the Stockholm Stock exchange increased each aDS represents 10 Class B shares. on august 24, 2006, by 24 percent, the naSDaQ telecom index increased by approxi- the ericsson stock ticker on naSDaQ was changed from eriCY mately 21 percent and the naSDaQ composite index increased to eriC. by approximately 7 percent in 2006. approximately 40 (43) billion shares were traded in 2006, of which about 88 (73) percent on the Stockholm Stock exchange, about 12 (16) percent on naSDaQ, and less than 1 (1) percent on the London Stock exchange. trading volume in ericsson shares increased by approximately 14 percent on the Stockholm Stock Share data earnings per share, diluted (SeK) 1) P/e ratio, Class B shares 1) Dividend (SeK) 2) 1) for 2004 restated in accordance with ifrS. 2) for 2006 as proposed by the Board of Directors. 2006 1.65 17 0.50 2005 1.53 18 0.45 2004 1.11 19 0.25 2003 –0.69 – 0 2002 –1.51 – 0 Share trend, the Stockholm Stock exchange, 2004 –2006 (Sek) Share turnover 2006 (million ShareS) 30 25 20 15 10 2004 2005 2006 Source: findata Direkt B share, SEK OMX SP Index 130 S h a r e i n f o r m at i o n 5,000 4,000 3,000 2,000 1,000 0 naSDaQ Stockholm Jan feb mar apr may Jun Jul aug Sep oct nov Dec ENXShareXInfo_v21.indd 130 07-02-27 14.28.07 e r i C S S o n a n n U a L r e P o r t 2 0 0 6 Share priceS on the Stockholm Stock exchange (Sek) Class a at last day of trading Class a high for year (march 24, 2006) Class a low for year (June 13, 2006) Class B at last day of trading Class B high for year (march 24, 2006) Class B low for year (June 13, 2006) 2006 27.60 30.90 20.90 27.65 31.00 20.90 2005 27.50 28.70 19.80 27.30 29.00 19.40 2004 21.70 26.10 14.00 21.20 24.50 12.70 2003 13.90 16.80 5.55 12.90 14.60 4.11 2002 8.60 42.89 3.80 6.10 44.78 2.96 offer and listing details Principal trading market – The Stockholm Stock Exchange share prices the exchange publishes a daily official Price List of Shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest record- ed trades of the day. the official Price List of Shares reflects the tables above and below state the high and low sales prices price and volume information for trades completed by the mem- for our Class a and Class B shares as reported by the Stockholm bers. Stock exchange for the last five years. the equity securities listed on the Stockholm Stock exchange official Price List of Host market NASDAQ ADS Prices Shares currently comprise the shares of 276 companies (of the table below states the high and low sales prices quoted for which 51 from the former a list). trading on the exchange gener- our aDSs on naSDaQ for the last five years. the naSDaQ quota- ally continues until 5:30 p.m. each business day. in addition to tions represent prices between dealers, not including retail mark- official trading on the exchange, there is also trading off the ups, markdowns or commissions, and do not necessarily repre- exchange during official trading hours and also after 5:30 p.m. sent actual transactions. trading on the exchange tends to involve a higher percentage of the annual high and low market prices on these markets are retail clients, while trading off the exchange often involves larger shown in the table “annual high and low market prices” below. Swedish institutions, banks arbitraging between the Swedish market and foreign markets, and foreign buyers and sellers pur- chasing shares from or selling shares to Swedish institutions. annual high and low market priceS period 2002 2003 2004 2005 2006 the Stockholm Stock exchange SeK per Class a share Low high SeK per Class B share Low high 42.89 16.80 26.10 28.70 30.90 3.80 5.55 14.00 19.80 20.90 44.78 14.60 24.50 29.00 31.00 2.96 4.11 12.70 19.40 20.90 naSdaQ USD per aDS 1) high 43.33 18.85 34.57 37.19 41.14 Low 3.40 5.20 17.93 27.78 28.88 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.) ENXShareXInfo_v21.indd 131 07-02-27 14.28.07 S h a r e i n f o r m at i o n 131 e r i C S S o n a n n U a L r e P o r t 2 0 0 6 the table below states the high and low sales prices for each quarter of 2005 and 2006. Quarterly high and low market priceS period 2005 first Quarter Second Quarter third Quarter fourth Quarter 2006 first Quarter Second Quarter third Quarter fourth Quarter 1) one aDS = 10 Class B shares the Stockholm Stock exchange SeK per Class a share Low high SeK per Class B share Low high naSdaQ USD per aDS 1) high Low 22.40 26.10 28.40 28.70 30.90 29.90 25.70 28.45 19.80 19.80 24.30 25.30 25.80 20.90 21.00 24.80 22.10 26.30 28.50 29.00 31.00 30.00 25.80 28.60 19.40 19.70 24.30 25.20 25.60 20.90 20.90 24.85 32.49 33.87 36.99 37.19 39.37 39.28 35.35 41.14 27.78 27.80 31.74 32.17 33.63 28.88 29.13 33.95 the table below states the high and low sales prices for each of the last six months (august 2006 to January 2007). monthly high and low market priceS the Stockholm Stock exchange SeK per Class a share Low high SeK per Class B share Low high 24.50 25.70 27.85 28.45 28.00 29.70 21.00 23.50 24.80 26.40 26.00 27.50 24.50 25.80 28.00 28.60 28.10 29.90 20.90 23.40 24.85 26.40 25.95 27.45 naSdaQ USD per aDS 1) high 33.93 35.35 38.24 40.41 41.14 42.13 Low 29.16 32.06 33.95 37.52 38.40 37.98 period august 2006 September 2006 october 2006 november 2006 December 2006 January 2007 1) one aDS = 10 Class B shares Share capital as of December 31, 2006, ericsson’s share capital was SeK vote, and 14,823,478,760 (14,823,478,760) Class B shares, each 16,132,258,678 (16,132,258,678) represented by 16,132,258,678 carrying one-tenth of one vote. as of December 31, 2006, erics- (16,132,258,678) shares. the par value of each share is SeK 1.00. son held 251,013,892 Class B shares as treasury shares. as of December 31, 2006, the shares were divided into there have been no share repurchases by ericsson during 1,308,779,918 (1,308,779,918) Class a shares, each carrying one 2006. changeS in number of ShareS and capital Stock 2002–2006 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) 2006 December 31 (no changes) 132 S h a r e i n f o r m at i o n number of shares Capital stock 560 7,908,754,111 158,000,000 16,132,258,678 16,132,258,678 16,132,258,678 16,132,258,678 560 7,908,754,111 158,000,000 16,132,258,678 16,132,258,678 16,132,258,678 16,132,258,678 ENXShareXInfo_v21.indd 132 07-02-27 14.28.08 e r i C S S o n a n n U a L r e P o r t 2 0 0 6 Shareholders ten l argeSt countrieS of ownerShip as of December 31, 2006, we had 814,841 shareholders regis- tered at VPC (the Swedish Securities register Center), of which percent of capital 1,640 holders with a US address. according to information pro- vided by Citibank, there were 117,866,408 aDSs outstanding as of December 31, 2006, and 5,892 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 cus- tomers. as of December 31, 2006, banks, brokers and/or nomi- nees held aDSs on behalf of 242,519 accounts. according to information known at year-end 2006, more than 80 percent of our Class a and Class B shares were owned by institutions, Swedish and international. Sweden United States United Kingdom Luxembourg Switzerland france Belgium netherlands Denmark Germany other countries Source: SiS Ägarservice aB as of December 31, 2005 2006 50.0% 27.1% 6.8% 3.9% 1.9% 1.4% 1.3% 1.1% 0.9% 0.7% 4.9% 54.1% 26.5% 4.3% 3.8% 1.8% 1.1% 0.9% 0.9% 0.9% 1.1% 4.0% the following table sets forth share information, as of December 31, 2006, with respect to our largest shareholders registered at VPC and known by us, ranked by percentage of voting rights: l argeSt ShareholderS by voting rightS december 31, 2006 number of Class a shares Percentage of total Class a shares number of Class B shares Percentage of total Class B shares Voting rights, percent Percentage of capital identity of person or group 1) investor aB aB industrivärden ShB Pensionsstiftelse Livförs. aB Skandia Pensionskassan ShB förs.fören. Swedbank robur fonder alecta amf Pension SeB trygg försäkring ShB/SPP fonder tredje aP-fonden första aP-fonden SeB fonder nordea fonder ShB Personalstiftelse fjärde aP-fonden andra aP-fonden oktogonen foreign owners 2) of which oppenheimer funds inc. of which Barclays of which fidelity 513,320,192 372,000,000 83,903,000 63,806,641 63,360,000 7,440,973 19,966,000 4,763,682 23,024,095 99,552 12,245,095 7,472,938 3,135,549 1,944,145 20,000,000 2,812,755 – 12,903,000 18,808,834 – 33,400 – 39.22 28.42 6.41 4.87 4.84 0.57 1.53 0.36 1.76 0.07 0.94 0.57 0.24 0.15 1.52 0.21 – 1.00 297,073,324 5,000,000 – 69,931,826 – 403,173,269 240,000,000 251,730,000 51,939,000 278,006,658 120,019,925 158,151,211 187,367,096 191,078,855 – 129,821,845 149,123,659 – 1.44 8,054,883,408 334,046,626 292,853,578 255,287,828 – 0.02 – others total 77,773,467 1,308,779,918 5.88 4,236,178,684 100% 14,823,478,760 1) Sources: SiS Ägarservice aB and VPC aB, December 31, 2006, and Capital Precision, December 2006. 2) including nats Cumco as nominee: 1,134,962,281 Class B shares. 2.00 0.03 – 0.47 – 2.72 1.62 1.70 0.35 1.87 0.81 1.07 1.26 1.29 – 0.88 1.01 – 54.34 2.25 2.00 1.72 28.58 100% 19.46 13.35 3.01 2.54 2.27 1.71 1.58 1.07 1.01 0.99 0.87 0.83 0.77 0.75 0.72 0.57 0.53 0.46 29.53 1.20 1.05 0.91 17.98 100% 5.02 2.34 0.52 0.83 0.39 2.54 1.61 1.59 0.46 1.71 0.82 1.03 1.15 1.19 0.12 0.82 0.92 0.08 50.05 2.07 1.82 1.58 26.81 100% S h a r e i n f o r m at i o n 133 ENXShareXInfo_v21.indd 133 07-02-27 14.28.08 e r i C S S o n a n n U a L r e P o r t 2 0 0 6 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, 2004, 2005 and 2006. person or group (percent) investor aB aB industrivärden Svenska handelsbankens Pensionsstiftelse Livförsäkrings aB Skandia Pensionskassan ShB försäkringsförening Swedbank robur fonder alecta amf Pension SeB trygg försäkring ShB/SPP fonder tredje aP-fonden första aP-fonden SeB fonder nordea fonder Svenska handelsbankens Personalstiftelse fjärde aP-fonden andra aP-fonden oktogonen 2006 Class a Class B shares shares 39.22 28.42 6.41 4.87 4.84 0.57 1.53 0.36 1.76 0.07 0.94 0.57 0.24 0.15 1.52 0.21 – 1.00 2.00 0.03 – 0.47 – 2.72 1.62 1.70 0.35 1.87 0.81 1.07 1.26 1.29 – 0.88 1.01 – foreign owners of which oppenheimer funds inc. of which Barclays of which fidelity 1.44 – 0.02 – 54.34 2.25 2.00 1.72 Voting rights 19.46 13.35 3.01 2.54 2.27 1.71 1.58 1.07 1.01 0.99 0.87 0.83 0.77 0.75 0.72 0.57 0.53 0.46 29.53 1.20 1.05 0.91 2005 Class a Class B shares shares Voting rights 2004 Class a Class B shares shares Voting rights 39.22 28.42 6.41 4.51 4.84 0.57 1.05 0.36 2.13 0.05 0.91 0.57 0.27 0.20 1.53 0.22 0.10 2.00 0.03 – 0.55 – 2.54 2.50 1.81 0.39 2.13 1.02 1.13 1.28 1.67 – 1.41 1.17 19.46 13.35 3.01 2.40 2.27 1.62 1.82 1.13 1.21 1.15 0.97 0.87 0.81 0.98 0.72 0.85 0.67 39.22 28.42 6.41 4.51 4.84 0.51 0.19 0.36 2.13 0.24 0.94 0.57 0.27 0.26 1.53 0.22 2.00 – – 0.50 – 2.65 1.25 2.15 0.39 1.74 0.97 1.17 1.25 1.64 – 1.32 19.46 13.33 3.01 2.38 2.27 1.62 0.75 1.33 1.22 1.05 0.97 0.90 0.80 1.01 0.72 0.81 1.24 49.86 27.06 1.82 50.15 27.48 – 2.29 1.22 – 5.52 2.93 5.85 20.04 100.00 100.00 100.00 32.75 others total 5.88 17.98 28.58 100.00 100.00 100.00 7.40 19.17 29.56 100.00 100.00 100.00 Source: SiS Ägarservice aB and VPC aB, December 31, 2006, and Capital Precision, December 2006. 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 gov- ernment or by any other natural or legal person(s) severally or jointly. as of December 31, 2006, the total number of voting securities of the Company owned by top executives and directors as a group was: number of Class a shares number of Class B shares Voting rights, percent top executives and directors as a group (28 persons) 6,080 18,149,028 0.07 for individual holdings, see “Corporate Governance report”. 134 S h a r e i n f o r m at i o n ENXShareXInfo_v21.indd 134 07-02-27 14.28.08 e r i C s s o n a n n U a l r e P o r t 2 0 0 6 shareholder information the annual General meeting of sharehold- of shareholders. the shareholder is re- annual reports and other financial reports ers will take place at the annex to the quested to inform the nominee well before can be downloaded or ordered on our Globe arena, Globentorget, stockholm, at that day. web site: www.ericsson.com/investors or 3.00 p.m. on Wednesday, april 11, 2007. ordered via e-mail or mail. Proxy Entitled to attend and notice of attendance shareholders, represented by proxy, shall For printed publications, contact: issue a power of attorney for the repre- strömberg distribution i huddinge aB shareholders, who wish to attend the sentative. to a power of attorney issued se – 120 88 stockholm, sweden annual General meeting of shareholders, by a legal entity, a copy of the certificate Phone: +46 8 449 89 57 must • have been entered into the share regis- ter kept by VPC aB (the swedish secu- of registration (or, if no such certificate E-mail: ericsson@strd.se exists, a corresponding document of authority) of the legal entity shall be at- in the United states, ericsson’s transfer rities register Centre) as of tuesday, tached. the documents must not be older agent Citibank: april 3, 2007; and than one year. in order to facilitate the Citibank shareholder services • give notice of attendance to the Com- pany no later than at 4 p.m. (sweden registration at the annual General meeting, Registered holders: +1 877 881 5969 power of attorney in its original, certifi- Interested investors: +1 800 808 8010 time) on tuesday, april 3, 2007, at the cates of registration and other documents E-mail: ericsson@shareholders-online.com Company’s web site of authority should be sent to the Com- www.citibank.com/adr www.ericsson.com, at telephone no.: pany at the address above so as to be +46 8 775 01 99 weekdays between available by tuesday, april 10, 2007. ordering a hard copy of the annual 10 a.m. and 4 p.m. or at fax no.: +46 8 775 80 18. notice of Dividend report: http://www.sccorp.com/annualreport/ attendance may also be given by post the Board of directors has decided to ericsson.htm to: propose the annual General meeting of Phone toll free: +1 866 216 0460 telefonaktiebolaget lm ericsson, shareholders to resolve on a dividend of Group function legal affairs, seK 0.50 per share for the year 2006 and Contact information: Box 47021, 100 74 stockholm, sweden monday, april 16, 2007 as record day for dividend. When giving notice of attendance, please state name, date of birth, address, tele- phone no. and number of assistants. the personal data that ericsson receives with the notice of attendance will be computer Financial information from Ericsson • interim reports 2007: april 26, 2007 (Q1) processed for the purpose of the annual July 20, 2007 (Q2) General meeting of shareholders 2007 only. october 25, 2007 (Q3) Shares registered in the name of a nominee february 1, 2008 (Q4) • annual report 2007: march, 2008 • form 20-f for the Us market 2007: shareholders, whose shares are regis- during Q2, 2008 tered in the name of a nominee, must request the nominee to enter temporarily the shareholder into the share register as of tuesday, april 3, 2007 to be entitled to participate at the annual General meeting 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 135 ENXShareholder_v16.indd 135 07-02-28 11.21.50 e R i c s s o n a n n U a L R e p o R t 2 0 0 6 compensation ericsson’s compensation system is based on three principles: ples of group targets for 2006 were financial performance, em- fairness, performance and competitiveness to attract and retain ployee satisfaction, customer satisfaction and operational targets. talent. However, we recognize that compensation is local and as employees not covered by global short term variable plans such we expect local management to create their own systems may be eligible for local plans. these vary in design. sweden, for based on these principles. performance shall be encouraged by example, has a plan for all employees that can give a variable pay aligning all employee efforts to the strategic direction of the orga- of up to 8 percent of fixed salary for maximum target achieve- nization. individuals and teams shall be rewarded according to ment, equaling one month’s fixed salary. their contribution to targets. Clear controls compensation processes by the nature of their sensitivity require clear controls. in ericsson these are based on three pillars: the Board of Directors and Remuneration committee authorization, audit controls and our internal system that requires two levels of managers to approve any compensation decision. in addition, the annual General meeting approves the compensation principles for the target payout levels vary depending on local competitive practice, but in general the following is valid for the short-term variable plans for management globally: Percent of fixed salary most management jobs Group management including ceo target maximum target achievement achievement 10–20% 20–40% 30–40% 60–80% the group management and also the terms of our long-term vari- Long-term variable plan able compensation program. the Remuneration committee is also as long-term variable compensation, we have a global stock supported by an independent remuneration expert to help in ob- purchase plan for employees in 86 countries. the plan is based taining an independent opinion and advice on remuneration issues. on the particpant’s own investments in shares at market price Compensating for performance and matching after three years by the company at different levels ranging from one share for all employees to nine shares for the the compensation package for our employees consists mainly of ceo. matching of more than two shares is performance tested. the following three parts: • fixed salary (cash) • short-term variable salary (annual cash); • long-term variable compensation (ericsson shares). For more details please see notes to the consolidated Financial statements – note c29, “information regarding employees, During 2006, 17,000 employees around the world purchased 20 million ericsson shares for future matching by the company. matching of shares under the first matching program, which started in 2004, will begin during 2007. Pensions members of the Board of Directors and management”. pension benefits are also set depending on local competitive- We have a preference where possible to encourage variable ness and local practice. in addition to any national system for compensation because it better supports performance, enables social security, pension benefits may contain various supple- the company to have a more flexible pay-roll cost and it supports mentary company plans. Group management including ceo employee alignment to clear targets. the company’s success have two supplementary plans: the itp plan (for all salaried staff becomes team success. Short-term variable salary in sweden) and a defined contribution plan based on premiums invested monthly in a pension fund. all costs for these pensions are accounted for annually during active service in the company. We have global short-term variable plans for management and for the pensions can be paid out from the age of 60. sales professionals. the Board of Directors and the Remuneration committee decide on all ericsson group targets, which are then cascaded to unit related targets, all subject to approval by the normal two level management approval process. the Remunera- tion committee monitors appropriateness of the target levels throughout the year and has the authority to revise them. exam- For further information on compensation principles, payout to the president and ceo and group management, as well as costs, see notes to the consolidated Financial statements – note c29, “information regarding employees, members of the Board of Directors and management”. 136 c o m p e n s at i o n ENXCompensation_v11.indd 136 07-02-28 11.23.47 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 corporate governance report 006 Corporate governance is a generic term describing the while these ideals and values are embedded in our ways of ways in which rights and responsibilities are distributed working, we know that controls and procedures are integral to among the various corporate bodies according to the rules, maintaining our high standards and we are constantly seeking processes or laws they are subject to. In practice, ways to make our corporate governance even more effective and corporate governance defines the decision-making reliable. systems and structure through which owners directly or this corporate governance report describes the corporate indirectly control a company. governance, direction and management of ericsson, including our commitment to corporate governance at ericsson we are committed to high standards of corporate governance and pride ourselves on how we conduct our busi- ness. we have policies and directives that guide all employees in how to work to meet legal and regulatory requirements and the information on how the board of Directors ensures the quality of the fi nancial reports and its interaction with ericsson’s indepen- dent auditors. the auditors have not reviewed ericsson’s corporate governance report 006. the report does not con- stitute a part of our formal annual report. high stanDarDs in business ethics ethical standards that we set for ourselves. the company’s our code of business ethics sets out how we work to achieve reputation for integrity and good corporate citizenship stems and maintain our high standards. from its core values of professionalism, respect and per- this document has been translated into more than 0 lan- severance. ErICSSon’S CorE vALuES profESSIonALISM • listen – lead through innovation • Keep commitments – be responsive • seek the truth – know your numbers rESpECt • build strength through a shared vision • qualify everyday – generate energy • Diversity as a strength – provide equal opportu- nities pErSEvErAnCE • lead change – shape the future • always deliver – walk the extra mile • trusted global partner for more than a cen- tury! guages to ensure that everyone who works for ericsson under- stands our policies and directives and the importance of con- ducting all business activities in an ethical manner. we also arrange corporate governance training for executives so that they can reinforce the messages among ericsson’s widespread work- force. all employees must regularly review the code of business ethics and acknowledge that they have understood its principles. our code of business ethics satisfi es the applicable require- ments of the sarbanes-oxley act of 00 and nasDaq. the code can be found at: www.ericsson.com/ericsson/ corporate_responsibility/ employees/code_businessethics. CODE OF BUSINESS ETHICS shtml information on our website does not form part of this document. the Code of Business Ethics has been translated into more than 20 languages. TAKING YOU FORWARD c o r p o r at e g o v e r n a n c e r e p o r t 1 ENXCGRXXXControl_v41.indd 1 07-03-01 13.06.16 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 compliance with requirements corporate boDies in corporate governance as a swedish public limited liability company, ericsson is gov- the governance and control of ericsson is carried out through a erned on the basis of its articles of association and the swedish number of corporate bodies. companies act. we also comply with the listing requirements of at general meetings of shareholders, the shareholders exer- the stockholm stock exchange, including the swedish code of cise their voting rights with regard to, for example, the composi- corporate governance (“the code”). the code is based on the tion of the board of Directors of ericsson and election of external “comply or explain” principle, which means that a company may auditors. deviate from individual rules but is required to explain why. a nomination committee proposes candidates to serve as in addition, we comply with the listing requirements of the board members, the board chairman and external auditors. other stock exchanges we are listed on, that is the london stock the board is responsible for ericsson’s long-term develop- exchange and nasDaq. we also satisfy the applicable nasDaq ment and strategy as well as controlling and evaluating the com- corporate governance requirements, subject to a few exemptions pany’s daily operations. in addition, the board appoints the principally reflecting mandatory swedish legal requirements, see president of ericsson, who is also the chief executive officer “nasDaq corporate governance exemptions” below. moreover, (ceo). the duties of the board are partly exercised through its we comply with the applicable requirements of the sarbanes- three committees; the audit, Finance and remuneration com- oxley act, including the certification of our annual report on the mittees. sec’s (securities and exchange commission’s) Form 0-F by the president and ceo is in charge of the day-to-day man- the chief executive officer and chief Financial officer. the agement of ericsson in accordance with guidelines and instruc- sarbanes-oxley act, commonly called soX, is a united states tions provided by the board. federal law establishing, among other things, enhanced corpo- ericsson reports three operating segments, systems, phones rate governance standards and is applicable to ericsson as we and other operations for the year ending December 31, 006. have securities quoted on nasDaq. the president and ceo is also head of the systems segment, Application of the Swedish Code of Corporate Governance and the heads of the business units and market units in systems report directly to him. the heads of the five units in other opera- tions also report to the president and ceo. ericsson has been applying the code since July 005. to ensure For more information on general aspects of swedish corpo- ericsson’s compliance with the code, our group steering docu- rate governance, please refer to a memorandum “special fea- ments and procedures have been evaluated and adapted to also tures of swedish corporate governance” posted on the website reflect the requirements of the code. internal processes, such as of the swedish corporate governance board www.corporat- reporting information on the corporate governance website, as egovernanceboard.se. information on this website does not form well as procedures in connection with the annual general part of this document. meeting of shareholders, have likewise been adapted to meet the requirements of the code. ericsson does not report any deviations from the code in 006.  c o r p o r at e g o v e r n a n c e r e p o r t ENXCGRXXXControl_v41.indd 2 07-03-01 13.06.16 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 our CorporAtE GovErnAnCE StruCturE Shareholders’ Meeting annual general meeting/ extraordinary general meeting unions Board of Directors 10 Directors elected by the shareholders’ meeting 3 Directors and 3 Deputies appointed by the unions audit committee Finance committee remuneration committe nomination Committee External auditors president and CEo Management meetings with the shareholDers in accordance with the swedish companies act and ericsson’s nity 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. articles of association, shareholders who exercise their voting shareholders and other interested parties can also corre- rights at the annual general meeting determine the composition spond in writing with the board of Directors or executive man- of the board of Directors and all other issues voted on at general agement at any time. meetings of shareholders. the board of Directors’ secretariat can be contacted by e- the annual general meeting is held in stockholm, generally at mail at boardsecretariat@ericsson.com, or by post: the end of march or beginning of april. the exact date is adver- telefonaktiebolaget lm ericsson tised, along with the agenda and information on how sharehold- the board of Directors’ secretariat ers can give notice of attendance, on ericsson’s website and in se-164 83 stockholm, sweden the swedish newspapers svenska Dagbladet, Dagens nyheter and post- och inrikes tidningar, as well as in the european edition Ericsson’s Annual General Meeting 2006 of Financial times, as a courtesy to our shareholders abroad. 1,106 shareholders, representing 57.4 percent of the votes and shareholders who cannot participate in person may be repre- 30.9 percent of the capital of ericsson, attended the annual sented by proxy (proxies are valid for a maximum of one year). to general meeting held on april 10, 006, at the annex to the allow non-swedish speaking shareholders to participate, the globe arena in stockholm. ericsson’s board of Directors, group annual general meeting is simultaneously interpreted into english. management and the external auditors, were present at the all information material is also available in english. resolutions at general meetings of shareholders are normally passed by simple majority. however, the swedish companies meeting. Decisions of the 006 annual general meeting include: • re-election of michael treschow as chairman of the board of Directors, re-election of marcus wallenberg and election of act requires special quorums and majorities in certain cases. at sverker martin-löf as Deputy chairmen. general meetings of shareholders each class a share carries • re-election of sir peter l. bonfield, ulf J. Johansson, nancy one vote and each class b share one-tenth of one vote. For more mcKinstry and carl-henric svanberg as members of the board information on the shares of ericsson, please see “share infor- of Directors and election of börje ekholm, Katherine hudson mation” in the annual report. the annual general meeting offers shareholders the opportu- and anders nyrén as new members of the board of Directors. • resolution to adopt the parent company income statement c o r p o r at e g o v e r n a n c e r e p o r t 3 ENXCGRXXXControl_v41.indd 3 07-03-01 13.06.17 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 and balance sheet and the consolidated income statement the tasks of the nomination Committee and balance sheet. • Discharge of liability of the members of the board of Directors the main task of the nomination committee is to propose candi- dates for election to the board of Directors, including the chair- and the president for the fiscal year 005. man and the Deputy chairmen. the nomination committee must • resolution that a dividend of seK 0.45 per share be paid for the year 005. • resolution that the number of board members be 10 with no take into consideration the various rules on independence of the board in relation to the company, its senior management and major shareholders, in accordance with the requirements of the deputies. code. • resolution that board of Directors’ fees be paid as follows: chairman seK 3,750,000; other non-employed board mem- in years in which election of auditors are held, the nomination committee also proposes candidates for election of auditors, bers seK 750,000 each; in addition seK 350,000 to the chair- based on the preparations carried out by the audit committee of man of the audit committee and seK 50,000 each to the the board. the nomination committee also proposes a candi- other two non-employed members of the audit committee; date for election of the chairman of general meetings of share- and seK 15,000 each to the chairmen and other non-em- holders and prepares proposals concerning the level of remu- ployed members of the Finance and remuneration commit- neration for Directors elected by the annual general meeting of tees. • approval of the nomination committee’s proposals for the procedure for appointing the members of the nomination committee and the assignment of the nomination committee. • amendments of the articles of association to reflect the new swedish companies act that came into effect on January 1, 006. • approval of the principles on remuneration and other employ- ment terms for ericsson’s top executives. • resolution to implement a long-term incentive plan for 006 shareholders not employed by ericsson, the auditors and mem- bers of the nomination committee for resolution by the annual general meeting. so far, the nomination committee has not proposed any fee to be paid to the nomination committee. recommendations to the nomination committee may be submitted by e-mail to nomination.committee@ericsson.com, or by post to: telefonaktiebolaget lm ericsson the nomination committee c/o general counsel’s office and transfer of own shares as a part thereof. se-164 83 stockholm Ericsson’s Annual General Meeting 2007 sweden ericsson’s annual general meeting 007 will take place on april 11, 007, at the globe arena in stockholm. this was announ- Work of the nomination Committee for the Annual General Meeting 2007 ced in conjunction with the release of the third quarter financial the nomination committee held five meetings and had informal report in 006. nomination committee the nomination committee, appointed on the basis of the pro- contacts between meetings. the nomination committee has thoroughly familiarized itself with how the board work is con- ducted and functions and has made assessments in terms of the competence and experience that is required by the board. in addition to matters prepared each year by the nomination com- cedure resolved by the annual general meeting of shareholders mittee, the nomination committee for the annual general meet- 006, consists of michael trewchow (chairman of the board of ing 007 has, in close cooperation with the board’s audit com- Directors) and of the four members appointed by the four largest mittee, prepared a proposal for the election of auditors for shareholders by voting power as of april 8, 006: Jacob wallen- resolution by the annual general meeting of shareholders 007. berg (investor ab), carl-olof by (ab industrivärden, chairman of a report on the work of the nomination committee will be the nomination committee), caroline af ugglas (livförsäkrings- published on ericsson’s website in connection with the notice of aktiebolaget skandia), tomas nicolin (alecta pensionsförsäkring). the annual general meeting of shareholders 007. 4 c o r p o r at e g o v e r n a n c e r e p o r t ENXCGRXXXControl_v41.indd 4 07-03-01 13.06.17 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 boarD oF Directors trade unions. the chairman of the board is elected by the annual general meeting. the president and ceo of the company may the board of Directors is ultimately responsible for the organiza- be elected as a director, but the swedish companies act pro- tion of the company and the management of the company’s hibits the president of a public company from being elected operations. it develops guidelines and instructions for the day-to- chairman of the board. day management of the company, conducted by the president and ceo who ensures the board of Directors receives regular Work procedure of the Board of Directors reports regarding the group’s business development – its results, the board of Directors has adopted a work procedure for its financial position and liquidity – and events of importance to the activities that outlines rules regarding the distribution of tasks group. between the board and its committees as well as between the according to the articles of association, ericsson’s board of board, its committees and the president and ceo. the work Directors shall consist of a minimum of five directors and a maxi- procedure is reviewed, evaluated and adopted by the board as mum of 1 directors, with no more than six deputies. Directors required, at least once a year. During 006, the work procedure are elected by the shareholders at the annual general meeting was adjusted by the board at its meeting in December. for the period from the date of the annual general meeting until the close of the following annual general meeting, but can serve Independence of the Directors any number of consecutive terms. in addition, under swedish law, in connection with its proposal to the annual general meeting of unions have the right to appoint three directors and their depu- shareholders 006, the nomination committee elected by the ties to the ericsson board of Directors. annual general meeting of shareholders 005 made the assess- ericsson abides by strict rules and regulations regarding ment that, for the purposes of the swedish code of corporate conflicts of interest. Directors and the president and ceo cannot governance, the following Directors are independent of the com- participate in any decision regarding agreements between them- pany and its senior management, as well as of the company’s selves and the company, or between the company and any third major shareholders: sir peter l. bonfield, Katherine hudson, ulf party or legal entity that the individual has an interest in. J. Johansson, nancy mcKinstry and michael treschow. Further, the audit committee has implemented a procedure for the approval of related-party transactions in accordance with Work of the Board of Directors nasDaq’s corporate governance rules as well as a pre-approval the board holds at least six meetings each year. material for process for non-audit services carried out by the external audi- each board meeting is distributed according to a pre-established tors, in order to ensure their independence. time plan by the board of Directors’ secretariat on behalf of the Members of the Board of Directors president and ceo. each board meeting generally includes reports by the chairman of each of the three committees based our board of Directors consists of 10 Directors, elected by the on the minutes from the committee meetings, which were dis- shareholders at the annual general meeting for the period until tributed to all Directors prior to the board meeting. Further, a the close of the next annual general meeting, and three em- board meeting typically includes the president and ceo’s report ployee representatives, each with a deputy, appointed by the on general business and market developments including the c o r p o r at e g o v e r n a n c e r e p o r t 5 ENXCGRXXXControl_v41.indd 5 07-03-01 13.06.45 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 BoArD of DIrECtorS’ MEEtInGS 2006 Forecast 2007 meeting Extraordinary meeting Q4 2005 meeting Q4 Dec Jan Q1 Meeting per capsulam Q3 2006 meeting Nov Feb Oct Sep Board Meetings 2006 Mar Apr Aug May Q3 Jul Jun Q2 Statutory meeting Q1 2006 meeting Extraordinary meeting Strategy meeting Q2 2006 meeting performance of the company. at board meetings held in con- are held each year to enhance the Directors’ knowledge of group junction with interim reports, the financial statements are dis- operations. training is also provided to new Directors and to cussed along with any proposed press release related to the cover specific issues as needed. interim report. a substantial part of the board’s ordinary work is devoted to strategy issues. towards the end of the year, the Work of the Board of Directors in 2006 board performs an evaluation of the board work, which serves in 006, ten board meetings were held. the Directors’ atten- as a guide for the work of the nomination committee. the board dance at board and committee meetings during 006 is reflect- is regularly informed of recent developments of legal and regula- ed in the table “Directors’ attendance and board of Directors’ tory matters and addresses, whenever necessary, the adoption Fees.” apart from general board matters referred to above, mat- of and implementation of various corporate governance rules. the Directors generally participate in all board meetings and, to the extent possible, also attend general meetings of share- holders. ters addressed by the board during 006 include: • integration of the operations acquired from marconi; • acquisition of the swedish company netwise ab; • divestment of the defense operations, ericsson microwave the board is also responsible for financial oversight and systems ab to saab ab; meets regularly with ericsson’s external auditors to receive and • a new organization as from January 1, 007, under three busi- consider the auditors’ observations regarding the annual report, ness units; interim reports and internal controls. the auditors attend the regularly scheduled audit committee meetings and meet with • long-term and short-term strategy with regard to the operator consolidation driven by convergence and development and the the entire board at least twice a year. at least one meeting with changes in the competitive landscape, and the auditors takes place without the presence of the president and ceo or other members of the management team. to assist Directors in their work for ericsson, training sessions • acquisition of the us company redback networks inc. 6 c o r p o r at e g o v e r n a n c e r e p o r t ENXCGRXXXControl_v41.indd 6 07-03-01 13.06.46 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 orGAnIZAtIon of tHE BoArD WorK Audit Committee (4 Directors) • oversight over financial reporting • oversight over internal control • oversight over auditing Board of Directors 13 Directors Finance Committee (4 Directors) • Financing • investing • customer credits Remuneration Committee (4 Directors) • remuneration policy • incentive programs • executive compensation training sessions for the board of Directors in 006 included members. the work of the committees is principally preparatory, research and Development, human resources and corporate that is they prepare matters for final resolution by the board. responsibility. Board work evaluation however, the board has authorized each committee to deter- mine certain issues in limited areas and may also provide exten- ded authorization to a committee to determine specific matters. the chairman of the board initiates and leads a thorough evalua- the board of Directors and each committee have the right to tion of board work and the board procedures each year. the engage external expertise, either in general or in respect to spe- evaluation process includes written questionnaires, as well as cific matters, if deemed appropriate. interviews and discussions. During 006, the chairman held indi- prior to each board meeting, each committee submits a vidual discussions with each Director and each Director an- report to the board on the issues handled, resolved or referred to swered three separate written questionnaires, i.e. one covering the board since the previous ordinary board meeting. the the board work in general, one covering the chairman’s perfor- minutes of each committee meeting are attached to the minutes mance, and one covering the president and ceo’s performance. of the board meeting following each committee meeting. the chairman and the president and ceo are neither involved in the development, compilation or evaluation of the questionnaires The Audit Committee related to their respective performances, nor present when their the audit committee, on behalf of the board, monitors the integ- respective performance is evaluated. rity of the financial statements, compliance with legal and regula- Committees of the Board of Directors tory requirements and the effectiveness of our systems of inter- nal control over financial reporting. the board of Directors has established three committees: the the audit committee is primarily responsible for reviewing audit, Finance and remuneration committees. the board ap- annual and interim financial reports, overseeing the external audit points each of the committee members amongst the board process, including audit fees and the internal audit function, and c o r p o r at e g o v e r n a n c e r e p o r t 7 ENXCGRXXXControl_v41.indd 7 07-03-01 13.06.46 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 resolving matters arising during the course of reviews and audits. DIrECtorS’ AttEnDAnCE AnD BoArD of DIrECtorS’ this involves: • reviewing, with management and the external auditors, the audited financial statements including conformity with general- ly accepted accounting principles; • reviewing, with management, the reasonableness of significant estimates and judgments made in preparing the financial state- ments, as well as the quality of the disclosures in the financial statements; • reviewing matters arising from reviews and audits performed. the audit committee is also involved in the preparatory work of proposing candidates for the election of auditors, when appli- cable, and monitors their ongoing independence and perfor- mance, as well as monitoring group transactions to avoid con- flicts of interest. to achieve this, the audit committee has implemented approval procedures for audit and other services performed by the external auditors (see “audit committee pre- approval policies and procedures.”); a pre-approval process for transactions with related parties; and a “whistle-blower” proce- dure for the reporting of violations in relation to accounting, inter- nal controls and auditing matters. the procedure for the report- ing of these violations has been adjusted in 006 to meet eu recommendations and French legal requirements in relation to whistle-blower procedures. these recommendations and re- quirements aim to limit misuse of the procedure and to secure handling of personal data in relation to reports made under such procedure. fEES 2006 Board Board Committee Board and Fin- remun- committee fee Meetings audit ance eration michael treschow sverker martin-löf marcus wallenberg peter l. bonfield börje ekholm 1) Katherine hudson 1) ulf J. Johansson ) nancy mcKinstry anders nyrén 1) carl-henric svanberg arne mårtensson 3) eckhard pfeiffer 3) monica bergström 4) Jan hedlund torbjörn nyman anna guldstrand per lindh 5) arne löfving 6) Kristina Davidsson 7) total 10 10 10 10 8 7 9 10 8 10 3 3 10 10 10 10 9 6 4 10 – 9 – 9 – – 6 – – – –  – 9 – – – – – 9 11 – 11 – – – – – 7 – 4 – – – 11 – – – – 11 8 4,000,000 1,100,000 – – 875,000 – 1,000,000 875,000 4 – 750,000 4 1,000,000 875,000 8 875,000 – – – – – – – 10,400 4 10,900 – 11,100 – 10,000 – 9,400 4 6,000 – – 4,000 8 11,411,800 1) appointed as member of the board of Directors as of april 10, 006. ) resigned from the remuneration committee and joined the audit committee as of april 10, 006. 3) resigned from the board of Directors as of april 10, 006. 4) Joined the remuneration committee as of april 10, 006. 5) resigned from the remuneration committee as of april 10, 006. 6) resigned from the board of Directors as of 31 July, 006. 7) Joined the board of Directors as of august 1, 006. alleged violations are investigated by ericsson’s internal audit determined that sverker martin-löf, sir peter l. bonfield and ulf function in conjunction with the relevant group Function. infor- J. Johansson satisfy these requirements. mation regarding any incidents, including measures taken, de- the audit committee has appointed an external expert advi- tails of the responsible group Function and the status of any sor, mr. peter markborn, to assist and advise the committee. investigation are reported to the audit committee. the audit committee itself does not perform audit work. erics- work of the audit committee son has an internal audit function, which reports to the audit the audit committee held nine meetings during 006 – atten- committee and performs independent audits. dance is reflected in the table “Directors’ attendance and board members of the audit committee of Directors’ Fees 006”. the work of the audit committee dur- ing the year included: review of financial reports, the scope and the audit committee consists of four members appointed by the execution of audits performed, the independence of the external board from among its members. in 006, the audit committee auditors, the internal audit function and audit fees. Further, the comprised sverker martin-löf (chairman of the committee), sir audit committee has, together with the external auditors, re- peter l. bonfield, ulf J. Johansson (succeeding eckhard pfeiffer viewed each interim report prior to publishing. part of the com- from april, 006) and Jan hedlund. all members, except the mittee’s work during the year has been to continuously monitor employee representative, are independent from the company the progress of the company’s implementation of the rules and and senior management. each member is financially literate and regulations of the sarbanes-oxley act. in addition, certain ser- familiar with the accounting practices of an international com- vices other than audits performed by the external auditors have pany comparable to ericsson. at least one member must be an been approved by the audit committee under the pre-approval audit committee financial expert. the board of Directors has policies and procedures. Further, the audit committee has ap- 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 ENXCGRXXXControl_v41.indd 8 07-03-01 13.06.47 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 proved certain related-party transactions in accordance with the pre-approval process implemented by the committee. • preparation of the long-term variable plan for referral to the board and subsequent resolution by the general meeting of The Finance Committee the Finance committee is primarily responsible for: • handling matters regarding acquisitions and divestments; • capital contributions to companies inside and outside the ericsson group; • raising of loans, issuances of guarantees and similar under- shareholders, and • preparation of the targets for variable pay for the following year for resolution by the board. to achieve this, the committee holds annual strategic compensa- tion reviews with representatives of the company to determine the direction to follow, allowing program designs and pay policies takings and approvals of financing support to customers; and to be aligned with the business situation. consideration is given • continually monitoring the group’s financial risk exposure. to trends in compensation, legislative changes, disclosure rules and the general global environment surrounding executive pay. the Finance committee is authorized to determine matters such the committee reviews salary survey data to approve any base as direct or indirect financing, provision of credits, granting secu- pay increase for executives, effective from the following January. rities and guarantees and certain investments, divestments and financial commitments, or can delegate this power. members of the Finance committee members of the remuneration committee the remuneration committee consists of four members ap- pointed by the board from among its members. in 006 the the Finance committee consists of four members appointed by remuneration committee comprised michael treschow (chair- the board from among its members. in 006, the Finance com- man of the committee), nancy mcKinstry, monica bergström mittee comprised marcus wallenberg (chairman of the commit- (succeeding per lindh as from april 006) and börje ekholm tee), anders nyrén, torbjörn nyman and michael treschow. (succeeding ulf J. Johansson as from april 006). work of the Finance committee the remuneration committee has appointed an independent expert advisor, mr. gerrit aronson, to assist and advise the com- the Finance committee held eleven meetings during 006 – mittee. attendance is reflected in the table “Directors’ attendance and board of Directors’ Fees 006”. the work included: resolutions work of the remuneration committee on matters such as customer financing and credit facility ar- the remuneration committee held eight meetings during 006 – rangements, and on certain acquisitions and divestments. the attendance is reflected in the table “Directors’ attendance and Finance committee also monitored the financial risk exposure board of Directors’ Fees 006”. the committee reviewed and and risk limits and was informed on a large amount of finance- prepared for the board a proposal for a long-term variable com- related matters such as the status of ongoing acquisitions, in pensation plan, which was resolved by the 006 annual general particular the integration of the operations acquired from mar- meeting of shareholders, and started to prepare a long-term coni. The Remuneration Committee variable compensation plan to be presented to the annual general meeting of shareholders 007. Further, the committee proposed to the board a structure for variable pay for the group the remuneration committee’s main responsibility is to advise management team and the extended management team. the the board of Directors regarding salary and other remuneration, committee also prepared proposals for salaries and variable pay including retirement compensation of the president and ceo, for 006, including compensation of the president and ceo and executive vice presidents and other officers reporting directly to of officers reporting directly to him. For further information on the president and ceo. other responsibilities include: • developing and monitoring strategies and general guidelines for employee compensation, including variable plans and compensation, fixed and variable pay, please see “notes to the consolidated Financial statements – note c9, information regarding employees, members of the board of Directors and retirement compensation; management” in the annual report. • approving variable pay under the previous year’s plan (begin- ning of each year); ENXCGRXXXControl_v41.indd 9 07-03-01 13.06.48 c o r p o r at e g o v e r n a n c e r e p o r t 9 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 members oF the boarD oF Directors Board members elected by the Annual General Meeting of Shareholders astraZeneca plc, mentor graphics inc., sony corporation, and tsmc. Holdings in Ericsson: none principal work experience and other information: ceo and chair- man of the executive committee of british telecommunications plc (1996–00). chairman and ceo of icl plc (1990–1996). positions with stc plc and texas instruments inc. member of the international advisory group of citigroup and of the international advisory panel of the university of london. non-executive Director of actis capi- tal llp, and hmg Department for constitutional affairs. trustee of cutty sark trust. Börje Ekholm (elected 2006) Member of the Remuneration Committee born 1963, master of science in electrical engineer- ing, royal institute of technology, stockholm. mas- ter of business administration, insead, France. Board member: ab chalmersinvest, greenway medical techn. inc. and husqvarna ab. Holdings in Ericsson 1): 58,803 class b shares principal work experience and other information: president and ceo of investor ab since 005. prior to this, börje ekholm was head of investor growth capital inc and new investments. previous posi- tions at novare Kapital ab and mcKinsey & co inc. Katherine M. Hudson (elected 2006) born 1947, bachelor of science in management, indiana university, usa. Board member (and lead Director): charming shoppes inc. Holdings in Erics- son 1): 5,000 class b shares principal work experience and other information: president and ceo of brady corporation 1994–003. management positions with eastman Kodak company, where she was employed for 4 years. ulf J. Johansson (first elected 2005) Member of the Audit Committee born 1945, Doctor of technology and master of science in electrical engineering, royal institute of technology, stockholm. Board Chairman: acando ab, eurostep group ab, novo a/s, and novo nordisk Foundation. Board member: trimble navigation ltd. Holdings in Ericsson 1): 3,176 class b shares principal work experience and other information: Founder of europolitan vodafone ab, where he was the chairman of the board 1990–005. previous positions at spectra-physics ab, where he was the president and ceo, ericsson radio systems ab. member of the royal academy of engineering sciences. Michael treschow (first elected 2002) Chairman of the Board of Directors Chairman of the Remuneration Committee Member of the Finance Committee born 1943, master of engineering, lund institute of technology. Board Chairman: ab electrolux and the confederation of swedish enterprise. Board mem- ber: abb ltd. and b-business partners. Holdings in Ericsson 1): 770,000 class b shares principal work experience and other information: president and ceo of ab electrolux 1997–00. earlier positions mainly include positions within atlas copco, where he served as president and ceo 1991–1997. member of the royal academy of engineering sciences. Marcus Wallenberg (first elected 1996) Deputy Chairman of the Board of Directors Chairman of the Finance Committee born 1956, bachelor of science of Foreign service, georgetown university, usa. Board Chairman: skandinaviska enskilda banken, saab ab, and international chamber of commerce (icc). Board member: astraZeneca plc, ab electrolux, stora enso oy, the Knut and alice wallenberg Foundation and thisbe ab. Holdings in Erics- son 1): 710,000 class b shares principal work experience and other information: positions within investor ab, where he served as president and ceo 1999–005. prior to this he was executive vice president at investor. previous employers include stora Feldmühle ag, citicorp, citibank and Deutsche bank. Sverker Martin-Löf (first elected 1993) Deputy Chairman of the Board of Directors Chairman of the Audit Committee born 1943, Doctor of technology and master of engineering, royal institute of technology, stock- holm. Board Chairman: skanska, svenska cellu- losa aktiebolaget sca and ssab. Deputy Chair- man: industrivärden. Board member: confederation of swedish enterprise and svenska handelsbanken. Holdings in Ericsson 1): 5,000 class b shares principal work experience and other information: president and ceo of svenska cellulosa aktiebolaget sca 1990–00, where he was employed 1977–1983 and 1986–00. previous positions at sunds Defibrator and mo och Domsjö ab. Sir peter L. Bonfield (first elected 2002) Member of the Audit Committee born 1944, honors degree in engineering, lough- borough university, leicestershire, uK. Board Chairman: supervisory board – nXp. Deputy Chair- man: british quality Foundation. Board member: 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 ENXCGRXXXControl_v41.indd 10 07-03-01 13.06.54 nancy McKinstry (first elected 2004) Member of the Remuneration Committee born 1959, master of business administration in Finance and marketing, columbia university, usa. bachelor of arts in economics, university of rhode island, usa. Board Chairman: ceo and chairman of the executive board of wolters Kluwer n.v. Board member: the american chamber of commerce, the netherlands, and tias nimbas business school. Holdings in Ericsson: none principal work experience and other information: ceo and chair- man of the executive board of wolters Kluwer n.v. president and ceo of cch legal information services (1996–1999). previous posi- tions at booz, allen & hamilton, and new england telephone com- pany. member of the advisory council of abn amro holding n.v. and the advisory board of the university of rhode island. Anders nyrén (elected 2006) Member of the Finance Committee born 1954, graduate from stockholm school of economics, master of business administration from anderson school of management, ucla, usa. Board Chairman: association of exchange listed companies and association for generally accepted principles in the securities market. Deputy Chairman: sandvik ab, svenska handelsbanken. Board member: svenska cellulosa aktie- bolaget sca ab, industrivärden, skanska, ssab, and ernströms- gruppen. Holdings in Ericsson 1): 33,48 class b shares principal work experience and other information: president and ceo of industrivärden since 001. cFo and evp of skanska ab 1997–001. nordbanken 1996–1997. cFo and evp of securum ab 199–1996. managing Director of om international ab 1987–199. earlier positions at stc scandinavian trading co ab and ab wilhelm becker. Carl-Henric Svanberg (first elected 2003) born 195, master of science, linköping institute of technology. bachelor of science in business admin- istration, university of uppsala. Board Chairman: sony ericsson mobile communications ab. Deputy Chairman: assa abloy ab. Board member: the confederation of swedish enterprise and hexagon. Holdings in Ericsson 1): 15,683,577 class b shares principal work experience and other information: president and ceo of telefonaktiebolaget lm ericsson since 003. prior to this, carl-henric svanberg was the president and ceo of assa abloy ab (1994–003). various positions within securitas ab (1986–1994) and abb group (1977–1985). carl-henric svanberg does not have mate- rial shareholdings or part ownerships in companies with which the company has material business relationships. c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 Board members and deputies appointed by the unions: Jan Hedlund (first appointed 1994) Employee representative. Member of the Audit Committee born 1946. appointed by the union iF metall. Holdings in Ericsson 1): 1,603 class b shares Monica Bergström (first appointed 1998) Employee representative. Member of the Remuneration Committee born 1961. appointed by the union siF. Holdings in Ericsson 1): 3,694 class b shares torbjörn nyman (first appointed 2004) Employee representative. Member of the Finance Committee born 1961. appointed by the union the swedish association of graduate engineers. Holdings in Ericsson 1): 10,440 class b shares per Lindh (first appointed 1994) Deputy employee representative. born 1957. appointed by the union siF. Holdings in Ericsson 1): 03 class b shares Anna Guldstrand (first appointed 2004) Deputy employee representative. born 1964. appointed by the union the swedish association of graduate engineers. Holdings in Ericsson 1): 4,146 class b shares, 900 options. Kristina Davidsson (appointed 2006) Deputy employee representative. born 1955. appointed by the union iF metall. Holdings in Ericsson 1): 1,06 class b shares carl-henric svanberg is the only Director who holds an operational management position at ericsson. no Director has been elected pursuant to an arrangement or understanding with any major share- holder, customer, supplier or other person. 1) The number of Class B shares (and Class A shares and options, if applicable) includes holdings by related natural or legal persons. c o r p o r at e g o v e r n a n c e r e p o r t 11 ENXCGRXXXControl_v41.indd 11 07-03-01 13.07.03 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 company management Members of the Group Management team the president and Chief Executive officer – operational Management the board of Directors appoints the president and ceo and the executive vice presidents. management of day-to-day opera- tions is the responsibility of the president and ceo and the group management team which, in addition to the president and ceo, consist of the chief Financial officer, the chief technology officer, the heads of group Functions and the heads of business units access, systems, global services and business unit broadband networks. Group functions ericsson’s group Functions perform tasks pertaining to group- wide matters that logically do not fall into a specific operational unit: communications, Finance, human resources & organiza- tion, legal affairs, operational excellence, research & Develop- ment, sales & marketing, and strategy & product management. the group Functions formulate group strategy, issue policies and directives, perform business control, resource allocation and risk management. they are also responsible for consolidation and reporting of financial performance, financing and cash man- agement, legal issues, communication with various stakeholders 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 responsibility, are managed by group Functions in conjunction with a network of experts from various parts of the company. operational units our operations are carried out in three business segments; systems, phones and other operations. systems, our largest segment, is organized into business units responsible for the provision of products and services, and market units, responsible for marketing, sales and customer support. For more information regarding our business segments and information on the new organisation effective as from January 1, 007, please see the “board of Directors’ report” and “information on the company” in the annual report. management of each operating unit has significant authority and responsibility in relation to day-to-day operations, while governance is carried out by steering commit- tees that include representatives of the group management team, the extended management team and the unit’s own man- agement. Carl-Henric Svanberg President and CEO and member of the Board of Directors (since 2003) born 195, master of science, linköping institute of technology, bachelor of science in business adminis- tration, university of uppsala. Chairman: sony ericsson mobile communications ab. Deputy Chair- man: assa abloy ab. Board member: the confederation of swedish enterprise and hexagon. Holdings in Ericsson 1): 15,683,577 class b shares Background: president and ceo of assa abloy ab (1994–003). vari- ous positions within securitas ab (1986–1994) and abb group (1977– 1985). Karl-Henrik Sundström Executive Vice President and Chief Financial Officer and head of Group Function Finance (since 2003) born 1960, bachelor in Finance, university of uppsala, advanced management program, harvard business school, usa. Board member: sony ericsson mobile communications ab. Holdings in Ericsson 1): 34,30 class b shares Background: prior to assuming his position, Karl-henrik sundström was head of business unit global services. Kurt Jofs Executive Vice President and head of Business Unit Access (since 2004) born 1958, master of science, royal institute of tech- nology, stockholm. Board Chairman: peoples travel group. Board member: sony ericsson mobile com- munications ab. Holdings in Ericsson 1): 9,5 class b shares Background: president and ceo of linjebuss and abb ventilation products. Bert nordberg Executive Vice President and head of Group Function Sales & Marketing (since 2004) born 1956, bachelor in electronic engineering, malmö, engineer in the marines, berga, university courses in international management, marketing and Finance, insead university, France. Holdings in Ericsson 1): 43,817 class b shares Background: prior to assuming this position, bert nordberg was head of business unit systems and held other various positions within ericsson. 1 c o r p o r at e g o v e r n a n c e r e p o r t ENXCGRXXXControl_v41.indd 12 07-03-01 13.07.07 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 Björn olsson Executive Vice President and head of Business Unit Systems (since 2004) born 1956, master of science in industrial engineer- ing and management, linköping institute of technol- ogy. Holdings in Ericsson 1): 40,176 class b shares Background: prior to assuming this position, björn olsson was chief information officer. he has held various positions within ericsson since 1981. Hans vestberg Executive Vice President and head of Business Unit Global Services (since 2003, appointed Executive Vice President in 2005) born 1965, bachelor in business administration, university of uppsala. Holdings in Ericsson 1): 7,364 class b shares Background: previous to his current position, hans vestberg was vice president and head of market unit mexico (00–003). hans vestberg has held various positions in the company since 1988. Marita Hellberg Senior Vice President and head of Group Function Human Resources & Organization (since 2003) born 1955, bachelor in social studies, stockholm university, advanced management program, cedep, France. Board member: utbildningsradion, and teknikföretagen. Holdings in Ericsson 1): 47,091 class b shares Background: prior to assuming this position marita hellberg was senior vice president of human resources of ncc group. torbjörn nilsson Senior Vice President (since 1998) and head of Group Function Strategy & Product Management (since 2003) born 1953, master of science, lund’s university, master of business administration, stockholm university. Holdings in Ericsson 1): 69 541 class b shares Background: prior to his position above, torbjörn nilsson was head of group Function marketing & strategic business Development. torbjörn nilsson has held various management positions within the company since 1978. Carl olof Blomqvist Senior Vice President, General Counsel and head of Group Function Legal Affairs (since 1999) born 1951, master of law, llm, university of upp- sala, sweden. Holdings in Ericsson 1): 6,080 class a shares and 46,491 class b shares Background: prior to assuming this position, carl olof blomqvist was a partner of mannheimer swart- ling law firm. Henry Sténson Senior Vice President and head of Group Function Communications (since 2002) born 1955, studied law, sociology and political science, linköping university and at the swedish war academy, Karlberg, stockholm. Board mem- ber: studsvik and the stockholm chamber of com- merce. Holdings in Ericsson 1): 4,574 class b shares Background: prior to assuming his position above, henry sténson was head of sas group communication, sas ab. Håkan Eriksson Senior Vice President, Chief Technology Officer and head of Group Function Research & Development (since 2004) born 1961, master of science and honorary ph D, linköping institute of technology. Deputy Chair- man: section Xi, research and education, swedish royal engineering academy. Board member: linköping university, anoto. Holdings in Ericsson 1): ,980 class b shares Background: prior to assuming this position, håkan eriksson was senior vice president and head of research & Development. he has held various positions within ericsson since 1986. Joakim Westh Senior Vice President and head of Group Function Operational Excellence (since 2004) born 1961, master of science, royal institute of technology, stockholm, master of science within aeronautics & astronautics, mit, boston, usa. Board chairman: absolent ab. Board member: vKr holding a/s. Holdings in Ericsson 1): 14,886 class b shares Background: member of assa abloy executive management team. before this, Joakim westh was a partner with mcKinsey & co. inc. Sivert Bergman Senior Vice President and head of Business Unit Broadband Networks (since 2006) born 1946, senior high school degree of electric engineering, trollhättan, complemented with studies in mathematics. Holdings in Ericsson 1): 7,60 class b shares Background: prior to assuming this position, sivert bergman was head of business unit transmission and transport networks. sivert bergman has held various management positions in the company since 1979. 1) The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal persons. Options and matching rights are reported in Notes to the Consolidated Financial Statements – Note C29, “Information Regarding Employees, Mem- bers of the Board of Directors and Management” in the Annual 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 13 ENXCGRXXXControl_v41.indd 13 07-03-01 13.07.18 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 Extended Management team Compensation to top executives the extended management team consists of the officers of the principles for remuneration and other employment terms for group management team and: • cesare avenía, vice president and head of market unit south east europe. • rory buckley, vice president and head of market unit north east asia; • ragnar bäck, chairman of the market units within the central and eastern europe, middle east & africa (cema) regions; • Jan campbell, vice president and head of market unit central europe; • mats granryd, vice president and head of market unit india & sri lanka; • Jef Keustermans, vice president and head of market unit ericsson’s top executives were approved by the annual general meeting of shareholders 006. For further information on com- pensation, fixed and variable pay, see notes to the consolidated Financial statements – note c9, “information regarding em- ployees, members of the board of Directors and management” in the annual report. auDitors ericsson’s 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’ northern europe; meetings. • ingemar naeve, vice president and head of market unit iberia and global customer account executive telefónica; • mats olsson, vice president and head of market unit greater china; • torbjörn possne, vice president and global customer account executive Deutsche telekom; • angel ruiz, vice president and head of market unit north america; • Jan signell, vice president and head of market unit south east asia; and • gerhard weise, vice president and head of market unit mexi- co. During 006, the officers below were also members of the extended management team of the company: • sandeep chennakeshu: former president ericsson mobile platforms ab. sandeep chennakeshu left the company on april 9, 006. the auditors; • update the board of Directors regarding the planning, scope and content of the annual audit; • examine the year-end financial statements and report findings to assess accuracy and completeness of the accounts and adherence to accounting procedures and principles; • advise the board of Directors of additional services performed (non-auditing), the consideration paid and other issues that are needed to determine the auditors’ independence. For further information on the contacts between the board and the audi- tors, please see “work of the board of Directors” above. all ericsson quarterly reports are reviewed by our auditors. Statutory auditors peter clemedtson authorized public accountant, pricewaterhousecoopers. elected 004 (as successor for the remaining mandate period of • Kinson loo: former vice president and global customer carl-eric bohlin) until 007. account executive for hutchison. Kinson loo left the company audit services performed in other large companies such as: on June 30, 006. electrolux, Kmt, medivir, omX, seb. • anders olin: former vice president and global customer account executive vodafone. anders olin was appointed head bo hjalmarsson of sales & marketing, western europe, within group Function authorized public accountant, pricewaterhousecoopers. sales & marketing on october 1, 006. elected 003 until 007. extended management team members are not involved in any sony ericsson, lundin petroleum, vostok nafta. audit services performed in other large companies such as omX, business activities that compete with or in any other way nega- tively affect ericsson’s business. none of the extended manage- ment team members have been appointed by arrangement or understanding with shareholders, customers, suppliers or other parties. 14 c o r p o r at e g o v e r n a n c e r e p o r t ENXCGRXXXControl_v41.indd 14 07-03-01 13.07.19 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 thomas thiel authorized public accountant, Kpmg. elected 003 until 007. audit services performed in other large companies such as atlas copco, Folksam, handelsbanken, holmen, peab, ratos, sKF, auDit committee pre- approval policies anD proceDures swedish match, Kungsleden. the audit committee makes recommendations to the board of Deputy auditors Jeanette skoglund Directors regarding the auditors’ performance and fees. it re- views the scope and execution of audits performed (external and internal) and analyzes the result and the cost. authorized public accountant, pricewaterhousecoopers. the audit committee has established pre-approval policies elected 003 until 007. and procedures for services other than audits performed by the audit services performed in several large subsidiaries of global external auditors. such services fall into two broad headings: companies such as tDc song. General Pre-Approval services that can be pre-approved by robert barnden the audit committee without consideration to specific case-by- case service. tax, transaction, risk management, corporate authorized public accountant, pricewaterhousecoopers. finance, attestation and accounting services and general ser- elected 004 (as successor for the remaining mandate period of vices have received a general pre-approval of the audit commit- peter clemedtson) until 007. tee, provided that the estimated fee level for the project does not audit services performed in other large companies such as: exceed seK 1 million. the external auditors must advise the acandoFrontec, nobia, sca, seco tools, vsm group. audit committee of services rendered under the general pre- approval policy. stefan holmström Specific Pre-Approval – all other audit-related, tax and other authorized public accountant, Kpmg. services must receive specific pre-approval. the audit commit- elected 003 until 007. tee chairman has the delegated authority for specific pre- audit services performed in other large companies such as: approval, providing service fees do not exceed seK .5 million. länsförsäkringar, posten, swedish meats, v&s vin & sprit. the chairman reports any pre-approval decisions to the audit fees paid to external auditors committee at its scheduled meetings. For other matters, an audi- tor submits an application to the cFo. if supported by the cFo, ericsson paid the fees (including expenses) listed in the table in the application is presented to the audit committee for final notes to the consolidated Financial statements – note c31, approval. “Fees to auditors” in the annual report for audit-related and other pre-approval authority may not be delegated to management. services. the policies and procedures include a list of prohibited services. the audit committee reviews and pre-approves any non-audit services to be performed by the external auditors to ensure the auditors’ independence. services other than audit services pro- vided by the auditors from 004 to 006 are described in notes Disclosure controls anD proceDures to the consolidated Financial statements – note c31, “Fees to ericsson has controls and procedures in place to make sure that auditors” in the annual report. information to be disclosed under the securities exchange act of 1934, and under ericsson’s agreements with the stockholm and london stock exchanges and nasDaq is done so on time, and that such information is provided to management, including the ceo and cFo, so that timely decisions can be made regarding required disclosure. to assist managers in fulfilling their responsibility with regard to disclosures made by the company to its security holders and the investment community, a Disclosure committee was estab- lished in 003. one of the main tasks of the Disclosure commit- tee is to monitor the integrity and effectiveness of the company’s c o r p o r at e g o v e r n a n c e r e p o r t 15 ENXCGRXXXControl_v41.indd 15 07-03-01 13.07.19 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 disclosure controls and procedures. Further, ericsson has investments in certain entities that ericsson does not control or manage. accordingly, our disclo- • a reflection of best practice – we strive to ensure that our dis- closure is in line with industry norms and, if possible, lead the sure controls and procedures with respect to such entities are way to improved best-in-class standards. necessarily substantially more limited than those we maintain our website (www.ericsson.com/investors) includes comprehen- with respect to our subsidiaries. sive information on ericsson, including an archive of our annual During the year, management, with the participation of erics- and interim reports, on-demand-access to recent news and son’s president and ceo and cFo, supervised and participated copies of presentations given by senior management at industry in an evaluation of the effectiveness of our disclosure controls conferences. information on our website does not form part of and procedures. as a result, ericsson’s president and ceo and this document. cFo concluded that the disclosure controls and procedures were effective at a reasonable assurance level. there were no changes to our internal control over financial reporting during the period covered by the annual report 006 that have materially affected, or are likely to materially affect, our internal control over financial reporting. ericsson’s Disclosure policies inDepenDence requirements on the boarD the ericsson board of Directors is subject to, and complies with, a variety of independence requirements. however, it has sought and received exemptions from those nasDaq requirements that are contrary to swedish law, see “nasDaq corporate gover- nance exemptions” below. ericsson’s financial disclosure policies are designed to give transparent, informative and consistent communication with the investment community on a fair and equal basis, which will re- flect in a fair market value for ericsson shares. we want our Stockholm Stock Exchange listing requirements • only one person from senior management may be a member of the board (applies also to senior management in the compa- shareholders and potential investors to have a good understand- ny’s subsidiaries). ing of how our company works, our operational performance, what our prospects are and the risks we face that these opportu- • the majority of the directors elected by the shareholders’ meetings (employee representatives not included) must be nities may not be realized. independent of the company and its management. an overall to continue to achieve these goals, our financial reporting and assessment should be made in each case in order to consider disclosure must be: • transparent – our disclosure should enhance understanding of the economic drivers and operational performance of our whether a director is independent or not. • at least two of the directors who are independent of the com- pany and its management must also be independent of the business, hence building trust and credibility. company’s major shareholders. one of these directors must • consistent – we aim for consistent and comparable disclosure within and between reporting periods. • simple – information should be provided in as simple a manner as possible, so readers gain the appropriate level of under- standing of our business operations and performance. • relevant – we focus our disclosure on what is relevant to erics- son’s stakeholders or required by regulation or listing agree- ments, to avoid information overload. • timely – we utilize well-established disclosure controls and be experienced in requirements placed on a listed company. The Swedish Code of Corporate Governance independence requirements on the board of directors (excluding employee representatives): • only one person from the senior management may be a mem- ber of the board. • a majority of the directors elected by the shareholders’ meet- ings must be independent of the company and its manage- procedures to ensure that all disclosures are complete, accu- ment. rate and performed on a timely basis. • Fair and equal – we publish all material information via press releases to ensure everyone receives the information at the • at least two of the directors who are independent of the com- pany and its management must also be independent of the company’s major shareholders. same time. 16 c o r p o r at e g o v e r n a n c e r e p o r t ENXCGRXXXControl_v41.indd 16 07-03-01 13.07.20 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 independence requirements on the audit committee: • the majority of audit committee members must be indepen- NASDAQ Corporate Governance Exemptions pursuant to a 005 amendment to nasDaq’s marketplace rules, dent of the company and senior management. foreign private issuers such as ericsson may follow home- coun- • at least one member of the committee must be independent of try practice in lieu of certain nasDaq corporate governance the company’s major shareholders. requirements. • a board member who is part of senior management may not before the amendment was adopted, nasDaq’s marketplace be a member of the audit committee. rules provided that foreign private issuers could, upon applica- independence requirements on the remuneration committee: • committee members must be independent of the company tion, be exempt from certain of its corporate governance require- ments when these requirements were contrary to the laws, rules or regulations, or generally accepted business practices of the and the senior management. issuer’s home jurisdiction. The NASDAQ Marketplace Rules independence requirements on the board of directors: • a majority of the members of the board of directors must be independent within the meaning of the nasDaq rules. ericsson has received (and is entitled to continue to rely there- on under the 005 amendment) exemptions from nasDaq’s corporate governance requirements under the marketplace rules in order to allow: • employee representatives to be elected to the board of Direc- tors and serve on its committees (including the audit commit- ericsson has obtained an exemption from nasDaq allowing tee), in accordance with swedish law. employee representative directors to be exempt from nasDaq’s independence 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 00. • shareholders to participate in the election of Directors and the nomination committee, in accordance with swedish law and common market practice respectively. • employee representatives on the board to attend all board and all committee meetings (including the audit committee), in accordance with swedish laws concerning attendance and decision making processes. in addition, ericsson relies on the exemption provided by the the sarbanes-oxley act of 00 includes a specific exemption 005 amendment to overcome contradictions between nasDaq for non-executive employee representatives. and swedish law requirements regarding quorums for its meet- ings of holders of common stock. ENXCGRXXXControl_v41.indd 17 07-03-01 13.07.20 c o r p o r at e g o v e r n a n c e r e p o r t 17 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 internal control over Financial reporting For year 006 according to the swedish companies act and the swedish code Control environment of corporate governance, the board of Directors shall ensure that the company has satisfactory internal controls and keep the company’s internal control structure is based on: • the division of work between the board of Directors and its itself informed of the company’s internal control system and committees and the president and ceo; assess how well it is working. this report has been prepared in • a management system based on accordance with the swedish code of corporate governance, • the company’s organization and mode of operations, with section 3.7., and is thereby limited to internal control over finan- well-defined roles and responsibilities and delegations of cial reporting. authority; the swedish corporate governance board has made a pro- • steering documents such as policies and directives, nouncement regarding the board of Directors’ reporting on inter- including a code of business ethics and conduct; and nal control under the code to the effect that: this report is to be • a number of well-defined planning, operational and included as a part of the corporate governance report; it is not support processes. necessary for the board of Directors to make a statement of how well the internal control over financial reporting has worked; and the most essential parts of the control environment regarding the the internal control report does not have to be examined by the financial reporting are included in steering documents related to auditors. in accordance with this pronouncement, we are not accounting and financial reporting. such steering documents are making any such statement in this report for 006 and this report updated regularly for changes to, for example, laws, financial has not been examined by our auditors. reporting standards and listing requirements, such as iFrs and as the company is listed in the united states, the require- soX in the united states. ments in soX section 404 regarding assessment of the effective- ness of internal controls over financial reporting are applicable Risk assessment as from the fiscal year 006. the company has implemented risks related to financial reporting are fraud and loss or embezz- detailed controls, documentation and testing procedures in lement of assets, undue favorable treatment of counter-parties at accordance with the coso framework, issued by the committee the expense of the company, and other risks of material mis- of sponsoring organizations of the treadway commission, to statements in the financial statements, for example those related ensure compliance with soX 404. management’s report to recognition and measurement of assets, liabilities, revenue according to soX 404 will be included in ericsson’s 0-F report and cost or insufficient disclosure. ericsson is managed through to the sec in the united states. common processes, where risk management is integrated, ap- Internal control over the financial reporting plying various methods for risk assessment and control, to en- sure that the risks the company is exposed to are managed ericsson has integrated risk management and internal control in according to established policies. accounting and reporting its business processes. as defined in the coso framework for policies and directives cover areas of particular significance to internal control, components of internal control are: a control support correct accounting, reporting and disclosure. environment, risk assessment, control activities, information and communication, and monitoring. 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 regard- ing recognition, measurement and disclosure, including the application of critical accounting policies and estimates, in con- solidated companies as well as on group level. all legal entities, business units and market units in ericsson have their own con- troller functions participating in planning and evaluation of each 18 c o r p o r at e g o v e r n a n c e r e p o r t ENXCGRXXXControl_v41.indd 18 07-03-01 13.07.21 c o r p o r at e g o v e r n a n c e r e p o r t  0 0 6 unit’s performance. their regular analysis of the financial reports Monitoring for their respective units, together with analysis performed at the company’s financial performance is reviewed at each board group level, is an important element of the internal control to meeting. the committees of the board fulfill important monitoring ensure that the financial reports do not contain material errors. functions regarding remuneration, borrowing, investments, For external financial reporting purposes, additional controls customer financing, cash management, financial reporting and that all disclosure requirements are fulfilled are performed by a internal control. the audit committee and the board of Directors Disclosure committee established by company management. review all interim and annual financial reports before they are the company has implemented controls to ensure that the released to the market. financial reports are prepared in accordance with iFrs. the the company’s process for financial reporting is reviewed company also has detailed documentation of internal controls annually by management and forms a basis for the evaluation of related to accounting and financial reporting, as well as moni- the internal management system and internal steering docu- toring of the performance and results of such controls, to ensure ments to ensure that these cover all significant areas related to ericsson can assess the effectiveness of the internal control in a financial reporting. compliance with policies and directives is way that is compliant with soX requirements. a thorough review also monitored through annual self assessments and representa- of materiality levels related to the financial reports has resulted in tion letters from heads and controllers in all consolidated compa- implementation of detailed control documentation in a number of nies as well as from business units and market units. the subsidiaries with significant scale of operations. For other sub- company has an internal audit function, reporting to the audit sidiaries, overall controls related to the control environment and committee, which performs independent audits. compliance with policies and directives related to financial re- porting have been implemented. Information and communication the company has information and communication channels supporting completeness and correctness of financial reporting, for example, by making internal instructions and policies regard- ing accounting and financial reporting widely known and accessible to all employees concerned, as well as regular up- dates and briefing documents regarding changes in accounting policies and reporting and disclosure requirements. legal and operational units make regular financial and man- agement reports to internal steering groups and company man- agement, including analysis and comments of financial perfor- mance and risks. the board of Directors receives financial reports monthly. the audit committee has established a “whistle blower” procedure for the reporting of violations in relation to accounting, internal controls and auditing matters. ENXCGRXXXControl_v41.indd 19 07-03-01 13.07.21 c o r p o r at e g o v e r n a n c e r e p o r t 19 CONTENTS Annual Report 2006 1 Operational review 25 Letter from the Chairman 26 Five-year summary 28 Board of directors' Report* 40 Consolidated financial statements* 44 Notes to the consolidated financial statements* 89 Risk factors* 94 Parent Company financial statements* 99 Notes to the Parent Company financial statements* 115 Auditors' Report 116 Information on the Company 129 Forward-looking statements 130 Share information 135 Shareholder information 136 Compensation Corporate Governance Report 2006 *Chapters covered by the Auditors' Report Annual publications The Ericsson Annual Report is intended to accurately describe Ericsson's financial and operational performance during 2006. This publication includes a Corporate Governance Report. The Ericsson Summary Annual Report is an extract of the full Annual Report. We issue a separate Corporate Responsibility Report. A summary is included on page 22 of this document. Our website www.ericsson.com is updated on a regular basis and contains a variety of useful information about the Company, including downloadable versions of each of the above reports. dRIvINg ChANgE ANd CREATINg OPPORTUNITIES dRIvINg ChANgE ANd CREATINg OPPORTUNITIES dRIvINg ChANgE ERICSSON ANNUAL REPORT 2006 ERICSSON SUMMARY ANNUAL REPORT 2006 ERICSSON CORPORATE RESPONSIBILIT Y REPORT 2006 Design and production Publicis Stockholm and Paues Media Photography Andreas Lind Reprographics C2, Jonas Skoglund, TBK Printing Sörmlands grafiska Quebecor AB/Printer Consult dRIvINg ChANgE ANd CREATINg OPPORTUNITIES ERICSSON ANNUAL REPORT 2006 A N N U A L R E P O R T 2 0 0 6 Opportunity The broadband revolution is just beginning. Cutting-edge applications and innovative services are driving the need for higher-speed and higher-capacity networks, in line with our vision of an all-communicating world. Result As of year-end 2006, Ericsson had rolled out 46 HSPA broadband networks on five continents, bringing easy access to the Internet to more corners of the world than ever before. Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden www.ericsson.com Printed on Amber graphic and holmen Ideal volume – chlorine free paper that meets international environmental standards. EN/LZT 108 9051 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2007 

Continue reading text version or see original annual report in PDF format above