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