Ericsson Annual Report 2007

Plain-text annual report

A N N U A L R E P O R T 2 0 0 7 ERICSSON ANNUAL REPORT 2007 EVERY MOMENT COUNTS 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 9753 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2008 Stockholm, Sweden Connecting with friends Alfa Indah, Sumatra, Indonesia Delivering an order received via mobile phone Singapore Keeping in touch with relatives in New York Glossary Annual Report 2007 Operational Review 1 25 Letter from the Chairman 26 Board of Directors' Report* 45 Consolidated Financial Statements* 49 Notes to the Consolidated Financial Statements* 105 Risk Factors* 111 Parent Company Financial Statements* 116 Notes to the Parent Company Financial Statements* 134 Auditors' Report 135 Share Information 140 Shareholder Information 141 Remuneration 145 Information on the Company 155 Forward-looking Statements 156 Corporate Governance Report 2007 176 Financial Terminology and Glossary Annual publications The Ericsson Annual Report describes Ericsson’s financial and operational performance during 2007. 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. Our website www.ericsson.com is updated on a regular basis and contains information about the Company, including downloadable versions of each of the above reports. * Chapters covered by the Auditors' Report 2G First digital generation of mobile systems, includes GSM, TDMA, PDC and cdmaOne. 3G 3rd generation mobile system, includes WCDMA/HSPA, EDGE, CDMA2000 and TD-SCDMA. All-IP A single, common IP infrastructure that can handle all network services, including fixed and mobile communi- cations, for voice and data services and also video services such as TV. ARPU Average Revenue Per User. Broadband Data speeds that are high enough to allow transmission of multimedia services with good quality. Centrex solutions Centrex is a telephony service for enter- prises, delivered by a service provider. Downlink = to your device. DSL access Digital Subscriber Line technologies for broadband multimedia com- munications in fixed line telephone networks. Examples: IP-DSL, ADSL and VDSL. EDGE Third generation mobile standard, developed as an enhancement of GSM. Enables the transmission of data at speeds up to 250 kbps. Emerging market Defined as a country that has a GNP per capita index below the World Bank average and a mobile subscrip- tion pene tration below 60 percent. IMS (IP Multimedia Subsystem) A standard for offering voice and multimedia services over mobile and fixed networks using Internet technology (IP). IP (Internet Protocol) Defines how information travels between network elements across the Internet. GPON (Gigabit Passive Optical Network) Used for fiber-optic communication to the home (FTTH). IPTV (IP Television) A technology that delivers digital television via fixed broadband access. GPRS (General Packet Radio Service) A packet-switched technology that enables GSM networks to handle mobile data communications at rates up to 115 kbps, for instance Internet connections. Generally referred to as 2.5G. HSPA (High Speed Packet Access) Enhancement of 3G/WCDMA that en- ables mobile broadband. A subscriber can download files to a 3G mobile device at speeds of several Mbps. IPX (Internet Payment eXchange) The global payment and messaging delivery solution for SMS, MMS, Web and WAP. LTE (Long-Term Evolution) The term for the next evolutionary step of mobile technology beyond today’s HSPA networks. Main-remote concept A split radio base station, with radio units at the top of the mast, near antennas. Managed services Outsourcing of the management of operator networks and/or hosting of their services. Packet switching A method of switching data in a network where individual packets are accepted by the network and delivered to their destinations. The method is used by the Internet and will replace traditional circuit switching. Penetration The number of subscriptions divided by the population in a geographical area. Softswitch A software-based system for handling call management functionality. Inte- grates IP-telephony and the legacy circuit-switched part of the network. Uplink = from your device, e.g. to the Internet. WCDMA (Wideband Code Division Multiple Access) A 3G mobile communica- tion system that uses code division multiple access technology over a wide frequency band. WCDMA builds on the same core network infrastruc- ture as GSM. Uncertainties in the Future Some of the information provided in this material is or may contain forward-looking information such as statements about expectations, assumptions about future market conditions, projec- tions or other characterizations of future events. The words “believe”, “expect”, “anticipate”, “intend”, “may”, “plan”, the negative of such terms, and similar expressions are intended to identify these statements. Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct and actual results may differ materially. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law or stock exchange regulation. We advise you that Ericsson is subject to risks both specific to our industry and specific to our company that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, changing conditions in the telecom- munications industry, political economic and regulatory developments in our markets, our management’s ability to develop and execute a successful strategy, various financial risks such as interest rate changes and exchange rate changes, erosion of our market position, structure and financial strength of our customer base, our credit ratings, product development risks, supply constraints, and our ability to recruit and retain quality staff. WHERE YOU CAN FIND OUT MORE Our website: www.ericsson.com Our share: www.ericsson.com/investors Project Management Ericsson Investor Relations Design and production Publicis Stockholm and Paues Media Photography Andreas Lind, Felix Oppenheim (p.8-9), Marcel Pabst (p.19), Lars Nybom (p.23-24) Reprographics TBK Printing Elanders, Falköping Kuala Lumpur, Malaysia Checking the account balance Portland, Oregon, USA Broadcasting live on the Internet Milan, Italy Sharing a goal with friends across the world Every moment counts Freeze any moment in time. Anywhere They are talking, working, keeping in the world. No matter where you look, in touch, exchanging ideas, buying, you will find people taking advantage selling, checking news, downloading of telecommunications: at home, on city information, watching videos. No streets, in remote locations, at work, matter what they are doing, it’s a new, in transit. natural part of their lives. In many ways, Ericsson is at the heart of this. Our technology and services make these moments possible. 1.6 million new subscriptions per day The number of GSM/WCDMA subscriptions around the world increased by 1.6 million per day in 2007. Source: Informa 1 every moment countsNET SALES (SEK billion) 187.8 179.8 153.2 132.0 117.7 2003 2004 2005 2006 2007 OuR 10 LARGEST MARkETS 2007 percent of total sales 7 6 6 5 5 4 4 China uSA India Italy Spain Sweden uk Indonesia 3 Japan Brazil 3 3 The Ericsson advantage Ericsson provides communication investments by creating, securing, protecting and networks, professional services and multimedia solutions to the world's largest and most demanding operators and service providers. licensing our portfolio of patents in support of our business goals. Operational Excellence Simple, efficient and effective processes that consis- tently yield high-quality products and services with low We are also engaged in bringing tele- cost of ownership provide competitive advantage. communication to benefit people in In this way we help our customers become as suc- developing areas of the world. cessful as they possibly can. Operational excellence, combined with our core values of professionalism, Long-term dedication to our customers respect and perseverance, is instrumental to our The essence of the telecommunication business ways of working. A 52.7 -1 % 54.6 +14% C 48.7 +5% B is long-term and trusted relationships between vendors and operators. With records of service exceeding a century in almost every market in the world, Ericsson has some of the strongest operator relationships in the industry. Simply put, operators know what they get when they choose to work with Ericsson – a trusted partner committed to making them as successful as they can possibly be. Technical superiority ThE ErICSSOn VISIOn Our vision is to be the prime driver in an all- communicating world. A world in which all E 13.4 -15% 18.4 +12% D For more than 130 years, Ericsson’s commitment people can use voice, text, images and video to research and development has been at the heart to share ideas and information whenever and of the Company’s vision to provide the means for wherever they want. As the leading supplier people everywhere to communicate. In addition to of communication networks and services, substantial contributions to standardization organi- Ericsson plays a vital role in making such a zations, Ericsson has one of the industry’s strongest world a reality. patent portfolios with approximately 23,000 granted worldwide. Furthermore, we capitalize on our SALES BY REGION 2007 Ericsson net sales (SEK billion) and change (%) year-over-year A Western Europe B Central & Eastern Europe, Middle East and Africa C Asia Pacific D Latin America E North America 2 the ericsson advantageFive-year summary SEK million Net sales Operating income Financial net Net income Year-end position Total assets Working capital Capital employed Net cash 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 per share, SEK Number of shares (in millions) – outstanding, basic, at end of period – average, basic – average, diluted Additions to property, plant and equipment Depreciation of property, plant and equipment Acquisitions/capitalization of intangible assets Amortization of intangible assets Research and development expenses – as percentage of net sales ratios Operating margin Operating margin excluding Sony Ericsson EBITDA margin Cash conversion Return on equity Return on capital employed Equity ratio Capital turnover Inventory turnover Trade receivables turnover Payment readiness, SEK million – as percentage of net sales statistical data, Year-end Number of employees – of which in Sweden Export sales from Sweden, SEK million 2007 2006 2005 2004 2003 2) 187,780 30,646 83 22,135 179,821 35,828 165 26,436 153,222 33,084 251 24,460 131,972 26,706 –540 17,836 117,738 –11,239 –864 –10,844 245,117 86,327 168,456 24,312 9,304 134,112 940 214,940 82,926 142,447 40,728 7,881 120,113 782 209,336 86,184 133,332 50,645 6,966 101,622 850 186,186 69,268 115,144 42,911 5,845 80,445 1,057 182,372 58,873 108,989 26,998 6,505 60,481 2,299 33,404 21,552 30,860 33,643 46,209 1.37 1.37 0.50 1) 8.44 1.65 1.65 0.50 7.56 15,900 15,891 15,964 4,319 3,121 29,838 5,433 28,842 15.4% 16.3% 12.5% 20.8% 66% 17.2% 20.9% 55.1% 1.2 5.2 3.4 64,678 34.4% 15,881 15,871 15,943 3,827 3,007 18,319 4,237 27,533 15.3% 19.9% 16.7% 24.1% 57% 23.7% 27.4% 56.2% 1.3 5.2 3.9 67,454 37.5% 1.53 1.53 0.45 6.41 15,864 15,843 15,907 3,365 2,804 2,250 3,269 24,059 15.7% 21.8% 20.3% 25.6% 47% 26.7% 28.7% 49.0% 1.2 5.1 4.1 78,647 51.3% 1.11 1.11 0.25 5.08 15,832 15,829 15,895 2,452 2,434 1,950 2,306 23,421 17.7% 20.2% 18.6% 25.5% 80% 24.2% 26.4% 43.8% 1.2 5.7 4.1 81,447 61.7% –0.69 –0.69 0 3.82 15,826 15,823 15,841 3,493 3,753 2,460 2,579 28,553 24.3% –9.5% –9.0% 11.1% –19% –16.2% –5.9% 34.4% 1.0 6.1 3.4 75,309 64.0% 74,011 19,781 102,486 63,781 19,094 98,694 56,055 21,178 93,879 50,534 21,296 86,510 51,583 24,408 72,966 1) For 2007, as proposed by the Board of Directors. 2) 2003 is 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 testing, and the effective pension costs for future salary increases are estimated and recognized during the time of service. For definitions of the financial terms used, see Financial Terminology. 3 five-year summary Dear fellow shareholders, This year’s theme “Every Moment Counts”, is at the Market growth has continued to slow down, espe- very core of Ericsson’s vision of an all-communicat- cially in mature markets, and we find it prudent to ing world. We are helping to create a world in which plan for a flattish mobile infrastructure market for all people can have access to information, entertain- 2008. Consequently, we will adjust our cost basis ment, social networks and more, whenever and to be in line with the anticipated market develop- wherever they want. It is exciting to talk about prod- ment while continuing our R&D investments and ucts and services that enrich the everyday lives of thereby further strengthen an already strong com- billions of people around the world. petitive position. Given such industry dynamics, I think it is important A thorough review of our strategy, the business to put this year's developments into a longer-term environment and our ways of working show that our perspective. When I joined Ericsson five years ago, strategy has been effective and should not be changed. the Company was emerging from one of the deepest We are determined to continue to improve our crisises in its history. Our focus then was and still is position even in an increasingly challenging market. to "generate sustainable growth and provide com- Our longer-term outlook remains positive and we are petitive returns to our investors, regardless of aiming to do for broadband communications what day-to-day market fluctuations.” By basing our we have already done for telephony – make it mobile strategy on technology leadership, economies of and available to everyone, everywhere. In addition, scale, operational excellence, a focus on the con- we intend to lead the industry in migrating fixed and sumer and lower cost of ownership for our mobile networks into a converged IP-based network customers, we have consistently outperformed the which is able to efficiently handle all forms of tele- competition. communication, applications and services. We continued to make progress during 2007, Ericsson already has a good starting position for but, during the autumn, we experienced significant taking the lead in this migration, and with the acquisi- unexpected margin compression in our networks tions of Marconi, Redback and Entrisphere we: business as a consequence of a changing business - Provide broadband services to homes and offices mix. Although 2007 was one of the most profitable over optical fiber, radio or copper with our fixed years in the Company's history, our operating margin broadband access portfolio. fell well below expectations at the end of the third - Provide broadband services to mobile devices quarter, which made us issue a profit warning in with our mobile broadband technology. mid-October. - Interconnect fixed and mobile access with our ‘‘ 2007 was one of the most profitable years in the Company's history. ’’ 4 message from the ceooptical and radio transmission systems, softswitches nications by also making mobile broadband available and IP-routers. and affordable for the majority of the world’s population. - Manage service delivery and revenues with an A year ago, we established segment Multimedia to IMS-based service network. better address and develop the potentially huge - Support operators in planning, implementing and market for access and distribution of content, adver- operating their networks with our Professional tising and multimedia communications via broadband services. IP-based networks. We made several strategic Whether you are at home, at work or anywhere else, acquisitions to improve our capabilities in these we will be there, ensuring that your multimedia areas in addition to our own ongoing activities. services work seamlessly, regardless of what device Over the coming years, we will see new services, you are using or how you are connected. This puts new devices and new ways of communicating but, Ericsson in an even stronger position. more importantly, many more people connected. Consumers are quickly becoming accustomed to Think about what this means in terms of making a having affordable mobile broadband services avail- person’s life better by making every moment count able with the same performance on the go as on even more. I take great pride in the part Ericsson their PC at work or at home. It has only been a few plays in making that happen. years since the introduction of Web 2.0 applications like YouTube or Facebook, and yet people already Yours truly, expect to be in control of how they use the Internet – to instantly share content they create themselves as well as access content created by others. We all have a basic need and desire to communi- cate and with the rapid deployment of mobile networks in emerging markets, we have come far in our ambition of making communications for all a reality. But now it’s time to further expand the social, economic and environmental benefits of telecommu- ‘‘ We are aiming communications to do for broadband what we have already done for telephony – make it mobile.’’ Carl-Henric Svanberg President & CEO 5 message from the ceoOur business focus 2007 - building on last year's progress. 1 Reaching more people 2 Increasing speed and capacity We provided access for many new sub- HSPA takes off: 81 commercial 3G/HSPA scribers that previously could not afford mobile broadband networks out of a total of service or lived outside coverage areas. 166 around the world were powered by We implemented solar panels to power Ericsson at year-end. radio base stations in remote areas. Fiber access technology enables delivery Acquisitions We made a number of acquisi- We extended our leadership in telecom services – supporting over 1 billion subscrib- ers – 24 hours/day – seven days a week. tions to enhance our position. More than 650 million people can now pay for multimedia services with their mobile phones using Ericsson's IPX payment and delivery solution. of HD-TV services over IP networks. We acquired Entrisphere to complement our fixed access portfolio with fiber. We delivered a variety of optical and radio transmission solutions to operators to accommodate the increasing data traffic as people generate and share more of their own content. One million We deployed our millionth radio base station. 40% Ericsson systems handle about 40 percent of all mobile traffic. More achievements Networks: p.10-11 Professional services: p.14-15 Multimedia: p.18-19 6 3 Preparing for the future 4 Expanding our role Through Ericsson ConsumerLab, we conducted Our market share increased, with numerous more than 40,000 interviews, to gain valuable new and expanded agreements to supply insight on consumer behavior and trends. network equipment and/or services during the We supported operators preparing for an all-IP network environment by deploying year. The new buildouts pave the way for future upgrades and expansions. softswitch, IMS and transport solutions. We continued our progress as prime inte- We also supported customers merging their mobile and fixed networks into one full-service broadband network. grator and managed services partner by - managing large technology shift projects. - integrating multi-vendor equipment in customer networks. Ericsson invested in fixed broadband and Over 28,000 service professionals in more multimedia, acquiring Tandberg Television, than 140 countries provide local competence Redback Networks, Entrisphere, Drutt, and global expertise. Mobeon and LHS. our business focus 2007Our strategy 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 The notion of an all-communicating world is rapidly gaining momentum Services – expertise in network design, rollout, integration, operation and customer support within a and drives the convergence of the tele- global structure with robust local capabilities enables communications, Internet and media industries. Ericsson to better understand and respond to the unique challenges of each customer and capitalize on the trend to outsource a broader range of activi- By helping operators to evolve and improve their ties to network equipment suppliers. networks to efficiently handle multimedia capabil- ities, we are creating a world in which all people can have affordable access to information, enter- tainment, social communities and more, whenever and wherever they want. In the course of mak- ing people’s lives easier and more productive we are spurring socio-economic development which Multimedia – innovative application platforms, service delivery and revenue management solutions combined with leading content developer and application provider relationships enables Ericsson to uniquely help customers create exciting new and differentiated multimedia services. brings our vision closer to reality. Phones -The complementary strength of Sony With the ambition of being the prime driver in Ericsson Mobile Communications, our joint venture an all-communicating world, we have divided our with SONY, further enhances our consumer per- operations into segments that create competitive spective for superior end-to-end offerings. advantage and best meet the needs of our global customer base. The synergies generated by the combined strengths of the segments differentiate the Company through Networks – technology leadership, a broad product a continuous focus on operational excellence to portfolio and scale enables Ericsson to excel in better leverage our economy of scale in technology meeting the coverage, capacity and network evolu- development as well as in product and service tion needs of fixed and mobile operators. delivery and customer support. 49% Worldwide mobile subscription penetration is now 49 percent. 3.3 billion The number of mobile sub- scriptions reached 3.3 billion. 7 Our strategy “ A mobile phone means fewer trips to my suppliers – a big time-saver.” When Chahaya Suharto restocked his store for the first time using a mobile phone, he not only made his boss happy but started a new era for the village. As the manager of a small general store in the village Alfa Indah, located deep in the jungle of Sumatra, Indonesia, Chahaya is a well- known character among the local inhabitants. Brimming with cakes, coconuts, and staple goods, his store is a central gathering point and lifeline for the village to the world beyond the surrounding palm plantations. When Chahaya takes time to talk to us, he’s about to call his supplier to check the availability of palm oil and rice. The store is bustling with local villagers who stand around chatting, joking and nibbling on small home-made cakes – a popular item. ‘‘Before we had mobile phones, I had to close the store and drive my moped to meet my supplier, about 30 kilometers from here. When I got there, I could never be sure they had the right supplies I needed. People depend on me, so that was not good.” The change came when the local operator installed solar- powered radio base stations in the region. Like many other rural villages, Chahaya's village is located outside the main power grid and they depend on diesel-powered generators for electricity. However, with the solar- powered radio base stations, a crucial step was taken in providing reliable coverage at an affordable price to this region. Chahaya Suharto will never forget the moment he made his first call. “It was so easy and natural – just the press of a button,” he recalls. “Mobile communication might seem like an everyday thing to most of the world, but it’s a giant leap forward for us,” he says with a smile. “Now I can even call my relatives in Java to see how they are doing.” 8 networks Chahaya Suharto is one of 85 million subscribers among Indonesia's growing population of 230 million people. This project was driven by Ericsson and the solution is a part of the Ericsson Communications Expander portfolio. Thanks to the main-remote concept, the solution uses 60 percent less energy than a standard radio base station and can run on solar power. It's light weight, easy to maintain and has a low total cost of ownership. 9 networksN E T WO R KS 13% operating margin. 1% sales growth year-over-year. Ericsson’s largest business is network infrastructure, and scale is critical for our continued market leadership. We have worked hard to secure our scale advantage in mobile networks and to strengthen our fixed broad- band and core network portfolios. This puts us in an even better position for long-term profitable growth. Networks strategy band services and drive the demand for more mobile There are three core elements to our strategy for broadband capacity. maintaining our leadership in mobile networks and The road, of course, doesn’t stop there. Ericsson is further strengthen our position in fixed and converg- very active in establishing Long-Term Evolution (LTE) – ing networks: 1. Technology leadership: Ensuring our customers are first to market with the best networks and end- the step beyond 3G that will address operator needs for user demands for an even more powerful and convenient mobile broadband experience. to-end solutions with the lowest total cost of A comprehensive fixed broadband portfolio ownership. 2. Economies of scale: Through lower develop- ment and production cost per unit delivered. We improved our fixed broadband networks portfolio by continuing our acquisition strategy that began in 2005 with Marconi, which strengthened our trans- mission offering. 3. Operational excellence: Benefiting from effi- Our January purchase of Redback Networks ciency – from R&D, supply and all the way through instantly gave us a strong position for helping opera- rollout and operational support. tors deliver Internet, telephony, TV and mobile In short, a company that can deliver the best solu- tions most efficiently at larger volumes is difficult to beat. Let’s look at the progress we’ve made in key parts of our networks business during the past year. services over IP-based broadband network infra- structures. In February, we announced our acquisition of Entrisphere, which provides gigabit passive optical networking (GPON) technology for networks that Extended lead in mobility deliver content-rich services to homes and enter- On the mobile side, we continued to build on our prises, e.g. to PCs and high-definition TV. strength in GSM. As we eagerly look toward the The key to delivering multimedia services with future, it is easy to overlook that 2007 was yet telecom-grade quality is the core network, where the another record year for GSM shipments, as global evolution to Internet Protocol (IP) begins. Ericsson mobile penetration reached almost 50 percent. and other industry leaders are expanding the IP We have also expanded our position in 3G/ Multimedia Subsystem (IMS) foundation for many WCDMA/HSPA, with which operators can introduce exciting multimedia applications that people can mobile broadband with such multimedia services as enjoy on any device wherever they are. Here, our TV, video, music and high-speed Internet access. technology and scale advantages mean that our Additionally, we have invested in HSPA modules customers will be able to launch and also generate for laptop computers and fixed modems, which will revenues from these services as they benefit from give consumers another way to enjoy mobile broad- a lower total cost of ownership. The designed cutting-edge Ericsson Tower Tube houses radio base station and antennas. The radio base station is located at the top of the tower, increasing coverage and capacity. Using innovative design and building materials, it can be built in a variety of shapes and sizes for rural and urban sites. The Ericsson Tower Tube reduces: - power consumption - need for cooling - footprint - construction time 10 networks Site City is an exhibition area where our customers can experience radio base stations for different environments and requirements. Milestones during 2007 width service delivery, including IP-based video We had a number of significant achievements in 2007: services to homes throughout the US. • In May, mobile operator MTN Nigeria took delivery of Ericsson’s millionth GSM radio • German operator Deutsche Telekom rolled out Ericsson's VDSL2 broadband access solution base station. Since its introduction in 1991, GSM across Germany's largest cities. has connected more than 2.6 billion users. Today, Ericsson has deployed GSM networks in more than 100 countries. A shift in our business mix Our business model in Networks is based on a three- 8% 23% part sales mix of build-outs, expansions and upgrades, 69% • We signed a GSM expansion framework agreement, valued at about USD 1 billion, with China Mobile. where we are normally able to offset lower margin network build-out sales by higher margin sales into the • Vodafone chose Ericsson to be sole supplier of IMS (IP Multimedia Subsystem) in a number of important markets. installed base. As 2007 progressed, Networks' business mix had a high proportion of new network buildouts and break-in contracts, where price competition is most intense. The NETWORKS SALES OF TOTAL Networks Professional Services Multimedia • We announced Ericsson Tower Tube, a 5m- dia meter, 40m-high flexible concrete radio base ongoing shift to new switching technology also grew significantly and affected the business mix. Late in the station site concept that is better for the environ- third quarter, the sales in certain markets unexpectedly ment, cost-efficient to build and run, and visually declined sharply. All of this led to significantly lower more attractive. gross margin and put pressure on cash conversion. • We won multi-billion USD contracts to supply GSM and WCDMA/HSPA equipment and related telecom services to Bharat Sanchar Nigam Ltd (BSNL), and Bharti, the largest telecom operators in India. • Mobile TeleSystems OJSV (MTS), Russia's leading mobile operator, selected Ericsson to GOING FORWARD The new network buildouts and break-in contracts will continue to affect the segment’s margins, at least for the near term, but our significant market share gains enlarge our footprint for follow-on sales of more networks supply and deploy a 3G/HSPA network. as well as multimedia and services over the • AT&T chose Ericsson to provide equipment for the planned deployment of GPON for high-band- longer term. E D A C B NETWORKS SALES BY REGION A B Western Europe 22% Central & Eastern Europe, Middle East and Africa 28% C Asia Pacific 33% D Latin America 10% E North America 7% 11 networks12 professional services“ With the Internet in my pocket, I can book tickets in seconds – on the fly.” Life just got easier for Indian entrepreneur Varun Ahuja. Standing in the afternoon heat of a bustling street in New Delhi, he is booking flights to Mumbai for two employees via his mobile phone. While punching departure times into a web-based portal, he artfully side-steps a hoard of cars, mopeds, buses – even a stray dog. “Isn’t this fantastic,” exclaims Varun above the street noise. “No more waiting for travel agents. Booking takes only a minute.” Varun Ahuja is the entrepreneur personified. Starting from scratch just ten years ago, he today runs a chain of retail outlets selling leading computer and software brands as well as services to small and home offices. His fleet of service vehicles is constantly on the go, navigating the chaotic traffic, delivering orders and trouble- shooting for clients. Varun Ahuja leads a hectic life staying on top of his business and juggling family life. “I’m on my phone all the time, either with business associates or with mem- bers of my family. We use our phones a lot in India,” he says with a smile. Varun recounts how he decided two years ago to equip all his 35 sales and service people with mobile phones with always-on access to the Internet and other services – a decision that has significantly changed their way of working. “Suddenly, I could access the Internet to book airline, railway and bus tickets – from the palm of my hand. We could even reserve hotel rooms. It was like having a personal travel agent,” he says. Varun Ahuja and his team are among some 250 million Indians who own a mobile subscription – a number that’s growing by six million a month. While most subscribers are still content to use their phones primarily for voice calls, Varun is keen to learn more about new mobile services such as banking online and the ability to pay bills. “Many people pack into internet cafés to check the news, weather and mail,” he says. ‘‘Soon they can do this anywhere, even without a PC. The mobile phone will be like your wallet, your ticket broker and your concierge.” The premium service experienced by Varun is enabled by Bharti Airtel, one of India’s leading private mobile operators, with more than 53 million customers. By letting Ericsson build, operate ge the network, the operator can concentrate on building relationships with customers and differentiating themselves through better service, higher quality and seamless fast-paced roll-outs. India is the world's fastest growing mobile market. Ericsson installs a new radio base station in India every 15 minutes. 13 professional services PRO FE S S I O N A l S E RV I c E S Ericsson’s services business helps operators generate more revenues, run their businesses more efficiently, and evolve their networks to meet customer demands. Once again, every moment counts – the more time operators can dedicate to adding value to their offering, the more satisfied their customers will be. Our strategy for services growth Support Ericsson's mobile, fixed and multime- Our services portfolio is based on six primary dia solutions. Networks' and Multimedia's global offerings: customer base is also the foundation of our services business. Through existing partnerships, we are in a position to provide services that ensure our custom- ers get all the benefits they can from Ericsson’s solutions. Through our daily work, we get first-hand insight into each of our customers’ technologies, 1. Managed Services ranging from designing, build- ing, operating and managing day-to-day operations of a customer's network. This also includes hosting of services, applications and enablers as well as providing network coverage and capacity. organizations and businesses. 2. customer Support for more than 800 networks Expand our services business. In addition to the opportunities that arise naturally from our installed base of products and solutions, Ericsson also pursues services business through consulting, securing more than 1 billion subscribers around the world. We minimize risks to our customers by making sure networks and services work the way they should. systems integration and managed services. 3. Systems Integration, to support customers in Our services portfolio integrating new technologies and applications as well as equipment from multiple suppliers, includ- Our dedicated Professional Services staff – a com- ing taking on the broad responsibility of “prime bination of global competence and local capabilities integrator”. – gives our customers the freedom to focus more on their customers. Our competitive strength in professional services comes from our skills and our scale. By applying 4. business consulting to help customers to identify and address market opportunities, chal- lenges and technology shifts. efficient tools, methods and processes based on our 5. Network and Technology consulting to help technology leadership, global customer base and operators plan, design, optimize and evolve their local presence, we have further developed and networks. grown our product-based services business as well as managed services and systems integration. 6. Educational Services to ensure that our customers’ employees have the skills and compe- tence necessary for working with today’s complex technologies. In addition, we have Network Deployment and Integration which includes rolling out, expanding, restructuring, upgrading and migrating networks. (Note: This offering is part of and reported under the Networks segment.) 15% operating margin. 16% sales growth year-over-year. 1000 1000 systems integration projects during the year. 185 million 185 million subscribers in managed networks. One billion Over one billion subscribers supported by Ericsson. 14 professional servicesMilestones during 2007 During 2007, we continued to outpace the market, • We won a six-year managed services deal with 16 percent growth. An important trend devel- for operation and maintenance of Deutsche oped: Tier-one operators have become more Telekom's microwave network in Germany. interested in managed services, as they see the The agreement reflects the maturation of the man- results that the early adopters get from outsourcing. aged services market, as it was the first managed Secondly, more operators asked us to serve as the services contract for an incumbent operator in its prime integrator when introducing new multimedia home market. services and when facing challenging technology shifts. Here are some noteworthy achievements during the past year: • We were selected to design, plan, deploy, optimize and manage bharti Airtel's GSM network and its prepaid platform across large • We entered a managed services agreement with France Telecom covering operations, rollout parts of India. and field maintenance of the operator’s mobile network in Belgium and in the Netherlands. • Vodafone selected us to manage the supply GOING FORWARD Ericsson’s early foray into services has and distribution of multi-vendor spare parts for created considerable advantages in skills its mobile networks across several of its major and in scale, even though consolidation European operating companies including those in among other vendors has increased compe- Germany, Spain and Portugal. tition. We will continue to build on our early 23% • KPN signed a five-year managed services con- tract with us for access network field maintenance in the Netherlands. • We acquired the Spanish company Hyc, successes by working to grow in such areas as managed services, systems integration and consulting. We will achieve our targets mainly through organic growth, but we may make smaller acquisitions in strategic areas focusing on consultancy and systems integration or add resources to support growth. of IPTV solutions. Ericsson Network Operation Center where we run the network and hosted applications, content and enablers for customers such as Bharti in India. 8% 69% PROFESSIONAL SERVICES SALES OF TOTAL Networks Professional Services Multimedia E D C B A PROFESSIONAL SERVICES SALES BY REGION A B Western Europe 41% Central & Eastern Europe, Middle East and Africa 19% C Asia Pacific 21% D Latin America 10% E North America 9% 15 professional services“ I’m broadcasting all over the country. All I need is my mobile.” Irene Englebertink will never forget the moment she first saw the aban- doned cats in the animal clinic. She captured them with her mobile phone, broadcasting the news live throughout the Netherlands. Although the sight was disturbing, her newscast made it possible to find homes for many of the forty-two cats. “It felt good when I realized I had done something to help these animals from being put to sleep,” Irene says. “Local items like this are often missed by the mainstream press, but people are certainly interested in them.” A part-time elementary school teacher, Irene is one of hundred citizen reporters who regularly file reports for the TV program and online service Ik op TV (Me-On-TV). Sometimes the Ik op TV news desk calls Irene to suggest stories, sometimes she comes up with ideas of her own. She’s equipped with a mobile phone that stores up to thirty minutes of video. Once she is on site for a story, she calls in and is directly linked to editors who check her video and sound quality before she is broadcasted. “It’s amazing how easy it is. I just press the record button on my mobile phone and I’m broadcasting to people across the Netherlands. I do it all by myself, I don’t need to bring a big crew with cameras.” “News is everywhere and it can always be filmed. With new technology, anyone can shoot a video and upload the content to a media or entertainment provider. I think we’re witnessing a media revolution. The power is shifting away from big media conglomerates to ordinary people like me.” 16 multimedia Irene’s moment was enabled by high-speed broadband, connecting everything to every- one. Together with Ericsson, TV production company Endemol provides the opportunity for ordinary people to create and distribute pictures and video clips in seconds, providing popular mobile multimedia content to everyone. 17 multimediaM U lTI M E D I A -1% operating margin. 14% sales growth year-over-year. Ericsson established its Multimedia segment to bet- ter address operator needs for applications, solutions and devices to encourage subscribers to increase their usage. This was a year of direction setting, of organizing our areas of existing strengths and of supplementing those areas with strategic acquisitions. Along the way, we have taken important steps in assuring Ericsson’s future growth. Multimedia strategy A broader portfolio To remain competitive, telecom operators have to Our ambition for growth required that we move deliver value beyond voice services. This means they swiftly into new territories with key acquisitions, to must extend beyond the traditional confines of both complement existing areas of strengths and telecom and into the Internet and media industries. extend into new ones. This injects a new level of complexity and different In March, we acquired Mobeon, a supplier of IP- business model possibilities for operators. Ericsson's based voice and video mail – key elements of our intent is to be the enabler of new revenue-generating multimedia strategy. The acquisition of Mobeon services and applications. allows us to develop our new messaging architec- In this new environment, Ericsson develops the ture more quickly, allowing easier integration of new multimedia solutions and acts as a facilitator to applications with established messaging methods, Media Web Telecom match operators and service providers with the right such as SMS, voicemail and MMS. tools to distribute media and Internet content to their Next, we improved our position in the IPTV and customers. Our expertise in managing complex networked video solutions market by acquiring networks capable of delivering IPTV, mobile TV, Tandberg Television in April. A world leader in music solutions, messaging and user-generated video encoding and compression technology as well content helps them give consumers the multimedia as on-demand and interactive video, the company experience they want – flexibly and profitably. brought a wide customer base with cable, satellite On the media side, content providers benefit from and telecom customers in more than 100 countries. our global presence and our relationships with Integration has been successful, and we now have operators around the world. a complete IPTV offering available around the world. Our revenue management offerings help operators With the addition of Drutt corporation in June, navigate different billing models, from the subscription we extended our Service Delivery Platform (SDP) basis of the telecom world to the content-specific leadership with products and features that make it basis of the media industry. To ensure multimedia possible to acquire, launch, deliver and charge for services that deliver the experience people expect, content to mobile devices. Ericsson also develops and licenses mobile technol- We also acquired postpaid billing and customer ogy platforms for mobile devices. care leader lHS to complement our proficiency in Ericsson’s multimedia strategy applies to the enter- prepaid and real-time charging. The combination prise market as well, with unified communications will allow operators to manage all users and ser- (i.e. across PCs, phones and mobile devices), IP- vices – prepaid or postpaid, mobile or fixed – in the based private branch exchanges and centrex same way. solutions for operators serving the enterprise market. Me-On-TV Consumers increasingly upload and share video content. 50 million More than 50 million of the world's 3G/WCDMA handsets are based on Ericsson technology. 18 multimedia Milestones during 2007 Here is an overview of Multimedia's performance in 2007: • Ericsson and Turner broadcasting announced a collaboration to develop Internet, broadcast news and entertainment content – including CNN International and Cartoon Network – for mobile multimedia environments. • Telefónica España selected our mobile TV solution to provide consumers with rich mobile TV content and services. • Together with TV production company Endemol, we developed 'Me-On-TV' to enable consumers to upload, publish and share live or recorded video content via any mobile device, from anywhere to any screen around the world. • Vodafone Iceland selected our end-to-end IPTV solution to provide an integrated solution • We introduced the first WcDMA mobile plat- form with HSPA capability, to enable mass- market HSPA multimedia devices capable of handling new services – including interactive mobile TV and video calling – that require both fast uplink and downlink data speeds. GOING FORWARD Multimedia is a huge market with the potential for strong growth and new customers from media and Internet companies. Although it is a fragmented market, Ericsson has a strong position in several multimedia areas – mobile platforms, service delivery platforms, and in the evolution toward converged multimedia charging are all showing strong growth with 8% 23% consumer services, based on Ericsson IMS. healthy margins. IPTV, IMS and messaging are 69% • Etisalat implemented our real-time convergent charging and billing solution, which enables them to offer the same services to all subscribers regardless of pre-paid or post-paid payment options. areas in which we are making significant investments. Furthermore, our relationship with Sony Ericsson provides a foundation for a strong business going forward. MULTIMEDIA SALES OF TOTAL Networks Professional Services Multimedia E D C B A MULTIMEDIA SALES BY REGION A B Western Europe 46% Central & Eastern Europe, Middle East and Africa 25% C Asia Pacific 15% D Latin America 7% E North America 7% 19 multimedia“ Suddenly my friends were treating me like a famous DJ.” It’s 3 pm in Stockholm and Tea Dahlgren is sitting in her favorite café. Tea laughs and tells about the moment she impressed her best friend Alexandra by knowing the name of a tune they had never heard before. “Suddenly, this song comes on the radio and Alexandra is madly trying to guess what track it is. So I say, ‘Hey check this out.’ Then I hold my phone up to the speaker and – presto – it tells us exactly what song we're listening to, the artist, the album and even the year it came out. Alexandra totally freaked out.” Tea is one of millions of music lovers who are delighted by TrackID™ from Sony Ericsson. By recording a few seconds of a song, they get the track, artist and album information sent to their phone in an instant. “I didn't believe it at first, but it really works,” says Tea, who has 318 songs in her phone. “This phone is not just a Walkman. It’s my secret weapon against music know-it-alls.” Tea Dahlgren has just experienced what her Walkman W800, equipped with TrackID™, Stereo Streaming and 2.0 megapixel camera can do. With all the latest features, she can download, stream, store and play music in her mobile. PH O N E S – S O N y E R I c S S O N Sony Ericsson – with a broad portfolio and a strong momentum, and with the ambition to become one of the top three mobile phone suppliers. 12% operating margin. 18% sales growth year-over-year. The slim slider W910i Walkman® phone is the playful companion to the world of mobile entertainment. 20 Sony Ericsson Mobile Communications is a 50/50 especially in the area of music and imaging through joint venture between Ericsson and Sony Corporation, the use of Sony sub-brands Cyber-shotTM and founded in 2001. Walkman®. At the same time, the company increased In 2007, Sony Ericsson sold over 100 million hand- the number of lower priced models in the portfolio, sets, 18 percent more than the previous year, and bringing compelling product propositions to the captured market share by increasing sales of lower lowest priced handsets in the line-up. The Walkman® priced handsets in emerging market such as Latin brand was extended with low and mid-end models America and Eastern Europe. such as the W200 and W300, and imaging models Although average selling price declined during 2007, were extended with the K310 and K550. the company maintained double-digit margins by In 2007, Sony Ericsson also announced its inten- controlling cost and focusing on internal efficiencies. tion to expand its PlayNowTM content distribution Sony Ericsson continued to set the standard in application into a full-service proposition offering ring sophisticated and fashionable feature-rich phones, tones, full-track downloads, games, wallpapers and phones – sony ericsson themes. The extended service, rebranded PlayNowTM Arena, will be fully integrated with the TrackIDTM music discovery service enabling consumers to discover, try and obtain new music direct to their mobile phones. Sony Ericsson is committed to helping operators drive traffic while giving consumers access to new music and content that bring the features of their mobile phone to life. Sony Ericsson continued to broaden its accessory portfolio. From Bluetooth headsets, car kits, music speakers and Bluetooth watches that discretely tell the owner who is calling, Sony Ericsson finds attrac- tive ways to extend the features and user benefits of its phones. GOING FORWARD Sony Ericsson continues to develop a broader range of products with a further Number of units shipped (million) 103.4 74.8 51.2 42.3 27.2 expansion into the low- to mid-range device 2003 2004 2005 2006 2007 market while maintaining margins and profitability. Its higher-end models continue to build brand awareness. In 2008, PlayNow™ Arena will deliver a wider range of content, including games, themes, and Sales (million Euro) 12,916 10,959 7,268 6,525 4,673 millions of music tracks and thousands of 2003 2004 2005 2006 2007 mastertones from major and independent labels. With an expanded multimedia experience, Sony Ericsson is in position to build on its strong performance in 2007. Income before taxes (million Euro) 1,574 1,298 486 512 -130 2003 2004 2005 2006 2007 21 phones – sony ericssonOur people and culture - key to Ericsson's success. corporate Responsibility We pursue a number of activities to maximize positive social, ethical and environmental effects and to control risks. Risks are controlled through several Company initiatives and policies, including the Code of Business Ethics, the Environmental Management System and the Code of Conduct. Benefits of our technology are promoted via the development of an energy- lean product portfolio and by highlighting the positive socio- economic contributions that communications bring to markets. For more, please see Ericsson’s Corporate Responsibility Report: Our core values Ericsson's code of business Ethics Ericsson’s position as a world-class company starts Our Code of Business Ethics summarizes the poli- with our people. cies and directives that govern the relationships Respect, professionalism and perseverance are the among our internal and external stakeholders. The values at the foundation of our culture. For decades, Code has been translated into more than 20 lan- they have served as guidance in our daily work – how guages to ensure all employees understand our we relate to people and how we do business. policies, our directives and the importance of con- Among the most important components of an ducting all business activities in an ethical manner. organization is a committed base of employees, and All employees must regularly review the Code and Ericsson today has a global workforce of 74,000 agree to its principles. employees. During 2007, our annual measurement of For more details, please see Ericsson’s Corporate employee satisfaction (measured as Human Capital Governance Report 2007. Index) reached 70 percent, which puts us among elite companies – 60 percent satisfaction is regarded as an area of strength. During the past year, we have worked hard to ensure a smooth integration of the companies we have acquired. To be successful, systems and processes must be aligned. Most importantly, however, the people must know they are part of the Ericsson culture. Furthermore, continuous personal competence development is essential for us to supply and sup- port our customers in a demanding and changing marketplace. To ensure they have the right tools, Diversity at Ericsson Ericsson’s workplace is characterized by respect for individuals and their contributions to innovation, customer success and performance at all levels. Ours is an environment in which people of different backgrounds with a multitude of perspectives, values and beliefs are assets to the organization and the teams in which they interact. Diversity is integrated and communicated throughout Ericsson. It is at the heart of our core value of “Respect,” in which we emphasize equal opportunities. www.ericsson.com/corporate_ methods and skills necessary to succeed in their responsibility roles, all employees have their own individual compe- tence plans and update them each year. 22 our people and cultureA Björn Olsson Executive Vice President and deputy head of Business Unit Networks Born: 1956 Shares held: 60,196 Class B b hans Vestberg Executive Vice President, Chief Financial Officer and head of Business Unit Global Services c Marita hellberg Senior Vice President and head of Group Function Human Resources & Organization D Joakim Westh Senior Vice President and head of Group Function Strategy & Operational Excellence Born: 1965 Shares held: 45,999 Class B Born: 1955 Shares held: 68,446 Class B Born: 1961 Shares held: 135,744 Class B E Carl-henric Svanberg President and CEO and member of the Board of Directors Born: 1952 Shares held: 15,781,966 Class B F Carl Olof Blomqvist Senior Vice President, General Counsel and head of Group Function Legal Affairs Born: 1951 Shares held: 6,080 Class A 70,424 Class B A c D b F E G H I J K G henry Sténson Senior Vice President and head of Group Function Communications H Kurt Jofs Executive Vice President and head of Business Unit Networks I Jan Wäreby Senior Vice President and head of Business Unit Multimedia Born: 1955 Shares held: 59,128 Class B Born: 1958 Shares held: 260,106 Class B Born: 1956 Shares held: 167,746 Class B J håkan Eriksson Senior Vice President, Chief Technology Officer and head of Group Function Technology K Bert Nordberg Executive Vice President and head of Group Function Sales & Marketing Born: 1961 Shares held: 43,679 Class B Born: 1956 Shares held: 57,841 Class B The number of shares held includes holdings by related natural or legal persons. Up to October 24, Karl-Henrik Sundström, former Executive Vice President and Chief Financial Officer and head of Group Function Finance, was a member of the Group Management Team. From January 1, 2008, Jan Frykhammar was appointed Senior Vice President and Head of Business Unit Global Services, and is also a member of the Group Manage- ment Team. 23 ThE GROUP MANAGEMENT TEAMthe group management teamAccording to our Articles of Association, the Board of Directors shall consist of a minimum of five and a maxi- mum of twelve directors, with no more than six deputies. The directors shall be elected each year at the Annual General Meeting for the period up to and including the following Annual General Meeting. Under Swedish law, unions have the right to appoint three additional direc- tors and their deputies to the Board. Our Directors (as of December 31, 2007) are as follows: A Karin Åberg Deputy employee representative Born: 1959 b Torbjörn Nyman Employee representative c Monica Bergström Employee representative Member of the Finance Committee Member of the Remuneration Committee First appointed: 2007 Born: 1961 Born: 1961 Shares held: 4,877 Class B First appointed: 2004 First appointed: 1998 Shares held: 15,061 Class B Shares held: 4,757 Class B D Sir Peter L. Bonfield Member of the Audit Committee Born: 1944 First elected: 2002 Shares held: 22,000 Class B E Nancy McKinstry Member of the Remuneration Committee F Börje Ekholm Member of the Remuneration Committee Born: 1959 First elected: 2004 Shares held: None Born: 1963 First elected: 2006 Shares held: 108,803 Class B G Sverker Martin-Löf Deputy Chairman of the Board of Directors Member of the Audit Committee Born: 1943 First elected: 1993 Shares held: 52,000 Class B H Michael Treschow Chairman of the Board of Directors Chairman of the Remuneration Committee Member of the Finance Committee Born: 1943 First elected: 2002 Shares held: 820,043 Class B I Marcus Wallenberg Deputy Chairman of the Board of Directors Chairman of the Finance Committee Born: 1956 First elected: 1996 Shares held: 710,000 Class B J Anders Nyrén Member of the Finance Committee Born: 1954 First elected: 2006 Shares held: 33,428 Class B A b c D E F G H I J K l M N O P K Ulf J. Johansson Chairman of the Audit Committee l Carl-henric Svanberg President and CEO Born: 1945 First elected: 2005 Shares held: 32,176 Class B Born: 1952 First elected: 2003 Shares held: 15,781,966 Class B M Katherine M. hudson Born: 1947 First elected: 2006 Shares held: 102,000 Class B N Jan hedlund Employee representative Member of the Audit Committee Born: 1946 First appointed: 1994 Shares held: 2,040 Class B O Anna Guldstrand Deputy employee representative P Kristina Davidsson Deputy employee representative Born: 1964 Born: 1955 First appointed: 2004 First appointed: 2006 Shares held: 4,723 Class B Options held: 900 Shares held: 3,401 Class B The number of shares held includes holdings by related natu- ral or legal persons. Carl-Henric Svanberg is the only Director who holds an opera- tional 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.) 24 ThE BOARD OF DIRECTORSthe board of directorsletter from the chairman of the Board Dear shareholder, company today and for the future. While this year was a dynamic and eventful one for ericsson, it it is therefore essential that was a disappointing time for you as an investor. Just as you executive remuneration policies suffered from the significant share price decline, so did many and practices are competitive and ericsson employees and Board members. at least some part of in line with industry norms. a this development reflects the general sentiment affecting most thorough assessment of the listed companies. current remuneration system by no doubt, ericsson’s third quarter result was a negative external experts shows that the surprise to all of us, but the company is stronger than ever, company’s remuneration plan is remains financially healthy and will pay a dividend the same as appropriate and reasonable. last year’s. i am confident about ericsson’s longer-term pro- During 2007, in particular, i was spects and believe the current strategy is effective and should able to visit many ericsson not be changed. facilities around the world. it was When considering a more challenging market, ericsson has a my pleasure to meet so many good geographic distribution and a diverse customer base, highly motivated and well-qualified employees who are totally where no single country or customer represents more than 10 dedicated to their roles in the company’s continued vitality. percent of sales. in addition, ericsson has the operational i am honored to work for you as the chairman of ericsson – a flexibility and resources to adjust to the short-term challenges of vibrant company that plays an important role in changing the a weaker network equipment market or increased competition, world for the better. while at the same time is well positioned to continue to grow thank you for your continued support. within services and multimedia. the company’s position of strength is confirmed by indepen- sincerely, dent perception studies, in which existing and potential custom- ers consistently rank ericsson well ahead of the competition. the same can be said of the internal perception, with the employee opinion survey showing that the company has now achieved a level of excellence. the success of any company depends on the leadership of its management and the quality of its workforce, which means that Michael treschow we must engage and retain the best talent at all levels of the chairman of the Board ericsson annual report 2007 25 letter from the chariman of the boardBoard of Directors’ report This Board of Directors’ Report includes a discussion and analysis of Ericsson’s consolidated financial statements and operational results for 2007 as well as other information. It includes forward-looking statements regarding a variety of matters, including future market conditions, strategies and anticipated results. Such statements are based on judgments, 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 discussion and analysis of the results are based on Ericsson’s consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of these financial statements requires management to apply accounting methods and policies that involve difficult, complex or subjective judgments and estimates based on past experiences and assumptions determined to be reasonable. The application of these judgments, estimates and assumptions affects the reported amounts of assets and liabilities and contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Under different judgments, assumptions or estimates, these amounts could differ materially. Please see Notes to the Consolidated Financial Statements – Note C2, “Critical Accounting Estimates and Judgments,” for more information about the accounting policies we believe to have the most significant effect on Ericsson’s reported results and financial position. The external auditors review the quarterly interim reports, perform audits of the annual report and report their findings to the Board’s Audit Committee. The terms “Ericsson”, “the Group”, “the Company”, and similar all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. Unless otherwise noted, numbers in parentheses refer to the previous year (i.e. 2006). Summary ericsson increased sales by 4 (17) percent to seK 187.8 (179.8) billion in 2007. organic growth (i.e. excluding acquisitions) was 8 percent in constant currencies. in an environment with a • increasing market share in professional services through new managed services contracts, especially in Western europe. • refinancing maturing borrowings and increasing committed credit facilities for greater financial flexibility and improved significantly weaker us dollar affecting reported sales and credit ratings. income negatively, ericsson still produced one of the highest • attaining the position as the fourth largest mobile phone incomes of its 130-year history. net income attributable to supplier through the sony ericsson joint venture. stockholders of the parent company was seK 21.8 (26.3) billion. earnings per share attributable to stockholders of the parent During the year, the company announced a significant number of company was seK 1.37 (1.65). cash flow from operating new or expanded agreements to supply network equipment and/ activities was seK 19.2 (18.5) billion. cash flow before financing or related services to operators around the world. the aggregate activities was seK –8.3 (+ 3.6) billion, after investments for value from these agreements was the highest in five years. acquisitions of seK 26.3 (18.1) billion. the company’s good progress has been somewhat tempered ericsson made good progress in strategically important areas by a change in business mix within the networks segment. the such as: • securing scale advantages by significantly increasing mobile systems market share, especially in emerging markets such as business mix now has a higher proportion of break-in contracts and contracts with large content of network rollout services and third party products which negatively affects gross margins. china, india, russia and africa. adding to this effect is the ongoing shift to new switching • strengthening the company’s position within the networks technologies, where the company is building a new footprint segment in fixed broadband access and transmission as well which has similar competitive characteristics, e.g. open bidding as ip routing. process, as new network buildouts. • Making complementing acquisitions to strengthen ericsson’s competence and product portfolio in ip technology, iptV and multimedia. in the third quarter, there was an unexpected shift in the business mix, with a relatively higher proportion of new network sales and a lower proportion of expansions and upgrades sales, 26 ericsson annual report 2007 Board of directors’ reportsales development 2005 –2007 (seK billion) Market Environment and Trends 200 150 100 50 0 179.8 187.8 153.2 2005 2006 2007 this was another record year for mobile communications with some 586 (500) million new subscriptions and over 1100 (980) million mobile phones shipped. as expected, overall growth of the network equipment market during the first half of the year was similar to 2006 but then unexpectedly slowed during the third quarter. using mobile operator capital expenditures spending estimates as a proxy for the mobile network equipment market, we believe the mobile systems market grew slightly below the company’s expectation of mid-single digits. at the end of 2007, the 3.3 (2.7) billion mobile subscriptions worldwide represented a global subscription penetration of 49 (41) percent. (note: the number of actual individual mobile resulting in significantly lower margins. this triggered the profit subscribers is significantly lower, perhaps some 15–20 percent warning which caused the share price to decline significantly. but possibly more, because of inactive subscriptions and people although the degree and speed of margin compression within having multiple subscriptions.) networks was unexpected, some degree of volatility and the company expects the number of mobile subscriptions to deviations from forecasts is likely to occur in any network grow to more than 4 billion during 2009, thus creating further equipment vendor’s quarterly results. need for new and expanded mobile networks and corresponding professional services sales, especially managed services, professional services. showed strong growth. the scale for continued profitable growth is now well established – particularly in Western europe. Strong growth in emerging markets the new Multimedia segment made good progress in estab- the historical price/performance trend in both mobile phones lishing their operations and quickly expanding the portfolio with and network infrastructure has expanded the addressable several acquisitions. the company continues to invest for a market significantly, making mobile communications affordable leading market position in networked media and ip-based also in emerging markets. capital spending on mobile networks applications and services. in emerging markets grew an estimated 17 percent and now sony ericsson Mobile communications continued its strong represents almost half of the total market. Developed markets performance, profitably gaining market share and ending the year declined an estimated 8 percent. as the fourth largest mobile device supplier. the joint venture has More mobile subscribers and growing average Mou (minutes strong momentum toward its ambition of achieving a top three of use) should sustain demand for network construction and position. sony ericsson also contributed significantly to erics- expansion in emerging markets. these projects are increasingly son’s operating income and cash flow. provided on a turnkey basis which, by its very nature, dilutes During the year, the company acquired redback networks, short-term margins and cash conversion because of substantial tandberg television and lHs as well as several smaller compa- installation, systems integration and third-party content. While nies. these aquisitions have already helped ericsson win several turnkey projects are likely to continue to represent a large significant contracts. the expanded product line along with the proportion of networks sales, these effects should decrease as addition of specialist resources should help the company benefit the initial phase gives way to expansions and upgrades. in a number of growth areas related to ip, such as routing, multimedia applications and services. CDMA operators switching to the GSM/WCDMA track While we believe the company is well positioned for the longer cDMa operators around the world continue to switch to the term and remains the most profitable among its peers, there are GsM/WcDMa track. During 2007, cDMa operators in Brazil and several challenges in the shorter term. these include macro- israel made the switch and operators in india, Vietnam and new economic and geo-political risks, exposure to the us dollar, Zealand have decided to change. even in the us, a major cDMa greater competition with intensified price pressure, a slower operator has announced plans to deploy next-generation mobile growth environment and the margin effects of an unfavorable broadband networks using the long-term evolution (lte) of the networks business mix. However, the company has strategies GsM/WcDMa track. and action plans to address these challenges. ericsson annual report 2007 27 board of directors’ report3G/WCDMA to soon overtake GSM agree with the company’s assertion that lte will most likely be although GsM continues to represent the majority of the mobile the predominant technology for next-generation mobile broad- systems market, its growth is slowing as 3G/WcDMa is starting band networks. to accelerate. Demand for new GsM networks is mainly in emerging markets, especially asia and africa. GsM should Bundling and flat-rate tariffs remain the predominant technology for emerging markets in the operator investments in fixed networks have been driven by the near to mid-term, but the company expects 3G deployments to need to replace lost revenues from voice that may have been soon start in earnest in such populous countries as Brazil, china, captured by mobile or Voip (Voice over ip) as well as from india and russia. this along with the projected 3G network increased competition amongst operators. a well established expansions and upgrades in more mature markets indicate that strategy for customer retention has been the so called triple-play sales of 3G/WcDMa will soon overtake GsM globally. (i.e. bundling of voice, internet and television), sometimes in at year-end, there were nearly 180 million subscriptions on 197 conjunction with flat-rate pricing. this has accelerated the (146) commercial 3G/WcDMa networks, of which ericsson is a conversion to all-ip broadband networks with increased supplier to 129 (91). the High speed packet access (Hspa) deployments of broadband access, routing and transmission version of 3G/WcDMa is now deployed within 166 (96) commer- along with next-generation service delivery and revenue cial networks in 75 (51) countries. ericsson is a supplier of 81 (46) management systems. of these networks, which represent the vast majority of Hspa similarly, mobile operators are also turning to bundling and users. Despite this growth, the number of potential subscribers flat-rate pricing, especially when combining mobile voice with covered by commercial 3G/WcDMa networks is less than a third mobile broadband. this trend is expected to accelerate with the of those covered by 2G/GsM services. this provides a significant introduction of mobile tV. in developing markets, voice and text opportunity for equipment suppliers to upgrade 2G networks to messaging remain the primary services. since there are limited 3G. fixed networks available in such markets, mobile broadband will become increasingly important as the demand for internet LTE becoming main choice for next-generation mobile access grows. broadband in such a converged world with more and more ip related as consumer demand for higher speed mobile data services, services, the demand for systems integration services is accelerates, especially for video, operators must find ways to expected to continue to grow strongly. reduce costs and improve service performance to meet this demand. unlike WiMax or ultra Mobile Broadband (uMB), two Operator consolidation alternative radio technologies, lte has the advantage of operator consolidation continues in several regions. in the providing an evolutionary path that leverages existing GsM/ americas, consolidation has reduced the number of operators by WcDMa as well as cDMa networks. the company believes that more than half. in europe, mergers continue as well as other an lte-based network offers more compelling life-cycle types of combinations, such as network sharing and outsourcing economics to an operator than alternative technologies. this is of network operations. in other regions, operator consolidation the main reason ericsson has chosen not to invest in WiMax or has led to the emergence of rapidly growing pan-regional uMB. operators, particularly in the ceMa markets (central and eastern the company’s commitment to, and substantial r&D invest- europe, Middle east and africa). ment in, lte has received strong support from the largest although operator consolidation does not impact the underly- operators in the industry. Verizon and Vodafone, joint owners of ing growth of the mobile market, it often disrupts market u.s. based Verizon Wireless, announced plans to deploy development by creating delays in procurement, reducing total next-generation mobile broadband networks using lte. they capital expenditures, while increasing pricing pressure on have a coordinated trial plan for lte that begins in 2008 with vendors as the combined entities have stronger negotiating ericsson as one of the suppliers. More recently, ntt DocoMo power. announced that they had selected ericsson to supply lte-based network infrastructure in Japan. in addition, china Mobile and Network sharing at&t Wireless recently announced that they would follow the the overall impact of network sharing will ultimately be neutral for lte-path. ericsson is currently a major supplier to both of these mobile equipment vendors. to a certain extent, short-term operators. We are encouraged by this strong momentum and disruption of capital expenditure plans or re-negotiation of 28 ericsson annual report 2007 Board of directors’ reportcontracts with the network sharing companies may be somewhat term. this trend is most pronounced for highly penetrated GsM compensated by increased sales of professional services, networks, in which demand for upgrades and expansions has especially network integration and managed operations. over the rapidly diminished as operators spend more to expand and longer term, the majority of savings will come from shared plant enhance their 3G networks. and property as the equipment has to be dimensioned for the peak traffic demand of the combined networks. Price/performance developments create opportunities as well as challenges Good growth opportunities for managed services and a continously improving price/performance ratio driven by systems integration technological development enlarges the mobile communications compared with network deployment services, which tend to market by making the cost of services affordable to more and grow more or less in line with the equipment market, demand for more of the world’s population. But it can also hurt vendors that managed services (i.e. network operation and hosting services) do not stay ahead of the technology cost curve. scale is as well as systems integration is growing more rapidly. the essential to ericsson’s ability to sustain the large r&D program potential market for network operation services is larger than the needed for technological leadership. Moore’s law implies that potential market for network equipment and related deployment the processing speed, capacity and capabilities of digital services. a mature operator is estimated to typically spend some electronics will improve exponentially at an ever lower cost and 5–6 percent of annual sales on equipment to build a network, but size. this affects communications technology as it does other spends approximately 10–12 percent of sales to operate that areas of digital technology. normal price erosion and continous network. More than 75 percent of network operation expenses improvements in spectrum utilization have historically been offset today are believed to be handled in-house by operators but they by unit volume increases. are increasingly being outsourced as operators realize the competitive advantages and potential cost savings. consequent- Technology shift affecting product mix ly, the market for such managed services is expected to show since operators can build and operate softswitch-based good growth prospects going forward. networks much more economically compared to a monolithic circuit switch, operators are motivated to replace the circuit Network development increasingly driven by non-voice traffic switch with softswitching rather than to continue spending on rather than enhancing their legacy voice-centric installed base, older technology. this trend is accelerating, and softswitches the company expects operators to increasingly target spending now represent the vast majority of shipped capacity but only on next-generation communications equipment that will raise account for slightly more than half of ericsson’s switch sales. this revenues by enabling new services and/or reduce operating growth is masked by the decline in legacy circuit switching sales. costs. therefore, ericsson believes the following key technolo- Furthermore, since these are initial deployments, the margin gies will drive industry growth for the next several years: mobile profile is that of new business but is creating an installed base for broadband; ip and multi-service switching; fixed broadband future sales. this shift, like all others, will eventually reach a access and iptV; Voip and ip multimedia subsystems (iMs); and steady state and the underlying growth will become visible. metro optical and radio transmission. Finally, ericsson expects operators to accelerate the transition from legacy technologies Evolving competitive landscape such as tDM (circuit) switching and atM (packet) in favor of the need for scale in r&D, production and support has led to ip- (ethernet) based technologies for both switching and consolidation among our competitors. this could have chal- transmission; all areas which the company continues to invest lenged ericsson’s scale advantage within mobile networks. the heavily in. company chose to defend its competitive position through notwithstanding the positive trends in mobile broadband, with organic growth rather than with disruptive and high risk mega- rapidly increasing data traffic, market conditions for mobile mergers. the rapid market share gains indicate the success of network equipment are expected to remain challenging in this strategy but it has come at a certain cost, as price levels for developed markets. ongoing operator consolidation, especially some contracts have been very competitive. With a scale in Western europe, where the technology shift for more efficient advantage reestablished, the company will now focus more on networks, as well as changing regulations, such as price caps for capitalizing on these gains and its leading position to derive more roaming and lower call termination fees, is affecting operator follow-on sales of expansions and upgrades from the enlarged willingness and need to increase network investments in the near installed base. ericsson annual report 2007 29 board of directors’ reportprice competition for mobile networks – for winning new trade growth, we are doubtful if these emerging economies are contracts and strategically increasing market share for a scale resilient enough to be unaffected in the event of a material advantage – was intense again this year, especially against slowdown in the us and major Western european markets. chinese competitors. although these competitors have in- We do not want to postulate a view on how the global creased their market share, especially in china, ericsson has economy will develop, but we believe that if an economic also increased its market share, including in china. recession should occur it would have a less pronounced impact New radio spectrum being allocated on mobile networks demand than in the recession of 2001–2003. operator balance sheets are much healthier now and there is Much needed radio spectrum is being allocated to mobile significantly greater geographic diversification where emerging communications as frequency bands previously used for analog markets now account for a much larger and faster growing tV broadcasting are made available. late in the year, sweden portion of network investments. in addition, mobile operator was one of the first markets to make the change. in the us, capital expenditure spending is not at unsustainably high levels auctions are scheduled for the first half of 2008. other markets and networks are well utilized unlike during the last market are expected to follow during the coming years. in addition, a downturn. number of mobile operators have started to refarm their existing spectrum in the 850/900 MHz bands for 3G/WcDMa buildouts, Goals and Results where allowed by regulators. Due to superior radio propagation our ultimate goal is for the company to generate growth and a characteristics at lower frequencies, an operator can potentially competitive profit that is sustainable over the longer term. build a network with significantly fewer cell sites for a much lower ericsson aims to be the preferred business partner to its total cost of ownership compared with 1900/2100 MHz spectrum. customers; especially to the world’s leading network operators Global economic development by being the market and technology leader for the supply and operation of network infrastructure. as the market leader, the although the company expects the market conditions of 2007 to company uses economies of scale to develop superior products continue during 2008, the most recent economic outlook from and services that provide competitive advantages. in addition, the organization for economic cooperation and Development when ericsson’s network equipment and associated services are (oecD) forecasts a slowdown in real GDp within the 30-nation combined with its multimedia solutions and mobile handsets oecD area but a continued ”brisk growth” in such emerging from the sony ericsson joint venture, the scope of ericsson’s economies as Brazil, china, india, and russia. However, while operations extends to complete end-to-end telecommunication we agree that emerging markets contribute significantly to world solutions. ericsson customer satisfaction ericsson employee satisfaction 90 80 70 60 50 World class Excellence Acceptable Ericsson Group Peer Group Average 2004 2005 2006 2007 80 70 60 50 40 Excellence Strength Potential Improvements needed 2001 2003 2005 2007 30 ericsson annual report 2007 Board of directors’ reportsales & operating margins 2004 –2007 Value creation 60 50 40 30 20 10 0 SEK billion Percent Q1 Q2 Q3 Q4 2004 Q1 Q2 Q3 Q4 2005 Q1 Q2 Q3 Q4 2006 Q1 Q2 Q3 Q4 2007 60 50 40 30 20 10 0 Operating margin including Sony Ericsson Operating margin excluding Sony Ericsson although margins fell below the levels of the last several years, the company strengthened its market position and continues to perform better than its peers. a strong balance sheet, flexible operational model and a strengthened industry-leading position provide the means for handling any near-term pressure on margins. in the longer term, the increased market share and footprint enlarges the opportunity for future sales of expansions and upgrades. Management has several metrics by which they measure the company’s progress relative to their ambitions: • increase sales at a rate faster than the market growth. as previously mentioned, we believe the mobile systems market grew slightly below the company’s expectation of mid-single digits in usD terms. ericsson’s mobile systems sales increased by 9 (15) percent in constant currencies, the professional services market showed good growth and We monitor the company’s performance according to three ericsson’s professional services sales grew by 19 percent in fundamental metrics: customer satisfaction, employee satisfac- constant currencies, compared with an estimated market tion and value creation. We believe that highly satisfied custom- growth of approximately 12–14 percent; ers along with empowered and motivated employees help to • Deliver best-in-class operating margin, i.e. better than the main assure an enduring capability for competitive advantage and competitors. value creation. the company’s objective is to have a leading With an operating margin of 13 (17) percent for the Group market share, a faster than market sales growth, a best-in-class excluding sony ericsson, ericsson’s operating margin operating margin and a healthy cash conversion. continued to be the highest among its main competitors; Customer satisfaction • Generate cash conversion of over 70 percent. the cash conversion for the full year was 66 (57) percent. every year, a customer satisfaction survey is independently reflecting an increased focus on cash flow, a longer-term cash conducted by the cFi Group, in which approximately 9,000 conversion target of over 70 percent was introduced and employees of some 380 fixed and mobile operators around the communicated during 2007. the company also communicated world are polled to assess their satisfaction with ericsson that this target was unlikely to be achieved shorter term, mainly compared to its main peers. this year’s results show a continued due to continued expansion of large turn-key projects in upward trend and ericsson was ranked as excellent while the emerging markets and demand from customers for more favor- company’s peers were ranked on average as acceptable. able payment terms. During 2007, the company also launched Employee satisfaction a strategic Focus area addressing cash flow to secure continous improvements in our sourcing, supply and sales every year, an employee survey is independently conducted by processes. research international. in 2007, 90 (90) percent of ericsson the cash conversion is expected to gradually improve as a employees participated in this survey. the results show a result of this program and as the growth in turn-key projects continued upward trend, especially in the Human capital index, slows down to be more in line with the Group’s overall growth. which measures employee contribution in adding value for customers and meeting business goals. ericsson has now reached a level considered excellent by external benchmarking. ericsson annual report 2007 31 board of directors’ reportSales number of years. However, the economics of the newer technol- Group sales grew 4 (17) percent, driven by higher professional ogy is such that operators are increasingly replacing their legacy services sales. acquisitions contributed an estimated 1.5 switch nodes rather than continuing to invest in them. Bidding for percentage points. With the average usD exchange rate some 9 the replacement opens the installed base to competition, but the percent lower, fluctuations in foreign exchange rates had a rather company is building an even larger installed base by capturing significant negative effect on reported sales as approximately 50 an increased market share. However, the growing sales of percent of sales were usD related. softswitches are currently insufficient to offset the more rapid sales decline of legacy circuit switching expansions and sales per region and segment 2007 upgrades. SEK billion Western europe ceMa 1) asia pacific latin america north america total share of total percent change profes- sional Multi- works services media net- percent Total change 28,085 36,435 43,101 12,972 8,392 128,985 69% 1% 17,287 8,305 9,061 4,274 3,965 7,313 52,685 3,921 48,661 2,467 54,629 1,137 18,383 1,065 13,422 42,892 15,903 187,780 100% 4% 23% 16% 8% 14% –1% 5% 14% 12% –15% 4% 1) central and eastern europe, Middle east and africa Segment Networks sales of which network rollout operating income operating margin eBitDa margin 2007 percent 2006 change 128,985 127,518 16,410 18,507 21,722 17,398 17% 13% 22% 19% 1% 13% –20% price competition remains intense and has also affected margins, but network’s gross margin development has been more affected by the business mix shift. the company’s success in replacing competitors’ installed base with certain operators to more rapidly gain market share has also been a significant part of this development. the company has in some cases offered to share in the cost of the change-out with the operator for the opportunity to enlarge the installed base. sales of optical and microwave transmission systems to fixed as well as mobile operators showed good growth. overall sales of fixed networks, however, grew in line with the market. the company’s ambition is to grow faster than the market. in support of this, the company has significantly strengthened its offering by combining ericsson’s own products with those acquired with redback networks and entrisphere. Furthermore, ericsson is using redback as the platform to combine and focus all of its ip efforts under one organization and leadership headquartered in silicon Valley. We believe this concentration of resources will be sufficient for redback to Mobile network buildouts, especially in emerging markets, seriously challenge the market leaders. represented the majority of sales. sales of related network rollout the alignment of ericsson’s and redback’s sales channels is services grew 13 percent to seK 18.5 billion during 2007, progressing according to plan, but with some dampening effects reflecting increased demand for turnkey projects and a larger on redback’s sales growth during the transition. lower sales of market share in mobile systems. the company reported mobile domestic legacy products in the us have been offset by systems sales growth of 3 percent; however, using constant increased sales of new products internationally. in combination currencies, management estimates that such sales grew by with ericsson, redback finished the year with 87 new customers approximately 9 percent. in 68 countries and now counts 15 of the top 20 fixed network networks’ business continues to grow where network operators and three of the top mobile operators amongst its buildouts and break-in contracts are predominant and price customer base of more than 300 operators. We remain optimistic competition is most intense. such lower gross margin sales have regarding growth opportunities for all-ip networks with ip routing, been historically balanced by sales of products with a typically iMs, broadband access and transmission. the company higher gross margin. ericsson’s market share gains, including continues to invest in these areas, with the ambition to be the many large turnkey projects, combined with relatively lower sales first vendor to be able to converge fixed and mobile networks on of upgrades and expansions has unfavorably altered the one platform – offering operators significant savings and new business mix resulting in lower margins. revenue opportunities. the ongoing technology shift from circuit-switched core networks to softswitch solutions has also negatively affected networks sales and margins. With an economic life of 10–12 years, this transition would reasonably be expected to take a 32 ericsson annual report 2007 Board of directors’ report Segment Professional Services level as investments to build a leading position in networked sales of which managed services operating income operating margin eBitDa margin 2007 42,892 12,172 6,394 15% 16% percent 2006 change media and messaging continues. the ambition is to be the key enabler for new services and applications based on iptV, iMs 16% 28% 20% 36,813 9,491 5,309 14% 15% and content aware billing solutions. this was a year of direction setting, organizing existing strengths and supplementing these areas with acquisitions. With the exception of enterprise solutions, sales opportunities for Multimedia show a positive trend, and the integration of the professional services sales were particularly encouraging, acquisitions are well on track. Multimedia solutions made good growing at 16 percent to seK 42.9 billion. Growth measured in progress with new business development, especially for mobile local currencies amounted to 19 percent compared with an platforms and revenue and service management systems. estimated market growth of some 12–14 percent. Managed ericsson is now a mobile platform supplier to nineteen handset services sales grew by 28 percent to seK 12.2 (9.5) billion, as the manufacturers, including 4 of the top 10. However, sony company continued to win contracts for network operations and ericsson continues to account for the majority of the volumes. hosting services. at year end 2007, ericsson-managed network this year was a transition year for tandberg television, as the operations served approximately 185 (100) million users. long process to complete the acquisition disrupted their operating margin is stable in the mid-teens despite the higher momentum early in the year. However, since completion of the proportion of managed services. this is mainly due to successful acquisition, tandberg has shown progressive sales growth and transformation of operations undertaken to the ericsson ways of has now regained their momentum as market leader. entering working and continuous cost optimization of the managed 2008, the company believes tandberg is well positioned in terms services businesses. a large managed services agreement in the of operational efficiency, new product pipeline and sales uK has been adjusted and the scope has been somewhat momentum. tandberg is a key element of ericsson’s iptV reduced to accommodate network sharing. this will affect ambitions. managed services sales but the company does not expect a number of key deals and partnerships were closed in margins to be affected. Multimedia. ericsson partnered with turner Broadcasting to ericsson won several breakthrough managed services deals develop turner’s content for internet, broadcast news and during the year, including a pan-european multi-vendor spare entertainment, including cnn international and the cartoon parts management agreement with Vodafone, managed network for mobile multimedia environments. a global partner- operations for parts of t-Mobile’s network in the uK, and ship agreement was signed with endemol international B.V. to managed operations for Deutsche telekom’s transmission develop interactive tV and user-generated content via ericsson’s network in Germany. in addition, more than 1,000 systems Me-on-tV solution. integration contracts were signed during the year, including a the multimedia market is quickly evolving and converging: multivendor network management solution for Wataniya algeria, industries, (telecom, media and internet), technologies and it development and maintenance of business support solutions payment options. end-to-end revenue management solutions with telecom italia, and a slovakia border control solution as part must be able to handle convergent technologies including of the schengen boundary expansion. ip-based broadband services, a variety of business models and Segment Multimedia sales operating income operating margin eBitDa margin partner relationships, as well as be payment-option agnostic. ericsson acquired lHs to form a strong constellation of prepaid 2007 percent 2006 change and postpaid solutions ready to immediately capture this opportunity. ericsson’s leadership in real-time charging and 15,903 –135 –1% 4% 13,877 714 5% 6% 14% mediation, together with the leading billing and customer care solutions of lHs, make the combined companies a leading player in revenue management and significantly strengthen ericsson’s overall multimedia offering. sales growth for the newly formed segment amounted to 14 entering 2008, the Multimedia segment is now established percent, driven mainly by acquisitions. organic growth was 2 and focus will continue on supporting service providers to be percent and reflects a challenging comparison to prior year’s able to offer a superior user experience to their customers. results. the segment is operating on a more or less break-even ericsson annual report 2007 33 board of directors’ report Segment Phones services. Multimedia showed mixed results over the year and in see sony ericsson Mobile communications under partnerships general is performing at a break-even level despite the large r&D and Joint Ventures. Regional Overview investments in iptV and iMs. sony ericsson contributed 3.8 (3.2) percentage points to the operating margin. operating margin was lower as a result of networks’ gross ericsson’s sales distribution between developed and developing margin facing unexpected pressure during the second half of the (emerging) markets within the networks business continues to year. operating expenses as a percentage of net sales increased shift toward emerging markets, which now accounting for 52 (46) slightly. some of the acquired companies had a higher propor- percent of sales which indicates a growth of some 14 percent in tion of operating expenses relative to sales. the company also these markets. considering that most sales in emerging markets increased sales and marketing expenses to support the are in some way linked to the usD, underlying growth in constant integration and personnel training of ericsson’s sales and currencies was even more significant. marketing staff to support the broader product portfolio. sales in market areas asia pacific, ceMa and Western europe With a slower market growth and increased pressure on are of similar volumes, but the business mix differs significantly. margins, the company will need to make larger than normal cost asia pacific is mainly driven by new networks and expansion of reductions. therefore, an acceleration of operational excellence network coverage to accomodate strong subscriber growth, (i.e. process efficiency) activities will be undertaken. cost whereas sales growth in Western europe is driven by managed savings of seK 4 billion will be made with full effect in 2009. all services and higher demand for mobile broadband and broad- parts of the business will be affected. the main focus areas are band transmission. Despite continued buildout of 3G along with sG&a, sourcing, supply and service delivery. the one-time Hspa upgrades, overall sales of mobile systems in Western charges are estimated to be seK 4 billion, which will be taken as europe declined as operators invested less in GsM. the ceMa each activity is decided. region is more like asia pacific, although central and eastern europe are maturing rapidly in terms of GsM subscriber Other income statement items penetration. the americas are gradually returning to growth, ericsson’s 50 percent share of sony ericsson Mobile communi- which is driven mainly by 3G deployments and professional cations’ pre-tax income increased from seK 5.9 billion in 2006 to services. asia pacific became the largest region in terms of sales, seK 7.1 billion in 2007. with turnkey network construction projects as the main growth other operating income declined to seK 1.7 billion from seK contributor. GsM remains the predominant technology in the 3.9 billion in 2006, when ericsson made a capital gain upon the region, but 3G deployments have begun in several countries with divestment of the Defense business. additional licenses expected to be issued in additional countries the financial net decreased slightly from seK 0.2 billion in during 2008. similarly, 3G deployments are underway or about to 2006 to seK 0.01 billion in 2007 due to reduced cash and begin in emerging markets such as russia, Brazil and india. We increased borrowings. continue to await china’s decision on 3G deployments, but income after financial items was seK 30.7 (36.0) billion. demand for GsM continues in the meantime. although domestic net income attributable to stockholders of the parent suppliers have become more competitive and increased their company decreased to seK 21.8 (26.3) billion. Diluted earnings share, ericsson has maintained its market position in china. the per share were seK 1.37 (1.65). company expanded its leading position in rapidly growing india, while political unrest in certain markets negatively affected sales Balance Sheet particularly during the second half of the year. total assets amounted to seK 245.1 (214.9) billion at year-end. Margins and operating expenses the main items contributing to the 14 percent increase were assets related to acquisitions and higher trade receivables, the company’s ambition is to generate a competitive return on reflecting high seasonal business activity in the last quarter of the sales. With best-in-class operating margins of 16 (20) percent year due to a higher completion rate of large projects, especially and 13 (17) percent excluding sony ericsson, the company in markets with longer payment terms. continued to perform well, albeit at lower than recent year’s Deferred tax assets decreased by seK 1.9 billion net to seK levels due to the development within networks previously 11.7 billion. utilization of tax loss carryforwards was seK 2.5 described. professional services’ operating margins were stable billion while acquisitions added seK 2.0 billion during the year. at 15 (14) percent even with the strong sales growth of managed net cash decreased from seK 40.7 billion to seK 24.3 billion, 34 ericsson annual report 2007 Board of directors’ reportmainly as a result of acquisition and build up of working capital for turnkey projects. Maturing borrowings were refinanced. long-term committed credit facilities were increased from usD 1 billion to usD 2 billion to improve flexibility to manage volatility if necessary. payment readiness was 64.7 (67.5) billion. equity increased to seK 135 (120.9) billion and the equity ratio decreased to 55.1 (56.2) percent. return on capital employed (roce) was 20.9 percent compared to 27.4 percent in 2006. cash flow SEK billion income reconciled to cash changes in operating net assets cash flow from operating activities cash flow from investing activities cash flow before financing activities cash flow before financing activities adjusted for acquisitions/divestments and short-term investments cash flow from financing activities cash conversion 2) 2007 2006 2005 1) 29.3 –10.1 19.2 –27.5 –8.3 32.5 –14.0 18.5 –14.9 3.6 35.1 –10.0 25.1 1.0 26.1 14.4 6.3 66% 12.4 –15.4 57% 19.6 –6.1 72% return on capital employed 2005 –2007 1) excluding pension trust fund (sweden). 2) cash flow from operating activities divided by net income reconciled to cash. 2005 2006 2007 Off balance sheet arrangements percent 28.7 27.4 20.9 cash flow from investing activities was seK –27.5 (–14.9) billion, of which seK –26.3 (–18.1) billion were used for acquisitions, seK –4.7 (3.0) billion for capital expenditures and other investment activities and seK 3.5 (6.2) billion in short-term investments. cash flow before financing activities adjusted for the major acqui- there are currently no material off-balance sheet arrangements sitions/divestments as well as the short-term investments that have or would be reasonably likely to have a current or amounted to 14.4 (12.4) billion. cash flow from financing activities anticipated effect on the company’s financial condition, revenues was seK 6.3 (–15.4) billion and mainly consisted of a bond issue or expenses, results of operations, liquidity, capital expenditures in the second quarter of seK 11.1 billion less shareholder or capital resources that is material to investors. dividends of seK 7.9 billion. in certain countries, there are legal Cash flow or economic restrictions on the ability of subsidiaries to transfer funds to the parent company in the form of cash dividends, cash flow from operating activities was seK 19.2 (18.5) billion, of loans or advances. such restricted cash amounted to seK 5.8 which seK 12 (11) billion was generated in the fourth quarter. the (5.8) billion. strong ending of 2007 is mainly due to the decrease in working inventory turnover (ito) and Days payable were improved capital as a result of a high completion rate for turnkey projects. somewhat compared to 2006. However, Days sales outstanding the cash conversion improved from 57 percent in 2006 to 66 (Dso) increased due to growth in turnkey projects and in markets percent in 2007. net operating assets increased by seK 10.1 with longer payment terms. efforts to further improve capital billion, reflecting continued working capital build-up in turnkey efficiency and cash conversion will continue. projects and particulary in trade receivables (which increased by seK 9.4 billion). the scope of a managed services agreement was renegotiated to allow for network sharing. this resulted in advance payments of seK 3.2 billion, of which half affected the operational cash flow and the other half affected financing activities. worK ing capital efficiency measures 2007 target 2006 2005 Days sales outstanding (Dso) inventory turnover (ito) payable Days <90 >5.5 >60 102 5.2 57 85 5.2 54 81 5.0 52 ericsson’s share of sony ericsson’s operating income before tax for 2007 was seK 7.1 billion and seK 3.9 billion was received Capital expenditures as dividend during the year. We continuously monitor the company’s capital expenditures and evaluate whether adjustments are necessary in light of market conditions and other economic factors. capital expendi- tures are typically investments in test equipment used to develop, manufacture and deploy network equipment. However, the increase in capital expenditures from 2006 to 2007 came mainly from investments needed to support the rapidly growing services business and establish stronger presence in certain markets. ericsson annual report 2007 35 board of directors’ report the following table summarizes annual capital expenditures r&d program during the five years ended December 31, 2007: capital eXpenditures 2003 –2007 seK billion 2007 2006 2005 2004 2003 capital expenditures of which sweden as percent of net sales 4.3 1.3 2.3% 3.8 1.0 2.2% 3.4 1.0 2.2% 2.5 1.1 1.9% 1.8 1.1 1.5% expenses (seK billion) as percent of sales employees within r&D at December 31 1) patents 1) 2007 2006 2005 28.8 15.4% 27.5 15.3% 24.1 15.7% 19,300 17,000 16,500 23,000 22,000 20,000 1) the number of employees and patents are approximate. excluding acquisitions, we do not expect capital expenditures in During 2008, r&D expenses, including the amortization of relation to sales to differ significantly in 2008, remaining at intangible assets from acquisitions, are expected to remain roughly 2 percent of sales. in addition to normal capital expendi- roughly the same in absolute terms as for the annualized run rate tures, there are commitments to repay seK 3.1 billion of debt. during the second half of 2007, i.e. ~seK 30–31 billion. currency With a net cash position at year-end of seK 24.3 (40.7) billion, we translation effects could affect the actual level of reported expect the company to be able to cover all capital expenditure spending. plans and customer financing commitments for 2008 by using funds generated from operations with no additional borrowing Partnerships and joint ventures required. During 2007, sony ericsson Mobile communications reported We believe the properties that the company now occupies are strong unit volume and sales increases, which caused their suitable for its present needs in most locations. as of December income before tax to improve significantly from last year. the 31, 2007, no material land, buildings, machinery or equipment improved performance is mainly the result of focusing on were pledged as collateral for outstanding indebtedness. imaging, music and enterprise phones, while at the same time Credit ratings increasing the number of lower priced models. sony ericsson’s ambition is to achieve continued profitable growth through the Both Moody’s and standard & poor’s (s&p) credit rating combination of technologies and expertise from their parent agencies raised ericsson’s credit rating during 2007, although companies to better leverage their own capabilities. s&p lowered their outlook from stable to negative on november each parent company was paid a dividend of eur 424 million. 27, 2007. at year-end, ratings of ericsson’s creditworthiness the joint venture results are accounted for in accordance with the were Baa1 for Moody’s and BBB+ for s&p, both of which are equity method. For more information, see also notes to the considered to be “investment Grade.” consolidated Financial statements – note c1, “significant accounting policies”. ericsson credit ratings year end 2005 –2007 Moody’s standard & poor’s Research and development 2007 2006 2005 Baa1 BBB+ Baa2 BBB– Baa3 BBB– sony ericsson results 2005 –2007 percent 2007 change 2006 2005 units sold (millions) sales (eur m.) 103.4 12,916 38% 18% 74.8 10,959 51.2 7,268 a robust r&D program is essential to ericsson’s competitiveness and future success. With most r&D invested in mobile communi- cations network infrastructure, ericsson’s program is one of the largest in the industry. the efficiency of the r&D activities has income before tax (eur m.) net income (eur m.) ericsson’s share of income before tax (seK billion) 1,574 1,114 21% 12% 1,298 997 512 350 7.1 21% 5.9 2.3 been improved, enabling a faster time to market for products and For more information on transactions with sony ericsson, please increased investment in new areas such as multimedia solutions see also notes to the consolidated Financial statements – note while decreasing r&D as a percentage of sales. the company c30, “related party transactions”. reduced r&D lead time more than 25 percent this year and have reached their target of a 50 percent reduction in time to market one year ahead of plan. 36 ericsson annual report 2007 Board of directors’ report Acquisitions and divestments acquisitions were made for seK 26.3 billion in 2007, seK 18.1 acquisitions or divestments completed during 2005, 2006 or billion in 2006 and seK 1.2 billion in 2005. Divestments were 2007 are described in the tables ”acquisitions 2005–2007” and made for seK 0.1 billion in 2007, seK 3.1 billion in 2006 and seK “Divestments 2005–2007”. 0.03 billion in 2005. For more information, please see notes to in total, the company has spent seK 42.4 billion net in the consolidated Financial statements, note c26 “Business acquisitions/divestments during the last three years (2005–2007). combinations”. acquisitions 2005 –2007 Company Description Hyc lHs Drutt spanish company with around 110 employees that specialize in design and systems integration of iptV networks. German provider of post-paid billing and customer care systems for wireless, wireline, and ip telecom markets. purchase price seK 2.7 billion. swedish company, with around 85 employees, that develops Mobile service Delivery platform which enables mobile operators to mobilize and charge for any content to any device, over any delivery channel. Date Dec 30, 2007 oct 1, 2007 June 28, 2007 tandberg television norwegian global supplier of products for digital tV solutions, including iptV, HDtV, video on demand, advertising on demand and interactive tV applications. purchase price seK 9.8 billion. May 1, 2007 Mobeon entrisphere swedish company, with around 130 employees that develop ip messaging software technology. Mar 15, 2007 us-based company, with around 140 employees, that develops gigabit passive optical network (Gpon) technology for fixed broadband access, i.e. Fttx. redback networks us supplier of multi-service routing platform for broadband services such as Voip, iptV and Video on-Demand. purchase price seK 14.8 billion. Distocraft oy netwise Marconi assets tusc axxessit teleca oss assets of Finnish company specialized in software development and with around 40 employees that develop mobile network performance management systems. swedish-based supplier of software for presence management, team collaboration, integration of mobile phones, ip telephony and multimedia for enterprise. certain assets related to broadband access, optical and radio transmission, data networks and service layer were acquired from uK-based Marconi. purchase price seK 19.4 billion. australian company, with around 80 employees, specializes in systems integration for telecom- munications, utilities and enterprises. norway-based technology company that supplies multi-service next-generation sDH metro transmission equipment. swedish company with around 40 employees, supplier of service assurance, network manage- ment and operator charging solutions as well as other tools to improve the quality of operator services toward consumers. Feb 12, 2007 Jan 23, 2007 aug 31, 2006 aug 11, 2006 Jan 23, 2006 nov 24, 2005 sept 13, 2005 July 4, 2005 netspira networks spanish company with around 20 employees, that provides software for content aware and event based charging. June 3, 2005 ericsson s.p.a. in the first quarter 2005, a residual public offer was launched for the remaining shares in ericsson s.p.a. in italy and subsequently ericsson s.p.a. was delisted from the Milan stock exchange. purchase price seK 0.6 billion. 1Q 2005 divestments 2005-2007 Company Description ericsson Microwave systems (eMW) swedish provider of radar, command and control systems for defense applications. cash flow effect seK 3.1 billion. shares in anoto swedish company that licenses a digital pen and paper technology. Date sept 1, 2006 May 30, 2005 ericsson annual report 2007 37 board of directors’ reportMaterial contracts and contractual obligations Corporate Governance ericsson is party to certain agreements which include provisions in accordance with the swedish code of corporate Governance, that may take effect, be altered or cease to be valid due to a a separate corporate Governance report including an internal change in control of the company, as a result of a public takeover control section has been prepared. there have been no offer. such provisions are not unusual for certain types of amendments or waivers to ericsson’s code of Business ethics agreements such as joint-venture agreements, financing for any Director or member of management. agreements and certain license agreements. However, none of a separate corporate responsibility report is also published, the agreements that ericsson currently has in effect would entail addressing ericsson’s activities regarding social responsibility, any material consequences due to a change in control of the environmental and human resource issues. company. Material contractual obligations are outlined in the following table. operating leases are mainly related to offices and the corporate bodies involved in the governance of ericsson are: • the shareholders through voting in annual general meetings or extraordinary general meetings and their appointed nomina- production facilities. purchase obligations are related mainly to tion committee for nomination of members of the Board and outsourced manufacturing, r&D and it operations and to auditors components for our own manufacturing. except for those transactions previously described in this report, ericsson has not been a party to any material contracts over the past three years other than those entered into during the ordinary course of business. contractual obligations 2007 • the Board of Directors and its Finance, remuneration and audit committees • the president and ceo • the management • the external auditors <1 year total payment due by period >5 years 3–5 years 1–3 years 23,659 3,625 7,968 3,630 8,436 1,875 11,895 171 210 1,210 3,147 3,708 2,308 2,732 284 the Board of Directors works according to Work procedures that outlines rules regarding the distribution of tasks between the Board and its committees as well as between the Board, its committees and the president and ceo. the external auditors examine the financial reports and assess the management by the Board of Directors and the president and ceo. 1,714 102 132 147 1,333 ericsson’s operations are governed by its ericsson Group 9,376 9,376 17,427 17,427 – – – – – – 4,185 4,185 – 70,131 38,033 12,092 6,295 13,711 – – 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 provisions. 5) see also notes to the consolidated Financial statements – note c14, “trade receiv- ables and customer Financing”. Management system, consisting of: • ericsson’s organization, with its segregation of duties distribution of work and delegation of authority. • Group policies and directives, including a code of Business ethics. • Group-wide standard business processes, including process- es for strategy and target setting as well as operational processes and processes for accounting, financial reporting and disclosure. For more information regarding the Board of Directors and its committees, please see the corporate Governance report. (seK million) long-term debt 1) 2) capital lease obligations 3) operating leases 3) other non-current liabilities purchase obligations 4) trade payables commitments for customer financing 5) Total 38 ericsson annual report 2007 Board of directors’ report Changes to the Board membership Operational risk management the Board of Directors is elected each year at the annual General risk management has been integrated within the ericsson Group Meeting for the period until the next annual General Meeting. at Management system and each business process. the opera- the annual General Meeting on april 11, 2007, the following tional risk management framework applies universally across all board members were re-elected: Michael treschow as chairman of the Board, Marcus Wallenberg and sverker Martin-löf as Deputy chairmen, sir peter l. Bonfield, ulf J. Johansson, nancy business activities and is based on the following principles: • risks are dealt with on three levels to ensure operational effectiveness, efficiency and business continuity: in the McKinstry, Börje ekholm, Katherine Hudson, anders nyrén and strategy process, in annual target setting and within ongoing carl-Henric svanberg. Board remuneration operations by transaction (e.g. customer bids/contracts, acquisitions, investments, product development projects) and by process. Members of the Board who are not employees of the company have not received any compensation other than the fees paid for • in the strategy and target setting processes, a balanced scorecard approach is used to ensure a comprehensive Board duties as outlined in notes to the consolidated Financial assessment of risks and opportunities across several statements – note c29, information regarding employees, perspectives: financial, customer/market, product/innovation, Members of the Board of Directors and Management. Members and Deputy Members of the Board who are employees (i.e. the ceo and the employee representatives) have not received any operational efficiency and employee empowerment. • in the strategy process, objectives are set for the next five years. risks are then assessed and strategies developed to remuneration or benefits other than their normal employee achieve these objectives. to ensure that actions are taken to entitlements, with the exception of a small fee paid to the realize the strategies, focus areas are identified to be included employee representatives for each Board meeting attended. in the near-term planning and target setting for the upcoming Risk Management year. the five-year strategy and one-year targets are approved annually by the Board of Directors. risk taking is an inherent part of doing business. risks and opportunities are managed in our strategy and target setting • each risk is owned and managed by an operational unit that is held accountable and monitored through unit steering groups processes and in all operational processes. risks are identified, and Group Management. probability of occurrence assessed and potential consequences • approval limits are clearly established with escalation estimated. actions are then taken to reduce or mitigate the risk according to defined delegations of authority. certain risks, exposures and limit potential unfavorable consequences. such as information security/it risks, corporate responsibility controls and monitoring activities are in place to ensure effective risks, physical security risks and insurable risks are centrally risk management. coordinated. a crisis management council is established to We broadly categorize risks into operational risks and financial deal with ad hoc events of a serious nature, as necessary. risks. We also manage risks related to financial reporting and compliance with applicable laws and regulations. our approach Financial risk management to risk management reflects the scale and diversity of our We have an established policy governing the Group’s financial business activities and balances central coordination and risk management. this is carried out by the treasury function support with delegated risk management responsibilities within within the parent company and by a customer Finance function. each operational unit. these are both supervised by the Finance committee of the For more information on risks related to our business, see also Board of Directors. risk Factors on page 105. the policy governs identified financial risk exposures regard- ing: • Foreign exchange risks, as the company has significant transaction volumes and assets and liabilities in currencies other than seK. the largest foreign exchange exposure was towards the usD and related currencies, which represented ericsson annual report 2007 39 board of directors’ reportapproximately 50 percent of sales in 2007. spending exposure Corporate Responsibility towards usD was approximately 35 percent. a variety of corporate responsibility (cr) is about integrating the environ- hedging activities are used to manage parts of the foreign mental, social and ethical imperatives into the way the company exchange risks. works and throughout its value chain. the company ensures that • interest rate risks, as the values of cash and bank deposits, borrowings and post-employment liabilities as well as related it has the controls in place to minimize risks and also strives to generate positive business impacts by connecting the core interest income and expenses are exposed to changes in business to the betterment of society. ericsson believes this interest rates. leads to an enduring capability for value creation as well as a • credit risks in trade and customer finance receivables, competitive advantage. including credit risk exposures in identified high-risk countries, ericsson supports the un Global compact and its ten guiding as well as credit risks regarding counterparties in financial principles. the company sees these principles not only as transactions, guiding principles, but also as a prerequisite for sound, long-term • liquidity and financing risks, where the company’s treasury function manages the company’s liquidity through monitoring business. as such, ericsson is committed to responsible business practices for sustainable economic growth from which of its payment readiness and refinancing needs and sources. all the company’s stakeholders benefit. this commitment to employees, customers, shareholders and the broader global During 2007, there have not been any defaults in the payment of community is underscored by external recognition of the principal or interest, or any other material default relating to the company’s efforts. During 2007, ericsson was again included in indebtedness of ericsson. the Ftse 4Good and was the only company in its sector to be For further information on objectives, policies and strategies for noted on the carbon Disclosure project’s (cDp) global leader- financial risk management, see notes to the consolidated ship index, and ranked 3rd overall on the cDp’s nordic index. Financial statements – note c14, trade receivables and ericsson publishes a separate corporate responsibility customer Financing, note c19, interest-Bearing liabilities and report annually, which provides comprehensive information note c20, Financial risk Management and Financial instruments. about the company’s corporate responsibility and related Financial Reporting Risks to ensure accurate and timely reporting that is compliant with Human Rights activities. financial reporting standards and stock market regulations, we ericsson believes that publicly available and affordable telecom- have adopted accounting policies and implemented financial munications is a fundamental prerequisite for social and reporting and disclosure processes and controls. please refer to economic development. as one of the world’s largest providers the report on internal control over financial reporting, included in of communications equipment and services, the company plays our corporate Governance report. a vital role in achieving this objective, especially in emerging Compliance Risks markets. ericsson joined the Business leaders’ initiative on Human rights (BliHr) in 2006. BliHr aims to find practical the company have implemented a number of policies to ensure applications of the universal Declaration of Human rights within compliance with applicable laws and regulations, including a a business context and to inspire other businesses to do likewise. code of Business ethics, covering among other areas: labor laws, ericsson’s participation in BliHr reinforces a longstanding trade embargoes, environmental regulations, corruption, fraud commitment to human rights and corporate responsibility and insider trading. regular training is conducted in this area in activities. the form of seminars as well as e-learning on internal training ericsson has undertaken a number of measures to demon- web sites where employees take courses and tests and get strate that it is a force for good in emerging markets. For example, certificates for passed courses. during 2007 ericsson commissioned McGrigors rights, an internal audits are routinely conducted in the areas of trade independent third party, to perform a Human rights impact compliance, fraud, security, health and safety, the environment assessment on ericsson’s operations in sudan. overall it was and supply chain management. During 2007, the company also concluded that ericsson can demonstrate non-complicity in included audits of the internal implementation of the code of human rights abuses and convincing “substantial actions” for conduct. investors and concerned stakeholders regarding its business operations in sudan. the full results are presented in ericsson’s 40 ericsson annual report 2007 Board of directors’ report2007 corporate responsibility report. it should be noted that the company continues to work actively in developing energy ericsson is not included on the sudan Divestment task Force’s efficient products and green site solutions, including solar, wind, list of divestment targets. fuel cell and biofuel technologies. ericsson introduced a number Community Involvement of innovative hardware and software solutions during the year, including the radio base station power saving feature, and the the company is committed to being a responsible member of ericsson tower tube – a completely new, environmentally the global society and of the local communities in which it designed, site concept. operates. During 2007, a cr sponsorship Directive was During 2007, ericsson was awarded both the elektra european established to ensure that all cr sponsorships are connected to electronic industry clean Design award for its energy efficient the use of telecommunications to support social and/or environ- power modules and the energy-efficiency innovation award by mental causes. the china center for information industry Development (cciD). ericsson believes that telecommunication, by its very nature, We believe that the company is in compliance with all material has a constructive role to play in the proactive engagement in environmental, health and safety laws and regulations required local economic, environmental and social challenges. ericsson is by its operations and business activities. ericsson provides encouraging economic growth in emerging markets through its public information on radio waves and health and supports communication for all program. independent research to further increase knowledge in this area. ericsson response is a global initiative to rapidly provide it, ericsson currently co-sponsors more than 45 different ongoing communication solutions and telecom experts anywhere in the research projects related to electromagnetic fields (eMF), radio world in response to human suffering caused by disasters. waves and health. since 1996 the company has supported more ericsson response assists the disaster relief operations of the than 90 studies. public health authorities and independent un office for the coordination of Humanitarian affairs (ocHa), expert groups have reviewed the total amount of research. they un World Food programme (WFp) and the international have consistently concluded that the balance of evidence does Federation of red cross and red crescent societies (iFrc). not demonstrate any health effects associated with radio wave During 2007, after an earthquake in peru, ericsson response exposure from either mobile phones or radio base stations. provided support to the relief operation in cooperation with iFrc. From august 13, 2005, ericsson has complied with the eu in cooperation with the swedish rescue services agency Directive on Waste electrical and electronic equipment (Weee). (srsa), ericsson response supported the un in the establish- ericsson’s global end-of-life treatment program is called the ment of operational offices in the central african republic. in ecology Management provision, and was initiated three years addition, ericsson was the winner of the 2007 pMi (project before the Weee requirements became law in the eu. this Management institute) community advancement through proactive approach gives ericsson an effective tool to meet project Management award. waste-management challenges in all markets around the world. employees are encouraged and empowered to make positive From July 1, 2006, ericsson is in compliance with the eu individual contributions to the world around them. their contribu- Directive on reduction of Hazardous substances (roHs). tions take many forms, determined by the employees according ericsson is assessing the effects of the June 1, 2007, european to local needs. For example, they may be in the fields of health community’s reacH (registration, evaluation, authorization and care, social and humanitarian aid, scholarships and other limitation of chemicals) regulation to ensure timely compliance educational support, art and culture, the environment or with its requirements. children’s welfare as well as many other activities. Employees Energy and Environment every year, an employee opinion survey is conducted with a high ericsson’s most significant environmental impact relates to the level of employee participation. the continued high participation energy consumed by the operation of its products during their rate of 90 percent reflects employee recognition that manage- active life time. the company has set ambitious targets in this ment actively uses the survey as a tool to further develop the area. By the end of 2008, the company intends to improve the workforce satisfaction and performance. Management’s main energy efficiency of its 3G/WcDMa radio base station portfolio ambition going forward is to sustain the current level of excel- by up to 80 percent, from a 2001 baseline. performance on lence and encourage an even higher level of employee participa- annual improvement targets is included in the corporate tion. responsibility report. ericsson annual report 2007 41 board of directors’ reportemployee headcount at year-end was 74,011 (63,781). Most of Legal and tax proceedings the additions were due to acquisitions of redback, tandberg and in the fall of 2007, ericsson was named as a defendant in three lHs as well as part of outsourcing agreements with operators to putative class action suits filed in the united states District court support the growing managed services business. During the year, for the southern District of new York. the complaints allege 6,657 (6,432) employees departed while 16,887 (14,158) joined violations of the united states securities laws principally in the company. please see notes to the consolidated Financial connection with ericsson’s october 2007 profit warning. at the statements – note c29, information regarding employees, conclusion of various pending procedural motions and after Members of the Board of Directors and Management. plaintiffs file a consolidated amended class action complaint, Executive Remuneration ericsson intends to seek the dismissal of the lawsuits. Following issuance of the third-quarter profit warning, the oMX the Board, through its remuneration committee continues to be nordic exchange stockholm brought an inquiry to determine mindful of the debates around the world on executive salaries whether the company appropriately issued the profit warning and benefits. We remain confident that current policies and and made appropriate disclosure at the november 20 manage- practices concerning authorization, compliance and control of ment briefing. the company believes it has complied fully with all senior executive remuneration within ericsson are appropriate stock market and other obligations, and is cooperating fully with and reasonable. principles for remuneration and other employ- the inquiry. the Financial services authority in england has ment terms for top executives were approved by the annual initiated a similar inquiry. General Meeting 2007 and are further described in notes to the ericsson, sony ericsson Mobile communications and the consolidated Financial statements –note c29, information Korean handset manufacturer samsung have settled the regarding employees, Members of the Board of Directors and companies’ multiple patent litigations in the us, uK, Germany Management. and the netherlands, including the proceedings in the us the proposed remuneration policy for Group Management for international trade commission (itc) under section 337 of the 2008 remains materially the same as the policy resolved by tariff act of 1930. shareholders for 2007, which is described in note 29. in october 2005, ericsson filed a complaint with the european the Board of Directors’ proposal for implementation of a long commission requesting that it investigate and stop us-based term Variable compensation plan for 2007 and transfer of shares Qualcomm’s anti-competitive conduct in the licensing of in connection therewith was not approved by shareholders at the essential patents for 3G mobile technology. at the same time, annual General Meeting on april 11, 2007. at a subsequent Broadcom, nec, nokia, panasonic Mobile communications and extraordinary General Meeting on June 28, 2007, ericsson texas instruments each filed similar complaints claiming shareholders agreed and approved a slightly modified long term Qualcomm is violating eu competition law and failing to meet the Variable compensation program 2007 for all employees. as of commitments Qualcomm made to international standardization December 31, 2007, there were no loans outstanding from, and bodies around the world that it would license its technology on no guarantees issued to or assumed by ericsson for the benefit fair, reasonable and non-discriminatory terms. the commission of any member of the Board of Directors or senior management. opened a first-phase investigation in December of 2005. in please see notes to the consolidated Financial statements – august 2007, it decided to conduct an in-depth investigation of note c29, information regarding employees, Members of the the case as a matter of priority. Board of Directors and Management. together with most of the mobile communications industry, ericsson has been named as a defendant in six class action lawsuits in the united states where plaintiffs alleged that adverse health effects could be associated with the use of mobile phones. in 2006, plaintiffs voluntarily dismissed four of those lawsuits. the two remaining cases are currently pending in the federal court in pennsylvania and the superior court of the District of columbia. in another suit filed in the us, Freedom Wireless inc., a technol- ogy company, sued cingular Wireless llc and ericsson claiming the two defendants built their prepaid wireless telephone service on Freedom Wireless’ patents that allow mobile telephone customers to purchase increments of airtime for any mobile phone. 42 ericsson annual report 2007 Board of directors’ reportericsson is engaged in litigation with an australian company, through the bond issue program; and increased current and QpsX, in the Federal court of australia. QpsX’s claim relates to an non-current liabilities to subsidiaries increased by seK 4.7 billion. alleged breach by ericsson of a patent license agreement. ericsson at year-end, cash and bank and short-term investments amounted has contested the claim. in april 2007, QpsX filed a patent to seK 45.6 (54.0) billion. infringement lawsuit against ericsson et al. in the eastern District of as per December 31, 2007, ericsson had 16,132,258,678 texas alleging ericsson infringed a QpsX patent related to shares. the shares were divided into 1,308,779,918 class a asynchronous transfer mode (“atM”) technology. shares, each carrying one vote, and 14,823,478,760 class B in December 2006, the stockholm city court acquitted all shares, each carrying one-tenth of one vote. the two largest current or former employees of the parent company who had been shareholders at year-end were investor and industrivärden indicted by the swedish national economics crimes Bureau for holding 19.49 percent and 13.36 percent respectively of the evasion of tax control. this judgment has in part been appealed by voting rights in the company. the prosecutor. the svea court of appeals will hold its main in accordance with the conditions of the stock purchase plans hearing in the first half of 2008. and option plans for ericsson employees, 19,022,349 shares For income tax purposes, swedish fiscal authorities have from treasury stock were sold or distributed to employees during disallowed deductions for sales commission payments via external the year. the quota value of these shares is seK 19.0 million, service companies to sales agents in certain countries. Most of representing less than 1 percent of capital stock, and compensa- these taxes have already been paid. the decision covering the tion received amounted to seK 103.7 million. the holding of fiscal year 1999 was appealed. in December 2006, the county treasury stock at December 31, 2007, was 231,991,543 class B administrative court in stockholm rendered a judgment in favor of shares. the quota value of these shares is seK 232.0 million, the fiscal authorities. also this judgment has been appealed. representing 1 percent of capital stock and related acquisition cost amounts to seK 516.2 million. Parent Company the parent company business consists mainly of corporate Proposed disposition of earnings management, holding company functions and internal banking the Board of Directors proposes that a dividend of seK 0.50 activities. the parent company business also includes customer (0.50) per share be paid to shareholders duly registered on the credit management, performed on a commission basis by record date of april 14, 2008, and that the company shall retain ericsson credit aB. the remaining part of non-restricted equity. the class B treasury the parent company is the owner of the majority of ericsson’s shares held by the parent company are not entitled to receive a intellectual property rights. it manages the patent portfolio, dividend. including patent applications, licensing and cross-licensing of assuming that no treasury shares remain within the company patents and defending of patents in litigations. on the record date, the Board of Directors proposes that the parent company has 7 (7) branch offices. in total, the earnings be distributed as follows: Group has 55 (51) branch and representative offices. net sales for the year were seK 3.2 (2.6) billion and income after amount to be paid to the shareholders seK 8,066,129,339 financial items was seK 14.7 (13.6) billion. patent license fees are amount to be retained included in net sales from 2007, instead of in other operating by the parent company seK 27,158,601,830 income and expenses. prior years have been restated accordingly. exports accounted for 59 percent of net sales in 2007 (63 percent total non-restricted equity of adjusted net sales in 2006). no consolidated companies were of the parent company seK 35,224,731,169 customers of the parent company’s sales in 2007 or 2006, while 46 percent (29 percent in 2006) of the company’s total purchases as a basis for its proposal for a dividend, the Board of Directors of goods and services were from such companies. Major changes has made an assessment in accordance with chapter 18, in the parent company’s financial position for the year include section 4 of the swedish companies act of the parent com- increased investments in subsidiaries of seK 30.3 billion, mostly pany’s and the Group’s need for financial resources as well as attributable to the tandberg, redback, entrisphere and lHs the parent company’s and the Group’s liquidity, financial position acquisitions; decreased other current receivables of seK 2.2 in other respects and long-term ability to meet their commit- billion; decreased cash and bank and short-term investments of ments. the Group reports an equity ratio of 55.1 (56.2) percent seK 8.4 billion; increased notes and bond loans of seK 11.1 billion and net cash amounts to seK 24.3 (40.7) billion. ericsson annual report 2007 43 board of directors’ report the Board of Directors has also considered the parent 2007 amounted to approximately seK 3 billion. the purchase company’s result and financial position and the Group’s position price is seK 650 million excluding net of assets and liabilities. a in general. in this respect, the Board of Directors has taken into capital gain of approximately seK 200 million is expected. account known commitments that may have an impact on the financial positions of the parent company and its subsidiaries. Board assurance the proposed dividend does not limit the Group’s ability to the Board of Directors and the president declare that the make investments or raise funds, and it is our assessment that consolidated financial statements have been prepared in the proposed dividend is well-balanced considering the nature, accordance with iFrs, as adopted by the eu, and give a fair view scope and risks of the business activities as well as the capital of the Group’s financial position and results of operations. the requirements for the parent company and the Group. financial statements of the parent company have been prepared Post-closing events Divestment of enterprise PBX solutions in accordance with generally accepted accounting principles in sweden and give a fair view of the parent company’s financial position and results of operations. on February 18,2008, ericsson announced the divestment of its the Board of Directors’ report for the ericsson Group and the enterprise pBX solutions business to the canadian company parent company provides a fair review of the development of the aastra technologies. the agreement involves transfer of Group’s and the parent company’s operations, financial position approximately 630 employees of which some 360 are based in and results of operations and describes material risks and sweden. the transaction is expected to close in april 2008. uncertainties facing the parent company and the companies ericsson’s enterprise pBX solutions business includes ip pBX, included in the Group. converged pBX systems and branch office solutions. sales in sverker Martin-löf Deputy chairman nancy McKinstry Member of the Board Börje ekholm Member of the Board torbjörn nyman Member of the Board stockholm February 22, 2008 telefonaktiebolaget lM ericsson (publ) org. no. 556016-0680 Michael treschow Chairman sir peter l. Bonfield Member of the Board ulf J. Johansson Member of the Board Monica Bergström Member of the Board carl-Henric svanberg President and CEO Marcus Wallenberg Deputy chairman anders nyrén Member of the Board Katherine Hudson Member of the Board Jan Hedlund Member of the Board 44 ericsson annual report 2007 Board of directors’ report Consolidated Income Statement Years ended December 31, SEK million Net sales Cost of sales Gross margin Research and development expenses Selling and administrative expenses Operating expenses Other operating income and expenses 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 Notes C3, C4 C6 C12 C7 C7 C8 2007 187,780 -114,059 73,721 -28,842 -23,199 -52,041 1,734 7,232 30,646 1,778 -1,695 30,729 -8,594 22,135 2006 1) 2005 1) 179,821 -104,875 74,946 -27,533 -21,422 -48,955 3,903 5,934 35,828 1,954 -1,789 35,993 -9,557 26,436 153,222 -82,764 70,458 -24,059 -16,800 -40,859 1,090 2,395 33,084 2,653 -2,402 33,335 -8,875 24,460 21,836 299 26,251 185 24,315 145 Other information Average number of shares, basic (million) Earnings per share attributable to stockholders of the Parent Company, basic (SEK) Earnings per share attributable to stockholders of the Parent Company, diluted (SEK) C9 C9 C9 15,891 1.37 1.37 15,871 1.65 1.65 15,843 1.53 1.53 1) Revenues for intellectual property rights (IPR) related to products are included in Net sales instead of Other operating income. In 2006, SEK 2,038 million (SEK 1,400 million in 2005) of Other operating income were reclassified. Accordingly, the related cost previously reported as part of Research and development expenses is reported as Cost of sales or Selling and administrative expenses, depending on the nature of the cost. In 2006, SEK 388 million (SEK 395 million in 2005) of the costs were reclassified. ERICSSON ANNUAL REPORT 2007 CONSOLIDATED FINANCIAL STATEMENTS 45 Consolidated Balance Sheet December 31, SEK million ASSETS Non-current assets Intangible assets Capitalized development expenses Goodwill Intellectual property rights, brands and other intangible assets Notes 2007 2006 C10 3,661 22,826 23,958 4,995 6,824 15,649 Property, plant and equipment C11, C26, C27 9,304 7,881 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 1) C12 C12 C12 C12 C8 10,903 738 1,012 2,918 11,690 87,010 9,409 721 1,921 2,409 13,564 63,373 C13 22,475 21,470 C14 C15 C20 C20 C16 C16 C17 C18 C8 C19, C20 C18 C19, C20 C22 C21 60,492 2,362 15,062 29,406 28,310 158,107 245,117 134,112 940 135,052 6,188 368 2,799 21,320 1,714 32,389 9,358 5,896 17,427 44,995 77,676 245,117 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 1) Of which interest-bearing liabilities and post-employment benefits SEK 33,404 million (SEK 21,552 million in 2006). 46 CONSOLIDATED FINANCIAL STATEMENTS ERICSSON ANNUAL REPORT 2007 Consolidated Statement of Cash Flows Years ended December 31, SEK million Operating activities Net income Adjustments to reconcile net income to cash Changes in operating net assets Inventories Customer financing, current and non-current Trade receivables Provisions and post-employment benefits Other operating assets and liabilities, net Notes 2007 2006 2005 22,135 26,436 1) 24,460 1) C25 7,172 29,307 6,060 1) 32,496 10,700 1) 35,160 -445 365 -7,467 -4,401 1,851 -10,097 -2,553 1,186 -10,563 -3,729 1,652 -14,007 -3,668 -641 -5,874 -15,574 7,266 -18,491 Cash flow from operating activities 19,210 18,489 16,669 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 Short-term Investments C11 C26 C26 C10 -4,319 152 -26,292 84 -1,053 396 3,499 -3,827 185 -18,078 3,086 -1,353 -1,070 6,180 -3,365 362 -1,210 30 -1,174 13 6,375 Cash flow from investing activities -27,533 -14,877 1,031 Cash flow before financing activities -8,323 3,612 17,700 Financing activities Proceeds from issuance of borrowings Repayment of borrowings Sale of own stock and options exercised Dividends paid 15,587 -1,291 94 -8,132 1,290 -9,510 124 -7,343 657 -2,784 174 -4,133 Cash flow from financing activities 6,258 -15,439 -6,086 Effect of exchange rate changes on cash 406 58 -288 Net change in cash -1,659 -11,769 11,326 Cash and cash equivalents, beginning of period 29,969 41,738 30,412 Cash and cash equivalents, end of period C20 28,310 29,969 41,738 1) Minority interest is reported as Net income instead of Adjustments to reconcile net income to cash. In 2006, SEK 185 million (2005 SEK 145 million) have been reclassified. ERICSSON ANNUAL REPORT 2007 CONSOLIDATED FINANCIAL STATEMENTS 47 Consolidated Statement of Recognized Income and Expense Years ended December 31, SEK million 2007 2006 2005 1) Income and expense recognized directly in equity: Actuarial gains and losses related to pensions 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 adjustments Tax on items reported directly in/or transferred from equity Total transactions reported in equity 1,208 440 -3,221 2 - 584 -1,390 - -797 -73 -466 -1 - 4,100 -1,990 99 -3,119 -769 -3 -147 -3,961 1,404 - 4,265 1,523 -1,240 -140 Net income 22,135 26,436 24,460 Total income and expense recognized for the period 21,669 25,196 24,320 Attributable to: Stockholders of the Parent Company Minority interest 21,371 298 25,101 95 24,028 292 1) As from January 1, 2006, Ericsson has adopted the new option in IAS 19 to charge actuarial gains/losses to equity. Earlier periods have been restated accordingly. 48 CONSOLIDATED FINANCIAL STATEMENTS ERICSSON ANNUAL REPORT 2007 notes to the consolidated Financial statements contents c1 significant accounting policies ............................................................................................................................................................................................................................ 50 c2 critical accounting estimates and Judgments ........................................................................................................................................................................................... 59 c3 segment information .................................................................................................................................................................................................................................................. 61 c4 net sales ........................................................................................................................................................................................................................................................................... 65 c5 expenses by nature .................................................................................................................................................................................................................................................... 65 c6 other operating income and expenses.......................................................................................................................................................................................................... 65 c7 Financial income and expenses .......................................................................................................................................................................................................................... 65 c8 taxes .................................................................................................................................................................................................................................................................................... 66 c9 earnings per share ...................................................................................................................................................................................................................................................... 67 c10 intangible assets ........................................................................................................................................................................................................................................................... 68 c11 property, plant and equipment ............................................................................................................................................................................................................................ 70 c12 Financial assets ............................................................................................................................................................................................................................................................. 71 c13 inventories......................................................................................................................................................................................................................................................................... 73 c14 trade receivables and customer Financing ................................................................................................................................................................................................ 74 c15 other current receivables ..................................................................................................................................................................................................................................... 75 c16 equity ................................................................................................................................................................................................................................................................................... 75 c17 post-employment Benefits ..................................................................................................................................................................................................................................... 79 c18 provisions .......................................................................................................................................................................................................................................................................... 85 c19 interest-bearing liabilities ....................................................................................................................................................................................................................................... 86 c20 Financial risk Management and Financial instruments ......................................................................................................................................................................... 87 c21 other current liabilities ............................................................................................................................................................................................................................................ 92 c22 trade payables ............................................................................................................................................................................................................................................................... 92 c23 assets pledged as collateral ................................................................................................................................................................................................................................. 92 c24 contingent liabilities .................................................................................................................................................................................................................................................. 92 c25 statement of cash Flows ......................................................................................................................................................................................................................................... 92 c26 Business combinations ............................................................................................................................................................................................................................................ 93 c27 leasing ............................................................................................................................................................................................................................................................................... 95 c28 tax assessment Values in sweden ...................................................................................................................................................................................................................96 c29 information regarding employees, Members of the Board of Directors and Management.............................................................................................96 c30 related party transactions .................................................................................................................................................................................................................................. 103 c31 Fees to auditors ......................................................................................................................................................................................................................................................... 104 c32 events after the Balance sheet Date.............................................................................................................................................................................................................. 104 ericsson annual report 2007 49 notes to the consolidated financial statementsc1 significant accounting policies the consolidated financial statements comprise telefonaktiebolaget lM ericsson, the parent company, and its subsidiaries (“the com- pany”) and the company’s interest in associated companies and joint ventures. the parent company is domiciled in sweden at tor- shamnsgatan 23, 164 83 stockholm. the consolidated financial statements for the year ended Decem- ber 31, 2007, have been prepared in accordance with international Financial reporting standards (iFrs) as endorsed by the eu, rr 30:06 additional rules for Group accounting, related interpretations issued by the swedish Financial reporting Board (rådet för Finan- siell rapportering), and the swedish annual accounts act. there is no effect on ericcsson’s financial reporting due to differences be- tween iFrs as issued by the iasB and iFrs as endorsed by the eu, nor is rr 30:06 or the swedish annual accounts act in conflict with iFrs. in light of the sec’s rule release “acceptance from Foreign private issuers of Financial statements prepared in accordance with interna- tional Financial reporting standards without reconciliation to us Gaap”, which becomes effective on March 4, 2008, reconciliation of equity and net income is not made to accounting principles generally accepted in the united states (us Gaap), neither in this annual report nor in the company’s annual rapport on form 20F. the financial statements were approved by the Board of Directors on February 22, 2008. the balance sheets and income statements are subject to approval by the annual general meeting of sharehold- ers. New standards and interpretations adopted as from January 1, 2007 • iFrs 7, Financial instruments: Disclosures, and a complementary amendment to ias 1, presentation of Financial statements – capi- tal Disclosures (effective from January 1, 2007). iFrs 7 introduces new disclosure requirements to improve the information 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 applies iFrs 7 and the amendment to ias 1 from annual periods beginning January 1, 2007. the new standard, iFrs 7, and the amendment to ias 1 relate to changes in disclosure or presentation and has therefore not had any impact on financial result or position. the following iFrics have been 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 require- ments of ias 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency. • iFric 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 9 reassessment of embedded Derivatives. this interpretation determines when an entity shall reassess the need for an embedded derivative to be separated. • iFric 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. none of the new iFrics have had a significant impact on financial result or position. Amendment issued by the Swedish Financial Reporting Board in March 2007, an amendment to ura 43 accounting for special payroll tax and tax on investment returns was issued. the amend- ment had no impact on the company’s financial result or position due to the fact that the company had applied the principles of this interpretation prior to the amendment. Changes in financial reporting structure Business segments ericsson reorganized its operating structure as from January 1, 2007. From the first quarter report 2007, the company’s financial reporting has been adapted to reflect this new structure. the company also took this opportunity to make other modifications to further enhance transparency with additional disclosures. ericsson reports the following business segments: networks, professional services, Multimedia and phones, represented by the share in earnings of sony ericsson. the changed segment reporting is in accordance with the objec- tives set forth in ias 14 segment reporting. the business activities previously reported in other operations have been merged into the new segments to better leverage the opportunities provided by internal business combinations. Business segment networks includes products for mobile and fixed broadband access, core networks, transmission and next- generation ip-networks. related network rollout services are also included. in addition, the power modules and cables operations, previously reported under other operations, are now included within networks, as well as the acquired operations of redback and entri- sphere. Business segment professional services includes all service operations, excluding network rollout reported under networks. services for systems integration of ip- and core networks previously reported as network rollout are now reclassified as professional services. sales of managed services as a part of the total profes- sional services will continue to be disclosed, since this represents service revenues of a recurring nature. the acquired operation of Hyc Group has been included in professional services. Business segment Multimedia includes multimedia systems, previ- ously reported under segment systems, and enterprise solutions and mobile platforms, previously included in other operations. the ac- quired operations of tandberg tV, Mobeon, lHs and Drutt have been included in Multimedia. For each of the business segments, the company has reported 50 ericsson annual report 2007 notes to the consolidated financial statementsnote c1net sales and operating margin quarterly. in addition, the company has continued to disclose sales of mobile systems, including relevant parts of networks and Multimedia. the nature of the acquisitions made during 2007, including those acquired within Multimedia, has not resulted in any significant addi- tion or amendment to the accounting policies of the company. Changes in accounting policies and reporting ing of more than one half of the voting rights. at acquisitions, consoli- dation is performed from the date control is transferred. at divest- ments, deconsolidation is made from the date when control ceases. intra-group balances and any unrealized income and expense arising from intra-group transactions are fully eliminated in preparing the consolidated financial statements. unrealized losses are elimi- nated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. Royalty revenues for intellectual property rights Associated companies and joint ventures Within the consolidated income statement, royalty revenues for intellectual property rights (ipr) related to products are included as part of net sales instead of other operating income. accordingly, the related costs, previously reported as part of research and develop- ment expenses, are reported as cost of sales or selling and adminis- trative expenses, depending on the nature of the costs. Research and development expenses these were prior to 2007 called “research and development and other technical expenses” but are from 2007 renamed “research and development expenses”. this change is only related to adoption of iFrs terminology and has not resulted in any changes of amounts. Statement of cash flows cash flow from operations is disclosed as before, but the subtotals “cash flow from operating investing activities” and “cash flow before financial investing activities” are no longer reported. note c25, “statement of cash Flows” includes additional breakdown of adjust- ments to reconcile net income to cash, operating net assets and investing activities. Basis of presentation the financial statements are presented in millions of swedish Krona (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 pension 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. Basis 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 are all companies 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 sharehold- investments in associated companies, where voting stock interest including effective potential voting rights is at least 20 percent but not more than 50 percent, or where a corresponding influence is ob- tained through agreement, are accounted for according to the equity method. under the equity method, the investment in an associate is initially recognised at cost and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. ericsson’s share of income before taxes is reported in item share in earnings of joint ventures and associated companies, included in operating income. this is due to that the majority of these interests relate to sony ericsson, an interest that is held for non-financial purposes. ericsson’s share of taxes is included in item taxes. unrealized internal profits in inventory, as well as other assets in associated companies and joint ventures purchased from subsidiary companies, are eliminated in the consoli- dated accounts in proportion to ownership. losses in transactions with associated companies and joint ventures are eliminated in the same way as profits, 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 of such profits and losses. undistributed share in 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 ac- quired assets, liabilities and contingent liabilities, for example intan- gible 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 ex- ceeds 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 unit and then to reduce the ericsson annual report 2007 51 notes to the consolidated financial statementsnote c1carrying 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 as- sessing value in use, the estimated future cash flows are discounted to their present value. an impairment loss in respect of goodwill is not reversed. Foreign currency remeasurement and translation items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). the consolidated financial statements are presented in swedish Krona (seK), which is the parent company’s functional and presenta- tion currency. Transactions and balances Foreign currency transactions are translated into the functional cur- rency using the exchange rates prevailing at the dates of the transac- tions. Foreign exchange gains and losses resulting from the settle- ment of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges. changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. translation differences related to changes in the amortized cost are recognized in profit or loss, and other changes in the carry- ing amount are recognized in equity. translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Group companies the results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are trans- lated at the closing rate at the date of that balance sheet; • income and expenses for each income statement are translated at average exchange rates; and • all resulting net exchange differences are recognized as a separate component of equity there is no significant impact due to a currency of a hyperinflationary economy. on consolidation, exchange differences arising from the transla- tion of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such invest- ments, are taken to stockholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were record- ed in equity are recognized in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Statement of cash flows the cash flow statement is prepared according to the indirect meth- od. cash flows from foreign subsidiaries are translated at the average exchange rate during the period. payments for subsidiaries acquired and/or divested are reported as cash flow from 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 the company offers a comprehensive portfolio of telecommunication and data communication systems, multimedia solutions and profes- sional services, covering a range of technologies. the contracts are of four main types: • delivery-type • contracts for various types of services, for example multi-year managed services contracts • licenses for the use of the company’s technology or intellectual property rights, not being a part of another product. • construction-type the majority of the company’s products and services are delivered under delivery-type contracts including multiple elements, such as base stations, base station controllers, mobile switching centers, routers, microwave transmission links, various software products and related installation and integration services. such contract elements generally have individual item prices in agreed price lists per cus- tomer. 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. specific contractual performance and acceptance criteria may impact the timing and amounts of revenue recognized. the profitability of individual contracts is periodically assessed, and provisions for any estimated losses are made immediately when losses are probable. For sales between consolidated companies, associated compa- nies, joint ventures and segments, the company applies arm’s length pricing. Definitions of contract types and related more specific accounting revenue recognition criteria Different revenue recognition methods, based on either ias 11 con- struction contracts or ias 18 revenue, are applied based on the solutions provided to customers, the nature and sophistication of the technology involved and the contract conditions in each case. the contract types that fall under ias 18 are: 52 ericsson annual report 2007 notes to the consolidated financial statementsnote c1• Delivery-type contracts are contracts for delivery of a product or a combination of products to form a whole or a part of a network as well as delivery of stand alone products. Medium-size and large delivery type contracts generally include multiple elements. such elements are normally standardized types of equipment or soft- ware as well as services such as network rollout. revenue is recognized when risks and rewards have been trans- ferred 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. • contracts for various types of services, include services such as: training, consulting, engineering, installation and multi-year man- aged services and hosting. revenue is generally recognized when the services have been provided. revenue for managed service contracts and other services contracts covering longer periods is recognized pro rata over the contract period. • licenses for the use of the company’s technology or intellectual property rights, i.e. not being a part of a sold product. these mainly relate to mobile platform technology and other license revenues from third parties for the right to use the company’s technology in design and production of products for sale. revenue is recognized based on the number of mobile devices or other products that are produced and made available for the market by the customer. the contract type that fall under ias 11: • construction-type contracts. in general, a construction type con- tract is a contract where the company supplies a customer with a complete network which to a large extent is based upon new technology or includes major components which are specifically designed for the customer. revenues from construction-type contracts are recognized according to stage of completion, gener- ally using the milestone output method. Earnings per share Basic earnings per share are calculated by dividing net income attrib- utable to stockholders of the parent company by the average num- ber 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 stockholders 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. Financial assets the company classifies its financial assets in the following catego- ries: at fair value through profit or loss, loans and receivables, and available for sale. the classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. regular purchases and sales of financial assets are recognized on the 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. available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. loans and receivables are carried at amortized cost, using the effective interest method. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the company has transferred substantially all risks and rewards of ownership. separate assets or liabilities are recognized if any rights and obligations are created or retained in the transfer. the fair values of quoted financial investments and derivatives 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. Valuations of FX options and interest rate Guarantees (irG) are made by using a Black-scholes formula. inputs to the valuations are market prices for implied volatility, foreign exchange and interest rates. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. a financial asset is classified in this category if ac- quired principally for the purpose of selling or repurchasing in the near term. Derivatives are classified as held for trading, unless they are desig- nated as hedges. assets in this category are classified as current assets. Gains or losses arising from changes in the fair values of the “fi- nancial assets at fair value through profit or loss”-category are pre- sented in the income statement within Financial income in the period in which they arise. Loans and receivables receivables are initially recognized at fair value and subsequently measured at amortized cost, less allowances for impairment charges. trade receivables include amounts due from customers. the balance represents amounts billed to customer and amounts where risk and rewards have been transferred to the customer but the invoice has not yet been issued. collectibility of the receivables is assessed for purposes of initial revenue recognition. Available-for-sale financial assets available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other cate- gories. they are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Dividends on available-for-sale equity instruments are recognized in the income statement as part of financial income when the com- ericsson annual report 2007 53 notes to the consolidated financial statementsnote c1pany’s right to receive payments is established. changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analyzed between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. the translation differences on monetary securities are recognized in profit or loss; translation differences on non-monetary securities are recognized in equity. changes in the fair value of mone- tary and non-monetary securities classified as available-for-sale are recognized in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recog- nized in equity are included in the income statement. Impairment at 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 classified as available-for- sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the security is im- paired. if any such evidence exists for available-for-sale 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. im- pairment losses recognized in the income statement on equity instru- ments are not reversed through the income statement. an assessment of impairment of receivables is performed when there is objective evidence that the company will not be able to collect all amounts due according to the original terms of the receiv- able. 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 esti- mated future cash flows, discounted at the original effective interest rate. the carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within selling expenses. When a trade receiv- able is finally established as uncollectible, it is written off against the allowance account for trade receivables. subsequent recoveries of amounts previously written off are credited against selling expenses in the income statement. Financial Liabilities Borrowings Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Trade payables trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Derivatives at fair value through profit or loss certain derivative instruments do not qualify for hedge accounting and are accounted for at fair value through profit or loss. changes in the fair value of these derivative instruments that do not qualify for hedge accounting are recognized immediately in the income state- ment within Financial expenses. Financial liabilities are derecognized when they are extinguished, i.e. when the obligation specified in the contract is discharged, can- celled or expires. Derivative financial instruments and hedging activities Derivatives are initially recognized at fair value at trade date and subsequently re-measured at fair value. the method of recognizing the resulting gain or loss depends on whether the derivative is desig- nated as a hedging instrument, and if so, the nature of the item being hedged. the company designates certain derivatives as either: a) a hedge of the fair value of recognized liabilities (fair value hedge); b) a hedge of a particular risk associated with a highly probable forecast transaction (cash flow hedge); or c) a hedge of a net investment in a foreign operation (net investment hedge). at the inception of the transaction, the company documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. the company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. the fair values of various derivative instruments used for hedging purposes are disclosed in note c20. Movements in the hedging reserve in stockholders’ equity are shown in note c16. the full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. trading deriva- tives are classified as current assets or liabilities. a) Fair value hedges changes in the fair value of derivatives that are designated and quali- fy as fair value hedges are recorded in the income statement, togeth- er with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. the Group only applies fair value hedge accounting for hedging fixed interest risk on borrowings. Both gains or losses relating to the interest rate swaps hedging fixed rate borrowings and the changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk are recognized in the income statement within Financial expenses. if the hedge no longer meets the criteria for hedge accounting, the adjustment to the carry- 54 ericsson annual report 2007 notes to the consolidated financial statementsnote c1ing amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the period to maturity. 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. b) Cash flow hedges the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. the gain or loss relating to an ineffective portion is recognized immediately in the income statement within financial income or ex- pense. amounts deferred in equity are recycled in the income statement in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place), either in net sales or cost of sales. When the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inven- tory or fixed assets), the gains and losses previously deferred in equity are transferred from equity and included in the initial measure- ment of the cost of the asset. the deferred amounts are ultimately recognized in cost of sales in case of inventory, or in Depreciation in case of fixed assets. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss which at that time remains in equity is recog- nized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was re- ported in equity is immediately transferred to the income statement within financial income or expense. c) Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. any gain or loss on the hedging instru- ment relating to the effective portion of the hedge is recognized in equity. a gain or loss relating to an ineffective portion is recognized immediately in the income statement within financial income or ex- pense. Gains and losses deferred in equity are included in the in- come statement when the foreign operation is partially disposed of or sold. Financial guarantees Financial guarantee contracts are initially recognized at fair value (i.e. usually the fee received). subsequently, these contracts are mea- sured at the higher of • the amount determined as the best estimate of the net expenditure required to settle the obligation according to the guarantee con- tract, and • the recognized contractual fee less cumulative amortization when amortized over the guarantee period, using the straight-line method. the best estimate of the net expenditure comprises future fees and cash flows from subrogation rights. Inventories inventories are measured at the lower of cost or net realizable value on a first-in, first-out (FiFo) basis. Intangible assets other than goodwill these assets consist of capitalized development expenses and acquired intangible assets, such as patents, customer relations, brands and software. at initial recognition, capitalized development expenses are stated at cost while acquired intangible assets related to business combinations are stated at fair value. subsequent to initial recognition, both capitalized development expenses and ac- quired intangible assets are stated at initially recognized amount less accumulated amortization/impairment. amortization and any impair- ment losses are included in research and development, mainly for capitalized development expenses and patents, selling and adminis- trative 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 estab- lished until the product is available for sale or use. these capitalized expenses are mainly generated internally and include direct labor and related overhead. amortization of capitalized development expenses begins when the product is available for general release. amortiza- tion is made on a product or platform basis according to the straight- line method over periods not exceeding five years. research and development expenses directly related to orders from customers are accounted for as a part of cost of sales. other research and develop- ment expenses are charged to expense as incurred. amortization of acquired intangible assets, such as patents, cus- tomer relations, brands and software, is made according to the straight-line method over their estimated useful life, normally not exceeding ten years. the company has not recognized any intangible assets with indefi- nite useful life other than goodwill. impairment tests are performed 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 after tax are discounted to their present value using an after-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. the amount related to corporate assets is not significant. 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 change in the estimates used to determine the recoverable amounts. an impair- ment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount, net of amortization, that would have been determined if no impairment loss had been recognized. ericsson annual report 2007 55 notes to the consolidated financial statementsnote c1Property, plant and equipment items of property, plant and equipment are stated at cost less accu- mulated depreciation and impairment losses. Depreciation is charged to income, generally on a straight-line basis, over the estimated useful life of each component of an item of property, plant and equipment, including buildings. estimated useful lives are, in general, 25 - 50 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 charges are included in cost of sales, research and development or selling and administrative expenses. the company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing a component and derecognizes the residual value of the replaced component. impairment testing as well as recognition or reversal of impairment for property, plant and equipment is performed in the same manner as for intangible assets other than goodwill, see description under “intangible assets other than goodwill” above. Gains and losses on disposals are determined by comparing the proceeds less costs to sell with the carrying amount and are recog- nized within other operating income and expenses in the income statement. 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 mini- mum lease payments. subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that type of asset, although the depreciation period would not ex- ceed 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 basis over the term of the lease. lease incentives re- ceived 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 in- vestment in the lease and revenue is recognized in accordance with the revenue recognition principles. under operating leases, a balance sheet item of property, plant and equipment is reported and revenue as well as depreciation is recognized on a straight-line basis over the lease term. 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 is recognized for temporary differences between the book values of assets and liabilities and their tax values and for 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 deductible temporary differences and tax loss carryforwards can be utilized. Deferred tax is not recognized for the following temporary differences: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profits, and differences related to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. 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. the measurement of deferred tax assets involves judgment regarding the deductibility of costs not yet subject to taxation and estimates regarding sufficient future taxable income to enable utiliza- tion of unused tax losses in different tax jurisdictions. all deferred tax assets are subject to annual review of probable utilization. the larg- est amounts of tax loss carryforwards are originated in sweden, with indefinite period of utilization. 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 an obligation may differ from such estimate. in the ordinary course of business, the company is subject to proceedings, lawsuits and other unresolved claims, including pro- ceedings under laws and government regulations and other matters. these matters are often resolved over a long period of time. the company regularly assesses the likelihood of any adverse judgments in or outcomes of these matters, as well as potential ranges of pos- sible losses. provisions are recognized when it is probable that a liability has been incurred and the amount can be reasonably esti- mated based on a detailed analysis of each individual issue. the provisions mainly relate to product warranty commitments, customer contract loss provisions, restructuring and other obliga- tions, such as unresolved income tax and value added tax issues, claims or obligations as a result of patent infringement and other litigations, supplier claims and customer financing guarantees. product warranty commitments consider probabilities of all mate- rial quality issues based on historical performance for established products and expected performance for new products, estimates of repair cost per unit, and volumes sold still under warranty up to reporting date. 56 ericsson annual report 2007 notes to the consolidated financial statementsnote c1For losses on customer contracts, provisions equal to the total estimated loss are recorded when a loss from a contract is antici- pated and possible to estimate reliably. these contract estimates include any probable penalties to a customer under a loss contract. a restructuring obligation has arisen when the company has a detailed formal plan for the restructuring (approved by management), communicated in such a way that a valid expectation has been raised among those affected. the company provides for estimated future settlements related to patent infringements based on the probable outcome of each infringe- ment. the ultimate outcome or actual cost of settling an individual infringement may vary from the company’s estimate. the company estimates the outcome of any potential patent infringement made known to the company through assertion and through the company’s own monitoring of patent-related cases in the relevant legal systems. to the extent that the company makes the judgment that an identified potential infringement will more likely than not result in an outflow of resources, the company records a provision based on the company’s best estimate of the expenditure required to settle infringement pro- ceedings. at various intervals, the company gives some of its suppliers and/ or subcontractors forecasts of expected purchases and also some- times commits 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, the company makes provi- sions for estimated compensation. additionally, provisions are made for estimated charges as a result of known changes in design specifi- cations 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 devel- opment subcontractors are included in research & development, 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. od. 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, assessed on a quarterly basis, 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 pos- sible that the actual result will differ from the estimated result or that the actuarial assumptions will change from one period to another. these differences are reported as actuarial gains and losses. they are for example caused by unexpectedly high or low rates of employ- ee 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 liability for each defined benefit plan consists of the present value of pension commit- ments less the fair value of plan assets and is recognized net on the balance sheet. When the result is a net 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. 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 employ- ees, including key management personnel. under iFrs, a company shall recognize compensation costs for share-based compensation programs to employees, being a measure of the value to the com- pany of services received from the employees under the plans. Stock option plans 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 pension trust fund) with 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 Meth- in accordance with iFrs 1 and iFrs 2, ericsson has chosen not to apply iFrs 2 to equity instruments granted before november 7, 2002. iFrs 2 was applied for one equity settled employee option pro- gram 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 calcu- lated 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 differ- ence between the market price of the share and the strike price. such social security charges are accrued during the vesting period. ericsson annual report 2007 57 notes to the consolidated financial statementsnote c1Stock purchase plans Non-current assets held for sale 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 perfor- mance-based matching programs, the company assesses the probability of meeting the performance targets when calculating the compensation costs. compensation expenses are based on esti- mates of the number of shares that will match at the end of the vest- ing 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 of Directors for both primary and secondary segments. these segments are subject to risks and returns that are different from those of other segments. Primary segments a primary segment is a business segment consisting of a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of the other business segments. Mainly the following factors have been considered when identifying the differences: • commonality in products and services regarding technology, research and development. • For which market and to what type of customers the segment’s products and/or services are aimed • through what distribution channels they are sold Secondary segments secondary, geographical segments are defined based on similarities in economic and market conditions, risks and returns for particular geographical environments. Borrowing costs the company does not capitalize any borrowing costs. such costs are expensed as incurred. to be classified as an asset held for sale, the asset must be available for immediate sale in its present condition and its sale must be highly probable, requiring that the appropriate level of management has authorized the plan to sell and that there is an active plan to complete the sale. non-current assets held for sale are measured at the lower of carrying amount and fair value less cost to sell. Government grants Government grants are recognized when there is a reasonable assur- ance of compliance with conditions attached to the grants and that the grants will be received. For ericsson, government grants are linked to performance of 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 develop ment are normally deducted in reporting the related expense, whereas grants related to assets are accounted for deducting the grant in arriving at the acquisition cost of the asset. New standards and interpretations not yet adopted a number of new standards, amendments to standards and interpre- tations are not yet effective for the year ended December 31, 2007, and have not been applied in preparing these consolidated financial statements: • iFrs 8 operating segments. this standard prescribes measure- ment and presentation of segments and replaces ias 14 segment reporting. the new standard requires a ”management approach”, under which segment information is presented on the same basis as that used for internal reporting to the Board of Directors 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. • ias 1 presentation of Financial statements has been revised and the revised standard shall be applied for financial periods begin- ning on or after January 1, 2009. the amendment to the standard is still subject to endorsement by the european union. the chang- es apply particularly to the presentation and names of the financial statements and the presentation of owner changes in equity and of comprehensive income. thus, the standard requires a company to present, in a statement of changes in equity, all owner changes in equity. all non-owner changes in equity (i.e. comprehensive in- come) are required to be presented in one statement of compre- hensive income. the company plans to apply this revised standard as from January 1, 2009. • revised ias 23 Borrowing costs removes the option to expense borrowing costs and requires that a company capitalize borrowing costs directly attributable to the acquisition, construction or pro- duction of a qualifying asset as part of the cost of that asset. the revised ias 23 will become mandatory for the company’s 2009 financial statements and will constitute a change in accounting policy for the Group. the amendment to the standard is still sub- ject to endorsement by the european union. in accordance with the transitional provisions, the Group will apply the revised ias 23 58 ericsson annual report 2007 notes to the consolidated financial statementsnote c1to qualifying assets from the effective date. the revised standard is not expected to have a significant impact on the financial state- ments of the company. the company plans to apply this revised standard as from January 1, 2009. • ias 27 (amendment) consolidated and separate Financial state- ments (effective from July 1, 2009). the amendment to the stan- dard is still subject to endorsement by the european union. the change implies, among other things, that minority interest shall always be recognized even if the minority interest is negative, transactions with minority interests shall always be recorded in equity, and, in those cases when a partial disposal of a subsidiary results in that the entity loses control of the subsidiary, any remain- ing interest should be revaluated to fair value. the change in the standard will influence the accounting of future transactions. • iFrs 2 share-Based payment (amendment) Vesting conditions and cancellations (effective from January 1, 2009). the amend- ment to the standard is still subject to endorsement by the euro- pean union. the amendment affects the definition of vesting conditions and introduces a new concept of non-vesting condi- tions. the standard states that non-vesting conditions should be taken into account in the estimate of the fair value of the equity instrument. Goods or services that are received by a counterparty that satisfies all other vesting conditions shall be accounted for irrespective of whether the non-vesting conditions are satisfied. a liability included in a share-based arrangement shall be remea- sured based on fair value at the date of cancellation or settlement. the amendment is not expected to have a significant impact on the financial statements of the Group. the company plans to apply this new standard as from January 1, 2009. • iFrs 3 (amendment) Business combinations (effective from July 1, 2009). the amendment to the standard is still subject to endorse- ment by the european union. the amendment will have an effect on how future business combinations are accounted for, i.e. the accounting of transaction costs, possible contingent consider- ations, and business combinations achieved in stages. at present, the company plans to apply the standard from January 1, 2010. • iFric 11 iFrs 2 – Group and treasury share transactions requires a share-based payment arrangement in which a company receives goods or services as consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments are obtained. iFric 11 will become mandatory for the company’s 2008 financial statements, with retrospective application required. it is not ex- pected to have any significant impact on the consolidated financial statements. • iFric 12 service concession arrangements provides guidance on certain recognition and measurement issues that arise in account- ing for public-to-private service concession arrangements. this interpretation is still subject to endorsement by the european union. iFric 12, which becomes mandatory for the company’s 2008 financial statements, is not expected to have any significant effect on the consolidated financial statements. • iFric 13 customer loyalty programmes addresses the accounting by companies that operate, or otherwise participate in, customer loyalty programmes for their customers. this interpretation is still subject to endorsement by the european union. iFric 13 relates to customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. iFric 13, which becomes mandatory for the company’s 2009 financial statements, is not expected to have any significant impact on the consolidated financial statements. • iFric 14 ias 19 – the limit on a Defined Benefit asset, Minimum Funding requirements and their interaction clarifies when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available and provides guidance on the impact of minimum funding requirements (MFr) on such as- sets. this interpretation is still subject to endorsement by the european union. iFric 14 also addresses when a MFr might give rise to a liability. iFric 14 will become mandatory for the com- pany’s 2008 financial statements, with retrospective application required. the Group has not yet determined the potential effect of the interpretation. 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 esti- mates and assumptions deemed to be reasonable at the time they are made. However, other results may be derived with different judg- ments or using different assumptions or estimates, and events may occur that could require a material adjustment to the carrying amount of the asset or liability affected. Following are the accounting policies subject to such judgments, estimates or assumptions that the com- pany believes could have the most significant impact on the reported results and financial position. Revenue recognition parts of the company’s sales are generated from large and complex customer contracts. Managerial judgment is applied regarding, among other aspects, degree of completion and conformance with acceptance criteria and if transfer of risks and returns to the buyer has taken place to determine if revenue and cost should be recog- nized in the current period, and the customer credit standing to assess whether payment is likely or not to justify revenue recognition. estimates are necessary e.g. in evaluation of contractual perfor- mance and estimated total contract costs for assessing whether any loss provisions are to be made or if customers will reach conditional purchase volumes triggering contractual discounts to be given. Trade and customer financing receivables the company monitors the financial stability of its customers and the environment in which they operate to make judgments regarding the likelihood that the individual receivables will be paid. total allowances for estimated losses as of December 31, 2007, were seK 1.4 (1.4) billion or 2.2 (2.7) percent of our gross trade receivables. credit risk for outstanding customer financing credits is regularly assessed and based on these judgments allowances are recorded for estimated losses. ericsson annual report 2007 59 notes to the consolidated financial statementsnote C1–C2Inventory valuation inventories are valued at the lower of cost or net realizable value. estimates are required in relation to forecasted sales volumes and inventory balances. in situations where excess inventory balances are judged to exist, estimates of net realizable values for the excess volumes are made. inventory allowances for estimated losses as of December 31, 2007, amounted to seK 2.8 (2.6) billion or 12 (12) percent of gross inventory. Deferred taxes Deferred tax assets are recognized for temporary differences be- tween the carrying amounts for reporting purposes of assets and liabilities and the amounts used for taxation purposes and for unuti- lized 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, deferred tax assets and the company’s ability to utilize tax losses is based upon management’s estimates of future taxable income in different tax jurisdictions and involves management’s judgment regarding the deductibility of costs not yet subject to taxation. in note c8 income taxes, more information is provided. at December 31, 2007, the value of deferred tax assets amounted to seK 11.7 (13.6) billion. the deferred tax assets related to loss carryforwards 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- and other taxe rules in all jurisdictions where we per- form activities. the total complexity of rules related to taxes and the accounting for these require management’s involvement in judg- ments regarding classification of transactions and in estimates of probable outcomes of claimed deductions and/or disputes. Capitalized development expenses Development costs that meet iFrs’ intangible asset recognition crite- ria 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 ac- cording to an established project management model. capitalization ceases and amortization of capitalized development costs begins when the product is available for general release. impairment testing is performed after initial recognition whenever there is an indication of impairment. intangible assets not yet available for use are tested annually. the definition of amortization periods as well as the evalua- tion of impairment indicators require management’s judgment. the impairment amounts are based on estimates of future cash flows for the respective products. at December 31, 2007, the amount of capitalized development expenses amounted to seK 3.7 (5.0) billion. Acquired intellectual property rights and other intangible assets, including 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 testing is performed after initial recognition whenever there is an indication of impairment, except for goodwill for which impairment testing is performed at least once per year. at initial recognition and subsequent measurement, management judgments are made, both for assumptions and regard- ing impairment indicators. negative deviations in actual cash flows compared to estimated cash flows as well as new estimates that indicate lower future cash flows might result in recognition of impair- ment charges. For further discussion on goodwill, see note c10 intangible assets. estimates related to acquired intangible assets are based on similar assumptions and risks in assumptions as for good- will. at December 31, 2007, the amount of acquired intellectual prop- erty rights and other intangible assets amounted to seK 46.8 (22.5) billion, including goodwill of seK 22.8 (6.8) billion. Provisions 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 estimates 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 the company’s pension plans. expected returns on plan assets consider long-term historical returns, allocation of assets and estimates of future long- term investment returns. at December 31, 2007, provisions for pen- sions and other post-employment benefits amounted to net seK 4.9 (6.1) billion. For a sensitivity analysis and more information of esti- mates and assumptions, see note c17 post-employment Benefits. Warranty commitments provisions for product warranties are based on current volumes of products sold still under warranty and on historic quality rates for mature products as well as judgments and assumptions on future quality rates for new products and estimates of costs to remedy the various qualitative issues that might occur. total provisions for prod- uct warranties as of December 31, 2007, amounted to seK 1.8 (3.0) billion. Provisions other than warranty commitments other provisions mainly comprise amounts related to contractual obligations and penalties to customers and estimated losses on customer contracts, risks associated with patent and other litiga- tions, supplier or subcontractor claims and/or disputes, as well as provisions for income tax and value added tax unresolved issues. the nature and type of risks for these provisions differ and manage- ment’s judgment is applied regarding the nature and extent of obliga- 60 ericsson annual report 2007 notes to the consolidated financial statementsnote c2tions. the estimates related to the amounts of provisions for penal- ties, claims or losses receive special attention from the management. at December 31, 2007, provisions other than warranty commitments amounted to seK 7.9 (10.9) billion. in note c18 provisions, more information is provided. Risks in financial instruments and hedge accounting 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 estimates 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, according to management’s judgment, the requirements for hedge accounting are not fulfilled. For further information regarding risks in financial instruments and related judgment and estimates, please see c14 trade receivables and c20 Financial risk Management and Financial instruments. Other areas that require certain judgments other areas that require judgment by management are: • whether or not consolidation shall be made of entities where the company does not have formal voting rights exceeding 50 percent, but where the company might have control due to other circum- stances, • whether to classify a counterpart as a related party or not for disclosure purposes, and • classification of leasing contracts as operating or financing leases, both when the company is a lessee and when it is a lessor. c3 segment information When determining the business segments, the company has looked at which market and to what type of customers the company’s prod- ucts are aimed, and through what distribution channels they are sold, as well as to commonality regarding technology, research and devel- opment. ericsson har reorganized its operating structure as from January 1, 2007. For further details see note c1 significant accounting policies. Primary segments ericsson has the following business segments: • networks, that includes products for mobile and fixed broadband access, core networks, transmission and next-generation ip-net- works. related network rollout services are also included. in addi- tion, power modules and cables operations are included within networks, as well as the acquired operations of redback and entrisphere. • professional services, that includes all service operations, exclud- ing network rollout reported under networks. services related to systems integration of ip- and core networks are classified as professional services. • Multimedia, that includes multimedia systems, enterprise solutions and mobile platforms. the operations of the acquired operations of tandberg tV, lHs, Drutt and Mobeon are also included in Multi- media. • phones, consisting of ericsson’s investment and share in earnings of the sony ericsson joint venture. Secondary segments ericsson operates in five main geographical areas: (1) Western eu- rope, (2) central and eastern europe, Middle east and africa, (3) asia pacific, (4) north america and (5) latin america. these areas repre- sent the geographical segments. ericsson annual report 2007 61 notes to the consolidated financial statementsnote c2–c3Business segments (primary ) 2007 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 networks 128,985 32 129,017 61 17,398 13% professional services 42,892 10 42,902 66 6,394 15% Multi- media 15,903 2 15,905 –3 –135 –1% phones – – – 7,108 7,108 – unallo- cated – – – – –119 – elimina- tions – –44 –44 – – – assets 1) 2) equity in joint ventures and associated companies Total assets Liabilities 3) 4) 107,819 850 108,669 39,819 36,974 298 37,272 19,101 18,739 206 18,945 4,915 – 9,549 9,549 – 70,682 – 70,682 46,230 – – – – Group 187,780 0 187,780 7,232 30,646 16% 1,778 –1,695 30,729 –8,594 22,135 234,214 10,903 245,117 110,065 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. Other segment items property, plant and equipment and intangible assets additions to property plant and equipment acquisitions/capitalization of intangible assets Depreciation amortization impairment losses reversals of impairment losses Gains/losses from divestments geographical segments (secondary ) 2007 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 3,264 15,401 –2,601 –4,630 –105 297 – 806 2,973 –367 –237 –1 – – 249 11,464 –152 –566 – – – – – – – – – – – – –1 – – – 280 – – – – – – – 4,319 29,838 –3,121 –5,433 –106 297 280 additions/ capitalization of pp&e and intangible assets 12,127 2,671 230 1,124 704 20,528 17,668 148 34,157 10,609 total assets 160,606 117,887 10,737 26,852 9,915 32,815 31,573 14,107 245,117 161,251 net sales 52,685 8,395 48,661 54,629 13,598 13,422 10,529 18,383 187,780 58,978 For employee information, see note c29, “information regarding employees, Members of the Board of Directors and Management”. 62 ericsson annual report 2007 notes to the consolidated financial statementsnote c3Business 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 networks 127,518 176 127,694 18 21,722 17% professional services 36,813 34 36,847 21 5,309 14% Multi- media 13,877 17 13,894 43 714 5% phones – – – 5,852 5,852 – unallo- cated 1,613 2 1,615 – 2 231 5) – elimina- tions – –229 –229 – – – assets 1) 2) equity in joint ventures and associated companies Total assets Liabilities 3) 4) 100,792 918 101,710 42,837 21,141 170 21,311 17,718 6,657 280 6,937 4,011 – 8,041 8,041 – 76,941 – 76,941 29,479 – – – – Group 179,821 0 179,821 5,934 35,828 20% 1,954 –1,789 35,993 –9,557 26,436 205,531 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 include 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 to property, plant and equipment acquisitions/capitalization of intangible assets Depreciation amortization impairment losses reversals of impairment losses restructuring expenses Gains/losses from divestments 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 2) 3,462 16,403 –2,689 –4,015 –303 31 –2,400 – 291 1,512 –271 –116 – – –402 – 74 404 –47 –68 – – –106 – – – – – – – – – – – – –38 – – – 2,945 – – – – – – – – 3,827 18,319 –3,007 –4,237 –303 31 –2,908 2,945 net sales 1) 53,182 7,809 46,413 47,884 11,776 15,862 13,878 16,480 179,821 58,983 total assets 158,773 125,578 8,139 24,853 9,088 10,893 10,231 12,282 214,940 160,074 additions/ capitalization of pp&e and intangible assets 20,704 17,819 147 419 206 798 739 78 22,146 20,763 1) revenues for intellectual property rights (ipr) related to products are included in net sales instead of other operating income. 2) restated for Bulgaria and romania which entered into the european union as from 2007. For employee information, see note c29, “information regarding employees, Members of the Board of Directors and Management”. ericsson annual report 2007 63 notes to the consolidated financial statementsnote c3Business 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 networks 114,134 750 114,884 92 26,583 23% professional services 26,324 178 26,502 57 4,355 16% Multi- media 10,496 5 10,501 –11 229 2% phones – – – 2,257 2,257 – unallo- cated 2,268 155 2,423 5) – –340 – elimina- tions – –1,088 –1,088 – – – assets 1) 2) equity in joint ventures and associated companies Total assets Liabilities 3) 4) 79,703 879 80,582 58,938 12,905 140 13,045 6,938 3,891 256 4,147 1,255 – 5,038 5,038 – 106,524 – 106,524 39,733 – – – – Group 153,222 0 153,222 2,395 33,084 22% 2,653 –2,402 33,335 –8,875 24,460 203,023 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) net sales includes Defense business. Other segment items property, plant and equipment and intangible assets additions to property, plant and equipment acquisitions/capitalization of intangible assets Depreciation amortization impairment losses reversals of impairment losses Gains/losses from divestments geographical segments (secondary ) 2005 Western europe – of which Sweden central and eastern europe, Middle east and africa 1) asia pacific – of which China north america – of which United States latin america Total – of which EU 2) 2,769 2,250 –2,468 –3,282 –109 380 – 491 – –258 –63 – – – 105 – –77 –8 – – – – – – – – – – – – –1 84 – – 56 net sales 1) 42,554 6,724 39,948 32,212 11,544 19,432 17,904 19,076 153,222 47,342 total assets 154,159 133,448 7,891 20,290 8,964 13,754 12,988 13,242 209,336 154,075 – – – – – – – 3,365 2,250 –2,804 –3,269 –109 380 56 additions/ capitalization of pp&e and intangible assets 4,576 3,502 113 285 123 552 453 89 5,615 4,639 1) revenues for intellectual property rights (ipr) related to products are included in net sales instead of other operating income. 2) restated for Bulgaria and romania which entered into the european union as from 2007. For employee information, see note c29, “information regarding employees, Members of the Board of Directors and Management”. 64 ericsson annual report 2007 notes to the consolidated financial statementsnote c3c4 net sales an increased part of ericsson’s products and services are sold as parts of delivery type 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 recogni- tion method. the contracts are of four main types: sales of equipment and network rollout of which: – Delivery-type contracts – construction-type contracts professional services sales 1) licenses 2) 2007 2006 2005 138,011 137,758 123,010 130,890 123,206 104,998 18,012 26,324 3,888 7,121 42,892 6,877 14,552 36,813 5,250 Net sales export sales from sweden 187,780 179,821 153,222 102,486 98,694 93,879 1) 2006 and 2005 are restated to reflect new organization. 2) revenues for intellectual property rights (ipr) related to products are included in net sales instead of other operating income. in 2006 seK 2,038 million (2005 seK 1,400 million) of other operating income were reclassified. in note c1, “significant accounting policies”, the definitions of the different contract types are disclosed. c5 expenses by nature 2007 2006 2005 Goods and services amortization and depreciation impairments, net of reversals employee remunerations interest expenses taxes 7,244 876 113,195 108,033 86,630 6,073 508 42,821 34,458 2,402 8,875 8,554 1,435 44,771 1,695 8,594 1,789 9,557 Expenses incurred less: inventory changes 1) additions to capitalized development 178,244 170,320 138,946 802 1,053 3,791 1,353 2,872 1,174 Expenses charged to the Income Statement 176,389 165,176 134,900 1) the inventory changes are based on changes of inventory values prior to allowances (gross value). the impairments, net of reversals, mainly relate to an increase of obsolescence allowances. c6 other operating income and expenses 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 1) losses on sales of investments and operations 2007 2006 2005 78 27 29 –104 –158 –120 296 3,038 205 –16 –93 –149 capital gains/losses, net 254 2,814 –35 other operating revenues 2) 1,480 1,089 1,125 Total other operating income and expenses 1,734 3,903 1,090 1) the gains on sales of investments and operations for 2006 mainly relate to the sale of the Defense business in the third quarter. 2) revenues for intellectual property rights (ipr) related to products are included in net sales instead of other operating income. in 2006, seK 2,038 million (2005, seK 1,400 million) of other operating income were reclassified. c7 Financial income and expenses 2007 2006 Financial Financial Financial Financial income expenses income expenses contractual interest from financial assets Of which from financial assets at fair value through profit or loss contractual interest from financial liabilities Of which from financial liabilities at fair value through profit or loss net gain/loss on: 2,293 1,952 1,094 1,190 –1,543 –1,416 – – instruments at fair value through profit or loss 1) Of which included in fair value hedge relationships available for sale loans and receivables liabilities at amortized cost other financial income and expenses –181 –60 –60 –366 – –342 – –7 – – 11 –414 – –160 383 – – – 8 –103 62 –230 Total 1,778 –1,695 1,954 –1,789 1) excluding net gain from operating assets and liabilities which was seK 762 (1,748) million reported as cost of sales. iFrs 7 was implemented January 1, 2007. the breakdown of the comparison figures for 2005 as above are not available. Financial income and expense for 2005 was seK 2,653 million and seK –2,402 million respectively. ericsson annual report 2007 65 notes to the consolidated financial statementsnote c4–c7 c8 taxes in summary, the Group tax expense for the year was seK 8,594 (9,557) million or 28,0 percent (26,6) of the income after financial items. Income taxes recognized in the income statement the following items are included in taxes: current income taxes for the year current income taxes related to prior years Deferred tax income/expense (–) share of taxes in joint ventures and associated companies taxes 2007 2006 2005 –4,115 –4,565 –3,635 –294 –2,227 –169 –3,582 138 –4,753 –1,958 –1,241 –625 –8,594 –9,557 –8,875 reconciliation of actual income ta x rate to the swedish income ta x rate: 2007 2006 2005 tax rate in sweden effect of foreign tax rates current income taxes related to prior years recognition/remeasurement of tax losses related to prior years recognition/remeasurement of deductible temporary differences related to prior years tax effect of non- deductible expenses tax effect of non-taxable income tax effect of changes in tax rates –28.0% –28.0% –28.0% –1.5% –0.4% 0.2% –1.0% –0.5% 0.4% –0.7% 1.2% – 1.5% 0.2% 1.1% –2.6% 2.8% –0.2% –3.7% 4.5% 0.1% –1.5% 2.8% 0.0% Actual tax rate – 28.0% –26.6% –26.7% Deferred tax balances tax effects of temporary differences and unutilized tax loss carryfor- wards are attributable as shown in the table below: change in deferred ta xes: Opening balance, net recognized in income statement recognized in equity acquisitions/disposals of subsidiaries translation differences Closing balance, net 2007 2006 13,182 –2,227 –73 –2,120 129 18,128 –3,582 –769 –124 –471 8,891 13,182 tax effects reported directly to equity amount to seK –73 million, of which hedge accounting seK 255 million and actuarial gains/losses on pensions seK –328 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 5,219 million, seK 2,911 million relate to sweden with indefinite time of utilization. With our strong current financial position and profitability during 2007, we have been able to utilize part of our tax loss carryfor- wards 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. Benefit from a previously unrecognized tax credit of a prior period that is used to reduce deferred tax expense amounted to seK 465 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 un- certainty as to which deductions can be realized in the future, no additional deferred tax assets are reported. ta x effects of temporary differences and unutilized ta x loss carryforwards Deferred tax assets Deferred tax liabilities Net balance Deferred tax assets Deferred tax liabilities net balance 2007 2006 intangible assets and property, plant and equipment current assets post-employment benefits provisions equity other loss carryforwards Deferred tax assets/liabilities netting of assets/liabilities Net deferred tax balances 1) refer mainly to r&D credits and intellectual property rights. 438 1,878 1,121 1,693 708 3,647 1) 5,219 14,704 –3,014 11,690 4,044 14 100 5 97 1,553 – 5,813 –3,014 2,799 312 2,146 1,229 2,277 1,036 2,197 6,756 15,953 –2,389 13,564 8,891 855 5 96 40 352 1,423 – 2,771 –2,389 382 13,182 66 ericsson annual report 2007 notes to the consolidated financial statementsnote c8 Tax loss carryforwards Deferred tax assets regarding unutilized tax loss carryforwards are reported to the extent that realization of the related tax benefit through future taxable profits is probable also when considering the period during which these can be utilized, as described below. at December 31, 2007, these unutilized tax loss carryforwards amounted to seK 17,734 (23,137) 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 2008 2009 2010 2011 2012 2013 or later Total 29 32 8 287 152 17,226 17,734 tax effect 8 9 1 79 33 5,089 5,219 c9 earnings per share Basic earnings per share are calculated by dividing net income attrib- utable to stockholders of the parent company by the average num- ber of shares outstanding (total number of shares less treasury stock) during the year. Basic, earnings per share 2007 2006 2005 net income attributable to stockholders of the parent company (seK million) average number of shares outstanding, basic (millions) Earnings per share, basic (SEK) 21,836 15,891 1.37 26,251 24,315 15,871 15,843 1.53 1.65 Diluted earnings per share are calculated by dividing net income attributable to stockholders 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. diluted, e arnings per share 2007 2006 2005 net income attributable to stockholders of the parent company (seK million) average number of shares outstanding, basic (millions) Dilutive effect for stock option plans 1) Dilutive effect for stock purchase plans average number of shares outstanding, diluted (millions) 21,836 15,891 10 63 26,251 24,315 15,871 15,843 25 39 17 55 15,964 15,943 15,907 Earnings per share, diluted (SEK) 1.37 1.65 1.53 1) During 2007, ericsson had outstanding stock option plans for which the exercise price exceeded the average market price. therefore these stock option plans have not had a dilutive effect and have not been included in the dilution calculation. if in the future the average market price should increase to a level above the exercise price these outstanding stock option plans will be included in the dilution calculation. ericsson annual report 2007 67 notes to the consolidated financial statementsnote c8–c9 c10 intangible assets Capitalized development expenses Goodwill Intellectual property rights, brands and other intangible assets 2007 Accumulated acquisition costs opening balance acquisitions/capitalization Balances regarding divested/ acquired businesses sales/disposals translation difference Closing balance Accumulated amortization opening balance amortization sales/disposals translation difference Closing balance Accumulated impairment losses opening balance impairment losses Closing balance Net carrying value to be marketed acquired costs for internal use internal costs, for internal use 12,388 989 – –899 – 12,478 –6,439 –2,371 899 – –7,911 –958 –16 –974 3,593 1,602 38 – – – 1,640 –1,562 – – – –1,562 –38 – –38 40 1,070 26 – – – 1,096 –1,042 – – – –1,042 –26 – –26 28 Total 15,060 1,053 – –899 – 15,214 –9,043 –2,371 899 – –10,515 –1,022 –16 –1,038 3,661 licenses trademarks and similar rights 5,317 178 5,132 1) –57 –198 10,372 –1,180 –913 41 –20 –2,072 – – – 8,300 6,824 – 16,917 –1 –914 22,826 – – – – – – – – 22,826 patents and acquired research and develop- ment 13,479 63 6,495 1) –1 –278 19,758 –1,953 –2,149 – 16 –4,086 –14 – –14 15,658 Total 18,796 241 11,627 –58 –476 30,130 –3,133 –3,062 41 –4 –6,158 –14 – –14 23,958 1) During 2007 ericsson acquired redback, tandberg and lHs. the acquisitions consist of ipr, seK 6.4 billion, brands and customer relationships, seK 4.8 billion and goodwill, seK 16 billion. the amortization period related to the intellectual property rights, brands and other intangible assets from redback, tandberg and lHs is between five and ten years. the goodwill is allocated to the business segments networks (seK 14.3 billion), professional services (seK 2.3 billion) and Multimedia (seK 6.2 billion). to a great extent, these three segments serve our customers with one combined offering, resulting in similar risks for all segments. according to iFrs, a cash generating unit (cGu) defined for the purpose of goodwill impairment testing, may not be larger than a business segment. the three business segments have been defined as cGu:s for the purpose of goodwill impairment test- ing. the estimates used for measuring the recoverable amounts for goodwill per cash-generating unit include assumptions mainly for the following key parameters: • sales growth, • development of operating income, • development of cash flow, including working capital and capital expenditure requirements. the company’s main assumptions, approved by group management and each business segments’ management, are based on assump- tions which reasonably well correspond to available industry sources providing estimates of the number of mobile subscribers, internet users, broadband connections and tV/video devices and, as a con- sequence the network traffic development. the demand for multime- dia solutions is as well driven by the opportunities for new types of service offerings enabled by ip technology and high-speed broad- band. the demand for professional services is also driven by an increas- ing business and technology complexity, paired with higher consum- er demands on operators. therefore, operators review their business models and look for vendor partners that can take on a broader responsibility. the number of global mobile subscriptions is estimated to grow from 3.2 billion to more than 5 billion within five years, and mobile traffic volume to grow during the same period from 700 to 4,500 petabytes yearly. impairment testing is based on the premise that changes for the company’s main assumptions are in line with the estimated industry development for these assumptions, based on specific estimates for the first five years and with a reduction of nominal annual growth rate to an average GDp growth of 3 to 4 percent per year thereafter. the impairment test for goodwill has not resulted in any impairment. a number of sensitivity tests have been made, for example the effect of lower annual growth rates. the effect of applying levels of profitability as estimated by leading analysts in the fourth quarter of 2007, based on an extension for the future of their 2-year forecasts, has also been applied for sensitivity analysis purposes. also when applying these more conservative estimates, no goodwill impairment is indicated. 68 ericsson annual report 2007 notes to the consolidated financial statementsnote c10the market capitalization of the company as per year end 2007,well exceeded the value of net assets of the company. between the cGu:s have been considered in the estimated cash flows. an after-tax discount rate of 13 percent has been applied for the in note c1 – “significant accounting policies”, the accounting discounting of projected after-tax cash flows. policies for goodwill impairment testing are further disclosed. the application of one rate is made due to that differences in risks Capitalized development expenses Goodwill Intellectual property rights, brands and other intangible assets patents and acquired research and develop- ment licenses trademarks and similar rights to be marketed acquired costs for internal use internal costs, for internal use Total 2,438 1,155 Total 1,373 363 1,638 – 1,094 – 1,065 792 7,362 163 11,983 1,353 14,715 1,353 – –36 – 1,602 – –948 – 12,388 2006 Accumulated acquisition costs opening balance acquisitions/capitalization Balances regarding divested/ acquired businesses sales/disposals translation difference Closing balance Accumulated amortization opening balance amortization sales/disposals translation difference Closing balance Accumulated impairment losses opening balance impairment losses Closing balance Net carrying value 1) as per January 1, 2006, ericsson acquired assets of Marconi telecommunications operations. the acquisition consists of ipr, seK 11.7 billion, and brands and customer –5,192 –2,195 948 – –6,439 –7,774 –2,277 1,008 – –9,043 –603 –1,508 155 3 –1,953 –1,549 –49 36 – –1,562 –1,033 –33 24 – –1,042 11,937 1) –188 –6 13,479 –882 –452 110 44 –1,180 3,711 1) –173 –78 5,317 – –1,008 – 15,060 –780 –242 –1,022 4,995 –14 – –14 11,512 –716 –242 –958 4,991 – – –701 6,824 – – – 6,824 – –24 – 1,070 – – – 4,137 –38 – –38 2 –26 – –26 2 – – – – – 15,648 –361 –84 18,796 –1,485 –1,960 265 47 –3,133 –14 – –14 15,649 relationships, seK 3.6 billion. the remaining amortization period related to the intellectual property rights acquired from Marconi is nine years. ericsson annual report 2007 69 notes to the consolidated financial statementsnote c10c11 property, plant and equipment Machinery and other technical assets Other equipment, tools and installations Construction in process and advance payments Total 25,148 4,319 284 –2,383 – 287 27,655 Real estate 457 1,120 4,551 471 5,005 617 15,135 2,111 – –77 –813 –12 675 10 –200 –186 –35 4,611 170 –311 135 81 5,697 104 –1,795 864 253 16,672 2007 Accumulated acquisition costs opening balance additions Balances regarding divested/acquired businesses sales/disposals reclassifications translation difference Closing balance Accumulated depreciation opening balance Depreciation Balances regarding divested businesses sales/disposals reclassifications translation difference Closing balance Accumulated impairment losses, net opening balance impairment losses reversals of impairment losses sales/disposals translation difference Closing balance Net carrying value contractual commitments for the acquisition of property, plant and equipment as per December 31, 2007, amounted to seK 176 (190) million. the reversal of impairment losses have been reported under cost of sales. –11,738 –2,302 17 1,759 8 –229 –12,485 –3,679 –573 7 294 –8 –54 –4,013 –1,212 –246 4 14 – –30 –1,470 –178 –6 25 10 1 –148 4,039 –306 –84 263 1 9 –117 3,024 –154 – 9 27 – –118 1,566 – – – – – – 675 – – – – – – – –16,629 –3,121 28 2,067 – –313 –17,968 –638 –90 297 38 10 –383 9,304 70 ericsson annual report 2007 notes to the consolidated financial statementsnote c11 Balances regarding divested/acquired 2007 Accumulated acquisition costs opening balance additions businesses sales/disposals reclassifications translation difference Closing balance Accumulated depreciation opening balance Depreciation sales/disposals reclassifications translation difference Closing balance Balances regarding divested businesses Accumulated impairment losses, net opening balance impairment losses reversals of impairment losses sales/disposals translation difference Closing balance Net carrying value Real estate Machinery and Other equipment, other technical assets tools and installations Construction in process and advance payments 4,551 471 10 –200 –186 –35 4,611 –1,212 –246 4 14 – –30 –1,470 –306 –84 263 1 9 –117 3,024 5,005 617 170 –311 135 81 5,697 –3,679 –573 7 294 –8 –54 –154 – 9 – 27 –118 1,566 15,135 2,111 104 –1,795 864 253 16,672 –11,738 –2,302 17 1,759 8 –229 –178 –6 25 10 1 –148 4,039 –4,013 –12,485 Total 25,148 4,319 284 –2,383 – 287 27,655 –16,629 –3,121 28 2,067 – –313 –17,968 –638 –90 297 38 10 –383 9,304 457 1,120 – –77 –813 –12 675 – – – – – – – – – – – – – 675 contractual commitments for the acquisition of property, plant and equipment as per December 31, 2007, amounted to seK 176 (190) million. the reversal of impairment losses have been reported under cost of sales. 2006 Accumulated acquisition costs opening balance additions Balances regarding divested/acquired businesses sales/disposals reclassifications translation difference Closing balance Accumulated depreciation opening balance Depreciation Balances regarding divested businesses sales/disposals reclassifications translation difference Closing balance Accumulated impairment losses, net opening balance impairment losses reversals of impairment losses translation difference Closing balance Net carrying value Real estate Machinery and other technical assets Other equipment, tools and installations Construction in process and advance payments 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 c12 Financial assets, non-current equit y in joint ventures and associated companies opening balance share in earnings taxes translation difference change in hedge reserve pensions Dividends capital contribution stock purchase and stock option plans reclassification Disposals Joint ventures 2007 2006 8,041 7,108 –1,957 304 4 –2 –3,949 – – – – 5,038 5,852 –1,237 –422 –33 3 –1,160 – – – – Associated companies 2007 1,368 124 –1 55 – – –273 103 –19 – –3 2006 1,275 82 –4 –9 – – –102 201 – –8 –67 Total 2007 2006 9,409 7,232 –1,958 359 4 –2 3 –4,222 103 –19 – – –3 6,313 5,934 –1,241 –431 –33 –1,262 201 –8 –67 Closing balance 9,549 8,041 1,354 1) 1,368 10,903 9,409 1) Goodwill, net, amounts to seK 19 million (seK 18 million in 2006). ericsson annual report 2007 71 notes to the consolidated financial statementsnote c11–c12 ericsson’s share of assets, liaBilities and income in ericsson’s share of assets, liaBilities and income in joint venture sony ericsson mo Bile communications non-current assets current assets non-current liabilities current liabilities 2,701 22,714 121 15,745 associated company ericsson nikola tesla d.d. 1) non-current assets current assets non-current liabilities current liabilities Net assets Net sales income after financial items income taxes Net income net income attributable to: stockholders of the parent company Minority interest assets pledged as collateral contingent liabilities 9,549 Net assets 59,700 7,276 –1,957 Net sales income after financial items income taxes 5,319 Net income 5,151 168 – 12 net income attributable to: stockholders of the parent company Minority interest assets pledged as collateral contingent liabilities 1) ericsson’s share is 49.07 percent. Both these companies apply iFrs in the reporting to ericsson. 363 728 1 263 827 1,100 124 –1 123 123 – 5 64 other financial assets, non – current other investments in shares and participations 2006 2007 customer financing, non-current 2006 2007 Derivatives hedging non-current liabilities with a positive value 2006 2007 other financial assets, non-current 2007 2006 Accumulated acquisition costs opening balance additions Business combinations Disposals/repayments/deductions reclassifications revaluation translation difference 1,999 2,336 82 – –286 – – –133 – – – – – 20 2,270 892 – –1,940 – – –1 2,372 1,760 – –1,755 –35 – –72 Closing balance 2,019 1,999 1,221 2,270 Accumulated impairment losses/allowances opening balance impairment losses/allowance Business combinations Disposals/repayments/deductions reclassifications translation difference –1,278 –1,531 –8 – 155 – 106 2 – – – –5 –349 41 – 98 – 1 –1,050 –84 – 727 31 27 116 – – – – –20 – 96 – – – – – – – 716 – – – – –600 – 116 – – – – – – – 622 2) 166 3,447 3,199 617 –84 –245 –149 – – 102 –136 – – 4,092 3,447 –1,154 –1,119 –81 – – – 46 –58 – – – –58 –1,270 –1,154 Closing balance Net carrying value –1,281 –1,278 –209 –349 738 1) 721 1,012 1,921 96 116 2,822 2,293 1) Fair value per December 31, 2007, for listed shares was seK 11 (6) million with a net carrying value of seK 11 (6) million. 2) additions include funded pension plans with net assets of seK 447 (381) million. For further information, see note c17, “post–employment benefits”. 72 ericsson annual report 2007 notes to the consolidated financial statementsnote c12 construction-t ype contracts in progress For construction-type contracts in progress: aggregate amounts of costs incurred aggregate amount of recognized profits (less recognized losses) Gross amount due from customers 1) Gross amount due to customers 2) 2007 2006 9,599 12,255 2,007 733 1,643 1,735 1,537 785 1) For all contracts in progress for which costs incurred plus recognized profits (less recognized losses) exceeds progress billings. 2) 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, 2007, and include all costs incurred since the start of these projects, includ- ing any costs incurred prior to January 1, 2007. net sales for con- struction-type contracts for 2007 amounts to seK 7,121 million, see note c4, “net sales”. c13 inventories 2007 2006 raw materials, components and consumables Manufacturing work in progress Finished products and goods for resale contract work in progress less advances from customers 7,161 315 5,338 10,338 –677 6,902 213 3,781 11,171 –597 Inventories, net 22,475 21,470 contract work in progress includes amounts related to construction- type contracts as well as other contracts with ongoing work in prog- ress. reported amounts are net of obsolescence allowances of seK 2,752 (2,578) million. movements in oB solescence allowances 2007 2006 opening balance additions utilized translation difference Balances regarding acquired/divested businesses 2,578 1,276 –1,114 17 –5 2,519 857 –693 –81 –24 Closing balance 2,752 2,578 the cost of inventories recognized as an expense and included in cost of sales was seK 52,864 (52,615) million. ericsson annual report 2007 73 notes to the consolidated financial statementsnote c13 movements in allowances for impairment trade receivables 2006 2007 customer finance credits 2006 2007 opening balance additions utilized reversal of excess amounts reclassification translation difference 1,372 564 –554 –137 56 50 1,382 686 –139 –527 56 –86 Closing balance 1,351 1,372 418 49 –43 –141 – –8 275 1,755 79 –284 –1,082 –5 –45 418 c14 trade receivables and customer Financing trade receivables excluding associated companies and joint ventures allowances for impairment trade receivables, net trade receivables related to associated companies and joint ventures Trade receivables, total customer finance credits allowances for impairment Customer finance credits, net Of which short term 2007 2006 60,669 –1,351 51,846 –1,372 59,318 50,474 1,174 596 60,492 51,070 3,649 –275 3,374 2,362 4,074 –418 3,656 1,735 credit commitments for customer financing 4,185 6,795 Days sales outstanding were 102 (85) in December, 2007. ageing analysis as per decemBer 31, 2007 of which neither impaired nor amount past due of which impaired, not past due of which past due in the following time intervals 90 days less than or more 90 days of which past due and impaired in the following time intervals 90 days or more less than 90 days trade receivables excluding associated companies and joint ventures allowances for impairment of receivables customer finance credits allowances for impairment of customer finance credits 60,669 –1,351 3,649 –275 52,560 – 3,723 1,577 2,476 305 –110 410 293 773 –422 1 –1 2,036 –929 164 –164 ageing analysis as per decemBer 31, 2006 of which neither impaired nor amount past due of which impaired, not past due of which past due in the following time intervals 90 days less than or more 90 days of which past due and impaired in the following time intervals 90 days or more less than 90 days trade receivables excluding associated companies and joint ventures allowances for impairment of receivables customer finance credits allowances for impairment of customer finance credits 51,846 –1,372 4,074 –418 45,085 – 2,714 1,222 3,342 473 –166 – 7 400 –397 32 –32 2,425 –975 220 –220 Credit risk credit risk is divided into three categories: credit risk in trade receiv- ables, customer finance risk and financial credit risk (see c20). Credit risk in trade receivables credit risk in trade receivables is governed by a policy applicable for all ericsson legal entities. the purpose of the policy is to: • avoid credit losses through establishing internal standard credit routines at all ericsson legal entities. • ensure monitoring and risk mitigation of defaulting accounts, i.e. events of non-payment and/or delayed payments from customers. • ensure efficient credit management within the Group and thereby improve Days sales outstanding and cash Flow. • ensure payment terms are commercially justifiable. • clarify escalation path and approval process for payment terms and customer credit limits. the credit worthiness of all customers is regularly assessed and a credit limit is set. through credit management system functionality, credit checks are performed every time a sales order or an invoice is generated in the source system based upon the credit risk set on the customer. credit blocks appear if credit limit set on customer is exceeded or if over due receivables are higher than permitted levels. release of block requires authorization. 74 ericsson annual report 2007 notes to the consolidated financial statementsnote c14 trade receivables amounted to seK 60,669 (51,846) million as of outstanding customer finance credits December 31, 2007. provisions for expected losses are regularly assessed and amounted to seK 1,351 (1,372) million as of December 31, 2007. ericsson’s nominal credit losses have, however, historically been low. the amounts of trade receivables follow closely the distri- bution of ericsson’s sales and do not include any major concentra- tions of credit risk by customer or by geography. Customer finance credit risk all major customer finance commitments are subject to approval by the Finance committee of the Board of Directors according to a credit approval policy. prior to the approval of new customer Finance deals, an internal credit risk assessment is conducted in order to assess the credit rating (for political and commerical risk) of each transaction respec- tively. the credit risk analysis is made by using an assessement tool, whereby the political risk rating is identical to the rating used by all export credit agencies within the oecD. the commercial risk is assessed by analyzing a large number of parameters, which may affect the level of the future commercial risk exposure. the output from the assessement tool for the credit rating is also a pricing of the risk, expressed as a risk margin per annum over funding cost. the reference pricing for political risk and commercial risk, on which the tool is based, are reviewed using information from export credit agencies and prevailing pricing in the bank loan market for structured financed deals. the objective is the internally set risk margin shall reflect the assessed risk and that the pricing is as close as possible to the current market pricing. risk provisions related to customer Finance risk exposures are only made upon events occuring after the financing arrangement has become effective, which in a significant way are expected to have an adverse impact on the borrower’s ability and/or willingness to service the outstanding debt. these events can be political (normally outside the control of the borrower) or commercial e.g. a borrower´s deterio- rating creditworthiness. as of December 31, 2007, ericsson’s total outstanding exposure related to customer finance credits was seK 3,679 (4,109) million. as of that date, ericsson also had unutilized credit commitments of seK 4,185 (6,795) million. 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, 2007, there were a total of 75 (66) customer loans originated by or guaranteed by ericsson. the five largest customer finance arrange- ments represented 48 (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, 2007 and 2006. on-balance sheet credits off-balance sheet credits total credits accrued interest less third-party risk coverage 1) ericsson’s risk exposure on-balance sheet credits, net carrying value reclassifications 2) on-balance sheet credits, net carrying value of which current credit commitments for customer financing 2007 2006 3,649 30 4,074 35 3,679 4,109 63 –511 89 –50 3,231 4,148 3,374 – 3,374 2,362 4,185 3,778 –122 3,656 1,735 6,795 1) By “third-party risk cover” means that a financial payment guarantee has been issued by a bank, an export credit agency or other financial institution covering the credit risk. it may also be a credit risk transfer under a so called “sub participation arrangement” with a bank whereby the credit risk and the funding is taken care of by the bank for the part covered by the bank. a credit risk cover from a third party may also be issued by an insurance company. 2) reclassification due to consolidation in accordance with sic 12. of ericsson’s total outstanding customer finance credit exposure as of December 31, 2007, 47 (52) percent related to central and eastern europe, Middle east & africa, 23 (36) percent to latin america, 14 (7) percent to Western europe, 14 (4) percent to asia pacific and 2 (1) percent to north america. the effect of risk provisions and reversals for customer financing affecting the income statement amounted to a net positive impact of seK 92 million in 2007, compared to seK 1,003 million in 2006. in 2007 and 2006, ericsson incurred credit losses of seK 43 million and seK 284 million respectively. c15 other current receivables prepaid expenses accrued revenues advance payments to suppliers Derivatives with a positive value taxes other 2007 2006 2,527 1,661 679 1,530 4,610 4,055 2,212 1,124 666 3,802 2,596 4,612 Total 15,062 15,012 c16 equity Capital stock 2007 capital stock at December 31, 2007, 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 ericsson annual report 2007 75 notes to the consolidated financial statementsnote c14–c16 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, 2007, was 231,991,543 (251,013,892 in 2006, 268,065,241 in 2005) class B shares. the number of treasury shares decreased during 2007 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, 2007 number of shares, Dec 31, 2007 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 2008 a dividend of seK 0.50 per share. revalua- tion of other invest- ments in shares and partici- pations 3 cumula- tive transla- tion adjust- ments –5,569 cash flow hedges 877 addi- tional paid in capital 24,731 capital stock 16,132 retained earnings 83,939 Stock- holders’ equity 120,113 Minority interests 782 Total equity 120,895 2007 January 1, 2007 actuarial gains and losses related to pensions Group associates 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 Group associates transferred to income statement for the period changes in cumulative translation adjustments Group associates tax on items reported directly in/or transferred from equity Total transactions reported directly in equity Net income Group associates Total income and expenses recognized for the period sale of own shares stock purchase and stock option plans – – – – – – – – – – – – – – – – – – – – – – – – Group associates Dividends paid Business combinations December 31, 2007 – – – – 16,132 – – – – 24,731 – 2 – – – – – – – 2 2 – – – – – 5 – – 580 4 –1,390 – – – – – – – – – –1,155 1) 359 1,210 –2 1,210 –2 2 580 4 –1,390 – –1,155 359 – – – – – – 236 20 2) –329 –73 –570 –776 879 –465 – – – – – – –1 – – –1 1,210 –2 2 580 4 –1,390 – –1,156 359 –73 –466 16,562 5,274 16,562 5,274 299 16,861 5,274 –570 – –776 – 22,715 62 21,371 62 298 – 21,669 62 – – – – 307 – – – – –6,345 528 –19 –7,943 – 99,282 528 –19 –7,943 – 134,112 – – –189 49 940 528 –19 –8,132 49 135,052 1) changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of seK –914 million (seK –701 million in 2006, seK 1,084 million in 2005), net gain/loss from hedging activities of foreign entities, seK –52 million (seK 123 million in 2006, seK –142 million in 2005) and seK –70 million (seK –1 million in 2006, seK 127 million in 2005) of realized gain/losses net from sold/liquidated companies. 2) Deferred tax on gains on hedges on net investments in foreign entities, seK –72 million pre tax. 76 ericsson annual report 2007 notes to the consolidated financial statementsnote c16 Additional paid in capital Cumulative translation adjustments relates to payments made by owners and includes share premiums paid. Revaluation of other investments in shares and participations the translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations, changes regarding revaluation of goodwill in local cur- rency as well as from the translation of liabilities that hedge the company’s net investment in foreign subsidiaries. the fair value reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the investments are derecognized or impaired. Retained earnings Cash flow hedges the cash flow hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash-flow-hedging instru- ments related to hedged transactions that have not yet occurred. retained earnings,including net income for the year, comprise the earned profits of parent company and its share of net income in subsidiaries, joint ventures and associated companies. revalua- tion of other invest- ments in shares and partici- pations 5 cumula- tive transla- tion adjust- ments –2,493 cash flow hedges –704 addi- tional paid in capital 24,731 capital stock 16,132 retained earnings 63,951 Stock- holders’ equity 101,622 Minority interests 850 Total equity 102,472 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16,132 – – – – – – 24,731 – – –2 – – – – – – – – – – 4,133 –33 –1,990 99 – – – – – – – – – –2,597 –431 437 3 – – – – – – – 437 3 –2 4,133 –33 –1,990 99 –2,597 –431 – – 1 – – – – 437 3 –1 4,133 –33 –1,990 99 –91 – –2,688 –431 –628 –48 –93 –769 – –769 –2 1,581 –3,076 347 –1,150 –90 –1,240 – – –2 – – – – – 3 – – 1,581 – – – – – 877 – – 20,317 5,934 20,317 5,934 –3,076 – – – – – –5,569 26,598 58 473 –7,141 – – 83,939 25,101 58 473 –7,141 – – 120,113 185 95 – – –202 70 –31 782 20,502 5,934 25,196 58 473 –7,343 70 –31 120,895 2006 January 1, 2006 actuarial gains and losses related to pensions Group associates 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 Group associates transferred to income statement for the period transferred to balance sheet for the period changes in cumulative translation adjustments Group associates tax on items reported directly in/or transferred from equity Total transactions reported directly in equity Net income Group associates Total income and expenses recognized for the period sale of own shares stock purchase and stock option plans Dividends paid stock issue, net Business combinations December 31, 2006 ericsson annual report 2007 77 notes to the consolidated financial statementsnote c16revalua- tion of other invest- ments in shares and partici- pations – 155 155 – cumula- tive transla- tion adjust- ments –6,530 –6,530 – cash flow hedges – 1,155 1,155 – addi- tional paid in capital 24,731 – 24,731 – capital stock 16,132 – 16,132 – 2005 January 1, 2005 changes in accounting policy Adjusted opening balance actuarial gains and losses related to pensions 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 Group associates transferred to income statement for the period changes in cumulative translation adjustments Group associates tax on items reported directly in/or transferred from equity Total transactions reported directly in equity Net income Group associates Total income and expenses recognized for the period sale of own shares stock purchase and stock option plans Dividends paid stock issue, net Business combinations December 31, 2005 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16,132 – – – – – – 24,731 retained earnings 45,372 179 45,551 –3,221 Stock- holders’ equity 79,705 1,489 81,194 –3,221 Minority interests 1,057 – 1,057 – Total equity 80,762 1,489 82,251 –3,221 – – – – – – – –3 –147 –3,968 7 1,404 3,740 378 – – – – – 147 – –3 –147 –3,968 7 1,404 3,887 378 – – – – – –3 –147 – – –3,968 7 1,404 – – – – – – – 3,740 378 698 –81 906 1,523 – 1,523 –150 –1,859 4,037 –2,315 –287 147 –140 – – –150 – – – – – 5 – – – – 21,920 2,395 21,920 2,395 145 – 22,065 2,395 –1,859 – – – – – –704 4,037 – – – – – –2,493 22,000 117 242 –3,959 – – 63,951 24,028 117 242 –3,959 – – 101,622 292 – – –174 17 –342 850 24,320 117 242 –4,133 17 –342 102,472 78 ericsson annual report 2007 notes to the consolidated financial statementsnote c16c17 post-employment benefits ericsson sponsors a number of post-employment benefit plans throughout the Group, which are in line with market practice in each country. the year 2007 was characterized by an increase in discount rates throughout the world and an increase in the life expectancy assumption in sweden. this note is divided into the following sections: 1. amount recognized in the consolidated Balance sheet 2. total pension cost recognized in the income statement 3. change in the Defined Benefit obligation, DBo 4. change in the plan assets 5. actuarial Gains and losses reported Directly in equity (sorie) 6. actuarial assumptions 7. summary information on pension plans per Geographical Zone Section One: Amount Recognized in the Consolidated Balance Sheet sweden uK euro zone us other total 2007 Defined Benefit obligation (DBo) 1) Fair value of plan assets 2) Deficit/surplus (+/–) unrecognized past service costs closing balance plans with net surplus 3) Provision for post-employment benefits 4) 2006 Defined Benefit obligation (DBo) 1) Fair value of plan assets 2) Deficit/surplus (+/–) unrecognized past service costs closing balance plans with net surplus 3) 12,512 9,463 3,049 – 3,049 – 3,049 11,772 9,141 2,631 – 2,631 – 5,606 4,854 752 – 752 39 791 5,713 3,897 1,816 – 1,816 – 3,079 2,104 975 – 975 426 1,401 3,241 1,959 1,282 – 1,282 310 Provision for post-employment benefits 4) 2,631 1,816 1,592 2,238 1,779 459 – 459 99 558 1,791 2,036 –245 –83 –328 717 389 25,226 20,236 4,990 –83 4,907 1,281 6,188 2,399 1,818 1,487 1,580 24,612 18,395 581 –6 575 41 616 –93 –77 –170 483 313 6,217 –83 6,134 834 6,968 1) For details on DBo, please refer to section 3 of this note. 2) For details on plan assets, please refer to section 4 of this note. 3) plans with a net surplus, i.e. where plan assets exceed DBo, are reported as other financial assets, non-current (please see note c12 “Financial assets”). none of the company’s plans with net surplus are affected by restrictions on asset recognition. 4) plans with net liabilities are reported in the Balance sheet as post-employment benefits, non-current. Section Two: Total Pension Cost Recognized in the Income Statement costs for post-employment benefits within ericsson are distributed between defined contribution plans and defined benefit plans, with a trend toward defined contribution plans. sweden uK euro zone us other total 2007 pension cost for defined contribution plans pension cost for defined benefit plans 1) Total total pension cost expressed as a percentage of wages and salaries 2006 pension cost for defined contribution plans pension cost for defined benefit plans 1) Total total pension cost expressed as a percentage of wages and salaries 2005 pension cost for defined contribution plans pension cost for defined benefit plans 1) Total total pension cost expressed as a percentage of wages and salaries 1) see cost details in table below. 1,166 471 1,637 1,350 347 1,697 929 417 1,346 265 279 544 – 249 249 – 71 71 370 128 498 195 300 495 198 200 398 105 42 147 93 49 142 83 101 184 148 100 248 82 44 126 59 107 166 2,054 1,020 3,074 9.0% 1,720 989 2,709 8.4% 1,269 896 2,165 8.5% ericsson annual report 2007 79 notes to the consolidated financial statementsnote c17 cost details for defined Benefit plans recognized in the income statement sweden uK euro zone us other total 2007 current service cost interest cost expected return on plan assets past service cost curtailments and settlements Total 2006 current service cost interest cost expected return on plan assets past service cost curtailments and settlements Total 2005 current service cost interest cost expected return on plan assets past service cost curtailments and settlements Total 473 435 –412 – –25 471 431 406 –352 – –138 347 275 407 –267 2 – 417 257 307 –285 – – 279 228 177 –169 31 –18 249 62 169 –160 – – 71 186 135 –125 – –68 128 279 133 –103 – –9 300 200 93 –93 – – 200 33 139 –135 3 2 42 47 146 –140 5 –9 49 78 148 –128 3 – 101 140 109 –163 8 6 100 92 104 –145 13 –20 44 81 61 –63 14 14 107 1,089 1,125 –1,120 11 –85 1,020 1,077 966 –909 49 –194 989 696 878 –711 19 14 896 Sections three to six focus on the Defined Benefit plans. Section Three: Change in the Defined Benefit Obligation, DBO sweden uK euro zone us other total 2007 Opening balance current service cost interest cost employee contributions pension payments actuarial gain/loss (–/+) settlements curtailments Business combinations 1) other translation difference Closing balance of which medical benefit schemes 11,772 473 435 – –72 –71 – –25 – – – 5,713 257 307 59 –119 –777 – – 440 –8 –266 12,512 5,606 – – 3,241 186 135 4 –89 –482 – –68 20 –9 141 3,079 – 2,399 33 139 – –195 –12 –2 2 – 22 –148 2,238 533 1,487 140 109 15 –68 83 –40 6 –6 –42 107 24,612 1,089 1,125 78 –543 –1,259 –42 –85 454 –37 –166 1,791 25,226 – 533 80 ericsson annual report 2007 notes to the consolidated financial statementsnote c17 2006 Opening balance current service cost interest cost employee contributions pension payments actuarial gain/loss (–/+) settlements curtailments Business combinations 1) other translation difference Closing balance of which medical benefit schemes sweden uK euro zone us other total 11,632 431 406 – –69 –208 –209 –211 – – – 11,772 – 3,795 228 177 54 –150 767 –18 – 909 29 –78 5,713 – 2,475 279 133 4 –60 –244 – –9 781 – –118 3,241 – 2,863 47 146 – –189 –159 – –9 45 37 –382 2,399 579 1,549 92 104 13 –69 –28 –48 –19 20 1 –128 22,314 1,077 966 71 –537 128 –275 –248 1,755 67 –706 1,487 24,612 – 579 1) Business combinations in 2007 are related to the acquisition of tandberg television asa. Business combinations in 2006 are related to the acquisition of Marconi. Funded Status the funded ratio, defined as total plan assets in relation to the total defined benefit obligation (DBo), was 80.2 percent in 2007, compared to 74.7 percent in 2006. the following table summarizes the value of the DBo per geographical area in relation to whether there are, or not, plan assets wholly or par- tially funding each pension plan. 2007 DBo, closing balance of which partially or fully funded of which unfunded 2006 DBo, closing balance of which partially or fully funded of which unfunded Section Four: Change in the Plan Assets 2007 Opening balance expected return on plan assets actuarial gain/loss (+/–) employer contributions employee contributions pension payments settlements Business combinations 1) other translation difference Closing balance sweden uK euro zone us other total 12,512 12,043 469 11,772 11,284 488 5,606 5,606 – 5,713 5,713 – 3,079 1,945 1,134 3,241 1,995 1,246 2,238 1,680 558 2,399 1,794 605 1,791 1,440 351 1,487 1,269 218 25,226 22,714 2,512 24,612 22,055 2,557 sweden uK euro zone us other total 9,141 412 –89 –1 – – – – – – 9,463 3,897 285 – 622 59 –127 – 349 – –231 4,854 1,959 125 –173 128 4 –19 – – –10 90 2,104 1,818 135 73 13 – –142 –2 – – –116 1,779 1,580 163 130 83 15 –55 –41 3 –18 176 18,395 1,120 –59 845 78 –343 –43 352 –28 –81 2,036 20,236 ericsson annual report 2007 81 notes to the consolidated financial statementsnote c17 2006 Opening balance expected return on plan assets actuarial gain/loss (+/–) employer contributions employee contributions pension payments settlements Business combinations 1) other translation difference Closing balance sweden uK euro zone us other total 8,809 352 261 – – – –281 – – – 2,754 169 26 191 54 –151 – 909 – –55 9,141 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 16,784 909 357 562 71 –366 –329 939 –12 –520 1,580 18,395 1) Business combinations in 2007 are related to the acquisition of tandberg television asa. Business combinations in 2006 are related to the acquisition of Marconi. actual return on plan assets 2007 2006 asset allocation 2007 equities interest-bearing securities other Total Of which Ericsson’s securities 2006 equities interest-bearing securities other Total Of which Ericsson’s securities sweden uK euro zone 323 613 285 195 –48 141 us 208 116 other 293 201 total 1,061 1,266 sweden uK euro zone us other total 2,943 6,520 – 9,463 – 2,377 6,764 – 9,141 – 1,874 2,387 593 4,854 – 1,802 1,914 181 3,897 – 1,159 847 98 2,104 – 1,142 714 103 1,959 – 1,442 316 21 1,779 – 1,058 696 64 1,818 – 479 1,381 176 2,036 – 353 1,087 140 1,580 – 7,897 11,451 888 20,236 – 6,732 11,175 488 18,395 – the expected contributions to the defined benefit plans during 2008 will be slightly higher than in 2007. 82 ericsson annual report 2007 notes to the consolidated financial statementsnote c17 Section Five: Actuarial Gains and Losses Reported Directly in Equity cumulative gain/loss (–/+) at beginning of year recognized gain/loss (–/+) during the year translation difference effects related to business combinations 1) 2007 2006 3,065 3,483 –1,200 –230 –55 8 –4 –196 cumulative gain/loss (–/+) at end of year 2) 1,806 3,065 1) related to the acquisition of tandberg television asa during 2007, and the divestiture of Defense Business during 2006. 2) no cumulative gain/loss is related to terminated pension plans. since January 1, 2006, ericsson applies immediate recognition of actuarial gains and losses directly in equity, as disclosed in the state- ment of recognized income and expense (sorie). actuarial gains and losses may arise from either a change in actuarial assumptions or in deviations between estimated and actual outcome. Section Six: Actuarial Assumptions 2007 Discount rate expected return on plan assets for the year Future salary increases Health care cost inflation, current year life expectancy after age 65 in years, males life expectancy after age 65 in years, females 2006 Discount rate expected return on plan assets for the year Future salary increases Health care cost inflation, current year life expectancy after age 65 in years, males life expectancy after age 65 in years, females 1) Weighted average multi-year summary plan assets DBo 2007 2006 2005 2004 20,236 18,395 24,612 25,226 5,764 16,784 22,314 16,820 –4,990 –6,217 –5,530 –11,056 Deficit/surplus (–/+) actuarial gains and losses (–/+) experience-based adjustments of pension obligations experience-based adjustments of plan assets –76 232 –415 –56 59 –358 –706 –146 sweden uK euro zone 1) us other 1) 4.4% 4.55% 3.25% n/a 21 24 3.7% 4.0% 3.0% n/a 18 22 5.6% 6.75% 4.6% n/a 21 24 5.0% 6.2% 4.5% n/a 21 24 5.42% 6.14% 3.08% n/a 22 25 4.5% 5.75% 3.0% n/a 20 24 6.25% 7.5% 4.5% 9.5% 18 20 6.0% 8.0% 4.5% 10.0% 18 20 8.84% 9.75% 6.76% n/a 18 22 8.25% 9.5% 6.0% n/a 17 20 • actuarial assumptions are assessed on a quarterly basis. • 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. • the overall expected long-term return on plan assets is a weighted average of each asset category’s expected rate of return. the expected return on interest-bearing investments is set in line with each country’s market yield. expected return on equities is derived from each coun- try’s risk free rate with the addition of a risk premium. • salary increases are partially affected by fluctuation in inflation. • the net periodic pension cost and the present value of the DBo for current and former employees are calculated using the projected unit credit (puc) actuarial cost method, which objective is to spread the cost of each employee’s benefits over the period that the employee works for the company. ericsson annual report 2007 83 notes to the consolidated financial statementsnote c17 Sensitivity Analysis for Medical Benefit Schemes the effect (in seK million) of a one percentage point change in the assumed trend rate of medical cost would have the following effect: UK: in 2007, the acquisition of tandberg television asa increased the DBo by seK 440 million, and the plan assets by seK 349 million. 1 percent 1 percent increase decrease net periodic post-employment medical cost accumulated post-employment benefit obligation for medical costs 4 –3 48 –42 Section Seven: Summary Information on Pension Plans per Geographical Zone applicable to all countries: in 2007, discount rates have increased resulting in a decrease in the DBo, and consequently an actuarial gain. Euro zone: Germany, italy and ireland are the countries with the most significant defined benefit pension plans for the Group. the acquisition of the German company lHs aG did not have any effect on the DBo since the company only has defined contribution plans. in italy, the parliament approved the reform of the “statutory sever- ance indemnity – tFr” to be effective per January 1 2007. this reform changes the nature of the pension plans from defined benefit to defined contribution. the defined benefit plans are closed per December 31 2006. overall, there is a trend towards increased usage of defined contri- in ireland, the life expectancy increased by two years for both bution plans. some defined benefit plans have been closed for new entrance and will gradually be replaced by defined contribution plans. males and females. Specific information per geographical area: US & Other: no issues except for the increase in discount rate. Sweden: in 2007, the swedish Financial supervisory authority issued new mortality tables which have been adopted in the calculation of the DBo at December 31, 2007. the life expectancy for males increased by three years and females one year, resulting in an increase in the DBo and consequently an actuarial loss. the trend towards defined contribution pension solutions is also applicable in sweden, since the collectively agreed itp plan, which historically has been a defined benefit plan, has been renegotiated and, as from July 1, 2007, the parties have agreed to launch a new itp plan. the new plan is a defined contribution plan which will be open for new participants in the itp system, whereas earlier partici- pants will continue in the old plan. as before, ericsson has secured the disability- and survivors’ pension part of the itp plan through an insurance solution with the insurance company alecta. although this part of the plan is classified as a multi-employer defined benefit plan, it has not been possible for ericsson to get sufficient information to apply defined benefit ac- counting, and therefore, it has been accounted for as a defined contribution plan. at the end of 2007, alecta reported a surplus of 52 procent (43 procent in 2006). such surplus reflects the fair value of alecta’s plan assets as a percentage of plan commitments, then measured in accordance with alecta’s actuarial assumptions, which are different from those in ias 19. alecta’s surplus may be distributed to the members of the plan and/or plan participants. 84 ericsson annual report 2007 notes to the consolidated financial statementsnote c17 c18 provisions 2007 Opening balance additions reversal of excess amounts Negative effect on Income Statement utilization/cash out Balances regarding divested/acquired businesses reclassification translation differences Closing balance 2006 Opening balance additions reversal of excess amounts Negative effect on Income Statement utilization/cash out Balances regarding divested/acquired businesses reclassification translation differences Closing balance Warranty commit- ments restructur- ing project related other 1) Total 2) 2,961 1,472 –861 –1,755 22 –24 –1 1,814 4,821 2,561 –1,100 –3,471 224 15 –89 2,961 2,277 676 –400 –1,680 – 123 55 1,051 2,314 2,765 –416 –2,308 20 19 –117 2,277 3,272 1,795 –1,080 –1,383 – –5 20 2,619 5,007 2,544 –872 –3,352 76 25 –156 3,272 5,372 1,216 –1,409 –1,490 –11 510 54 4,242 6,526 2,876 –2,359 –1,209 –100 –146 –216 5,372 13,882 5,159 –3,750 1,409 –6,308 11 604 128 9,726 18,668 10,746 –4,747 5,999 –10,340 220 –87 –578 13,882 1) off-balance customer financing is included in other provisions. 2) of which non-current seK 368 (602) million. other has been split into two different categories, project related and other. 2006 figures have been restated accordingly. Provisions Restructuring risk assessment in the ongoing business is performed monthly to identify the need for new additions and reversals. Management uses its best judgment to estimate provisions based on this assessment. the actual utilization for 2007 was seK 6.3 billion compared to the estimated seK 8.3 billion. in certain circumstances, provisions are no longer required due to more favo rable outcomes than anticipated, and that will affect the provisions as a reversal. in other cases the outcome can be negative, and in that case a cost will be booked directly in the income statement. For 2007, new or additional provi- sions amounting to seK 5.2 billion were made, and seK 3.8 billion were reversed. the expected utilization in 2008 is approximately seK 6 billion. For more information, see note c1, “significant accounting poli- cies” and note c2 “critical accounting estimates and Judgments”. Warranty commitments Warranty provisions are based on historic quality rates for estab- lished products as well as estimates regarding quality rates for new products and costs to remedy the various types of faults predicted. the actual utilization for 2007 was seK 1.8 billion, compared to the expected seK 2.2 billion. provisions amounting to seK 1.5 billion were made and due to more favorable outcomes in certain cases reversals of seK 0.9 billion were made. the expected utilization of warranty provisions during year 2008 is approximately seK 1 billion. there have not been any major new restructuring provisions made during 2007. restructuring provisions amounting to seK 1.7 billion were utilized during 2007, in line with the expected seK 1.6 billion. the major part of the provisions utilized during 2007 refers to provi- sions made in 2006 related to the Marconi integration and the career change offer in sweden. the expected utilization of restructuring provisions during 2008 is approximately seK 1 billion. Project related project related provisions include onerous (estimated losses) con- tracts, contractual penalties and undertakings. the utilization of project related provisions were seK 1.4 billion compared to the estimated seK 1.7 billion. provisions amounting to seK 1.8 billion were made and seK 1.1 billion were reversed due to a more favorable outcome than expected. the expected utilization for 2008 is esti- mated to be approximately seK 2 billion. Other other provisions include provisions for income taxes, value added tax issues, litigations, supplier claims, customer financing and other provisions. the utilization was seK 1.5 billion in 2007 compared to the estimate of seK 2.8 billion. new provisions amounting to seK 1.2 billion were made and seK 1.4 billion were reversed during the year due to a more favorable outcome. For 2008 the expected utilization is approximately seK 2 billion. ericsson annual report 2007 85 notes to the consolidated financial statementsnote c18c19 interest-Bearing liabilities ericsson’s outstanding interest-bearing liabilities were seK 27.2 (14.6) billion as of December 31, 2007. interest-Bearing liaBilities 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 2,898 (0) million. notes and B ond loans 2007 2006 3,065 2,831 88 1,592 5,896 1,680 19,380 1,940 11,204 1,700 21,320 12,904 27,216 14,584 all outstanding notes and bond loans are issued by the parent com- pany under its euro Medium term note program. Bonds issued at a fixed interest rate are swapped to a floating interest rate using interest rate swaps, resulting in a weighted average interest rate of 5.48 percent at December 31, 2007. these bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in ias 39. in June 2007 ericsson successfully placed a bond issuance. the transaction comprised a eur 875 million dual-tranche eurobond, consisting of a eur 375 million seven-year floating rate note and a eur 500 million ten-year fixed rate note, as well as a seK 3 billion five-year note. the bond issues will materially lengthen ericsson’s average debt maturity profile. ericsson last accessed the eurobond market in 2004. Issued-maturing 1999-2009 2001-2008 2003-2010 2004-2012 2007-2012 2007-2012 2007-2017 2007-2014 Total nominal amount 483 226 1) 471 2) 450 1,000 2,000 500 375 coupon 6.500% 7.375% 6.750% 3.935% 5.100% 3.710% 5.380% 4.459% currency usD GBp eur seK seK seK eur eur Book value (seK m.) 3,166 3) 2,898 3) 4,462 3) 450 1,002 3) 2,000 4,757 3) 3,543 22,278 Maturity date (yy-mm-dd) 09-05-20 08-06-05 10-11-28 12-12-07 4) 12-06-29 12-06-29 5) 17-06-27 14-06-27 6) unrealized hedge gain/loss (incl. in book value) –61 8 –14 –4 –65 –136 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 2008-06-09. 5) contractual repricing date 2008-03-29. 6) contractual repricing date 2008-03-27. 86 ericsson annual report 2007 notes to the consolidated financial statementsnote c19 c20 Financial risk Management and Financial instruments ericsson’s financial risk management is governed by a policy ap- proved by the Board of Directors. the Finance committee of the Board of Directors is responsible for overseeing the capital structure and financial management of the company and approving certain matters such as acquisitions, investments, customer financing com- mitments, guarantees and borrowing and is continuously monitoring the exposure to financial risks. ericsson defines its managed capital as the total Group equity. For ericsson, a robust financial position with a strong equity ratio, invest- ment grade rating, low leverage and ample liquidity is necessary. this provides us with the financial flexibility and independence to operate and manage variations in working capital needs as well as capitalize on business opportunities. the company’s overall capital structure should support the finan- cial targets: to grow faster than the market, deliver best in class mar- gins and generate a healthy cash flow. the capital structure is man- aged by balancing equity, debt financing and liquidity in such a way that we secure funding of our operations at a reasonable cost of capital. regular borrowings are complemented with committed credit facilities to give additional flexibility to manage unforeseen funding needs. We strive to finance our growth, normal capital expenditures and dividends to shareholders by generating sufficient positive cash flows from operating activities. our capital objectives are: • an equity ratio above 40 percent • a cash conversion rate above 70 percent • maintain a positive net cash position • maintain a solid investment grade rating from Moody’s and stan- dard &poor’s capital (seK billion) Capital objective equity ratio (percent) cash conversion rate (percent) positive net cash (seK billion) Credit rating Moody’s standard & poor’s 2007 2006 135 121 55 66 24.3 56 57 40.7 Baa1 BBB+ Baa2 BBB– 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 expo- sures in a manner consistent with underlying business risks and financial policies. Hedging activities, cash management and insur- ance management are largely centralized to the treasury function in stockholm. ericsson also has a customer finance function with the main objec- tive to find suitable third-party financing solutions for customers and to minimize recourse to ericsson. to the extent customer loans are not provided directly by banks, the parent company provides or guar- antees vendor credits. the customer finance function monitors the exposure from outstanding vendor credits and credit commitments. 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. the Board of Directors has established risk limits for defined expo- sures to foreign exchange and interest rate risks as well as to political risks. For further information about accounting policys please see note c1 – “significant accounting policies”. Foreign exchange risk ericsson is a global company with sales mainly outside sweden. revenues and costs are to a large extent in currencies other than seK and therefore the financial results of the Group may be impacted through currency fluctuations. ericsson has a structural mismatch between revenues and costs in different currencies and is therefore exposed to various currency combinations. these currency combinations and exposures will vary over time. ericsson reports the financial accounts in seK and movements in exchange rates between currencies will affect: • specific line items such as net sales and operating income • the comparability of our results between periods; and, • the carrying value of assets and liabilities. the results of operations and financial position of non-swedish sub- sidiaries are reported in other currencies than seK, and thus trans- lated into seK upon consolidation. Overall Exposure Currency net sales purchases Transaction Exposure in SEK entities internal sales 2) purchases 3) usD 1) eur GBp seK JpY auD inr cnY other 41% 27% 4% 3% 3% 3% 2% 7% 10% 32% 25% 5% 20% 1% 2% 2% 5% 8% 44% 33% 2% 2% 5% 3% 0% 0% 11% 38% 21% 1% 38% 1% 0% 0% 0% 1% 1) including usD related currencies except cnY 2) eliminated upon consolidation. However, net impact on cost of sales as the internal purchases normally is in functional currency of the buying company. 3) 39 percent of overall purchases, offsetting internal sales net sales and operating income are affected by changes in foreign exchange rates from two different kinds of exposures; ericsson annual report 2007 87 notes to the consolidated financial statementsnote c20 outstanding derivatives Currency 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 Total currency derivatives (of which is included in cash flow hedge relations) currency nominal currency 2007 asset seK 2006 liability seK nominal currency asset seK liability seK usD eur other usD eur other 3,786 2,546 575 1,026 eur – 6,764 2,062 109 1,043 471 783 20 42 845 131 13 1 145 – 990 416 558 531 –78 1) 1,011 15 78 –10 1) 83 – 1,094 13 726 70 –40 1) 756 29 0 –17 1) 12 0 0 768 158 2,281 370 456 3,107 63 90 58 211 17 17 3,335 1,239 2006 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. 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 maturity more than five years Total interest derivatives (of which is included in Fair Value hedgerelations) currency nominal currency 2007 asset seK eur noK seK usD GBp other seK GBp noK eur usD other eur usD seK seK eur 1,500 10,120 24,157 – 276 30,823 – 9 1,112 483 107 – 2,000 1,305 526 16 42 21 1 114 – 194 24 – 26 13 163 – 226 5 – 27 32 5 179 184 636 1) 478 liability seK nominal currency asset seK liability seK 15 7 30 1 1 – 54 21 – 18 14 – 3 56 4 – –1 2) 3 3 – 3 116 – 260 24,289 42,820 – – 226 25,275 – 483 434 50 – 1,428 – – – 12 119 – – – 131 115 43 – 180 5 343 94 6 – 100 9 – 9 583 1) 385 2 23 63 – – 4 92 – –2 2) 8 6 12 – – – – 11 – 11 115 – 1) of which 96 million is reported as non-current assets for 2007 and 116 million for 2006 2) 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. Transaction exposure • sales and cost of sales in non-reporting currencies in individual group companies. to a large extent the exposure is concentrated to the swedish subsidiary ericsson aB • these exposures are addressed by hedging the current policy for hedging transaction exposures and due to the fact that translation exposure can’t be hedged, results in that only around a fifth of the Group’s foreign exchange exposure in net sales is hedged. the hedge effect on operating margin is larger, as it is a net of sales and cost of sales. Translation exposure • sales and cost of sales in foreign entities are translated into seK • these exposures cannot be addressed by hedging Transaction exposure Foreign exchange risk is as far as possible concentrated to swedish group companies, primarily ericsson aB. sales to foreign subsidiaries 88 ericsson annual report 2007 notes to the consolidated financial statementsnote c20 are normally invoiced in the functional currency of the receiving entity, and export sales from sweden to external customers are normally denominated in usD or other foreign currency. in order to limit the exposure toward exchange rate fluctuations on future revenue or expenditure, committed and forecasted future sales and purchases in major currencies are hedged, for the coming 6–12 months. During 2007, the only entity performing hedge accounting on forecasted transactions was ericsson aB. according to policy the transaction exposure in the subsidiaries’ balance sheets (i.e. trade receivables and payables and customer financing receivables) should be fully hedged. Group treasury has a mandate to leave selected transaction exposures in local companies’ balance sheets un-hedged up to an aggregate risk of Var seK 20 million, given a confidence level of 99 percent and a 1 day horizon. 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, 2007, outstanding foreign exchange deriva- tives hedging transaction exposures had a positive net market value of seK 0.1 (2.3) 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 corre- sponds to depreciation of trade receivable balances being remea- sured at lower rates compared to the exchange rates prevailing when originated. Cash flow hedges the purpose of hedging future cash flows is to protect operating margin and reduce volatility in the income statement. Hedging is done by selling or buying foreign currencies against the functional currency of the hedging entity using FX forwards. Hedging is done based on a rolling 12-month exposure forecast. ericsson uses a layered hedging approach where the closest quar- ters are hedged to a higher degree than coming quarters. each consecutive quarter is hereby hedged on several occasions and is covered by an aggregate of hedging contracts initiated at various points in time which supports the objective of reducing volatility in the income statement from changes in foreign exchange rates. Translation exposure in net assets ericsson has many subsidiaries operating outside sweden with other functional currencies than seK. the net results in such companies and the value of such foreign equity investments 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 related to equity in foreign subsidiaries is hedged up to 20 percent in selected companies. the translation differences reported in equity during 2007 were negative, seK 0.8 billion, includ- ing hedging gains of seK 0.1 billion. translation risk related to fore- casted results from foreign operations is not hedged. Net Investment hedges the purpose of net investment hedges is to protect the value in seK of net investments in foreign entities from changes in the relevant foreign exchange rates. Hedging is done selling the relevant foreign currency against seK using FX forwards. Interest Rate Risk ericsson is exposed to interest rate risk through market value fluctua- tions in certain balance sheet items and through changes in interest expenses and revenues. the net cash position was seK 24.3 (40.7) billion at the end of 2007, consisting of cash, cash equivalents and short-term cash investments of seK 57.7 (62.3) billion and interest- bearing liabilities and post-employment benefits of seK 33.4 (21.6) billion. ericsson manages the interest rate risk by (i) matching fixed and floating interest rates in interest-bearing balance sheet items and (ii) avoiding significant fixed interest rate exposure in ericsson’s net cash position. the policy is that interest-bearing assets shall have an average interest duration between 6 and 18 months and interest- bearing liabilities an average interest duration shorter than 6 months, taking derivative instruments into consideration. treasury has a mandate to deviate from the asset management benchmark given by the Board and take FX positions up to an aggregate risk of Var seK 30 m. given a confidence level of 99 percent and a 1 day horizon. as of December 31, 2007, 92 (100) percent of ericsson’s interest- bearing liabilities and 100 (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 deriva- tive instruments, such as interest rate swaps. Derivative instruments used for converting fixed rate debt into floating rate debt are desig- nated as Fair value hedges. Fair value hedges the purpose of fair value hedges is to hedge the variability in the fair value of fixed-rate debt (issued bonds) from changes in the relevant benchmark yield curve for its entire term by converting fixed interest payments to a floating rate (e.g. stiBor or liBor) by using interest rate swaps (irs). the credit risk/spread is not hedged. the fixed leg of the irs is matched against the cash flows of the hedged bond. Hereby the fixed-rate bond/debt is converted into a floating-rate debt, in accordance with the policy. Sensitivity analysis ericsson uses the Value at risk (Var) methodology to measure for- eign exchange and interest rate risk in portfolios managed by trea- sury. this statistical method expresses the maximum potential loss that can arise with a certain degree of probability during a certain period of time. For the Var measurement, ericsson has chosen a probability level of 99 percent and a 1-day time horizon. the daily Var measurement uses market volatilities and correlations based on historical daily data (one year). the average Var calculated for 2007 was for the interest rate mandate seK 16.1 (12.3) million and for the transaction exposure mandate seK 13.5 million (new mandate from January 1, 2007). no Var-limits were exceeded during 2007. ericsson annual report 2007 89 notes to the consolidated financial statementsnote c20Financial 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, cash equivalents, short term invest- ments 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. We have had no sub-prime exposure in our invest- ments. all derivative transactions are covered by isDa netting agree- ments to reduce the credit risk. no credit losses were incurred during 2007, neither on external investments nor on derivative positions. at December 31, 2007, the credit risk in financial cash instruments was equal to the instruments’ carrying value. credit exposure in derivative instruments was seK 1.6 (3.9) 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, and by having sufficient committed credit lines in place to meet potential funding needs. For information about contractual obliga- tions please see Board of Directors’ report. the current cash posi- tion is deemed to satisfy all short-term liquidity requirements. During 2007, cash and bank and short-term cash investments decreased by seK 4.6 billion to seK 57.7 billion despite issuance of non-current debt. the decrease was mainly due to investments in new business acquisitions and dividend. the decrease was partly offset by a positive operating cash flow. cash and short-term cash investments (SEK billion) 2007 2006 remaining time to maturity < 3 months 29.8 33.0 < 1 year 18.0 9.0 1–5 years 8.9 20.3 >5 years 1.0 – Total 2007 57.7 62.3 the instruments are either classified as held for trading or assets available for sale with maturity less than one year and therefore short- term investments. Refinancing risk refinancing risk is the risk that ericsson is unable to refinance out- standing debt at reasonable terms and conditions, or at all, at a given point in time. repayment schedule of long-term Borrowings 1) liabilities to financial institutions current maturities of long- term debt notes and bonds (non-current) Nominal amount (SEK billion) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total 2.9 – – – – – – – – – 2.9 (non-current) Total – – 0.1 – – 0.1 0.1 – – 0.2 2.9 3.1 4.6 – 3.5 0.1 3.6 – – 4.9 – 3.1 4.5 – 3.5 – 3.5 – – 4.7 19.3 0.5 22.7 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 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.) indian commercial paper program (inr m) short-term committed credit facilities (seK m.) amount utilized unutilized 5,000 3,051 1,949 1,500 5,000 2,000 3,000 273 – – – – – 1,500 5,000 2,000 3,000 273 on July 16th, 2007, ericsson entered into a usD 2.0 billion long-term committed credit facility agreement. the usD 2.0 billion facility re- places the previous usD 1.0 billion facility. the new facility does not have interest rates linked to credit rating or financial covenants. Both Moody’s credit rating agency and standard & poor’s (s&p) raised ericsson’s credit rating during 2007. at year-end, their ratings of ericsson’s creditworthiness were Baa1 (Baa2) for Moody’s and BBB+ (BBB–) for s&p, both considered to be “solid investment Grade”. 90 ericsson annual report 2007 notes to the consolidated financial statementsnote c20 financial instruments carrying amount receiv- ables trade short- cash and term invest- c14 ments equiva- lents cash Borrow- trade ings payables c22 c19 customer financing SEK billion assets at fair value through profit or loss loans and receivables available for sale assets Financial liabilities at amortized cost 3.4 60.5 29.0 0.3 9.8 1.6 0.1 –27.2 other financial assets c12 other current receivables c15 other current liabilities c21 1.5 –1.2 2.3 0.7 2007 2006 39.1 67.8 1.1 46.5 57.8 0.7 Total 3.4 60.5 29.3 11.5 –27.2 –17.4 –17.4 3.0 1.5 –1.2 63.4 72.2 –44.6 –32.8 Financial Instruments Carried at other than 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. 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 showed a net gain of seK 987 million. For further information about valuation principles, please see note c1, “significant account- ing policies”. financial instruments carried at other than fair value (SEK billion) current maturities of non-current borrowings notes and bonds Total carrying amount 2006 2007 Fair value 2006 2007 2.9 19.4 22.3 0.1 11.2 11.3 3.1 19.4 22.5 0.1 11.7 11.8 Financial instruments excluded from the tables, such as trade receiv- ables and payables, are carried at amortized cost which is deemed to be equal to fair value. When a market price is not readily available and there is insignificant interest rate exposure affecting the value, the carrying value is considered to represent a reasonable estimate of a fair value. ericsson annual report 2007 91 notes to the consolidated financial statementsnote c20 c21 other current liabilities c25 statement of cash Flows 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 c22 trade payables payables to associated companies and joint ventures other Total 2007 2006 1,126 1,969 3,419 1,441 49 31 466 365 21,369 19,040 8,042 9,443 11,926 10,998 4,583 5,961 883 1,210 8,866 11,395 44,995 37,178 2007 2006 90 17,337 730 17,453 17,427 18,183 c23 assets pledged as collateral assets pledged as collateral chattel mortgages Bank deposits Total c24 contingent liabilities contingent liabilities Total 2007 2006 1,639 130 230 1,999 – 114 171 285 2007 2006 1,182 1,392 1,182 1,392 contingent liabilities assumed by ericsson include guarantees of loans to other companies of seK 73 (95) million. ericsson has seK 492 (496) million issued to guarantee the performance of a third party. interest paid in 2007 was seK 1,513 million (seK 1,353 million in 2006, seK 2,577 million in 2005) and interest received was seK 1,864 million (seK 1,539 million in 2006, seK 2,142 million in 2005). taxes paid, including withholding tax, were seK 5,116 million (seK 3,649 million in 2006, seK 2,010 million in 2005). For more information regarding the disposition of cash and cash equivalents and unutilized credit commitments, see note c20 – “Fi- nancial risk Management and Financial instruments”. cash restricted due to currency restrictions or other legal restric- tions in certain countries amounted to seK 5,797 million (seK 5,794 million in 2006, seK 3,773 million in 2005). adjustments to reconcile net income to cash Property, plant and equipment Depreciation impairment losses/reversals of impairments Total Intangible assets amortization capitalized development expenses intellectual property rights, brands 2007 2006 2005 3,121 3,007 2,804 –207 30 –366 2,914 3,037 2,438 2,371 2,277 3,009 and other intangible assets 3,062 1,960 260 total amortization impairments 5,433 4,237 3,269 capitalized development expenses intellectual property rights, brands and other intangible assets total impairment losses 16 242 – 16 – 242 95 – 95 Total 5,449 4,479 3,364 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 8,363 7,516 5,802 1,119 4,282 5,518 4,223 1,262 31 –5,636 –4,233 –2,154 –254 –643 –2,815 48 35 1,468 Total adjustments to reconcile net income to cash 7,172 6,060 10,700 92 ericsson annual report 2007 notes to the consolidated financial statementsnote c21–c25 c26 Business combinations 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 consideration payable 2007 2006 2005 11,627 15,648 1,257 163 4,422 325 16,917 4,266 –127 –6,227 45 2,387 –812 –2,689 89 1,781 404 15 512 124 –135 –55 345 16 29,213 19,859 1,226 2,387 534 1,781 – 16 – • Redback: as per January 23, ericsson purchased all shares in redback inc., based in santa clara, usa, with the purpose to strengthen the network offering for multiple services over the ip network. redback’s products, multi-service routers, provide the intelligence needed to adapt the quality of a service to the screen and the resolution that the user can reach with their access at any particular time. redback has over 500 carrier customers in more than 80 countries and employs about 800 people. net sales for redback amounted to approximately seK 1,600 million for the period January 23 – December 31, 2007. Had the acquisition been made as per January 1, 2007, additional net sales of seK 57 million would have been recognized and the operating income would have been reduced by seK 141 million. the main reasons for that part of the acquisition costs are recognized as goodwill, representing 53 percent of total assets acquired, are that strong future synergies are estimated and also the value of the acquired assembled work force. transaction costs for the acquisition amounted to seK 82 million. Cash flow effect 26,292 18,078 1,210 redB ack Business in 2007, ericsson made acquisitions with a cash flow effect amount- ing to seK 26,292 million (seK 18,078 million in 2006), primarily: Net assets acquired Intangible assets intellectual property rights Brands customer relationships Goodwill Other assets and liabilities inventory property, plant and equipment other assets other liabilities Total purchase price less: cash and cash equivalents consideration payable Cash flow effect Fair value Book value adjustments Fair value – – – – 96 153 2,625 –768 952 – 3,272 609 1,575 9,354 3,272 609 1,575 9,354 – – – 96 153 2,625 –2,122 –2,890 14,794 – 275 952 275 13,567 the determination of purchase consideration allocation and fair values of assets acquired and liabilities assumed is based on preliminary appraisal; therefore, these values may be subject to minor adjustments. ericsson annual report 2007 93 notes to the consolidated financial statementsnote c26 • Tandberg: as per May 1, ericsson purchased all shares in tand- berg television asa in norway. the aim was to further strengthen ericsson’s position as an end-to-end supplier within iptV, which is judged to be the central point in the future digital home. tandberg’s strength is coding and compression of tV signals to gain maximum benefit from the bandwidth available while retaining the highest possible picture quality. tandberg employs approximately 870 people with headquarters in southampton, uK, and atlanta, usa. net sales for tandberg amounted to approximately seK 1,400 million for the period May 1 – December 31, 2007. Had the acquisi- tion been made as per January 1, 2007, additional net sales of seK 586 million would have been recognized and the operating income would have been reduced by seK 389 million. the main reasons for that part of the acquisition costs are recog- nized as goodwill, representing 45 percent of total assets acquired, are that strong future synergies are estimated and also the value of the acquired assembled work force. transaction costs for the acquisition amounted to seK 69 million. tandB erg Business Net assets acquired Intangible assets intellectual property rights Brands customer relationships Goodwill Other assets and liabilities inventory property, plant and equipment other assets post-employment benefits other liabilities Total purchase price less: cash and cash equivalents Cash flow effect Book Fair value value adjustments Fair value – – – – 227 124 1,938 –62 –924 2,712 276 1,486 5,442 2,712 276 1,486 5,442 – – – – 227 124 1,938 –62 –1,432 –2,356 742 – 742 9,045 the determination of purchase consideration allocation and fair values of assets acquired and liabilities assumed is based on preliminary appraisal; therefore, these values may be subject to minor adjustments. • LHS: as per october 1, ericsson purchased 87.47 percent of the shares in lHs aG in Germany. the company provides telecom billing and customer care systems for the post-paid wireless, wireline and ip telecom markets. lHs employs approximately 550 people with headquarter in Frankfurt. net sales for lHs amounted to approximately seK 250 million and the operating income amounted to seK 40 million for the period october 1 – December 31, 2007. Had the acquisition been made as per January 1, 2007, additional net sales of seK 657 million would have been recog- nized and the operating income would have been reduced by seK 17 million. the main reasons for that part of the acquisition costs are recog- nized as goodwill, representing 38 percent of total assets acquired, are that strong future synergies are estimated and also the value of the acquired assembled work force. transaction costs for the acquisition amounted to seK 26 million. lhs Business Net assets acquired Intangible assets intellectual property rights Brands customer relationships Goodwill Other assets and liabilities property, plant and equipment other assets Minority interest other liabilities Total purchase price less: cash and cash equivalents Book Fair value value adjustments Fair value – – – – 32 866 –82 –252 367 43 777 1,293 – – –380 367 43 777 1,293 32 866 –82 –632 2,664 249 – 249 2,415 the determination of purchase consideration allocation and fair values of assets acquired and liabilities assumed is based on preliminary appraisal; therefore, these values may be subject to minor adjustments. • Entrisphere: as per February 12, ericsson acquired entrisphere inc., a company providing fiber access technology, based in santa clara, usa. the acquisition strengthens ericsson’s fixed broad- band access portfolio and its position in converged networks. Fiber technology is essential for next generation access networks and for High Definition iptV and other ip-based services with high demand for bandwidth and cost efficiency. entrisphere employs about 140 persons. • Mobeon: as per March 15, ericsson announced the acquisition of the swedish company Mobeon aB, the world leader in ip messag- ing components for mobile and fixed networks. ericsson already owned 21 percent of the shares, and Mobeon has been ericsson’s partner for messaging equipment, such as voicemail, video mail and unified messaging, both for mobile and fixed networks. With this acquisition, ericsson will be more competitive in the messag- ing market and can accelerate the development of new messaging architecture. Mobeon employs approximately 130 persons. 9,787 Cash flow effect 94 ericsson annual report 2007 notes to the consolidated financial statementsnote c26 • Drutt: as per June 28, ericsson acquired Drutt corporation. Drutt is the world leading provider of service Delivery platform solutions that enables mobile operators to mobilize and charge for any content to any device, over any delivery channel. Drutt employs approximately 85 persons. • HyC: as per December 20, ericsson acquired Hyc Group, a lead- ing spanish company in tV consultancy and systems integration. the acquisition further strengthens ericsson’s position in the services and multimedia domains as a system integrator of iptV solutions. Hyc employs approximately 110 persons. other Net assets acquired Intangible assets intellectual property rights, brands and other intangible assets Goodwill Other assets and liabilities inventory property, plant and equipment other assets provisions, including post-employment benefits purchase of minority holdings other liabilities Total purchase price less: cash and cash equivalents consideration payable Cash flow effect Divestments Book Fair value value adjustments Fair value – 34 16 868 –65 45 –121 444 – 510 828 – – – – – –147 – 259 510 828 34 16 868 –65 45 –268 1,968 444 259 1,265 c27 leasing Leasing with the Company as lessee assets under finance leases, recorded as property, plant and equip- ment, consist of: finance leases Acquisition costs real estate Machinery other equipment Accumulated depreciation real estate Machinery other equipment Accumulated impairment losses real estate Net carrying value 2007 2006 1,743 4 – 1,767 – 5 1,747 1,772 –589 –2 – –544 – –1 –591 –545 –80 –349 1,076 878 as of December 31, 2007, future minimum lease payment obligations for leases were distributed as follows: 2008 2009 2010 2011 2012 2013 and later Total Future finance charges 1) Finance operating leases leases 171 146 138 118 92 1,210 3147 2,026 1,682 1,293 1,015 2,732 1,875 11,895 –748 n/a Net assets disposed of 2007 2006 2005 1) average effective interest rate on lease payables is 5,80 percent. present value of finance lease liabilities 1,127 11,895 property, plant and equipment other assets provisions, including post- employment benefits other liabilities Gains from divestments less: cash and cash equivalents cash flow effect 13 498 253 2,946 –19 –234 –89 –2,079 258 280 1,031 2,945 3 76 –8 –30 41 16 454 890 84 3,086 1) 27 30 1) the amount mainly relates to the sale of the Defense business. expenses in 2007 for leasing of assets were seK 2,878 (2,873) mil- lion, of which variable expenses were seK 8 (11) million. the leasing contracts vary in length from 1 to 21 years. the company’s lease agreements normally do not include any 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 stock- holders’ equity of at least seK 25 billion. 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. ericsson annual report 2007 95 notes to the consolidated financial statementsnote c26–c27 at December 31, 2007, future minimum payment receivables were distributed as follows: numBer of employees at year-end Employees by region 2008 2009 2010 2011 2012 2013 and later Total unearned financial income uncollectible lease payments Net investments in financial leases Finance leases operating leases – – – – – – – – – – 147 107 77 45 12 67 455 n/a n/a n/a leasing income in 2007 was seK 160 (149) million. c28 tax assessment Values in sweden land and land improvements Buildings Total 2007 2006 58 265 323 60 235 295 c29 information regarding employees, Members of the Board of Directors and Management Number of employees average numBer of employees Western europe 1) central and eastern europe, Middle east and africa north america latin america asia pacific 32,118 8,961 41,079 31,212 8,697 39,909 5,483 4,329 4,779 10,952 1,128 5,191 7,079 4,063 1,596 998 4,250 1,225 5,554 3,252 1,058 5,837 3,324 740 4,064 2,844 13,796 8,298 2,774 11,072 Total 2) 57,661 15,684 73,345 50,149 14,337 64,486 1) Of which Sweden 2) Of which EU 14,128 33,563 4,618 18,746 14,517 4,792 19,309 9,351 42,914 32,133 8,989 41,122 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 networks professional services Multimedia Total 2007 2006 41,517 38,432 7,329 5,498 6,547 13,120 6,063 4,138 4,498 10,650 74,011 63,781 19,781 42,387 19,094 39,991 2007 2006 44,661 19,790 9,560 40,761 15,697 7,323 74,011 63,781 employees By gender and age at year end 2007 under 25 years old 26–35 years old 36–45 years old 46–55 years old over 55 years old Percent of total Female percent of total Male 667 5,850 6,360 2,374 711 2,275 20,275 22,763 9,733 3,003 4% 35% 39% 17% 5% 22% 78% 100% numBer of employees related to cost of sales and operating expenses cost of sales operating expenses Total 2007 2006 2005 33,904 27,682 40,107 36,099 22,477 33,578 74,011 63,781 56,055 Head count at year-end Departed employees employees joining the company temporary employees Remuneration 2007 2006 74,011 6,657 16,887 1,415 63,781 6,432 14,158 1,219 wages and salaries and social securit y expenses Wages and salaries social security expenses Of which pension costs 2007 2006 34,111 10,660 3,074 32,219 10,602 2,709 amounts related to the president and ceo and the Group Manage- ment team are included. Men Women 2007 Total Men Women 2006 total employee movements 96 ericsson annual report 2007 notes to the consolidated financial statementsnote c27–c29 wages and salaries per geographical area 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 2007 2006 22,278 22,296 2,520 4,168 1,431 3,714 1,914 3,503 1,333 3,173 34,111 32,219 11,025 22,603 2,904 11,467 22,531 2,244 remuneration in foreign currency has been translated to seK at average exchange rates for the year. remuneration to Board memBers and presidents in suBsidiaries salary and other remuneration Of which annual variable remuneration pension costs 2007 2006 266 43 28 222 38 20 Board memBers, presidents and group management By gender if the competitive position of the total package should remain un- changed. the annual report 2007 sets out details on the total remuneration and benefits awarded to the top executives during 2007 including previously decided long-term variable compensation that has not yet become due for payment. Relative importance of and variable components of the remuneration of Top Executives and the linkage between performance and remuneration ericsson takes account of global remuneration practice together with the practice of the home country of each top executive. Fixed salary is set to be competitive. its absolute level is deter- mined by the size and complexity of the job and year to year perfor- mance of the individual jobholder. performance is specifically reflected in the variable components – both in an annual variable salary and in a long-term variable portion. although this may vary over time to take account of pay trends, cur- rently the target level of the annual component for top executives is 30–40 percent of the fixed salary. the long-term component is set to achieve a target of around 30 percent of the fixed salary. in both cases the variable pay is measured against the achievement of spe- cific business objectives, 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. As per December 31 2007 2006 the company’s cost for the short-term variable and the long-term Females Males Females Males Parent Company Board members and president 38% 10% Group Management Subsidiaries Board members and presidents 11% 62% 90% 31% 8% 69% 92% 89% 10% 90% Remuneration policy and remuneration to the Board of Directors and to the Group Management Remuneration Policy for Group Management the following principles for remuneration and other employment terms for Group Management were approved by the annual General Meeting 2007. variable components for the top executive group can amount to 0–125 percent of the fixed salary cost, at constant share price. The principal terms of variable schemes the annual variable salary is a cash program based on specific busi- ness targets derived from the annual business plan approved by the Board of Directors. the exact nature of the targets will vary depend- ing on the specific job but may include financial targets at either corporate level or at a specific business unit level, operational tar- gets, employee motivation targets and customer satisfaction targets. share based long-term variable plans are submitted each year for approval by the shareholders at the annual General Meeting. the payout is determined by three specific variables, the individuals’ own investment in shares, a long-term financial target at corporate level, and the share price development. 2007 Remuneration Policy for Group Management this policy covers the remuneration and other terms of employment for the Group Management team, including the president and ceo, in the following referred to as the “top executives”. remuneration of top executives in ericsson is based on the prin- ciples of performance, competitiveness and fairness. Different remu- neration elements are suited to various degrees to reflect these prin- ciples. therefore a mix of several remuneration elements is applied in order to reflect the remuneration principles in a balanced way. the top executives’ total remuneration consists of fixed salary, variable components in the form of annual variable salary and long-term variable compensation, pension and other benefits. together these elements constitute an integral remuneration pack- age. if the size of any of the elements should be increased or de- creased, at least one other element has to be decreased or increased Pension pension benefits shall follow the competitive level in the home coun- try. For top executives in sweden, the company applies a defined contribution scheme for old age pension in addition to the basic pension plans on the swedish labor market. the retirement age is normally 60 years but can be different in individual cases. Other benefits the basic principle is that other benefits, such as company car and medical schemes, shall be competitive in the local market. Additional remuneration arrangements By way of exception, additional arrangements can be made when deemed required in order to attract or retain key competences or ericsson annual report 2007 97 notes to the consolidated financial statementsnote c29 skills, or to make individuals move to new locations or positions. such additional arrangement shall be limited in time and shall not exceed a period of 36 months and two times the compensation the individual concerned would have received had no additional arrangement been made. Notice of termination and severance pay For top executives in sweden the mutual notice period is six 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. • Members of the Board, who are not employees of the company, have not received any remuneration 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, from the annual General Meeting 2007 a fee of seK 1,500 per attended Board meeting was paid to each employee representative on the Board. For Board meetings and Board committee meetings up to the annual Meeting 2007, the previous fees of seK 1,000 and seK 100 respectively for each attended meeting were paid. Remuneration to the Group Management remuneration paid to the president and ceo and other Remuneration to the Board of Directors remuneration to memBers of the Board of directors during 2007 Board emp- loyee re- member commit- presen- tative tee fee fee total 3,750,000 250,000 750,000 125,000 750,000 250,000 750,000 250,000 750,000 125,000 – 750,000 750,000 350,000 750,000 125,000 750,000 125,000 – 4,000,000 875,000 – – 1,000,000 – 1,000,000 875,000 – – 750,000 – 1,100,000 875,000 – 875,000 – – – – – – – – – – – 400 16,500 19,500 100 19,500 200 – 16,500 – 18,000 – 18,000 2,000 – – 16,900 19,600 19,700 16,500 18,000 18,000 2,000 SEK Board member Michael treschow Marcus Wallenberg sverker Martin-löf peter l. Bonfield Börje ekholm Katherine M. Hudson ulf J. Johansson nancy McKinstry anders nyrén carl-Henric svanberg Jan Hedlund Monica Bergström torbjörn nyman Karin Åberg anna Guldstrand Kristina Davidsson per lindh Total 9,750,000 1,600,700 110,000 11,460,700 social security fees Total 3,715,559 15,176,259 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 commit- tee 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 received a fee of seK 125,000 for each committee. However, the chairman of the audit committee received a fee of seK 350,000 and the other two members of the audit committee received a fee of seK 250,000 each. memBers of group management during 2007 other Members of Group president Management SEK the Total salary annual variable remuneration earned 2006 and paid 2007 long-term variable remuneration other benefits 15,472,998 45,141,977 60,614,975 8,940,002 17,958,448 26,898,450 1,399,040 52,946 3,131,011 659,612 4,530,051 712,558 Total 25,864,986 66,891,048 92,756,034 Comments to the table • the annual fixed salary for the president and ceo was adjusted from seK 14,900,000 to seK 15,200,000 from January 1, 2007. the salary amount stated in the table includes vacation salary. • the Board of Directors has appointed five executive Vice presi- dents of whom one has resigned during the year. no one of these executives has during the year acted as deputy to the president and ceo. all executive Vice presidents are included in the group “other members of Group Management”. • the group “other members of Group Management” comprises the following persons: Hans Vestberg, Kurt Jofs, Bert nordberg, Björn olsson, carl olof Blomqvist, Håkan eriksson, Marita Hellberg, Henry sténson, Joakim Westh, Jan Wäreby and Karl-Henrik sund- ström. Karl-Henrik sundström left the Group Management team on october 25, 2007, but is included for the entire year as he is fulfilling his notice period of 6 months. • “long-term variable remuneration” refers the value of matching shares received during 2007 under the stock purchase plan 2003 and under the performance share plan 2004 (the first of four quar- terly matchings). the above value of matching shares for the presi- dent and ceo corresponds to 74,220 ericsson B shares and for other members of Group Management to 164,269 ericsson B shares. the value of matching shares is based on the share price at matching. 98 ericsson annual report 2007 notes to the consolidated financial statementsnote c29 • 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 ser- vice periods within the company. Total outstanding stock options and matching rights As per December 31, 2007 Number of B shares stock option plan 2001 – May Grant stock option plan 2002 stock purchase plan 2003 (two-year), 2005 and 2006, 2007 and performance share plans 2004, 2005, 2006 and 2007 other Members of Group Management the president – – 595,000 520,000 1,153,937 2,207,712 Comments to the tables • For the definition of matching rights, see description under “long- term variable remuneration”. • the number of options presumes full exercise under applicable plans. • For strike prices for option plans, see “long-term variable remu- neration”. • the number of matching rights presumes maximum performance matching under performance share plans 2004, 2005, 2006 and 2007. Long-term variable remuneration The Stock Purchase Plan the stock purchase plan is designed to offer an incentive for all employees to participate, where practicable, in the company, which is consistent with industry practice and with our ways of working. under the plans, employees can save up to 7.5 percent (ceo 9 per- cent) of gross fixed salary, for purchase of class B shares at market price on the oMX nordic exchange stockholm or aDrs at nasDaQ (contribution shares) during a twelve-month period (contribution period). if the contribution shares are retained by the employee for three years after the investment and the employment with the erics- son Group continues during that time, the employee’s shares will be matched with a corresponding number of class B shares or aDrs free of consideration. employees in 88 countries participate in the plan. the below table shows the contribution periods and participation details for ongoing plans. remuneration costs incurred during 2007 for the president and ceo and other memBers of group management Total costs, SEK salary provisions for annual variable remuneration earned 2007 to be paid 2008 long-term variable remuneration other benefits pension premiums other Members of Group president Management the 15,472,998 45,141,977 60,614,975 1,216,000 8,781,785 9,997,785 7,281,922 52,946 8,494,555 14,325,283 659,612 26,940,453 21,607,205 712,558 35,435,008 social security fees 9,027,952 27,284,569 36,312,521 Total 41,546,373 123,133,679 164,680,051 Comments to the table • the provisions for the annual variable remuneration 2007 corre- spond to 8 percent of the fixed salary for the president and ceo and to 20.3 percent for other members of the Group Management • “long-term variable remuneration” includes the compensation cost during 2007 for share based programs, which represent Group Management’s part of total compensation costs as dis- closed under “shares for all plans”. under iFrs, a company shall recognize costs for share-based compensation plans to employees, being a measure of the value to the company of services received from the employees under the plans. • For the president and ceo and other members of Group Manage- ment 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 60 years. these pension plans are not conditional upon future employment at ericsson. in the defined contribution plan, the company pays for old age pension a contribution between 25 and 35 percent per year on salary portions in excess of 20 base amounts (during 2007, one base amount was seK 45,900) 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. During 2007, this contribution was seK 7,250,833 and the fee in the itp plan seK 1,243,722. included in the pension premiums are also changes of commitments made to the president and ceo and the other members of Group Management for benefit based tem- porary disability and survival’s pensions until retirement age. the pensionable salary consists of the annual fixed salary and the target value of the annual variable remuneration. • ericsson’s commitments for benefit-based pensions per December 31, 2007, under ias 19 amounted to seK 940,700 for the president and ceo which refers to the itp plan. For other members of Group Management the company’s commitments amounted to seK 30,012,100, of which seK 19,278,500 refers to the itp plan and the remaining seK 10,733,600 to temporary disability and sur- vival’s pensions until retirement age. ericsson annual report 2007 99 notes to the consolidated financial statementsnote c29 number of contribution participants take-up rate – % of at launch all employees Plan stock purchase plan 2003 2nd year stock purchase plan 2005 stock purchase plan 2006 stock purchase plan 2007 period august 2004 – July 2005 august 2005 – July 2006 august 2006 – July 2007 august 2007 – July 2008 15,000 16,000 17,000 19,000 30% 29% 29% 26% it should be noted that participants save each month, beginning with august payroll, towards quarterly investments. these investments (in november, February, May and august) are matched on the third anniversary of each such investment, subject to continuous employ- ment, and hence the matching spans over two financial years and two tax years. The Key Contributor Retention Plan the Key contributor retention plan is designed to give recognition for performance and potential as well as encourage retention of key employees. under the program, up to 10 percent of employees (2004: up to 4,500, 2005: up to 5,000, 2006: up to 6,040 and 2007: up to 6,300) are selected through a nominations process that identi- fies individuals according to performance, critical skills and potential. participants obtain one extra matching share in addition to the ordi- nary 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, 2006, and 2007. The Executive Performance Stock Plan the executive performance stock plan was introduced in 2004 and has been repeated 2005, 2006 and 2007. the plan is designed to focus the management on driving earnings and provide competitive remuneration. senior executives, including Group Management, are selected to obtain up to four or six extra shares (performance match- ing shares) in addition to the ordinary one matching share for each contribution share purchased under the stock purchase plan. For the 2006 and 2007 programs, the ceo is allowed to invest up to 9 per- cent of fixed salary in contribution shares and may obtain up to eight performance matching shares in addition to the stock purchase plan matching share for each contribution share.the performance match- ing is subject to the fulfillment of a performance target. the past and continued use of average annual earnings per share (eps) growth relative to challenging and stretching targets as a per- formance measure reflects the company’s ongoing strategy of add- ing shareholder value through the long-term improvement of profit- ability. Furthermore, the use of a constant and key financial performance measure alongside the inherent share price focus of the co-investment principle ensures close alignment with the long-term interests of shareholders whilst providing clear, transparent and continuous line-of-sight for participants. the remuneration commit- tee has been satisfied that the present approach remains preferable to other measures, including those that reflect relative performance, but alternative measures are considered on an ongoing basis. Plan performance share plan 20045) performance share plan 2005 performance share plan 2006 performance share plan 2007 Base year eps1) 0.69 1.34 1.53 1.77 target average annual eps growth range2) 5% to 25% or 0.76 to 1.10 3% to 15% or 1.42 to 1.78 3% to 15% or 1.62 to 2.04 5% to 15% or 1.95 to 2.36 Matching share vesting range3) Maximum opportunity as percentage of fixed salary4) 0 to 4 0 to 6 0 to 4 0 to 6 0 to 4 0 to 6 0 to 8 0.67 to 4 1 to 6 1.33 to 8 30% 45% 30% 45% 30% 45% 72% 30% 45% 72% 1) sum of four quarters up to June 30 of plan year. 2) eps range found from three-year average eps of the twelve quarters to the end of the performance period and corresponding growth targets. 3) corresponding to eps range (no performance share plan matching below this range). Matching shares per contribution share invested in addition to stock purchase plan matching according to program of up to 4, 6 or 8 matching shares. 4) at full investment, full vesting and constant share price. excludes stock purchase plan matching. 5) Fully vested in 2007, being matched in full over the quarterly three-year investment anniversaries in november 2007, February 2008, May 2008 and august 2008. it is the Board of Directors’ intention to repeat the stock purchase plan, the Key contributor retention plan and the executive performance stock plan for next year. 100 ericsson annual report 2007 notes to the consolidated financial statementsnote c29 stock option plans ongoing plans Dec 2007 stock option plan 2001 – May Grant stock option plan 2001 – november Grant 2) Grant/expiry date 14 May 01/14 May 08 exercise price1) (seK) 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 2007 15,000 7,423 900 493 12,800 5,933 Vesting period from Grant date 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 2007, the weighted average share price was seK 24.74. Shares for all plans all plans are funded with treasury stock. sale of shares is recognized directly in equity. treasury stock for all plans has been issued in a directed cash issue of class c shares at a nominal amount of seK 1, and purchased under a public offering at seK 1 per share plus a premium corresponding to the subscribers’ financing costs, and then converted to class B shares. For all plans, additional shares have been allocated for financing of social security expenses. treasury stock is sold on the oMX nordic exchange stockholm to cover the social security payments when arising due to exercise of options or matching of shares. During 2007, 2,786,761 shares were sold at an average price of seK 21.76. if all options outstanding as of December 31, 2007, 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 match- ing, approximately 283 million class B shares would be transferred, corresponding to 1.8 percent of the total number of shares outstand- ing, 15,900 million. as per December 31, 2007, 231 million class B shares were held as treasury stock. 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 2007. it also shows compensation costs charged for each plan. the total compen- sation costs charged for the long term Variable compensation plans during 2007 amount to seK 496 million. For a description of compensation costs, including accounting treatment, see note c1 – “significant accounting policies, share- based employee compensation”. ericsson annual report 2007 101 notes to the consolidated financial statementsnote c29 out- exer- cised/ originally beginning of 2007 designated 1) standing Granted matched Forfeited during 2007 during 2007 during 2007 compen- sation costs expired standing options charged end of exercis- during number of out- during 2007 2007 2) able 2007 Plan (million shares) 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 2007 stock purchase plan, Key contributor and performance Matching programs 1.4 71.6 0.7 28.4 44.9 23.6 2.6 53.9 1.3 24.7 151.7 27.0 31.5 23.6 – – – – – – – – – – 0.1 3.9 – – 1.3 0.1 0.1 11.3 1.2 0.6 0.9 31.8 5.8 19.6 0.4 0.7 35.0 – 9.9 – – – – – – – – – 0.7 28.4 – – – – 22.3 22.3 1.1 1.1 20.7 20.7 – – – – – 14.5 3) – 182 4) 22.1 3) – 178 4) 24.3 3) – 131 4) 9.9 3) – 5 4) 1) adjusted for split, bonus issue and rights offering when applicable. 2) all oustanding options in the 1999- and the Millennium stock option plan expired during 2007. 3) presuming maximum performance matching under the performance Matching program. 4) 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 the class B share at each investment date during 2007 was: February 15 seK 24.27, May 15 seK 24.05, august 15 seK 23.00 and november 15 seK 16.96. 102 ericsson annual report 2007 notes to the consolidated financial statementsnote c29 c30 related party transactions During 2007, various transactions were executed pursuant to con- tracts 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 erics- son’s handset operations was sold to seMc. as part of the formation of the joint venture, contracts were entered into between ericsson and seMc. 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. ericsson receives dividends from ericsson nikola tesla Major transactions are as follows: d.d. • 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. • Dividends. Both owners of seMc, sony corporation and erics- son, receive dividends. Related party transactions sales royalty purchases ericsson’s share of Dividends Related party balances receivables liabilities 2007 2006 3,906 1,837 333 3,949 2,486 1,478 173 1,160 932 204 479 108 ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward sony-ericsson Mobile communica- tions aB. Related party transactions sales royalty purchases Dividends Related party balances receivables liabilities 2007 2006 1,010 9 506 267 103 55 867 7 465 98 86 82 ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward ericsson nikola tesla d.d. 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 remuneration of the Group Manage- ment, see note c29, information regarding employees, members of the Board of Directors and Management. ericsson annual report 2007 103 notes to the consolidated financial statementsnote c30 c31 Fees to auditors c32 events after the Balance price- waterhouse- sheet Date coopers others Total Divestment of enterprise PBX solutions on February 18, 2008, ericsson announced the divestment of its enterprise pBX solutions business to the canadian company aastra technologies. the agreement involves transfer of approximately 630 employees of which some 360 are based in sweden. the transaction is expected to close in april 2008. ericsson’s enterprise pBX solutions business includes ip pBX, converged pBX systems and branch office solutions. sales in 2007 amounted to approximately seK 3 billion. the purchase price is seK 650 million excluding net of assets and liabilities. a capital gain of approximately seK 200 million is expected. 2007 audit fees audit related fees tax services fees other fees Total 2006 audit fees audit related fees tax services fees other fees Total 2005 audit fees audit related fees tax services fees other fees Total 102 4 13 – 119 98 14 19 1 132 58 24 43 – 7 – 12 6 25 11 – 3 3 17 9 – 2 1 109 4 25 6 144 109 14 22 4 149 67 24 45 1 125 12 137 During the period 2005–2007, in addition to audit services, pricewa- terhousecoopers provided certain audit related services and tax services to the company. the audit related services include consul- tation on financial accounting, consultation in connection with con- version to international Financial reporting standards (iFrs), ser- vices 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. KpMG are no longer auditors of the parent company (effective from the annual General Meeting (aGM) 2007). Fees to KpMG during the period 2005-2006 are included in others. 104 ericsson annual report 2007 notes to the consolidated financial statementsnote c31–c32 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 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. other factors discussed elsewhere in this report, could have adverse economic conditions could cause network operators to a material negative effect on our business, operational and postpone investments or initiate other cost-cutting initiatives to after-tax results, financial position, cash flows, liquidity, improve their financial position, which could result in significantly credit rating, reputation and/or our share price. reduced capital expenditures for network infrastructure. if operator Furthermore, our operational results may have a greater spending for network equipment and associated rollout services variability than in the past and we may have difficulties in declines substantially, our business and operating results would accurately predicting future developments. See also suffer. We have established flexibility to cost effectively accommo- “Forward-looking statements”. date fluctuations in demand. However, if demand were to fall in the Risk associated with the industry and market conditions We are subject to political, economic and regulatory risks in the various countries in which we operate. future, we may experience material adverse effects on our revenues and may even incur operating losses. if demand is significantly weaker than expected, this may have a material adverse impact on the trading price of our shares. Industry convergence between telecom, data and media We conduct business throughout the world and are subject to the represents opportunities but also risks effects of general global economic conditions as well as conditions We are affected by market conditions within the telecommunica- unique to a specific country or region. We conduct business in more tions industry. We are also affected by the convergence of the than 140 countries, with a significant proportion of our sales to telecom-, data-, and media industries, which is largely driven by emerging markets in asia pacific, latin america, eastern europe, the technological development related to ip-based communications. Middle east and africa. We expect that sales to such emerging this change impacts our addressable market, competition, and markets will be an increasing portion of total sales, as developing our objective setting and strategies, as well as the need to nations and regions around the world increase their investments in consider risks to achieve our set objectives. should we not telecommunications. We already have extensive operations in many succeed to understand the market development or acquire the of these countries, which involve certain risks, including volatility in necessary competence or develop and market products and gross domestic product, civil disturbances, economic and political solutions that are competitive in this changing market, our future instability, nationalization of private assets and the imposition of results will suffer. exchange controls. changes in regulatory requirements, tariffs and other trade Our business essentially depends upon the continued growth barriers, price or exchange controls or other governmental of mobile communications and the success of new types of policies in the countries in which we conduct business could limit services offered in broadband netrworks. our operations and make the repatriation of profits difficult. in Most of our business depends on continued growth in mobile addition, the uncertainty of the legal environment in some regions communications in terms of both number of subscriptions and usage could limit our ability to enforce our rights. We also must comply per subscriber, which in turn requires the continued deployment of with the export control regulations of the countries in which we our network systems by customers. in particular, we are dependent operate and trade embargoes in force at the time of sale. on operators in highly penetrated markets to successfully introduce although we seek to comply with all such regulations, even services that cause a substantial increase in usage for both voice and unintentional violations could have material adverse effects on data. in emerging markets, we are, to a certain extent, dependent on our business, operational results and reputation. the availability of lower-cost handsets in addition to affordable tariffs ericsson annual report 2007 105 risk factorsby operators to support a continued increase of mobile subscribers. reliance on key customers and, due to the increased size of if operators are not successful in their attempts to increase the these companies, may negatively impact our bargaining position number of subscribers and/or stimulate increased usage, our and profit margins. Moreover, if the combined companies business and operational results could be materially adversely operate in the same geographic market, networks may be shared affected. and less network equipment and associated services may be Fixed and mobile networks converge and new technologies, such as required. another possible consequence of customer consolida- ip and broadband, enable operators to deliver a range of new types tion is that it could cause a delay in their network investments of services in both fixed and mobile networks. We are dependent while they negotiate merger/acquisition agreements, secure upon the market acceptance of such services, e.g. iptV, and on the necessary approvals, or are constrained by efforts to integrate outcome of regulatory and standardization activities in this field, such the businesses. a recent development is also that network as spectrum allocation. if delays in standardization or market operators, without legal consolidation but through cooperation acceptance occur, this could adversely affect our business and agreements, share parts of their network infrastructure, which operational results. may adversely affect demand for network equipment. Changes in the regulatory environment for Consolidation among equipment and services suppliers may telecommunications systems and services could negatively lead to increased competition and a different competitive impact our business. landscape. telecommunications is a regulated industry and regulatory changes industry consolidation among equipment suppliers could potentially affect both our customers’ and our operations. For example, result in stronger competitors that are competing as end-to-end changes in regulations that impose more stringent, time-consuming suppliers as well as competitors more specialized in particular areas. or costly planning, zoning requirements or building approvals consolidation may also result in competitors with greater resources, regarding the construction of radio base stations and other network including technical and engineering resources, than we have or infrastructure could adversely affect the timing and costs of new reduce existing scale advantages for us. this could have a material network construction or expansion and the commercial launch and adverse effect on our business, operating results, and financial ultimate commercial success of these networks. similarly, tariff condition. regulations that affect the pricing of services offered by operators could also affect their ability to invest in network infrastructure, which We operate in a highly competitive industry, which is subject in turn could affect the sales of our systems and services. radio to competitive pricing and rapid technological change. frequency spectrum allocation between different types of usage may the markets for our products are highly competitive in terms of affect operator spending adversely or force us to develop new pricing, functionality and service quality, the timing of develop- products to be able to compete in such market. ment and introduction of new products and services and terms license fees, environmental, health and safety, privacy and of financing. We face intense competition from significant other regulatory changes may increase costs and restrict competitors, and chinese companies in particular, have become operations of network operators and service providers. the relatively stronger in recent years. our competitors may imple- indirect impact of such changes could affect our business ment new technologies before we do, allowing them to offer adversely even though the specific regulations may not directly more attractively priced or enhanced products, services or apply to our products or us. solutions, or may offer other incentives that we do not provide. some of our competitors may have greater resources in certain Consolidation among network operators may increase our business segments or geographic markets than we do. We may dependence on a limited number of key customers. also encounter increased competition from new market entrants, the market for mobile network equipment is highly concentrated, alternative technologies or evolving industry standards. the rapid with the 10 largest operators representing more than 40 percent of technological change also results in shorter life-cycles for the total market. network operators have undergone significant products, increasing the risk in all product investments. our consolidation, resulting also in a significant number of operators with operating results significantly depend on our ability to compete in activities in several countries. this trend is expected to continue, this market environment, in particular on our ability to introduce while also intra-country consolidation is likely to accelerate as a result new products to the market and to continuously enhance the of competitive pressure. functionality while reducing the cost of new and existing a market with fewer and larger operators will increase our products, in order to cope with the continuous price erosion that 106 ericsson annual report 2007 risk factorsis a result of the rapid technological change. Strategic and operational risks Our current and historical operations are subject to a wide range of environmental, health and safety regulations. Short-term volatility in business mix may have impact on sales and gross margins We are subject to certain environmental, health and safety laws and our sales to network operators are a mix of equipment, software and regulations that affect our operations, facilities and products in each services, which normally generate different gross margins. of the jurisdictions in which we operate. We believe that we are in compliance with all material environmental, health and safety laws and regulations related to our products, operations and business telecom network solutions are delivered in three different ways: • as initial network buildouts, including equipment, software and network rollout services, and often also significant amounts of activities. However, there is a risk that we may have to incur civil works and/or third-party products with lower gross expenditures to cover environmental and health liabilities to maintain margins than own products; compliance with current or future environmental, health and safety laws and regulations or to undertake any necessary remediation. it is • as subsequent network expansions (added geographical coverage or increased capacity) and upgrades to higher difficult to reasonably estimate the future impact of environmental functionality, where the deliverables include higher shares of matters, including potential liabilities due to a number of factors software and less rollout services and therefore normally have especially the lengthy time intervals often involved in resolving them. higher margins; and Liability claims related to and public perception of the potential health risks associated with electromagnetic fields could negatively affect our business. • as professional services, which have lower gross margins than equipment and software. as a consequence, reported gross margin in a specific period will be the mobile telecommunications industry is subject to claims that affected by the overall mix of equipment, software and services as mobile handsets and other telecommunications devices that well as the relative content of third party products.. generate electromagnetic fields expose users to health risks. at network expansions and upgrades have much shorter leadtimes for present, a substantial number of scientific studies conducted by delivery than initial network buildouts. such orders are normally various independent research bodies have indicated that electro- placed with short notice by customers, i.e. less than a month, and magnetic fields, at levels within the limits prescribed by public health consequently, variations in demand are difficult to forecast. as a authority safety standards and recommendations, cause no adverse result, changes in our product and service mix may affect our ability effects to human health. However, any perceived risk or new to forecast and may also impact our ability to detect in advance scientific findings of adverse health effects of mobile communication whether actual results will deviate from those forecasted. devices and equipment could adversely affect us through a reduction in sales. although ericsson’s products are designed to comply with Most of our business is derived from a limited number of all current safety standards and recommendations regarding customers. electromagnetic fields, we cannot assure you that we or the jointly We derive most of our business from large, multi-year network owned sony ericsson Mobile communications will not become the build-out agreements with a limited number of significant customers. subject of product liability claims or be held liable for such claims or although no single customer currently represents more than 10 be required to comply with future regulatory changes that may have percent of sales, the loss of, or a reduced role with, a key customer an adverse effect on our business. see also “legal and tax for any reason could have a significant adverse impact on sales, proceedings” in the Board of Directors’ report. profit and market share for an extended period. Some long-term frame agreements expose us to risks related to agreed future price reductions or penalties. long-term agreements are typically awarded on a competitive bidding basis. in some cases, such agreements also include commitments to future price reductions. in order to maintain the gross margin even with such lower prices, we continuously strive to reduce the costs of our products. We reduce costs through design improvements and other changes to benefit from new technical development, resulting in for example reduced component prices ericsson annual report 2007 107 risk factorsand productivity in production. However, there can be no assurance other companies and successfully integrate such technologies that our actions to reduce costs will be sufficient or timely to maintain with our products. it may be necessary in the future to seek or our gross margin in such contracts. renew licenses relating to various aspects of these products. Frame agreements often also provide for penalties and there can be no assurance that the necessary licenses would be termination rights in the event of our failure to deliver ordered available on acceptable terms, or at all. Moreover, the inclusion in products on time or if our products do not perform as promised, our products of software or other intellectual property licensed which may affect our results negatively. from third parties on a non-exclusive basis could limit our ability to protect our proprietary rights in our products. We expend significant resources on product and technology R&D which may not be successful in the market. Our products incorporate intellectual property rights (IPR) Developing new products or updating existing products and developed by us that may be difficult to protect or may be solutions requires significant levels of financial and other commit- found to infringe on the rights of others. ments to research and development, which may not always result in While we have been issued a large number of patents and other success. We are also actively engaged in the development of patent applications are currently pending, there can be no assurance technology standards that we are incorporating into our products that any of these patents will not be challenged, invalidated, or and solutions. in order to be successful, those standards must be circumvented, or that any rights granted under these patents will in accepted by relevant standardization bodies and by the industry as a fact provide competitive advantages to us. whole. our sales and earnings may suffer if we invest in development the european union recently considered placing restrictions of technologies and technology standards that do not function as on the patentability of software. although the european union expected, are not adopted in the industry or are not accepted in the ultimately rejected this proposal, we cannot guarantee that they marketplace within the timeframe we expect, or at all. will not revisit this issue in the future. We rely on many software please also see section “research and Development” in the patents, and any limitations on the patentability of software may Board of Directors’ report and in information on the company. materially affect our business. We utilize a combination of trade secrets, confidentiality We make strategic acquisitions to get access to technology, policies, non-disclosure and other contractual arrangements in competence or new markets addition to relying on patent, copyright and trademark laws to in our industry, which requires huge investments in technology protect our intellectual property rights. However, these measures and at the same time is exposed to rapid technological and may not be adequate to prevent or deter infringement or other market changes, we make strategic investments in order to misappropriation. Moreover, we may not be able to detect obtain various benefits, e.g. to reduce time to market, to gain unauthorized use or take appropriate and timely steps to access to technology and/or competence, to increase our scale establish and enforce our proprietary rights. in fact, existing laws or to broaden our product portfolio or expand our customer base. of some countries in which we conduct business offer only there are no guarantees that such acquisitions are successful or limited protection of our intellectual property rights, if at all. that we succeed in integrating the acquired entities to gain the Many key aspects of telecommunications and data network expected benefits at all or in the timeframe we expect. technology are governed by industry-wide standards, which are We enter into joint ventures, strategic alliances and third party agreements to offer complementary products and services. usable by all market participants. as the number of market entrants as well as the complexity of the technology increases, the possibility of functional overlap and inadvertent infringement of intellectual property rights also increases. third parties have if our partnering arrangements fail to perform as expected, whether asserted, and may assert in the future, claims against us alleging as a result of having incorrectly assessed our needs or the capabili- that we infringe their intellectual property rights. Defending such ties of our strategic partners, our ability to work with these partners claims may be expensive, time consuming and divert the efforts or otherwise, our ability to develop new products and solutions may of our management and/or technical personnel. as a result of be constrained and this may harm our competitive position in the litigation, we could be required to pay damages and other market. additionally, our share of any losses from, or commitments to compensation, develop non-infringing products/technology or contribute additional capital to, joint ventures may adversely affect enter into royalty or licensing agreements. However, we cannot our financial position or results of operations. be certain that any such licenses, if available at all, will be our solutions may also require us to license technologies from available to us on commercially reasonable terms. 108 ericsson annual report 2007 risk factorsAdverse resolution of litigation may harm our operating We are dependent on access to short-term and long-term results or financial condition. capital. We are a party to lawsuits in the normal course of our business. if we do not generate sufficient amounts of capital to support our litigation can be expensive, lengthy and disruptive to normal operations, service our debt, continue our research and development business operations. Moreover, the results of complex legal and customer financing programs or we cannot raise sufficient proceedings are difficult to predict. an unfavorable resolution of a amounts of capital at the times and on the terms required by us, our particular lawsuit could have a material adverse effect on our business will likely be adversely affected. access to short-term business, reputation, operating results, or financial condition. funding may decrease or become more expensive as a result of our as a publicly listed company, ericsson is exposed to class- operational and financial condition and market conditions or due to action lawsuits, in which plaintiffs allege that the company or its deterioration in our credit rating. We cannot assure you that officers have failed to comply with securities laws, stock market additional sources of funds will be available or available on reason- regulation or any other laws, regulations or requirements. able terms. Whether or not there is merit to such claims, the time and costs incurred to defend the company and its officers and the potential As a Swedish company operating globally, we have settlement or compensation to the plaintiffs may have significant substantial foreign exchange exposures. impact on our reported results and reputation. For additional With the majority of our cost base being swedish krona (seK) information regarding certain of the lawsuits in which we are denominated and a very large share of sales in currencies other than involved, see “legal and tax proceedings” in the Board of seK, and many subsidiaries outside sweden, our foreign exchange Directors’ report. We rely on a limited number of suppliers for the majority of our components and electronic manufacturing services. exposure is significant. currency exchange rate fluctuations affect our consolidated balance sheet, cash flows and income statement when foreign currencies are exchanged or translated to seK. our attempts to reduce the effect of exchange rate fluctuations through a our ability to deliver according to market demands depends in large variety of hedging activities may not be sufficient or successful, part on obtaining timely and adequate supply of materials, compo- resulting in an adverse impact on our results. nents and production capacity on competitive terms. Failure by any a stronger seK exchange rate would generally have a negative of our suppliers could interrupt our product supply and could effect on our competitiveness compared to competitors with significantly limit our sales or increase our costs. if we fail to costs denominated in other currencies. anticipate customer demand properly, an over/undersupply of components and production capacity could occur. in many cases, some of our competitors also utilize the same contract manufactur- ers, and we could be blocked from acquiring the needed compo- 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 nents or from increasing capacity if they have purchased capacity results. ahead of us. this factor could limit our ability to supply our customers our business operations rely on complex it operations and or could increase our costs. at the same time, we commit to certain communications networks which are vulnerable to damage or capacity levels or component quantities, which, if unused, will result disturbance from a variety of sources. Having outsourced a in charges for unused capacity or scrapping costs. significant portion of our it operations, we depend partly on security and reliability measures of external companies. regardless of We are dependent upon hiring and retaining highly qualified protection measures, essentially all it systems and communications employees. networks are susceptible to disruption from equipment failure, We believe that our future success depends in large part on our vandalism, computer viruses, security breaches, natural disasters, continued ability to hire, develop, motivate and retain engineers and power outages and other events. although we have assessed these other qualified personnel needed to develop successful new risks and implemented controls and selected reputable companies products, support our existing product range and provide services to for outsourced services, we cannot be sure that interruptions with our customers. competition for skilled personnel and highly qualified material adverse effects will not occur. managers in the telecommunications industry remains intense. We are continuously developing our remuneration and benefit policies as well as other measures. However, we may not be as successful at attracting and retaining such highly skilled personnel in the future. ericsson annual report 2007 109 risk factorsRisks associated with owning Ericsson shares Our share price has been and may continue to be volatile. our share price has been volatile due in part to the high volatility in the securities markets generally and for telecommunications and technology companies in particular, and in part due to the develop- ment in our market and our reported financial results, as well as statements and market speculation regarding our future prospects. Variations between our actual financial results and expectations of financial analysts and investors, as well as the timing or content of any profit warning announcements by us, may have significant impact on our share price. Factors other than our financial results that may affect our share price include, but are not limited to, a weakening of our brand name or any circumstances causing adverse effects on our reputation, announcements by our customers, competitors or ourselves regarding capital spending plans of network operators, financial difficulties for network operators for whom we have provided financing or with whom we have entered into material contracts, awards of large supply agreements or contracts for network roll-out. additional factors include but are not limited to: speculation in the press or investment community about the level of business activity or perceived growth in the market for mobile communications services and equipment; technical problems, in particular those relating to the introduction and viability of new network systems like 3G or iptV; actual or expected results of ongoing or potential litigation involving ourselves or the markets in which we operate. even though we may not be directly involved, announcements concerning bankruptcy or other similar reorganization proceedings involving, or any investiga- tions into the accounting practices of, other telecommunications companies may materially adversely affect our share price. our ability to forecast and communicate our future results in a manner consistent with investor expectations may affect the market value of our shares. Currency fluctuations may adversely affect the trading prices of our Class B shares and ADSs and the value of any distributions we make thereon. Because our shares are quoted in swedish kronor (seK) on the oMX nordic exchange stockholm (our primary stock exchange), but on nasDaQ (aDss) and the london stock exchange (class B shares) in local currencies, i.e. usD and GBp, fluctuations in exchange rates between seK and these currencies may affect the value of your investment. in addition, because we pay cash dividends in seK, fluctuations in exchange rates may affect the value of distributions if arrangements with your bank, broker or depositary, in the case of aDss, call for distributions to you in currencies other than seK. 110 ericsson annual report 2007 risk factorsparent company income statement Years ended December 31, SEK million net sales 1) cost of sales Gross margin selling expenses 2) administrative expenses operating expenses other operating income and expenses 1) 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 2007 3,236 –368 2,868 –632 –719 –1,351 2,723 4,240 13,747 –3,262 14,725 –448 183 –265 2006 1) 2,601 –285 2,316 2005 1) 2,497 –621 1,876 –206 –1,072 –1,278 2,339 3,377 12,811 –2,549 13,639 –631 543 –88 148 –796 –648 1,964 3,192 13,535 –2,700 14,027 10 –57 –47 –1,315 13,145 –1,189 12,362 –581 13,399 1) patent license fees are included in net sales from 2007, instead of in other operating income and expenses, and 2006 and 2005 have been restated accordingly. 2) selling expenses include the net effect of risk provisions for customer financing of seK 133 million in 2007 (seK 1,262 million in 2006 and seK 782 million in 2005). ericsson annual report 2007 111 parent company financial statementsparent 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 notes 2007 2006 p6 p7, p26 2,989 443 2,800 300 p8, p9 p8, p9 p8 p12 p8, p11 p5 p8 p10 p11 p11 p12 p13 p19 p19 81,406 4,466 475 18,433 751 589 358 109,910 51,124 4,469 19 16,978 1,562 403 401 78,056 84 91 42 263 25,130 278 3,160 38,891 6,717 74,565 184,475 68 366 27,099 19 5,399 43,372 10,614 87,028 165,084 112 ericsson annual report 2007 parent company financial statements 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 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 2007 2006 p14 p15 p16 p17 p18 p12 p18 p21 p12 p20 p22 p23 16,132 20 31,472 47,624 22,080 13,145 35,225 82,849 1,339 402 655 1,057 19,372 30,921 164 50,457 2,906 626 41,413 3,828 48,773 184,475 359 9,650 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 ericsson annual report 2007 113 parent company financial statements parent company statement of cash Flows Years ended December 31, SEK million Operations net income notes 2007 2006 2005 13,145 12,362 13,399 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 433 13,578 7 1,041 –155 –442 4,182 18,211 –262 6 –579 –35,918 6,189 3,053 –19 –27,530 –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 Cash flow before financing activities –9,319 31,174 12,642 Financing activities changes in current liabilities to financial institutions, net changes in current liabilities to subsidiaries proceeds from new borrowings repayment of borrowings sale of own shares and options exercised Dividends paid settled contributions from/to (-)subsidiaries other Cash flow from financing activities Net change in cash and cash investments – 1,094 11,050 – 64 –7,943 –3,324 – 941 –8,378 – –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 Cash and short-term investments, beginning of period 53,986 74,962 71,696 Cash and short-term investments, end of period p19 45,608 53,986 74,962 114 ericsson annual report 2007 parent company financial statements 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 shares 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 2007 80,611 – 80,611 62 41 –4,263 1,194 –7,943 2 – 2006 76,593 –17 76,576 58 67 –1,955 548 –7,141 –3 99 13,145 82,849 12,362 80,611 ericsson annual report 2007 115 parent company financial statementsnotes to the parent company Financial statements contents p1 significant accounting policies ......................................................................................................................................................................................................................... 117 p2 segment information ............................................................................................................................................................................................................................................... 117 p3 other operating income and expenses ......................................................................................................................................................................................................118 p4 Financial income and expenses .......................................................................................................................................................................................................................118 p5 taxes.................................................................................................................................................................................................................................................................................118 p6 intangible assets .......................................................................................................................................................................................................................................................119 p7 tangible assets ..........................................................................................................................................................................................................................................................119 p8 Financial assets ........................................................................................................................................................................................................................................................ 120 p9 investments................................................................................................................................................................................................................................................................... 121 p10 inventories .................................................................................................................................................................................................................................................................... 122 p11 trade receivables and customer Financing ............................................................................................................................................................................................. 123 p12 receivables and liabilities – subsidiary companies ........................................................................................................................................................................... 124 p13 other current receivables ................................................................................................................................................................................................................................. 124 p14 stockholders’ equity .............................................................................................................................................................................................................................................. 124 p15 untaxed reserves ................................................................................................................................................................................................................................................... 126 p16 pensions ........................................................................................................................................................................................................................................................................ 126 p17 other provisions .........................................................................................................................................................................................................................................................127 p18 interest-bearing liabilities ................................................................................................................................................................................................................................... 128 p19 Financial risk Management and Financial instruments .................................................................................................................................................................... 129 p20 other current liabilities .........................................................................................................................................................................................................................................131 p21 trade payables ........................................................................................................................................................................................................................................................... 131 p22 assets pledged as collateral ..............................................................................................................................................................................................................................131 p23 contingent liabilities ............................................................................................................................................................................................................................................... 131 p24 statement of cash Flows ......................................................................................................................................................................................................................................131 p25 leasing ........................................................................................................................................................................................................................................................................... 132 p26 tax assessment Values in sweden ............................................................................................................................................................................................................... 132 p27 information regarding employees ................................................................................................................................................................................................................. 132 p28 related party transactions ................................................................................................................................................................................................................................ 133 p29 Fees to auditors ........................................................................................................................................................................................................................................................ 133 116 ericsson annual report 2007 notes to the parent company financial statementsp1 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 2005. the amended rr32:06 (from 2007) requires the parent company to use the same accounting principles as for the Group, i.e. iFrs to the extent allowed by rr32:06. the main deviations between accounting policies adopted for the Group 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 per- formed annually and write-downs are made when permanent decline in value is established. contributions to/from subsidiaries and shareholders’ contributions are accounted for according to ura7 issued by the swedish Finan- cial reporting Board. contributions to/from swedish subsidiaries are reported directly in equity, net of taxes, as these transactions are aimed at reducing the swedish taxes. shareholders’ contributions increase the parent company’s investments. 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 for 2005 are accounted for according to the annual accounts act. the main deviations are: • short-term investments, interest and foreign exchange derivatives are carried at lowest of amortized cost and fair value. • Foreign exchange derivatives are recognized in the balance sheet at fair value to offset value changes in the hedged item. effects from foreign exchange derivatives hedging future transactions are deferred to offset the hedged transaction. interest rate derivatives hedging loans or investments are valued in the same way as the underlying transaction. • Bonds issued by 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 bal- ance December 31, 2005. restatement of opening balances has been performed. remeasured opening balances include other cur- rent receivables and liabilities, current maturities of long-term bor- rowings 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 financial statements. 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 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 institute of authorized public accountants. according to rr 32:06, 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. Critical accounting estimates and judgments please see notes to the consolidated Financial statements, note c2 – “critical accounting estimates and Judgments”. Major critical ac- counting estimates and judgments applicable to the parent company include trade and customer financing receivables and acquired intellectual property rights and other intangible assets, excluding goodwill. p2 segment information Net SaleS Western europe 1) 2) central and eastern europe, Middle east & africa asia pacific north america latin america Total 1) of which sweden 2) of which eu 2007 2006 2005 1,478 1,093 654 33 1,383 304 38 543 1,047 760 915 28 31 8 19 3,236 2,601 2,497 1,336 1,478 964 1,093 430 654 parent company net sales in sweden are mainly related to business segment Multimedia, and the remaining part of net sales are mainly related to business segment networks. ericsson annual report 2007 117 notes to the parent company financial statementsnote P1–P2 p3 other operating income p5 taxes and expenses royalties, license fees and other operating revenues subsidiary companies other net losses (–) on sales of tangible assets Total 2007 2006 2005 the following items are included in taxes: Income taxes recognized in income statement 2,058 667 2,018 323 1,728 240 –2 –2 –4 2,723 2,339 1,964 current income tax on contributions, net other current income taxes current income taxes related to prior years Deferred tax income/expense (–) Taxes 2007 2006 2005 –1,194 –259 –548 –291 1,254 –511 –49 187 124 –474 326 –1,650 –1,315 –1,189 –581 p4 Financial income and expenses Financial Income result from participations in subsidiary companies Dividends net gains on sales result from participations in JV and associated companies Dividends net gains on sales result from other securities and receivables accounted for as fixed assets Dividends other interest income and similar profit/loss items subsidiary companies other 2007 2006 2005 4,308 2,345 4,830 3,673 3,804 6,774 4,216 20 1,258 – 25 – – – 6 reconciliation of actual income tax rate to the swedish income tax rate: 2007 2006 2005 –28.0% –28.0% –28.0% tax rate in sweden current income taxes related to prior years tax effect of non-deductible expenses tax effect of non-taxable income tax effect related to write-downs of investments in subsidiary companies –2.0% 22.0% –0.8% –0.3% 0.9% 2.3% –0.9% –0.3% 20.4% 22.0% –1.2% –0.2% Taxes –9.1% –8.8% –4.2% Deferred tax balances Total 13,747 12,811 13,535 1,641 1,217 1,611 1,439 1,267 1,659 tax effects of temporary differences have resulted in deferred tax assets as follows: Deferred tax assets 2007 2006 589 403 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 –213 –222 –14 Deferred tax assets refer mainly to pensions, customer financing and intellectual property rights. –1,061 –556 –106 – – – –3 –7 – –995 –918 –75 –1,067 –652 –49 –1,115 –1,445 –13 –3,262 –2,549 –2,700 10,485 10,262 10,835 interest expenses on pension liabilities are included in the interest expenses shown above. 118 ericsson annual report 2007 notes to the parent company financial statementsnote P3–P5 p6 intangible assets PateNtS, liceNSeS, trademarkS aN d Similar rightS Accumulated acquisition costs opening balance acquisitions Closing balance Accumulated amortization opening balance amortization Closing balance Net carrying value 2007 2006 3,314 579 222 3,092 3,893 3,314 –514 –390 –904 –204 –310 –514 2,989 2,800 acquisitions for the year relate mainly to redback trademarks and 2006 relate mainly to Marconi trademarks. the useful life and amorti- zation period for the trademarks has been set to 10 years. p7 tangible assets 2007 Accumulated acquisition costs opening balance additions sales/disposals reclassifications Closing balance Accumulated depreciation opening balance Depreciation sales/disposals Closing balance Net carrying value 2006 Accumulated acquisition costs opening balance additions sales/disposals reclassifications Closing balance Accumulated depreciation opening balance Depreciation sales/disposals reclassifications Closing balance Net carrying value land and buildings other equipment and installations construction in process and advance payments 23 – –10 – 13 –2 – 2 – 13 23 – – – 23 –2 – – – –2 21 576 45 –1 91 711 –344 –111 1 –454 257 580 29 –128 95 576 –322 –92 70 – –344 232 47 217 – –91 173 – – – – 173 39 103 – –95 47 – – – – – 47 Total 646 262 –11 – 897 –346 –111 3 –454 443 642 132 –128 – 646 –324 –92 70 – –346 300 ericsson annual report 2007 119 notes to the parent company financial statementsnote P6–P7 p8 Financial assets iN veStme NtS iN SubSidiary comPaNieS, joiN t veNtureS aNd aSSociated comPaNieS opening balance acquisitions and stock issues shareholders’ contribution Write-downs reclassifications Disposals Closing balance other fiNaN cial aSSetS Accumulated acquisition costs opening balance effect of changed accounting principle, ias 39 additions Disposals/repayments/deductions reclassifications translation difference Closing balance Accumulated write-downs/allowances opening balance Write-downs/allowances Disposals/repayments/deductions reclassifications translation difference Closing balance Net carrying value subsidiary companies 2006 2007 Joint ventures 2006 2007 associated companies 2006 2007 51,124 35,463 –3,439 –1,061 – –681 53,066 538 –1,435 –556 3 –492 81,406 51,124 4,136 – – – – – 4,136 4,136 – – – – – 4,136 333 – – – – –3 330 338 – – – –3 –2 333 other investments in shares and participations 2006 2007 customer financing, non-current1) 2006 2007 other financial assets, non-current 2006 2007 28 3 453 – – – 484 –9 – – – – –9 475 24 3 1 – – – 28 –6 –3 – – – –9 19 1,765 – 646 –1,593 – –18 2,175 – 1,185 –1,502 –35 –58 800 1,765 –203 –8 160 – 2 –49 751 –944 –32 718 31 24 –203 1,562 357 114 –70 401 401 – – – –43 – – – – 358 – – – – – – – – – – – – 358 401 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. 120 ericsson annual report 2007 notes to the parent company financial statementsnote P8 p9 investments the following listing shows certain shareholdings owned directly and indirectly by the parent company as of December 31, 2007. a com- plete listing of shareholdings, prepared in accordance with the swed- ish 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 i i i ii i i ii i ii i ii i i ii type company Subsidiary companies ericsson aB i ericsson shared services aB i ericsson enterprise aB i ericsson sverige aB i netwise aB i aB aulis ii 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 telecomunicazioni s.p.a. ericsson Holding international B.V. ericsson a/s tanDBerG television asa ericsson corporatia ao ericsson aG ericsson Holding ltd. other (europe, excluding sweden) ericsson Holding ii inc. cía ericsson s.a.c.i. ericsson telecom s.a. de c.V. other (united states, latin america) teleric pty ltd. ericsson ltd. ericsson (china) company 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) ii i i i i i i i ii i i reg. no. Domicile 556056-6258 556251-3266 556090-3212 556329-5657 556404-4286 556030-9899 556326-0552 sweden sweden sweden sweden sweden sweden sweden austria Denmark Finland France Germany Hungary ireland italy the netherlands norway norway russia switzerland united Kingdom united states argentina Mexico australia china china india Malaysia singapore taiwan thailand Total Joint ventures and associated companies i i sony ericsson Mobile communications aB ericsson nikola tesla d.d. 556615-6658 sweden croatia Total percentage of ownership par value in local currency, million carrying value, seK m. 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 53 1) 100 100 100 100 100 100 – 100 12 2) 100 – 100 100 100 100 70 100 80 49 3) – 50 49 50 361 360 100 2 14 5 – 4 90 13 26 20 1,301 2 23 222 156 161 5 – 328 – 2,817 13 n/a – 20 2 65 725 2 2 240 90 – 20,645 2,216 335 102 306 6 5 983 665 216 196 524 3,884 120 15 3,151 3,200 237 8,787 5 – 4,094 217 28,881 10 1,550 61 100 2 475 147 4 1 20 17 229 – 81,406 50 65 – 4,136 330 4,466 ericsson annual report 2007 121 notes to the parent company financial statementsnote P9 ShareS owNed by Sub Sidiary comPaNieS company type Subsidiary companies i ii i i i i ii i i i i i i i i i ii i i i i i i i i i ericsson network technologies aB ericsson cables Holding aB ericsson France sas lHs telekommunikation GmbH & co. KG lM ericsson ltd. Marconi s.p.a. ericsson nederland B.V. ericsson telecommunicatie B.V. ericsson españa s.a. soluciones De Video Y comunicationes Hache s.l. ericsson telekomunikasyon a.s. ericsson ltd. ericsson canada inc. ericsson inc. ericsson ip infrastructure inc. ericsson amplified technologies inc. Drutt corporation inc. entrisphere inc. redback networks inc. ericsson servicos de telecomunicações ltda. ericsson telecommunicações s.a. ericsson australia pty. ltd. ericsson (china) communications co. ltd. nanjing ericsson panda communication co. ltd. nippon ericsson K.K. ericsson communication solutions pte ltd. reg. no. Domicile percentage of ownership 556000-0365 556044-9489 sweden sweden France Germany ireland italy the netherlands the netherlands spain spain turkey united Kingdom canada united states united states united states united states united states united states Brazil Brazil australia china china Japan singapore 100 100 100 87.5 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 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 telecomunicazioni s.p.a. 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 (thailand) ltd. p10 inventories Finished products and goods for resale Inventories 2007 2006 84 84 91 91 122 ericsson annual report 2007 notes to the parent company financial statementsnote P9–P10 moveme NtS iN allowaNceS for imPairmeNt trade receivables 2006 2007 12 – – – – 12 13 – – –1 – 12 customer financing 2006 2007 221 19 –74 –100 –2 1,495 13 –12 –1,243 –32 64 221 opening balance additions utilized reversal of excess amounts translation difference Closing balance p11 trade receivables and customer Financing credit risk management is governed on a Group level. For further information, please see note c14 and c20. trade receivables excluding associated companies and joint ventures allowances for impairment trade receivables, net trade receivables related to associated companies and joint ventures Trade receivables, total customer finance credits allowances for impairment customer finance credits, net age aNalySiS aS Per december 31, 2007 2007 2006 54 –12 42 – 42 52 –12 40 28 68 1,078 –64 2,149 –221 1,014 1,928 of which neither impaired nor past due amount of which impaired not past due of which past due in the following time intervals less than 90 days 90 days or more of which past due and impaired in the following time intervals less than 90 days 90 days or more trade receivables excluding associated companies and joint ventures allowances for impairment of receivables customer finance credits allowances for impairment of customer finance credits 54 –12 1,078 –64 34 796 263 –46 6 1 2 – – 1 –1 12 –12 17 –17 age aNalySiS aS Per december 31, 2006 of which neither impaired nor past due amount of which impaired not past due of which past due in the following time intervals less than 90 days 90 days or more of which past due and impaired in the following time intervals less than 90 days 90 days or more trade receivables excluding associated companies and joint ventures allowances for impairment of receivables customer finance credits allowances for impairment of customer finance credits 52 –12 2,149 –221 17 1,431 646 –158 11 1 12 8 – 31 –31 12 –12 32 –32 ericsson annual report 2007 123 notes to the parent company financial statementsnote P11 outSta NdiN g cuStomer fiN aNce creditS on-balance sheet credits off-balance sheet credits Total credits accrued interest less third-party risk coverage Parent Company’s risk exposure on-balance sheet credits, net carrying value of which short term 2007 2006 1,078 185 2,149 211 1,263 2,360 6 –163 28 –275 1,106 2,113 1,014 263 1,928 366 credit commitments for customer financing 988 1,075 p12 receivables and liabilities – subsidiary companies p13 other current receivables receivables from associated companies and joint ventures prepaid expenses accrued revenues Derivatives with a positive value other Total 2007 2006 874 703 418 850 315 65 575 416 3,789 554 3,160 5,399 p14 stockholders’ equity Capital stock 2007 capital stock at December 31, 2007, consisted of the following: payment due by period >5 years 1–5 years < 1 year 2007 total total 2006 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). 18,433 6,703 11,730 16,978 908 908 24,222 24,222 25,130 25,130 614 26,485 27,099 30,921 30,921 32,369 678 678 40,735 40,735 41,413 41,413 236 35,025 35,261 Non-current receivables 1) Financial receivables Current receivables trade receivables Financial receivables Total Non-current liabilities 1) Financial liabilities Current liabilities trade payables Financial liabilities Total 1) including non interest-bearing receivables and liabilities, net, amounting to seK –20,959 million (seK –33,457 million in 2006). interest-free transactions involving current receivables and liabilities may also arise at times. 124 ericsson annual report 2007 notes to the parent company financial statementsnote P12–P13 chaNge S iN StockholderS ’ equit y revalua- capital stock tion statutory restricted equity reserve reserve Total Disposi- tion reserve Fair value other Non- retained restricted equity reserves earnings Total 2007 January 1, 2007 Revaluation of other investments in shares Fair value measurement reported in equity tax on items reported directly in equity sale of own shares stock purchase and stock option plans contributions from/to (–) subsidiary companies tax on contribution Dividends paid net income 2007 December 31, 2007 2006 January 1, 2006 effect of changed accounting principle, ias 39, net 1) Adjusted opening balance sale of own shares 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 net income 2006 December 31, 2006 16,132 20 31,472 47,624 100 2 32,885 32,987 80,611 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16,132 20 31,472 47,624 100 3 –1 – – – – – – 4 – – 62 41 3 –1 62 41 3 –1 62 41 –4,263 1,194 –7,943 –4,263 –4,263 1,194 –7,943 –7,943 1,194 13,145 13,145 13,145 35,121 35,225 82,849 16,132 20 31,472 47,624 100 – 28,869 28,969 76,593 – 16,132 – – – 20 – – – – 31,472 – – 47,624 – – – – – – – – – – – – – – – – – – – – – – – – – – – 100 – – – – – –94 –94 – – 77 –17 –17 28,946 58 67 28,952 76,576 58 67 58 67 – – – –1,955 548 –7,141 –1,955 –1,955 548 –7,141 548 –7,141 – –3 – – 99 – 2 – – –3 –3 99 99 12,362 12,362 12,362 32,885 32,987 80,611 16,132 20 31,472 47,624 100 1) 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. ericsson annual report 2007 125 notes to the parent company financial statementsnote P14 p15 untaxed reserves 2007 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 Jan. 1 634 –1 633 441 441 1,074 additions/ withdrawals (–) Dec. 31 434 14 448 –183 –183 265 1,068 13 1,081 258 258 1,339 change in depreciation in excess of plan of intangible assets relates mainly to Marconi and redback trademarks. changes in other untaxed reserves related to withdrawal from reserve for doubtful receivables, seK 543 million in 2006. Deferred tax liability on untaxed reserves, not accounted for in deferred taxes, amounts to seK 375 million (seK 301 million in 2006). p16 pensions the parent company has two types of pension plans: • Defined contribution plans: post-employment benefit plans where the parent company pays fixed contributions into separate entities and has no legal or constructive obligation to pay further contribu- tions 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 ben- efits that the employee will receive on or after retirement. the FpG/ pri plan for the parent company is partly funded. pension obliga- tions are calculated annually, on the balance sheet date, based on actuarial principles. PeNSioN obligatioN – defiNed beNefit PlaNS Opening balance current service cost interest cost pensions payments closing balance pension obligation 1) of which funded Total 2007 2006 896 35 36 –55 912 –510 402 864 52 34 –54 896 –477 419 chaN ge iN PlaN aSSetS Opening balance plan assets return on plan assets Closing balance plan assets reclassification return on plan assets not accounted for Closing balance reported in provision for pension 2007 2006 592 21 613 553 39 592 –103 –104 – –11 510 477 in 2005, seK 524 million was transferred into the swedish pension trust, of which seK 103 (104) million is accounted for as prepaid expense. 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 pen- sion trust. return on plan assets for 2007 is 3.5 (7.1) percent. 69 (74) percent of plan assets are invested in interest-bearing securities and 31(26) percent in shares. amouNt recogNized iN the balaNce Sheet 1) including FpG/pri obligation of seK 515 million (seK 479 million) which is 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 is increased by 4.0 percent. Weighted average life expectancy after the age of 65 is 24 years for women and 21 years for men. closing balance pension obligation less fair value of plan assets excess from plan assets not accounted for excess from plan assets reclassified Closing balance provision for pensions 2007 2006 912 –613 – 103 402 896 –592 11 104 419 126 ericsson annual report 2007 notes to the parent company financial statementsnote P15–P16 total PeNSioN coSt recogNized iN the iNcome StatemeNt 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 p17 other provisions 2007 2006 35 36 –32 39 98 98 – 26 –24 139 52 34 –28 58 95 95 – 35 –1 187 2007 opening balance additions costs incurred reversal of excess amounts Closing balance 2006 opening balance additions costs incurred reversal of excess amount Closing balance Warranty commitments restruc- turing customer financing other total other provisions 1) 1 – – – 1 1 – – – 1 228 20 –61 –73 114 763 44 –433 –146 228 188 – – –11 177 310 – – –122 188 778 21 –62 –374 363 317 639 –3 –175 778 1,195 41 –123 –458 655 1,391 683 –436 –443 1,195 1) of which seK 208 million (seK 161 million in 2006) are expected to be utilized within one year. ericsson annual report 2007 127 notes to the parent company financial statementsnote P16–P17 p18 interest-Bearing liabilities the parent company’s outstanding interest-bearing liabilities, ex- cluding liabilities to subsidiaries, were seK 22.3 billion as per Decem- ber 31, 2007. iNtereSt-beariN g liabilitieS Borrowings, current current maturities of long-term borrowings Total current borrowings Borrowings, non-current notes and bond loans other borrowings, non-current Total non-current interest- bearing liabilities 2007 2006 2,906 2,906 – 1) – 19,372 11,204 1) – – 19,372 11,204 Total interest-bearing liabilities 22,278 11,204 1) including effect of changed accounting principle, ias 39, as per January 1, 2006. current maturities of long-term borrowings seK 79 million and notes and bond loans seK 468 million. NoteS aNd boNd loaNS Issued-maturing 1999–2009 2001–2008 2003–2010 2004–2012 2007–2012 2007–2012 2007–2017 2007–2014 Total nominal amount 483 226 1) 471 2) 450 1,000 2,000 500 375 coupon 6.500% 7.375% 6.750% 3.935% 5.100% 3.710% 5.380% 4.459% currency usD GBp eur seK seK seK eur eur Book value (seK m.) 3,166 3) 2,898 3) 4,462 3) 450 1,002 3) 2,000 4,757 3) 3,543 22,278 Maturity date (yy-mm-dd) 09-05-20 08-06-05 10-11-28 12-12-07 4) 12-06-29 12-06-29 5) 17-06-27 14-06-27 6) unrealized hedge gain/loss (incl. in book value) –61 8 –14 –4 –65 –136 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 can not 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 reprising date 2008-06-09. 5) contractual reprising date 2008-03-29. 6) contractual reprising date 2008-03-27. 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 5.48 percent at December 31, 2007. these bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipu- lated in ias 39. in June 2007, ericsson successfully placed a bond issuance. the transaction comprised a eur 875 million dual-tranche eurobond, consisting of a eur 375 million seven-year floating rate note and a eur 500 million ten-year fixed rate note, as well as a seK 3 billion five-year note. the bond issues will materially lengthen ericsson’s average debt maturity profile. ericsson last accessed the eurobond market in 2004. 128 ericsson annual report 2007 notes to the parent company financial statementsnote P18 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. outStaN diNg derivativeS Currency 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 Total currency derivatives 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 maturity more than five years Total interest rate derivatives (of which included in Fair value hedge relations) Total outstanding derivatives (of which internal counterparts) currency nominal currency usD eur other usD eur other 1,129 381 1,047 1,027 eur – eur noK seK usD GBp other seK GBp noK eur usD other eur usD seK seK eur 1,500 10,120 24,157 – 276 30,823 – 9 1,112 483 107 – 2,000 1,305 526 2007 asset seK 805 35 127 967 131 13 1 145 – – 1,112 16 42 21 1 114 – 194 24 – 26 13 163 226 5 – 27 32 5 179 184 636 1) 478 1,748 801 liability seK nominal currency 5,229 2,060 453 1,043 471 260 24,289 42,820 226 25,275 483 434 50 – 1,428 1,337 422 149 1,908 11 78 –10 2) 79 – – 1,987 15 7 30 1 1 – 54 21 – 18 14 – 3 56 4 – –1 2) 3 3 – 3 116 2,103 953 2006 asset seK 2,269 371 469 3,109 63 91 58 212 17 17 3,338 – 12 119 – – – 131 115 43 180 5 343 94 6 – 100 9 liability seK 2,402 286 291 2,979 29 – 9 38 – – 3,017 2 23 63 – – 4 92 – –2 2) 8 6 12 – – – – 11 9 583 1) 385 3,921 16 11 115 3,132 2,258 1) of which 96 million is reported as non-current assets for 2007 and 116 million for 2006 2) negative amounts relate to effect from one exposure of a derivative that is positive/negative while the total effect of the derivative is the opposite. ericsson annual report 2007 129 notes to the parent company financial statementsnote P19 caSh, caSh equivaleN tS aNd Short-term iNveStmeNt S fuNdiN g ProgramS amount utilized unutilized SEK billion Bank deposits type of issuer/ counterpart Governments Banks corporations Mortgage institutes liquidity funds remaining time to maturity > 5 < 3 months 1–5 < 1 year years years 2007 2006 6.7 – – – 6.7 10.6 – 11.3 0.1 0.2 – 7.8 6.5 1.7 1.4 – 4.0 2.7 2.1 0.1 – 1.0 12.8 6.2 0 20.5 27.7 6.2 3.9 – 2.2 1.7 – 1.1 – – Total 18.3 17.4 8.9 1.0 45.6 54.0 the instruments are classified as held for trading and are therefore short-term investments. During 2007, cash and bank and short-term investments de- creased by seK 8.4 billion to seK 45.6 billion mainly due to invest- ments in companies. re PaymeNt Schedule of loNg-term borrowi Ng S nominal amount SEK billion 2008 2009 2010 2011 2012 2013 and later Total current maturities of long- term debt notes and bonds (non-current) 2.9 – 3.1 4.5 – 3.5 8.2 Total 2.9 3.1 4.5 – 3.5 8.2 2.9 19.3 22.2 Debt financing is mainly carried out through borrowing in the swedish and international debt capital markets. fiNaN cial iNStrumeNtS carryiNg amouNt 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 3,051 1,949 1,500 5,000 2,000 273 – – – – 1,500 5,000 2,000 273 on July 16, 2007, ericsson entered into a usD 2.0 billion long-term committed credit facility agreement. the usD 2.0 billion facility re- places the previous usD 1.0 billion facility. the new facility does not have interest rates linked to credit rating or financial covenants. Both Moody’s credit rating agency and standard & poor’s (s&p) raised ericsson’s credit rating during 2007. at year-end, their ratings of ericsson’s creditworthiness were Baa1 (Baa2) for Moody’s and BBB+ (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 and loss had a net gain of seK 164 million. For further information about valuation principles, please see note c1, “significant account- ing policies”. receiv- ables trade short- term invest- p11 ments cash and cash equiva- lents receiva- ables and liabilities subsidia- ries p12 29.0 9.8 1.1 –0.1 42.7 Borrow- ings p18 trade payables p21 Financial assets p8 other current receiva- bles p13 other current liabilities p20 0.1 0.5 0.8 0.8 –1.1 2007 2006 44.2 29.1 38.5 44.6 0.5 – SEK billion assets at fair value through profit or loss loans and receivables available for sale assets Financial liabilities at amortized cost Total 1.1 29.0 9.8 –28.8 –22.3 –71.4 –22.3 –0.6 –0.6 0.6 1.6 –1.1 –10.7 28.8 –94.3 –44.5 130 ericsson annual report 2007 notes to the parent company financial statementsnote P19 fiNaN cial iNStrumeNtS carried at other thaN fair value SEK billion current maturities of long-term borrowings notes and bonds carrying amount 2006 2007 Fair value 2006 2007 2.9 19.4 22,3 – 11.2 11.2 3.1 19.4 22.5 – 11.7 11.7 Financial instruments excluded from the tables, such as trade receiv- ables and payables, are carried at amortized cost which is deemed to be equal to fair value. When a market price is not readily available and there is insignificant interest rate exposure affecting the value, the carrying value is considered to represent a reasonable estimate of a fair value. p20 other current liabilities 2007 2006 7 445 7 306 237 296 818 1,007 1,151 163 202 201 874 411 3,828 2,297 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 p21 trade payables trade payables excluding associated companies and joint ventures Total all trade payables fall due within 90 days. p22 assets pledged as collateral Bank deposits Total 2007 2006 359 359 277 277 the major item in bank deposits is the internal bank’s clearing and settlement commitments of seK 229 million (seK 162 million in 2006). p23 contingent liabilities Total contingent liabilities 2007 2006 9,650 7,670 contingent liabilities include pension commitments of seK 8,199 million (seK 6,909 million in 2006), and subsidiary companies’ bor- rowing from financial institutions of seK 18 million (seK 51 million in 2006). 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 2007 was seK 16,312 million (seK 16,027 million in 2006). potential pay- ments due under these bonds are related to ericsson’s performance under applicable contracts. p24 statement of cash Flows interest paid in 2007 was seK 1,977 million (seK 1,887 million in 2006 and seK 3,215 million in 2005) and interest received was seK 3,066 million (seK 3,123 million in 2006 and seK 3,151 million in 2005). income taxes paid were seK 559 million (seK 364 million in 2006 and seK 65 million in 2005). 2007 2006 Major non-cash items in investments are: investments in shares and other investments of seK 3,214 million in 2005. 626 626 509 509 ericsson annual report 2007 131 notes to the parent company financial statementsnote P20–P24 adjuStmeNtS to recoNcile Net iNcome to caSh 2007 2006 2005 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 111 111 389 389 500 756 92 92 310 310 402 825 97 97 22 22 119 516 –1,088 –2,889 –6,643 265 – 88 – 47 –5 Total adjustments to reconcile net income to cash 433 –1,574 –5,966 p25 leasing Leasing with the Parent Company as lessee at December 31, 2007, future payment obligations for leases were distributed as follows: 2008 2009 2010 2011 2012 2013 2014 and later operating leases 1,192 935 817 619 476 946 – 4,985 Leasing with the Parent Company as lessor at December 31, 2007, future minimum payment receivables were distributed as follows: 2008 2009 2010 2011 2012 2013 and later operating leases 34 9 8 8 – – 59 the operating lease income is mainly income from sublease of prop- erty. p26 tax assessment Values in sweden land and land improvements Total 2007 2006 8 8 11 11 p27 information regarding employees average Number of emPloyeeS Western europe 1) 2) central and eastern europe, Middle east and africa Total 2007 2006 Men Women total Men Women total 294 173 313 165 140 129 104 277 9 113 520 17 537 149 426 685 146 831 1) of which sweden 173 2) of which eu 173 140 140 313 313 165 165 129 129 294 294 abSeNce due to illNeSS percent of working hours absence due to illness for men absence due to illness for women employees 30–49 years old employees 50 years or older 2007 2006 0% 2% 1% 1% 0% 2% 1% 1% long-term absence due to illness total 1) 0.5% 0.4% 1) Defined as absence during a consecutive period of time of 60 days or more. Remuneration wageS aN d SalarieS aN d Social Securit y exP eNSeS Wages and salaries social security expenses of which pension costs 2007 2006 431 253 139 570 264 187 wageS aN d SalarieS Per geograP hical area Western europe 1) 2) central and eastern europe, Middle east and africa 2) Total 2007 2006 315 350 113 428 220 570 1) of which sweden 2) of which eu remuneration in foreign currency has been translated to seK at average exchange rates for the year. 315 315 350 350 132 ericsson annual report 2007 notes to the parent company financial statementsnote P24–P27 Compensation policies and remuneration to the Board of Directors and the President and CEO see notes to the consolidated Financial statements, note c28 – “in- formation regarding employees, Members of the Board of Directors and Management”. Other related parties For information regarding the remuneration of management, see note c29 to the consolidated financial statements, “information regarding employees, members of the Board of Directors and Management”. p29 Fees to auditors Long term incentive plans The Stock Purchase Plan compensation costs for all employees of the parent company amounted to seK 14.5 million in 2007 (seK 17.1 million in 2006). p28 related party transactions During 2007, various transactions were executed pursuant to con- tracts 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 com- pany and seMc. For the parent company, the transactions are royalty and license fees for seMc’s usage of trademarks and patents and received dividends. 2007 audit fees audit related fees tax services fees Total 2006 audit fees audit related fees tax services fees other fees Total 2005 audit fees audit related fees tax services fees Total price- waterhouse- coopers others Total 37 3 – 40 41 8 1 1 51 21 18 1 40 – – – – 2 – – – 2 2 – – 2 37 3 – 40 43 8 1 1 53 23 18 1 42 Related party transactions sales royalty Dividends Related party balances receivables liabilities Ericsson Nikola Tesla d.d. 2007 2006 1,202 1,837 3,949 959 519 1,160 871 – 70 1 During the period 2005–2007, in addition to audit services, pricewa- terhousecoopers provided certain audit related services and tax services to the parent company. the audit related services include consultation on financial accounting and services related to acquisi- tions. the tax services include general tax advice. KpMG are no longer auditors of the parent company (effective from the annual General Meeting (aGM) 2007). Fees to KpMG during the period 2005–2006 are included in others. ericsson nikola tesla d.d. is a joint stock company for manufacturing and sales 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. Related party transactions royalty Dividends 2007 2006 9 267 7 98 ericsson annual report 2007 133 notes to the parent company financial statementsnote P28–P29 auditors’ report To the Annual General Meeting of the shareholders annual accounts and the consolidated accounts. as a basis for of Telefonaktiebolaget LM Ericsson (publ), Corporate our opinion concerning discharge from liability, we examined identity number 556016-0680 significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to We have audited the annual accounts, the consolidated the company of any Board Member or the president and ceo. accounts, the accounting records and the administration of the We also examined whether any Board Member or the president Board of Directors and the president and ceo of telefonaktiebo- and ceo has, in any other way, acted in contravention of the laget lM ericsson (publ) for the year 2007. (the company’s companies act, the annual accounts act or the articles of annual accounts are included in the printed version on pages association. We believe that our audit provides a reasonable 26–133). the Board of Directors and the president and ceo are basis for our opinion set out below. responsible for these accounts and the administration of the the annual accounts have been prepared in accordance with company as well as for the application of the annual accounts the annual accounts act and give a true and fair view of the act when preparing the annual accounts and the application of company’s financial position and results of operations in international financial reporting standards iFrss as adopted by accordance with generally accepted accounting principles in the eu and the annual accounts act when preparing the sweden. the consolidated accounts have been prepared in consolidated accounts. our responsibility is to express an accordance with international financial reporting standards, opinion on the annual accounts, the consolidated accounts and iFrss, as adopted by the eu and the annual accounts act and the administration based on our audit. give a true and fair view of the group’s financial position and We conducted our audit in accordance with generally results of operations. the Board of Directors’ report is consistent accepted auditing standards in sweden. those standards with the other parts of the annual accounts and the consolidated require that we plan and perform the audit to obtain reasonable accounts. assurance that the annual accounts and the consolidated We recommend to the annual general meeting of share holders accounts are free of material misstatement. an audit includes that the income statements and balance sheets of the parent examining, on a test basis, evidence supporting the amounts and company and the Group be adopted, that the profit of the parent disclosures in the accounts. an audit also includes assessing the company be dealt with in accordance with the proposal in the accounting principles used and their application by the Board of Board of Directors’ report and that the members of the Board of Directors and the president and ceo and significant estimates Directors and the president and ceo be discharged from liability made by the Board of Directors and the president and ceo when for the financial year. preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of information in the stockholm, February 22, 2008 Bo Hjalmarsson Authorized Public Accountant PricewaterhouseCoopers AB Lead Partner peter clemedtson Authorized Public Accountant PricewaterhouseCoopers AB 134 ericsson annual report 2007 auditors’ report share information Stock exchange trading Share price trend ericsson’s class a and class B shares are traded on oMX in 2007, ericsson’s total market value decreased by about 45 nordic exchange stockholm and the class B shares are also percent to approximately seK 245 billion (seK 446 billion in traded on the london stock exchange. 2006). the oMX sp index on oMX nordic exchange stockholm in the united states, the class B shares are traded on decreased by 6 percent, the nasDaQ telecom index increased nasDaQ in the form of american Depositary shares (aDs) by approximately 9 percent and the nasDaQ composite index evidenced by american Depositary receipts (aDr) under the increased by approximately 10 percent in 2007. symbol eric. each aDs represents 10 class B shares. approximately 44 (40) billion shares were traded in 2007, of which about 83 (88) percent on oMX nordic exchange stock- holm, about 16 (12) percent on nasDaQ, and less than 1 (1) percent on the london stock exchange. trading volume in ericsson shares increased by approximately 3 percent on oMX nordic exchange stockholm and increased by approximately 51 percent on nasDaQ as compared to 2006. Share data earnings per share, diluted (seK) 1) operating income per share (seK) 1) cash flow from operating activities per share (seK) 1) stockholders´ equity per share (seK) 1) p/e ratio (%), class B shares 1) Dividend per share (seK) 2) 1)For 2004 restated in accordance with iFrs. 2)For 2007 as proposed by the Board of Directors. 2007 2006 2005 2004 1.37 1.90 1.19 8.44 11 0.50 1.65 2.22 1.15 7.56 17 0.50 1.53 2.05 1.03 6.41 18 0.45 1.11 1.66 1.39 5.08 19 0.25 2003 –0.69 –0.70 1.42 3.82 – 0 Share trend, omx nordic exchange Stockholm, Share turnover 2007 (million ShareS) 2005 –2007 (Sek) 40 35 30 25 20 15 10 2005 2006 2007 source: Findata Direkt B share, SEK OMX SP Index 8,000 6,000 4,000 2,000 0 nasDaQ oMX nordic exchange stockholm Jan Feb Mar apr May Jun Jul aug sep oct nov Dec ericsson annual report 2007 135 share information Share priceS on omx nordic exchange Stockholm (SEK) class a at last day of trading class a high for year (Jan 17, 2007) class a low for year (november 21, 2007) class B at last day of trading class B high for year (Jan 17, 2007) class B low for year (november 21, 2007) 2007 15.36 29.70 14.60 15.18 29.90 14.53 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 Offer and listing details on OMX Nordic Exchange Stockholm and NASDAQ foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to swedish institutions. Principal trading market – OMX Nordic Exchange oMX nordic exchange stockholm publishes a daily official Stockholm share prices price list of shares which includes the volume of recorded transactions in each listed stock, together with the prices of the the tables above and below state the high and low sales prices highest and lowest recorded trades of the day. the official price for our class a and class B shares as reported by oMX nordic list of shares reflects price and volume information for trades exchange stockholm for the last five years. the equity securities completed by the members. listed on the oMX nordic exchange stockholm official price list of shares currently comprise the shares of 274 companies. Host market NASDAQ ADS Prices trading on the exchange generally continues until 5:30 p.m. the table below states the high and low sales prices quoted for (cet) each business day. in addition to official trading on the our aDss on nasDaQ for the last five years. the nasDaQ exchange, there is also trading off the exchange during official quotations represent prices between dealers, not including retail trading hours and also after 5:30 p.m. (cet). trading on the mark-ups, markdowns or commissions, and do not necessarily exchange tends to involve a higher percentage of retail clients, represent actual transactions. while trading off the exchange often involves larger swedish the annual high and low market prices on these markets are institutions, banks arbitraging between the swedish market and shown in the table “annual high and low market prices” below. annual high and low market price S period 2003 2004 2005 2006 2007 1)one aDs = 10 class B shares. oMX nordic exchange stockholm seK per class a share low High seK per class B share low High 16.80 26.10 28.70 30.90 29.70 5.55 14.00 19.80 20.90 14.60 14.60 24.50 29.00 31.00 29.90 4.11 12.70 19.40 20.90 14.53 nasDaQ usD per aDs 1) low 5.20 17.93 27.78 28.88 22.23 High 18.85 34.57 37.19 41.14 43.41 136 ericsson annual report 2007 share information the table below states the high and low sales prices for each quarter of 2006 and 2007. Quarterly high and low market priceS period 2006 First Quarter second Quarter third Quarter Fourth Quarter 2007 First Quarter second Quarter third Quarter Fourth Quarter 1)one aDs = 10 class B shares oMX nordic exchange stockholm seK per class a share low High seK per class B share low High nasDaQ usD per aDs 1) low High 30.90 29.90 25.70 28.45 29.70 27.86 28.40 26.80 25.80 20.90 21.00 24.80 23.95 24.85 23.54 14.60 31.00 30.00 25.80 28.60 29.90 28.06 28.74 27.04 25.60 20.90 20.90 24.85 23.80 25.00 23.64 14.53 39.37 39.28 35.35 41.14 42.13 40.52 43.41 41.96 33.63 28.88 29.13 33.95 33.94 36.10 33.66 22.23 the table below states the high and low sales prices for each of the last six months (august 2007 to January 2008). monthly high and low market priceS period august 2007 september 2007 october 2007 november 2007 December 2007 January 2008 1)one aDs = 10 class B shares Share capital oMX nordic exchange stockholm seK per class a share low High seK per class B share low High 26.10 26.84 26.80 19.46 16.68 15.90 23.54 24.20 18.30 14.60 14.95 13.60 26.26 27.00 27.04 19.48 16.56 15.78 23.64 24.38 18.20 14.53 14.77 13.40 nasDaQ usD per aDs 1) low 33.66 35.94 28.22 23.00 22.23 20.37 High 38.92 40.79 41.96 30.55 25.75 24.56 vote, and 14,823,478,760 (14,823,478,760) class B shares, each as of December 31, 2007, ericsson’s share capital was seK carrying one-tenth of one vote. as of December 31, 2007, 16,132,258,678 (16,132,258,678) represented by 16,132,258,678 ericsson held 231,991,543 class B shares as treasury shares. (16,132,258,678) shares. the par value of each share is seK 1.00. there have been no share repurchases by ericsson during as of December 31, 2007, the shares were divided into 2007. 1,308,779,918 (1,308,779,918) class a shares, each carrying one changeS in number of ShareS and capital Stock 2003 –2007 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) number of shares capital stock 158,000,000 16,132,258,678 16,132,258,678 16,132,258,678 16,132,258,678 158,000,000 16,132,258,678 16,132,258,678 16,132,258,678 16,132,258,678 2007 December 31 (no changes) 16,132,258,678 16,132,258,678 ericsson annual report 2007 137 share information Shareholders ten largeSt countrieS of ownerShip as of December 31, 2007, we had 760,949 shareholders registered at Vpc aB (the swedish securities register center), of which 1,517 holders with a us address. according to information provided by citibank, there were 144,025,238 aDss outstanding as of December 31, 2007, and 5,461 registered holders of such aDss. a significant number of the aDss are held of record by banks, brokers and/or nominees for the accounts of their customers. as of December 31, 2007, banks, brokers and/or nominees held aDss on behalf of 300,568 accounts. according to information known at year-end 2007, approxi- mately 80 percent of our class a and class B shares were percent of capital sweden united states united Kingdom luxembourg switzerland France netherlands Denmark norway Belgium other countries owned by institutions, swedish and international. source: sis Ägarservice aB the following table sets forth share information, as of December 31, 2007, with respect to our largest shareholders registered at Vpc aB and known by us, ranked by percentage of voting rights: largeSt ShareholderS by voting rightS december 31, 2007 as of December 31, 2006 2007 46.1% 32.3% 6.7% 3.9% 1.9% 1.3% 1.1% 1.0% 0.7% – 0.5% 4.5% 50.0% 27.1% 6.8% 3.9% 1.9% 1.4% 1.1% 0.9% 1.3% 5.6% Identity of person or group 1) investor aB industrivärden sHB pensionsstiftelse livförs,aB skandia pensionskassan sHB Förs.fören, swedbank robur fonder sHB/spp fonder seB trygg Försäkring alecta aMF pension tredje ap-fonden seB fonder sHB personalstiftelse Första ap-fonden nordea fonder Fjärde ap-fonden oktogonen andra ap-fonden number of class a shares 513,320,192 372,000,000 83,903,000 71,440,966 63,360,000 7,435,973 12,045 23,224,095 19,509,672 4,763,682 12,345,095 2,673,549 20,000,000 7,472,938 1,498,674 2,519,655 12,903,000 percentage of total class a shares 39.22 28.42 6.41 5.46 4.84 0.57 0.01 1.77 1.49 0.36 0.94 0.20 1.53 0.57 0.11 0.19 0.99 number of class B shares 307,073,324 10,000,000 percentage of total class B shares 2.07 0.07 54,499,272 391,698,721 302,112,446 57,165,000 63,228,420 201,000,000 112,984,743 192,175,139 120,898,211 140,903,485 124,115,522 124,137,880 0.37 2.64 2.04 0.39 0.43 1.36 0.76 1.30 0.82 0.95 0.84 0.84 Voting rights percent 19.49 13.36 3.01 2.75 2.27 1.67 1.08 1.04 0.93 0.89 0.85 0.78 0.72 0.70 0.56 0.53 0.46 0.44 percentage of capital 5.09 2.37 0.52 0.78 0.39 2.47 1.87 0.50 0.51 1.28 0.78 1.21 0.12 0.80 0.88 0.78 0.08 0.77 Foreign owners 2) 14,939,320 1.14 8,676,142,384 58.53 31.62 53.87 of which: Brandes investment partners, l.l.c. oppenheimer Funds inc. Baillie Gifford & co. ltd. Barclays Fidelity 481,616,029 439,521,640 191,885,219 188,349,187 136,740,145 others Total 1) sources: sis Ägarservice aB and Vpc aB, December 31, 2007 and capital precision, December 2007. 2) including nats cumco as nominee: 1 403 970 581 class B shares. 3,945,344,213 100% 14,823,478,760 75,458,062 1,308,779,918 5.78 3.25 2.97 1.29 1.27 0.92 26.59 100% 1.73 1.57 0.69 0.67 0.49 16.85 100% 2.99 2.72 1.19 1.17 0.85 24.93 100% 138 ericsson annual report 2007 share information 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, 2005, 2006 and 2007. Person or group (percent) investor aB aB industrivärden svenska Handelsbankens pensionsstiftelse livförsäkrings aB skandia pensionskassan sHB Försäkringsförening swedbank robur Fonder sHB/spp Fonder seB trygg Försäkring alecta aMF pension tredje ap-fonden seB fonder svenska Handelsbankens personalstiftelse Första ap-fonden nordea Fonder Fjärde ap-fonden oktogonen andra ap-fonden Foreign owners of which: Brandes investment partners, l.l.c. oppenheimer Funds inc. Baillie Gifford & co. ltd. Barclays Fidelity class a shares 39.22 28.42 6.41 5.46 4.84 0.57 0.01 1.77 1.49 0.36 0.94 0.20 1.53 0.57 0.11 0.19 0.99 – 2007 class B shares 2.07 0.07 – 0.37 – 2.64 2.04 0.39 0.43 1.36 0.76 1.30 – 0.82 0.95 0.84 – 0.84 Voting rights 19.49 13.36 3.01 2.75 2.27 1.67 1.08 1.04 0.93 0.89 0.85 0.78 0.72 0.70 0.56 0.53 0.46 0.44 class a shares 39.22 28.42 6.41 4.87 4.84 0.57 0.07 1.76 1.53 0.36 0.94 0.24 1.52 0.57 0.15 0.21 1.00 – 2006 class B shares 2.00 0.03 – 0.47 – 2.72 1.87 0.35 1.62 1.70 0.81 1.26 – 1.07 1.29 0.88 – 1.01 Voting rights 19.46 13.35 3.01 2.54 2.27 1.71 0.99 1.01 1.58 1.07 0.87 0.77 0.72 0.83 0.75 0.57 0.46 0.53 class a shares 39.22 28.42 6.41 4.51 4.84 0.57 0.05 2.13 1.05 0.36 0.91 0.27 1.53 0.57 0.20 0.22 – 0.10 2005 class B shares 2.00 0.03 – 0.55 – 2.54 2.13 0.39 2.50 1.81 1.02 1.28 – 1.13 1.67 1.41 – 1.17 Voting rights 19.46 13.35 3.01 2.40 2.27 1.62 1.15 1.21 1.82 1.13 0.97 0.81 0.72 0.87 0.98 0.85 – 0.67 1.14 58.53 31.62 1.44 54.34 29.53 1.24 49.86 27.06 – – – – – 3.25 2.97 1.29 1.27 0.92 1.73 1.57 0.69 0.67 0.49 – – – 0.02 – – 5.88 100 – 2.25 – 2.00 1.72 – 28.58 100 – 1.20 – 1.05 0.91 – 17.98 100 – – – – – – 7.40 100 – – – – 2.29 – 29.56 100 – – – – 1.22 – 19.17 100 others Total source: sis Ägarservice aB and Vpc aB, December 31, 2007, and capital precision, December 2007. 26.59 100 16.85 100 5.78 100 our major shareholders do not have different voting rights than as of December 31, 2007, the total number of voting securities of other shareholders holding the same classes of shares. the company owned by top executives and directors as a group as far as we know, the company is not directly or indirectly was: owned or controlled by another corporation, by any foreign government or by any other natural or legal person(s) severally or Voting number of number of class B rights, shares percent class a shares jointly. top executives and directors as a group (26 persons) 6,080 18,666,584 0.07 For individual holdings, see “corporate Governance report”. ericsson annual report 2007 139 share information shareholder information the annual General Meeting of sharehold- the shareholder into the share register as annual reports and other financial reports ers will take place at the annex to the of thursday, april 3, 2008, to be entitled can be downloaded or ordered on our Globe arena, Globentorget, stockholm, at to participate at the annual General web site: www.ericsson.com/investors or 3.00 p.m. on Wednesday, april 9, 2008. Meeting of shareholders. the shareholder ordered via e-mail or mail. Entitled to attend and notice of attendance is requested to inform the nominee well before that day. shareholders, who wish to attend the Proxy For printed publications, contact: strömberg Distribution i Huddinge aB se – 120 88 stockholm, sweden annual General Meeting of shareholders, shareholders represented by proxy shall phone: +46 8 449 89 57 must • have been entered into the share issue a power of attorney for the repre- e-mail: ericsson@strd.se sentative. to a power of attorney issued register kept by Vpc aB (the swedish by a legal entity, a copy of the certificate in the united states, ericsson’s transfer securities register centre) as of of registration (or, if no such certificate agent citibank: thursday, april 3, 2008; and • give notice of attendance to the exists, a corresponding document of citibank shareholder services authority) of the legal entity shall be registered holders: +1 877 881 5969 company at the latest on thursday, attached. the documents must not be interested investors: +1 800 808 8010 april 3, 2008, at the company’s web older than one year. in order to facilitate e-mail: ericsson@shareholders-online. site the registration at the annual General com www.ericsson.com, Meeting, the power of attorney in its www.citibank.com/adr at telephone no.: +46 8 775 01 99 original, certificates of registration and weekdays other documents of authority should be ordering a hard copy of the annual between 10 a.m. and 4 p.m. or sent to the company at the address report: at fax no.: +46 8 775 80 18. above so as to be available by tuesday, http://www.sccorp.com/annualreport/ notice of attendance may also be given by mail to: april 8, 2008. Dividend ericsson.htm phone toll free: +1 866 216 0460 telefonaktiebolaget lM ericsson, the Board of Directors has decided to Contact information: Group Function legal affairs, propose the annual General Meeting of investor relations for europe, Middle Box 47021, 100 74 stockholm, sweden shareholders to resolve on a dividend of east, africa and asiapacific: seK 0.50 per share for the year 2007 and telefonaktiebolaget lM ericsson When giving notice of attendance, please Monday, april 14, 2008 as record day for se-164 83 stockholm, sweden state name, date of birth, address, dividend. telephone no. and number of assistants. the personal data that ericsson receives with the notice of attendance will be computer processed for the purpose of Financial information from Ericsson • interim reports 2008: april 25, 2008 (Q1) the annual General Meeting of sharehold- July 22, 2008 (Q2) ers 2008 only. Shares registered in the name of a nominee october 24, 2008 (Q3) January 29 , 2009 (Q4) • annual report 2008: March, 2009 • Form 20-F for the us market 2008: 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 shareholders, whose shares are regis- During Q2, 2009 e-mail: investor.relations@ericsson.com tered in the name of a nominee, must request the nominee to enter temporarily 140 ericsson annual report 2007 shareholder information remuneration this chapter outlines how we implement our remuneration policy and its other members are nancy McKinstry, Börje ekholm and in line with corporate governance best practice throughout Monica Bergström, all of whom are non-executive directors and ericsson, with specific references to senior management. Details independent as required by the swedish code of corporate of senior management remuneration and Board Directors’ fees Governance. the chairman continues to ensure that the can be found in the notes to the consolidated Financial state- company maintains contact, as necessary, with its principal ments, note c29: “information regarding employees, Members shareholders on the subject of remuneration. of the Board of Directors and Management”. the company is the company’s General counsel acts as secretary to the required to submit the formal remuneration policy for senior committee and the ceo, the senior Vice president Human management for shareholder approval at the annual General resources & organization and the Vice president compensation Meeting and the appropriate resolution for 2008, which remains & Benefits attend the remuneration committee meetings by materially the same as the 2007 policy, together with resolutions invitation and assist the committee in its considerations, except relating to the company’s long-term variable remuneration plans when issues relating to their own remuneration are being are set out in the notice of annual General Meeting on ericsson’s discussed or decided. website (www.ericsson.com). the auditors’ opinion on how we the remuneration committee has appointed an independent have followed our policy during 2007 is also posted on the expert advisor, Gerrit aronson, to assist and advice the commit- website. Clear controls tee. Gerrit aronson provided no other services to the company during 2007. the remuneration committee is also provided with national and international pay data collected from external survey remuneration processes by the nature of their sensitivity require providers and can call on other independent expertise should it clear controls. Within ericsson these controls are based on three so require. pillars: Board of Directors and remuneration committee authorization, audit controls and our internal system that requires Remuneration Policy two levels of managers to approve any remuneration decision. in remuneration at ericsson is based on the principles of perfor- addition, the annual General Meeting approves the terms of our mance, competitiveness and fairness. Different remuneration ele- long-term variable remuneration plans and the remuneration ments are designed to reflect these principles. therefore a mix of policy for the senior management comprising the Group several remuneration elements is applied in order to reflect the Management team, including the ceo, hereafter referred to as remuneration principles in a balanced way. “Group Management.” The Remuneration Committee the remuneration policy and the remuneration committee’s terms of reference for subsequent years will be reviewed annually in light of matters such as changes to corporate governance best the remuneration committee advises the Board of Directors on practice or changes to accounting, legislation, political opinion or an ongoing basis on the remuneration of Group Management, business practices among peers. this will help to ensure that the including fixed salaries, pensions, other benefits and short-term policy continues to provide ericsson with a competitive remu- and long-term variable remuneration. the remuneration neration strategy and, in accordance with swedish law, the policy committee also approves variable remuneration outcomes, will be brought to shareholders annually for approval. prepares remuneration related proposals for Board and share- holder approval and develops and monitors the remuneration Fixed Salary policy, strategies and general guidelines for employee remunera- Fixed salaries are set to be competitive, taking account of global tion. the committee is sensitive to pay and employment remuneration practices together with an individual’s home conditions throughout the company when dealing with Group market. the absolute levels are determined by the size and Management remuneration. the purpose and function of the complexity of the job and the year-to-year performance of the committee will continue going forward and its terms of reference individual jobholder. Group Management salaries are, together can be found on our website. with other elements of remuneration, subject to an annual review the remuneration committee is chaired by Michael treschow by the remuneration committee, which considers external pay ericsson annual report 2007 141 remunerationdata to ensure that levels of pay remain competitive and overall remuneration of the individual. in 2006 ericsson enjoyed appropriate in light of the company’s remuneration policy. When one of several years of outstanding performance with short-term setting fixed salaries the remuneration committee considers the variable remuneration paying out at or near the maximum impact on total remuneration, including pension contributions opportunity for Group Management. During 2007, our profitability and associated costs. did not develop to expectations and, as a result, payments will Variable Remuneration and Performance generally be significantly lower. at ericsson we strongly believe that, where possible, we should Long-Term Variable Remuneration encourage variable remuneration throughout the company as we share based long-term variable remuneration plans are submit- believe it reinforces performance, enables businesses to have ted each year for approval by shareholders at the annual General more flexible pay-roll costs and supports employee alignment to Meeting. For Group Management the payout is determined by clear targets. three specific variables: the individual’s own investment in performance is specifically reflected in the variable remunera- shares, a long-term financial target at group level and the share tion – both in an annual variable component and in a long-term price development. variable part. although this may vary over time to take account of all long-term variable remuneration plans are designed to form pay trends, currently the target level of the short-term variable part of a well balanced total remuneration. ericsson has no remuneration for Group Management is between 30 and 40 formal guidelines for equity ownership but the long-term variable percent of the fixed salary, but outcomes can vary between zero remuneration facilitates that Group Management and a large and twice the target opportunity. the long-term variable proportion of ericsson’s employees build up a significant remuneration is set to achieve a target of around 30 percent of personal ownership in the company’s stock over time. this is the fixed salary. in both cases the variable pay is measured achieved through a combination of personal investment and against the achievement of specific business objectives, stock-based remuneration made up of three different but linked reflecting the judgment of the Board of Directors as to the right plans: the stock purchase plan, the Key contributor retention balance between fixed and variable pay and the market practice plan and the executive performance share plan. for remuneration of executives. all variable remuneration plans have maximum award and vesting limits. The Stock Purchase Plan Short-Term Variable Remuneration the stock purchase plan is designed to offer, where practicable, an incentive for all employees to participate in the company, the annual variable remuneration is through cash-based which is consistent with industry practice and with our ways of programs, with specific business targets derived from the annual working. under the plans, employees can save up to 7.5 percent business plan approved by the Board of Directors. the exact (ceo 9 percent) of gross fixed salary for purchase of class B nature of the targets will vary depending on the specific job but shares at market price on the oMX nordic exchange stockholm for Group Management may include financial targets at either or aDss at nasDaQ (contribution shares) during a twelve-month corporate level or at a specific business unit level, operational period. if the contribution shares are retained by the employee for targets, employee motivation targets and customer satisfaction three years after the investment and employment with the targets. ericsson Group continues during that time, the employee’s We operate global short-term variable plans for management shares will be matched with a corresponding number of class B and for sales professionals and these plans are adopted to local shares or aDss free of consideration. employees in 88 countries requirements. the Board of Directors and the remuneration participate in the plan and in november 2007 the number of committee decide on all ericsson Group targets, which are then participants was 19,000 or approximately 26 percent of employ- cascaded to unit-related targets, all subject to the two level ees. management approval process. the remuneration committee participants save each month, beginning with august payroll, monitors the appropriateness of the target levels throughout the towards quarterly investments. these investments (in november, year and has the authority to revise them should they not remain February, May and august) are matched on the third anniversary relevant, stretching and/or enhance shareholder value. employ- of each such investment and hence the matching spans over two ees not covered by global short-term variable plans may be financial years and two tax years. eligible for local plans, which vary in design according to local competitive practice. performance has a significant effect on the 142 ericsson annual report 2007 remunerationThe Key Contributor Retention Plan 2007 Evaluation of Long-Term Variable Remuneration the Key contributor retention plan is designed to give recogni- During 2007, the remuneration committee undertook an tion for performance and potential as well as encourage retention evaluation of the company’s long-term variable remuneration of key employees. under the program up to 10 percent of plans under the leadership of its independent advisor Gerrit employees are selected through a nominations process that aronson. a number of third-party providers assisted the identifies individuals according to performance, critical skills and company in surveying and analyzing the participant populations potential. participants obtain one extra matching share in of the stock purchase plan, the Key contributor retention plan addition to the one matching share for each contribution share and the executive performance stock plan. the evaluation purchased under the stock purchase plan during a twelve- looked at how well the plans adhere to original principles, testing month program period. the plan was introduced in 2004 and has key features, auditing administration and scrutinizing outcomes been repeated 2005, 2006 and 2007. and costs. the objectives of the stock purchase plan of providing an The Executive Performance Stock Plan investment opportunity for all of ericsson’s employees and thus the executive performance stock plan was introduced in 2004 reinforcing a “one ericsson” aligned with shareholder interests and has been repeated 2005, 2006 and 2007. the plan is were shown to have been successful. over a quarter of all designed to focus management on driving earnings and provide employees world-wide invest in contribution shares; participation competitive remuneration. senior executives, including Group currently being as high as 45 percent in sweden and with north Management, are selected to obtain up to four or six extra shares america not far behind. in a survey of our employees, the two (performance matching shares) in addition to the one matching most prominent reasons for participation were attractiveness of share for each contribution share purchased under the stock investment and “the importance to view ericsson from a purchase plan. For the 2006 and 2007 programs, the ceo is shareholder perspective.” of those surveyed who participate in allowed to invest up to 9 percent of fixed salary in contribution the plan the majority agreed or strongly agreed that the plan shares and may obtain up to eight performance matching shares aligns participants’ interests with those of shareholders, as did a in addition to the stock purchase plan matching share for each significant proportion of non-participants. contribution share. the performance matching is subject to the the nomination process for the Key contributor retention plan fulfillment of an earnings per share (eps) performance target. was audited and found to be robust. During the period 2004 to the past and continued use of average annual eps growth 2007, just over half of those nominated had been nominated relative to challenging and stretching targets as a performance once only. the objectives of the plan of retaining key contributors measure reflects the company’s ongoing strategy of adding by recognizing performance together with critical skills and shareholder value through the long-term improvement of potential were also shown to have been met. surveying individu- profitability. Furthermore, the use of a constant and key financial als nominated for the plan and their managers, both managers performance measure alongside the inherent share price focus and nominees recognized performance and future potential as of the co-investment principle ensures close alignment with the the two key reasons for nominations. of participating nominees, long-term interests of shareholders whilst providing clear, most agreed or strongly agreed that this plan has increased transparent and continuous line-of-sight for participants. the loyalty to ericsson. remuneration committee has been satisfied that the present the executive performance stock plan is well supported by approach remains preferable to other measures, including those participants and outcomes follow performance and share price. that reflect relative performance, but alternative measures are Viewed against a swedish peer group the plan is competitive, considered on an ongoing basis. however, against ericsson’s global competitors the plan provides the performance targets are not capable of being retested earnings opportunities towards the lower end of the scale. after the end of the three-year performance period. if the overall the cost and share usage of the programs have been minimum required performance is not achieved, all matching modest in comparison with most practices around the world. the shares subject to performance will lapse. the Board may also dilution from all three plans for 2004, 2005 and 2006 is estimated reduce the number of performance matching shares, if deemed to come out at less than 0.2 percent per year of award with the appropriate, considering the company’s financial results and cost below 3 percent of total remuneration costs. position, conditions on the stock market and other circumstanc- the conclusions drawn from the extensive research were that es at the time of matching. the current plans are very effective and achieve their objectives with a positive impact on the business that we believe by far ericsson annual report 2007 143 remunerationoutweighs the costs. it is therefore the Board of Directors’ intention to repeat the stock purchase plan, as well as the Key contributor retention plan and the executive performance stock plan in 2008, subject to approval from shareholders. 2001 and 2002 Stock Option Plans three grants of stock options were made in 2001 and 2002 that had vested but not expired as of 31 December 2007. For further details please see note c29: “information regarding employees, Members of the Board of Directors and Management”. Pensions and benefits pension benefits follow the competitive practice in the employ- ee’s home country and in addition to any national system for social security, pension benefits may contain various supplemen- tary company plans. the basic principle is that other benefits, such as company car and medical schemes, shall also be competitive in the local market. 144 ericsson annual report 2007 remunerationinformation on the company History and development 2007 Fiber access and VDsl, along with iptV in broadband our origins date back to 1876 when lars Magnus ericsson networks opened a small workshop in stockholm to repair telegraph instruments. that same year in the united states, alexander Long-term goals and business strategy Graham Bell filed a patent application for the telephone. lars our ultimate goal is for the company to generate growth and a Magnus ericsson soon recognized the great potential of healthy profit that is sustainable over the longer term. ericsson’s voice-based telecommunications and realized that the technol- strategy is to be the preferred business partner to our customers, ogy could be improved. He started to develop and sell his own especially to the world’s leading network operators. in order to telephone equipment and within a few years reached an succeed with this, we strive to be the market and technology agreement to supply telephones and switchboards to sweden’s leader by offering superior end-to-end solutions, mainly related to first telecom operator. stockholm soon had the highest tele- network infrastructure, related professional services and phone density in the world. multimedia. today, ericsson is a leading provider of telecommunications We are a major supplier to most of the world’s leading mobile equipment and related services to operators of mobile and fixed operators and many of the world’s leading fixed-line operators. networks worldwide. over 1,000 networks in more than 175 We believe that our ability to offer end-to-end solutions – systems, countries utilize our equipment and we are one of the few compa- applications, services and core handset technology – together nies worldwide that support end-to-end solutions for all major with our in-depth knowledge of consumer requirements, make us mobile communication standards. well positioned to assist network operators with their network We invest heavily in r&D and actively promote standardization and open systems. as a result, we have a long history of innovation and pioneering of future technologies for more efficient and higher quality telecommunications. development and operations. • We are a market leader in GsM and WcDMa/Hspa network equipment and in systems integration and managed services. • We are growing in the area of wireline broadband networks, in also reflecting our ongoing commitment to technology leader- metro ethernet solutions and in optical transport. ship, we have one of the industry’s most comprehensive intellec- • We are a provider of multimedia solutions for both wireless and tual property portfolios containing approximately 23,000 patents. wireline operators. Technical milestones 1878 telegraph to telephone 1923 Manual switching to automatic switching 1956 First mobile phone system 1968 electro-mechanical to computer control our strategy is to: • excel in network infrastructure; • expand in services; • establish a position in multimedia solutions in order to make people’s lives easier and richer, provide afford- 1978 analog switching to digital switching able communication for all and enable new ways for companies to 1981 Fixed communications to mobile communications do business. this is performed with operational excellence in 1991 1G analog to 2G digital mobile technology everything we do as a base. 1998 integration of voice and data in mobile networks 1999 narrowband circuit to broadband packet switching Innovation for technology leadership 1999 introduction of fixed telephony softswitch innovation is an important element of our corporate culture and is 2001 2G narrowband to 3G wideband mobile technology key to our competitiveness and future success. 2003 introduction of mobile softswitch We have a long tradition of developing innovative communica- 2004 Mass commercial launch of WcDMa (3G) networks in tion technologies, including technologies that form the base for Western europe industry standards. By early involvement in creating new 2005 commercial launch of HsDpa mobile broadband standards and technologies we are often first to market with new networks in north america solutions – a distinct competitive advantage. 2006 Global commercial launches of Hspa mobile broad- ericsson has earned a reputation for innovation and technology band networks ericsson annual report 2007 145 information on the company leadership by developing open standards and bringing reliable, Intellectual property rights (IPR) and licensing cost-effective network solutions to market. We helped pioneer the through many years of involvement in the development of new development of industry-wide mobile technologies such as GsM, technologies, we have built up a considerable portfolio of Gprs, eDGe, 3G/WcDMa/Hspa, and Bluetooth. the GsM intellectual property rights (ipr) relating to telecommunications family (GsM and WcDMa) now connect more than 80 percent of technologies. as of December 31, 2007, we held approx. 23,000 the world’s mobile subscribers. ericsson holds a leading position (22,000) patents worldwide, including patents essential to the in standardization and trials of the next major wireless technology, standards GsM, Gprs, eDGe, WcDMa, Hspa, MBMs, long-term evolution (lte). tD-scDMa, cdma2000, WiMaX and next-generation oFDM/ Within our ambitious r&D program, we have approximately lte. We also hold essential patents for many other areas, e.g 19,300 (17,100) employees in 17 (17) countries worldwide and we Voice-over-ip, atM, Wap, Bluetooth, sDH, sonet and WDM. spent seK 29 billion or 15 percent of sales on research and our intellectual property rights are valuable business assets. development during 2007. We license these rights to many other companies including the vast majority of our r&D is invested in product develop- infrastructure equipment suppliers, embedded module suppliers, ment of which the majority in mobile communications network handset suppliers and mobile applications developers, in return infrastructure. We have continued to invest in strategically for royalty payments and/or access to additional intellectual important areas of broadband access, converged networks, property rights. in addition, we acquire rights via licenses to service layer, ip technology and multimedia. utilize intellectual property rights of third parties. We also believe World-class innovations are achieved also through cooperation that we have access to all related patents that are material to our with a variety of partners including customers, universities and business in part or in whole. research institutes. standardization bodies establish the stan- For more information, see “risk Factors – strategic and dards that lead the industry, and ericsson is a leading player in all operational risks”. major standardization organizations. For more information regarding product and technology Addressing key operator needs development, please see “risk Factors – strategic and opera- We will continue to devote significant resources to develop tional risks” and “Board of Directors’ report – research and end-to-end communications solutions that will stimulate Development”. network deployments for geographic coverage as well as traffic General facts on the company Legal name: telefonaktiebolaget lM ericsson (publ) 6300 legacy Drive, plano, texas 75024. telephone number Organization number: 556016-0680 +1 972 583 0000. Legal form of the Company: a swedish limited liability Shares: our class a and class B shares are traded on oMX company organized under the swedish companies act. the nordic exchange stockholm. our class B shares are also traded terms “ericsson”, “the company”, “the Group”, “us”, “we”, “our” on the london stock exchange (lse). all refer to telefonaktiebolaget lM ericsson and its subsidiaries. in the united states, our american depository shares (aDs), each Country of incorporation: sweden. the company was representing 10 underlying class B shares, are traded on incorporated on august 18, 1918, as a result of a merger between nasDaQ. aB lM ericsson & co. and stockholms allmänna telefon aB. Parent Company operations: the business of the parent Domicile: our registered address is telefonaktiebolaget lM company, telefonaktiebolaget lM ericsson, consists mainly of ericsson, se–164 83 stockholm, sweden. our headquarters are corporate management, holding company functions and internal located at torshamnsgatan 23, Kista, sweden. banking activities. parent company operations also include our telephone number is +46 8 719 0000. customer credit management activities performed by ericsson our web site is www.ericsson.com. please note that information credit aB on a commission basis. on our web site does not form part of this document. Subsidiaries and associated companies: For a listing of our Agent in the US: ericsson inc., Vice president legal affairs, significant subsidiaries, please see notes to the parent company 146 ericsson annual report 2007 information on the companycapacity and thereby drive demand for our products and the use of wireless broadband for fixed and mobile use is services. growing rapidly. ericsson provides both cost effective infrastruc- We believe that the migration of voice, messaging and video ture solutions and laptop embedded modules for eDGe/Hspa to services into ip-based multimedia services common to both satisfy this growing demand. wireless and wireline access networks is the primary technologi- By successfully addressing three key operator needs: cal shift facing operators today. modernization and expansion of access networks; introduction of Many of the world’s leading operators are beginning to ip-based revenue generating services; and cost-efficient rollout converge their mobile and fixed networks into one. Wireline of high capacity broadband networks with service differentiation, operators are moving from single-service networks toward we continuously secure strong market positions in voice over broadband packet-switched multi-service networks that have the packet, soft switching and public ethernet access. ability to simultaneously handle multiple services, such as voice, data and images. Migration to an all-ip-based packet-switched Expanding Professional Services network is a necessary step in order to combine broadband network operators are reducing operating expenses by optimiz- internet, voice and image traffic into one broadband network. ing the operation and maintenance of their networks. as a result, For consumers this means a richer experience with easier access many network operators are increasingly outsourcing for example to a wide range of applications and content on any device. For their network design, operations and maintenance activities. operators it means reduced costs and shorter time to market When outsourcing, operators can reduce cost of operations with new services. and gain flexibility in resources and time to market – all with an our solution for such multi-service networks utilizes an assured quality of service. iMs-based multi-service environment, intelligent edge routers, the combination of our local expertise, global technology combined with broadband access and core network routing and leadership, business understanding, strong delivery capabilities transmission elements. organizing a network into layers isolates and experience in integrating and managing networks make the different functions, i.e., access, core network and services, ericsson an attractive partner for operators seeking support to and facilitates easier migration to an all-ip environment. in recent reliably and cost-effectively evolve their networks to accommo- years, we have strengthened our wireline portfolio in preparation date multiple technologies in their transition into one converged for convergence and all-ip networks. network. Financial statements – note p9 “investments”. in addition to our information related to the parent company, only consolidated joint venture with sonY corporation, we are engaged in a numbers for the Group totals are included in our reports. number of other minor joint ventures, cooperative arrangements Filing in the US: annual reports and other information are filed and venture capital initiatives. For more information regarding with the securities and exchange commission (sec) in the risks associated with joint ventures, strategic alliances and third united states pursuant to the rules and regulations that apply to party agreements please see “risk Factors – strategic and foreign private issuers. electronic access to these documents operational risks”. may be obtained from the sec’s website, www.sec.gov/edgar/ Documents on display: We file annual reports and other searchedgar/webusers.htm, where they are stored in the eDGar information (normally in swedish only) for certain domestic legal database. You may read and copy any of these reports at the entities with Bolagsverket (swedish companies registration sec’s public reference room at 100 F street, n.e., Washington, office) pursuant to swedish rules and regulations. D.c. 20549, or obtain them by mail upon payment of sec’s You may order any of these reports from their web site www. prescribed rates. For further information, you can call the sec at bolagsverket.se. if you access these reports, please be aware +1 800 732 0330. that the information included may not be indicative of our published consolidated results in all aspects. other than ericsson annual report 2007 147 information on the companyBusiness (primary) segments network operators as they begin integrating their fixed and We supply the network equipment and services that enable mobile networks. telecommunication; end-to-end solutions for mobile and fixed our position in public ethernet access has been strengthened communication. through the acquisitions of Marconi and entrisphere. Marconi ericsson is a telecommunications company developing and products added ip-Dsl for fiber- and copper-based broadband selling a variety of products aimed largely at customers in the access. the entrisphere products in fiber technology (Gigabit telecommunications industry. When determining our operating passive optical networks, Gpon) are essential for High segments, we have looked at which market and to what type of Definition iptV and other ip based services with high demand on customers our products and services are aimed, and through bandwidth and cost efficiency. what distribution channels they are sold as well as to commonal- ity regarding technology, research and development. to best IP core network (switching, routing and control) reflect our business focus and to facilitate comparability with our the evolution to ip starts in the core. our core network solutions peers, we implemented a more customer-oriented organization include industry-leading softswitch, ip infrastructure, ip-based as from January 1, 2007. We now report four business segments: • networks; communications infrastructure and related deploy- multimedia subsystem (iMs) and media gateways. our acquisi- tion of redback networks has further strengthened our ip ment services. product portfolio with broadband routers to manage broadband, • professional services; managed services, services for network systems integration, consulting and education and customer support services. • Multimedia; networked media and messaging, enterprise telephony, tV and mobility services. GsM and WcDMa/Hspa share a common core network, meaning that previous investments are preserved as operators migrate from voice-centric to multimedia networks. our switching applications, revenue management, service delivery platforms products have industry-leading scalability and capacity. Many of (sDp) and mobile platforms. our core network switching systems are built upon common • phones; the 50/50 joint venture with sonY corporation, sony ericsson Mobile communications, offer a range of mobile platforms. ip Multimedia subsystem (iMs) is the key that enables handsets and other mobile devices, including those supporting subscribers to access the same content and services from a multimedia applications and other personal communication multitude of devices. iMs is an open service layer platform that services. Segment Networks hosts ip based services such as Voice over ip (Voip), “push-to- talk” etc. since our iMs solution is common for both fixed and mobile networks, converged services can be transparently Business segment networks includes products for wireless and provided independent of the type of access. wireline access, core networks and transmission. related network deployment services are also included. Transmission segment networks accounted for 69 percent of total sales in Microwave and optical transport solutions provide cost-effective 2007. management of voice and data traffic. Wireless and wireline Access most widely deployed solutions. transport networks (e.g. We provide wireless access solutions to network operators that Mini-linK, metro optical networks) are essential elements of our enable reliable, efficient and cost effective mobile telephony end-to-end solutions and are also used by operators utilizing networks as well as wireless broadband for mobile, nomadic and network equipment from other suppliers. our Mini-linK micro-wave radio systems is one of the world’s fixed users in urban and rural areas. our expertise in all 2G and 3G standards allow us to offer tailored solutions to a network Deployment Services operator, regardless of the existing network standard used. our Fast deployment in large volumes involves a heavy ramp-up of radio base stations, interconnecting the device (eg. handset, pc) resources. ericsson has developed a service delivery concept with the mobile network can easily be upgraded from GsM to using a mix of local, in-house capabilities, subcontractors and Gprs/eGDe and from WcDMa to Hspa respectively. central resources. We can manage these capabilities in a way the recent expansion of our wireline broadband offering has that has proven to be successful and results in a very high degree been an important step in reinforcing our ability to address of customer satisfaction. 148 ericsson annual report 2007 information on the company Segment Professional Services such as the revenue management portfolio and our mobile ericsson’s professional services capabilities include expertise in platforms, whereas others should be seen as investment areas. managed services, systems integration, consulting, education segment Multimedia accounted for 8 percent of total sales in and customer support services 2007. segment professional services accounted for 23 percent of total sales in 2007. Managed Services We offer some of the most comprehensive managed services capabilities within the telecom industry. our offerings cover • network operations; management of all aspects of day-to-day operations of a customer’s network, high-quality operations of fixed and mobile networks at a predictable cost. • hosting of applications and content management; we enable operators to launch multimedia services in a simple, fast and cost-effective manner. Networked media and messaging networked media and messaging includes: • converged tV; our end-to-end tV offerings for personal and interactive tV was complemented through the aquisition of tandberg television in 2007. • Music & gaming entertainment solutions; for delivering music, games and videos to a broad base of devices. • creative communication; the offerings include applications for enriched communication and instantaneous sharing of experiences and information. Mobeon, a leading supplier of ip based messaging components was aquired to complement our offering. We are the industry leader in managed services, managing networks with more than 185 million subscribers. since managed • Mobile media management solutions, which are tailored for media companies and mobile network operators to provide services often are signed in the form of multi-year agreements, a means for them to expand into new channels and new areas. major part of managed services sales are of a recurring nature. the offering contains functions for gathering, adapting, and Systems integration operators can minimize risk by engaging ericsson to integrate delivering information in a secure way. • advertising is a major funding element within traditional media, with the largest growth in new media channels such as the equipment from multiple suppliers and handle technology change internet. programs, as well as to design and integrate new solutions. More and more operators who face challenging technology transfor- Enterprise applications mations or introduce multimedia services are asking us to serve ericsson makes enterprises more competitive by mobilizing their as a prime integrator. communications and business processes. users on the move can access a range of business-critical communications and Consulting and education information applications from a variety of devices over private or as technologies and business models become more complex in public, fixed and mobile networks. offerings include an applica- the evolution towards broadband and all-ip, our customers rely tion portfolio, platforms and services. We have end-to-end on our consultants to support them in defining strategies for solutions for enterprises of all sizes, both for company premises network evolution, identifying multimedia services for growth and and/or for hosting by operators. developing the competence of their employees. Revenue management Customer support We are a leading provider of revenue management solutions. We Having experienced professionals available around-the-clock to help our customers capture and secure their money streams and provide customer support is a crucial part of our service offering. leverage the business opportunities, by providing expertise and our staff, across all regions of the world, supports operators solutions to manage the revenues from traditional as well as that in total have more than 1 billion customers. Giving advice on multimedia services. how to maximize efficiency in day-to-day operations ensures the acquisition of lHs in 2007 further strengthened our network uptime and lowers total cost of ownership. position; we can now offer a convergent charging and billing Segment Multimedia solution that enables operators to handle all users and services in the same way independent on payment options or access the Multimedia offering includes a variation of products and technologies. applications of which some are well established in the market, ericsson annual report 2007 149 information on the company Service Delivery Platforms (SDP) segments, mitigating volatility, as a decrease in one area is often ericsson’s service Delivery platform (sDp) covers all aspects of offset by an increase in another. the segments have different business-to-consumer (B2c) and business-to-business (B2B) characteristics in terms of penetration of fixed and mobile services. our solutions, products, systems integration and telephony, network traffic, sophistication of services and average business consulting capabilities are combined to create a country GDp and other economic factors. multimedia marketplace according to each customer’s specific We strongly believe that affordable and generally available need. through the acquisition of Drutt, ericsson has a core telecommunication services are a prerequisite for social and product offering, which supports both on- and off-portal economic development which improves the welfare of all people business and enables advertisement and commerce of a wide in any given country. as one of the world’s largest providers of range of different products facilitated by the sDp. communications equipment and services, ericsson has imple- Mobile Platforms mented a strict trade compliance program throughout the group in order to comply with foreign and domestic laws and regula- ericsson is a leading platform technology supplier for GsM/eDGe tions, trade embargos and sanctions in force. in no way should and WcDMa/Hspa platforms used in devices such as mobile our business activities be construed as supporting a particular handsets, pc-cards, and other mobile devices. ericsson licenses political agenda or regime. open-standard end-to-end interoperability tested GsM/eDGe SaleS per region and Segment 2007 and WcDMa technology platforms. the product offerings are based on our comprehensive ipr portfolio and include: reference designs, platform software, asic designs and development boards, development and test tools, and training. By licensing our technology and platforms, mobile phone manufacturers can launch new products faster, with limited r&D investments and lower technology risks. seK million Western europe ceMa 1) asia pacific north america latin america Total profess- ional Multi- networks services media total 28,085 36,435 43,101 8,392 12,972 7,313 52,685 3,921 48,661 54,629 2,467 13,422 1,065 1,137 18,383 128,985 42,892 15,903 187,780 17,287 8,305 9,061 3,965 4,274 Segment Phones 1) central and eastern europe, Middle east and africa sony ericsson Mobile communications aB (sony ericsson) delivers innovative and feature-rich mobile phones, accessories Market environment and pc-cards, which allow us to provide end-to-end solutions to Long-term customer relationships and global scale our customers. the 50/50 joint venture, formed in october 2001, combines the mobile communications expertise of ericsson with We have been present in most of our markets for more than 100 the consumer electronic devices and content expertise of sonY years, building strong, long-term relationships with the world’s corporation and forms an essential part of our end-to-end leading operators. our scale advantage, end-to-end offerings capability for mobile multimedia services. and a local presence in every major market enable us to serve as sony ericsson is responsible for product design and develop- a true partner for cost-effective delivery of solutions and support ment, as well as marketing, sales, distribution and customer to a diverse base of customers. as operators are increasingly services. reducing the number of different suppliers they rely on, the sales for sony ericsson are not included in our reported sales, responsiveness of our employees and the power of our portfolio as their operating results are reported according to the equity of products and services are key to our future success. method under “share in earnings of joint ventures and associated We work closely with our customers to understand their companies” in the income statement. businesses and technology needs, and provide tailored solutions please also see “notes to the consolidated Financial state- to help them fulfill their business objectives. our expertise and ments – note c3, segment information.” experience in all major telecommunication standards along with Geographical (Secondary) segments our proven track record for quality and innovation have allowed us to develop our business on a worldwide basis. We believe that We group sales into five geographical segments; Western our widespread geographical presence and the economies of europe, ceMa (central and eastern europe, Middle east and scale associated with market share leadership give us competi- africa), asia pacific, north america and latin america. tive advantages. Global presence is an important factor, there is a good distribution of sales between geographical particularly when working as a business partner to operators 150 ericsson annual report 2007 information on the company working in multiple markets or globally. We are utilizing our strong subsequent recovery during 2004. the table below illustrates the international reach and core competence in mobile and fixed long-term average seasonal effect on sales for the period 1993 communications to expand into growth areas such as systems through 2007. integration, service applications and managed services, as well 15-Year aVerage SeaSonalit Y as to develop alliances with suppliers and manufacturers in many countries in order to increase our combined effectiveness. Customers First second Fourth quarter quarter quarter quarter third sequential change share of annual sales -26% 21% 17% 24% -4% 23% 32% 31% We are supplying equipment, integrated solutions and services to the table below illustrates the average seasonal effect on sales almost all major network operators globally.We derive most of our for the last three years. sales from large, multi-year agreements with a limited number of moSt reCent 3-Year aVerage SeaSonalit Y significant customers. out of a customer base of more than 425 network operators, the ten largest customers account for 42 (44) percent of our net sales, while the 20 largest customers account for 58 (63) percent of our net sales. our largest customer accounted for approximately 6 (7) percent of sales during 2007. our customers have different needs in interacting with First second Fourth quarter quarter quarter quarter third sequential change share of annual sales -19 % 22 % 16 % 25 % -7 % 23 % 27 % 30 % Competitors ericsson as a supplier, ranging from support in identifying and in networks, we compete mainly with large and well-established capturing business opportunities to complex system deliveries communication equipment suppliers. although competition including systems integration or outsourced operation of the varies depending on the products, services and geographical customer’s network to simple add-on deliveries of equipment or regions, our most significant competitors in mobile communica- spare parts to “do-it-yourself” fulfillment. We use three different tion include alcatel/lucent, Huawei, Zte and nokia/siemens. sales approaches that acknowledge these different needs; • project sales (interactive relationship selling with high With respect to fixed communications equipment, the competi- tion is also highly concentrated and includes, among others, involvement of the customer to identify and capture business alcatel/lucent, cisco, Huawei, nokia/siemens and nortel. We opportunities, where the solution is not known at the point of also compete with numerous local and regional manufacturers sales), • system sales (interactive relationship selling of solutions and providers of communication equipment and services. We believe the most important competitive factors in this industry configured for specific customer needs) and include existing customer relationships, the ability to cost-effec- • product sales (the outcome of relationship sales and frame agreements where customers may call–off well-defined tively upgrade or migrate an installed base, technological innovation, product design, compatibility of products with products and services electronically). industry standards, and the capability for end-to-end systems integration. system sales has historically been our most common sales competition in professional services not only includes many of approach to best meet our customers’ needs, however, as their our traditional systems competitors mentioned above but also a needs evolve, the two other sales approaches will grow in number of large companies from other industry sectors, such as importance. is/it, for example iBM, eDs, accenture and electronics manufac- For more information, see “risk Factors – risks associated with turing services companies as well as a large number of smaller the industry and Market conditions”. but specialized companies operating on a local or regional basis. Seasonality as this segment grows, we expect to see additional competitors emerge, possibly including some network operators attempting our quarterly sales, income and cash flow from operations are to expand into new segments. seasonal in nature and generally lowest in the first quarter of the in the Multimedia segment, our competitors vary widely year and highest in the fourth quarter. this is mainly a result of depending on the product or service being offered. We face the seasonal purchase patterns of network operators. although significant competition with regard to substantially all of these demonstrating a strong seasonal pattern historically, our products and services. seasonal sales variances have not conformed to the longer-term Within the segment phones, the primary competitors include pattern during the market downturn starting in 2001 and nokia, Motorola, samsung and a number of other companies ericsson annual report 2007 151 information on the company such as lG electronics, nec and sharp. We believe that our We intend to continue to outsource module production where mobile phone joint venture with Japan’s sonY corporation adequate manufacturing capacity and expertise are available on creates a distinctive competitive advantage. favorable terms. such outsourcing of the major part of module For more information, see “risk Factors – risks associated manufacturing provides us greater flexibility to adapt to economic with the industry and Market conditions”. and market changes. However, the timing and level of outsourc- Supply Manufacturing and assembly ing is a balance between short-term demand and longer-term flexibility. We manage our own production capacity on a global basis by Most of our node production, i.e., assembly, integration and allocating production to sites where capacity is available and testing of modular subsystems into complete system nodes such costs are competitive. at year-end 2007, our overall utilization as radio base stations, mobile switching centers etc., is done was close to 100 percent as we continuously adjust our produc- in-house. about half of our module production, i.e., production of tion capacity to meet expected demand. the table “primary subsystems such as circuit boards, radio frequency (rF) Manufacturing and assembly facilities” below summarizes where modules, antennas etc., is outsourced to a group of electronics we have our major manufacturing and assembly facilities as well manufacturing services companies including celestica, elcoteq, as the total square meters of floor space at year-end. Flextronics, Jabil and solectron, of which the vast majority is in low-cost countries. We also purchase customized and standard- Sources and availability of materials ized equipment, components and services from several global We purchase raw materials, electronic components, ready-made providers as well as from numerous local and regional suppliers. products and services from a significant number of domestic and a number of our suppliers design and manufacture highly foreign suppliers. Variations in market prices for copper, specialized and customized components for our end-to-end aluminum, steel, precious metals, plastics and other raw solutions as well as individual nodes. We generally attempt to materials have a limited effect on our total cost of goods sold. negotiate global supply agreements with our primary suppliers. our purchases mainly consist of electronic components as well While we are not dependent on any one supplier for the provision as ready-made products and services. to a limited extent, we are of standardized equipment or components and seek to avoid involved in the production of certain components such as power single source supply situations, a need to switch to an alternative modules and cables, which are used in our systems products as supplier may require us to allocate additional resources to ensure well as sold externally to other equipment manufacturers. that our technical standards and other requirements are met. Based on our most recent sourcing agreements, the increase this process could take some time to complete. accordingly, a in oil and metal prices during 2007 had only a limited negative need to switch to an alternative supplier could potentially have an effect on our costs and did not affect the availability of the adverse effect on our operations in the short term. electronic components or ready-made products and services For more information, see “risk Factors – strategic and that we require. to the extent possible, we rely on alternative operational risks”. supply sources for the purchased elements of our products to in sweden, the majority of the floor space within our produc- avoid sole source situations and to secure sufficient supply at tion facilities is used for node assembly and testing. including the competitive prices. assuming there will only be a moderate eMs production, approximately 35–40 (35–40) percent of increase in market demand, we do not foresee any supply module production and 75–80 (75–80) percent of node produc- constraints to meet our expected production requirements during tion is performed in sweden. 2008. primarY manUFaCtUring and aSSemBlY FaCilitieS sweden china italy Brazil Germany india other total 2007 sites sq meters 2006 sites sq meters 2005 sites sq meters 2004 sites sq meters 8 4 2 1 1 1 1 18 244,300 33,900 20,100 25,900 300 6,400 5,000 335,900 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 0 308,455 152 ericsson annual report 2007 information on the company For more information, see “risk Factors – strategic and segments, where network deployment activities performed by operational risks”. Organization Governance business unit Global services are included in segment networks, with the remaining service activities reported as segment professional services. a significant amount of authority and responsibility is assigned to Market units the management of our various operating units for tasks We use our own sales organization consisting of 24 market units pertaining to day-to-day operations. Governance of our operating to market and sell our systems and services to customers in over units is carried out through steering boards whose members are 175 countries via a worldwide sales and support network. each representatives of the Group Management team, the extended market unit represents either a single country or a group of Management team and the management of the particular operat- countries, depending on the extent of our business activities in ing unit. that region. We have significant sales in all of the largest For more information regarding our corporate governance, geographic markets for telecommunications, with no individual please see the corporate Governance report or visit our web site country accounting for more than 7 percent of sales. For the www.ericsson.com/ericsson/corpinfo/corp_governance/index. services business, represented in 140 countries, local knowl- shtml. edge is key and therefore most of the 28 000 employees in our information on our web site does not form part of this docu- service organization are based within the local market units. ment. Group Functions the majority of our market units operate through local subsidiaries that are present in each country. We use our local presence to help our customers achieve greater efficiencies and a number of Group Functions perform tasks pertaining to certain gain access to recognized world-class support resources group-wide matters that are not naturally referable to a specific wherever they operate. the market units utilize the product operational unit: communications, Finance, internal audit, expertise of the business units in tailoring and integrating our Human resources and organization, legal affairs, technology, products for delivery to customers. sales & Marketing and strategy & operational excellence. their responsibilities include the formulation of the Group’s Operational excellence strategy, issuing of directives, business control and resource We are convinced that operational excellence is a competitive allocation. in addition, Group Functions are responsible for the advantage. therefore we are continuously focusing on how to consolidation and reporting of financial performance, financing improve our internal processes, support systems and ways of and cash management, legal issues, communication with various working. our mission to take our customers forward in the best stakeholders including employees, investors, press and media as possible way requires well developed change capabilities, well as coordination and administration of a number of group- efficient and effective processes that consistently yield innova- wide issues. other important group-wide matters, such as tive, high-quality products and services with low cost of owner- corporate responsibility, are managed by Group Functions in ship. conjunction with a network of experts from various parts of the no matter how far we have come, we will always continue to company. ericsson research conducts applied research in drive operational excellence across the company. By continu- various strategic areas to provide ericsson with system concepts, ously learning from our experiences and the needs of our technology, and methodology to help secure our long-term, customers we will become an even better company. strategic position Business Units Working at Ericsson We believe that every employee should be treated with respect our operational organization is built around a structure of and dignity. We value the rich diversity and creative potential of business units responsible for the development and delivery of people with differing backgrounds and abilities. a culture of equal products and services to market units that are responsible for opportunities in which personal success depends on personal local sales and customer support. product development units are merit and performance is encouraged throughout our operations. included in the business units. every year we conduct an employee satisfaction survey to the business units are network, Global services and Multime- assess our Human capital index. dia, corresponding largely to our three reportable business We maintain an open management style that involves our ericsson annual report 2007 153 information on the companyemployees in daily decisions that affect them as well as longer- term matters. We are fully committed to keeping all employees informed about the implications of major business changes and other relevant matters. Key business priorities are communicated • on February 12, ericsson announced the acquisition of entrisphere, a company providing fiber access technology. • on February 26, ericsson announced a voluntary public cash offer to acquire tandberg television. on May 8, ericsson held throughout the organization and form part of the basis for more than 90 percent of the outstanding shares in tandberg employee remuneration and incentive plans. Details of these television, and initiated a compulsory acquisition of the plans appear in notes to the consolidated Financial statements remaining shares. – note c29, “information regarding employees, Members of the Board of Directors and Management”. We also have constructive • on March 15, ericsson announced the acquisition of business and assets of Mobeon aB, a world leader in ip-messaging relationships with a variety of trade unions, including formal components for mobile and fixed networks. recognition and active dialog where appropriate. For information on our corporate responsibility, please see separate “corporate responsibility report”. • on June 5, ericsson announced a voluntary public cash offer to acquire lHs aG. lHs brings a postpaid billing offering. • on June 7, ericsson announced the acquisition of Drutt For information on our corporate Governance, please see corporation; a swedish company that develops Mobile service “corporate Governance report” in this document. Delivery platform. Our vision – how we see the world • on December 20, ericsson announced the acquisition of Hyc Group, a spanish company with competence as a systems our vision is to be the prime Driver in an all-communicating integrator of iptV solutions. world. Core values – how we act Changes in the Group Management Team: • as per January 2007, Kurt Jofs was appointed head of the new professionalism, respect and perseverance are the cornerstones business unit networks. of the ericsson culture, guiding us in our daily work, both in how • as per January 2007, Jan Wäreby was appointed head of we relate to people and how we conduct our business. business unit Multimedia and included in the Group Manage- these values form the foundation of how we operate our ment team. business. our core values define how we treat each other, our • as per January 2007, sivert Bergman left the Group Manage- customers and our business partners and therefore they define ment team as Marconi was fully integrated. our culture. characteristics of our culture are exhibited by a • as per January 2007, torbjörn nilsson left the Group Manage- passion to win; employee diversity, honesty, trust and support for ment team. each other; integrity and high ethical standards; and leadership by example at all levels. We believe the best way to further • as per october 25, Karl-Henrik sundström, cFo and head of Group Function Finance, left ericsson and Hans Vestberg was develop our business is to remain accountable to ourselves and appointed cFo to our customers. • as per January 2008, Jan Frykhammar was appointed senior Vice president and Head of Business unit Global services, and Results – how we measure our performance included in the Group Management team. We measure three fundamental metrics: customer satisfaction, employee satisfaction and financial returns for our owners. We For more information about management, please see “notes to believe that highly satisfied customers, empowered employees the consolidated Financial statements – note c29, information and an enduring capability for value creation for our share- regarding employees, Members of the Board of Directors and holders help to assure a competitive advantage. Management”. Changes in organization and management Organizational changes made during 2007: • a new organization is effective as from January 1, consisting of networks, Global services and Multimedia. • as per January 24, ericsson completed the cash tender offer for us-based redback networks, now part of segment networks. 154 ericsson annual report 2007 information on the companyForward-looking statements this annual report includes “forward-looking statements” in- tection regulations, allegations of health risks from electromag- cluding statements reflecting management’s current views relat- netic fields, cost of radio licenses for our customers, allocation ing to the growth of the market, future market conditions, future of radio frequencies for different purposes and results of stan- events and expected operational and financial performance. the dardization activities within telecommunications; words “believe”, “expect”, “anticipate”, “intend”, “may”, “could”, • the effectiveness of our strategies and their execution includ- “plan,” “estimate,” “will,” “should,” “could,” “aim,” “target,” “might” ing partnerships, acquisitions and divestitures; or, in each case, their negative, and similar words are intended to help identify forward-looking statements. Forward-looking state- • financial risks, including changes in foreign exchange rates or interest rates, lack of liquidity or access to financing, changes ments may be found throughout this document, but in particular in tax liabilities, credit risks in relation to counterparties, cus- in the sections captioned “operational review”, “Board of Direc- tomer defaults under significant customer financing arrange- tors’ report” and “information on the company” and include statements regarding: • our goals, strategies and operational or financial performance expectations; • the growth of the markets in which we operate; • our liquidity, capital resources, capital expenditures and our credit ratings; • the expected demand for our existing as well as new products and services; • the expected operational or financial performance of our sony ericsson joint venture and other strategic cooperation activi- ties; • technology and industry trends including competition and our customer structure; and • our plans for new products and services including research ments and risks of confiscation of assets in foreign countries; • the impact of the consolidation in the industry, and the result- ing reduction in the number of customers, and adverse conse- quences of a loss of, or significant decline in, our business with a major customer; • the impact of changes in product demand, price erosion, com- petition from existing or new competitors or new technologies or alliances between vendors of different types of technology and the risk that our products and services may not sell at the rates or levels we anticipate; • the product mix of our sales; • our ability to develop commercially viable products, systems and services, to acquire licenses of necessary technology, to protect our intellectual property rights through patents and trademarks and to defend them against infringement, and and development expenditures. results of patent litigation; although we believe that the expectations reflected in these and • supply constraints, including component or production capac- ity shortages, suppliers’ abilities to cost effectively deliver other forward-looking statements are reasonable, we cannot quality products on time and in sufficient volumes, and risks assure you that these expectations will materialize. Because related to concentration of proprietary or outsourced produc- forward-looking statements are based on assumptions and tion in a single facility or sole source situations with a single estimates, and are subject to risks and uncertainties, actual vendor; and results could differ materially from those described or implied • our ability to recruit and retain qualified management and other herein. important factors that could affect whether and to what key employees. extent any of our forward-looking statements materialize include, but are not limited to: • our ability to respond to changes in the telecommunications certain of these risks and uncertainties are described further in “risk Factors.” We undertake no obligation to publicly update or market and other general market conditions in a cost effective revise any forward-looking statements included in this annual and timely manner; • developments in the political, economic or regulatory environ- ment affecting the markets in which we operate, including trade embargos, changes in tax rates, changes in patent pro- report, whether as a result of new information, future events or otherwise, except as required by applicable law or stock ex- change regulation. ericsson annual report 2007 155 forward-looking statementscorporate Governance report 2007 Corporate governance is a generic term that describes the stems from its core values of professionalism, respect and per ways in which rights and responsibilities are distributed severance. among the various corporate bodies according to the rules, While these ideals and values are embedded in our ways of processes or laws to which they are subject. In practice, working, we know that controls and procedures are integral to corporate governance defines the decision-making systems maintaining our high standards and we are constantly seeking and structure through which owners directly or indirectly ways to make our corporate governance even more effective and control a company. reliable. our commitment to corporate Governance this corporate Governance report describes ericsson’s corporate governance, direction and management, including information on how the Board of Directors ensures the quality of the financial reports and its interaction with ericsson’s indepen dent auditors. the auditors have not reviewed this report nor ericsson is committed to high standards of corporate gover does it con stitute a part of our formal annual report. nance and strives to ensure that our strong ethos of corporate governance permeates the entire organization and the way we conduct business. High standards in business ethics We have policies and directives that guide all employees in our code of Business ethics sets out how we work to achieve how they should work to meet legal and regulatory requirements and maintain our high standards. it summarizes the Group’s and the ethical standards that we set for ourselves. the com fundamental policies and directives governing our relationships pany’s reputation for integrity and good corporate citizenship to each other and to our stakeholders. erIC sson’s Core values ProfessIonalIsm resPeCt • listen – lead through innovation • Keep commitments – be responsive • seek the truth – know your numbers • Build strength through a shared vision • Qualify everyday – generate energy • Diversity as a strength – provide equal opportu nities PerseveranCe • lead change – shape the future this document has been translated into more than 20 lan 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. all employees must regularly review the code of Business ethics and, by sign ing a form as part of the recruitment routine and at regular inter vals, acknowledge that they have understood its principles.. through this meticulous process, we strive to ensure that our high ethical standards are upheld by all employees in their daily work, and that employees make it their individual responsibility to ensure that business is conduct ed in accordance with the rules and guidelines set forth in this document. CODE OF BUSINESS ETHICS • always deliver – walk the extra mile • trusted global partner for more than a century! The Code of Business Ethics has been translated into more than 20 languages. TAKING YOU FORWARD 156 ericsson annual report 2007 corporate governance report 2007our code of Business ethics satisfies the applicable require ments of the sarbanesoxley act of 2002 and nasDaQ. the code can be found at: corporate bodies in corporate governance www.ericsson.com/ericsson/corporate_responsibility/employ several corporate bodies govern and control ericsson. ees/code_businessethics.shtml at General Meetings of shareholders, the shareholders information on our website does not form part of this document. exercise their voting rights with regard to, for example, the We also arrange corporate governance training for executives composition of the Board of Directors of ericsson and election of so that they can reinforce the messages among ericsson’s wide external auditors. spread workforce. in 2007, individual corporategovernance a nomination committee, a corporate body introduced training included allemployee training in anticorruption and through the code in 2005 and not required by law, represents corporate responsibility. the results of individual training are the shareholders and proposes candidates to serve as Board closely monitored and reported to management. members, the Board chairman and external auditors. compliance with requirements the Board is responsible for ericsson’s longterm develop ment and strategy as well as controlling and evaluating the com pany’s daily operations. in addition, the Board appoints the presi as a swedish public limitedliability company, ericsson is dent of ericsson, who is also the chief executive officer (ceo). governed on the basis of its articles of association and the the duties of the Board are partly exercised through its three swedish companies act. We also apply the listing requirements committees; the audit, Finance and remuneration committees. of oMX nordic exchange stockholm, which includes the the president and ceo is in charge of the daytoday man swedish code of corporate Governance (“the code”). the code agement of ericsson in accordance with guidelines and instruc is based on the “comply or explain” principle, which means a tions provided by the Board. company may deviate from individual rules but must then explain ericsson is audited by independent, external auditors elected why it has done so. by the annual General Meeting of shareholders for a period of We also apply the listing requirements of the other stock four years. exchanges on which we are listed; that is, the london stock For more information on general aspects of swedish corpo exchange and nasDaQ. We satisfy applicable nasDaQ rate governance, please refer to the “special Features of swed corporate governance requirements, subject to certain exemp ish corporate Governance” memorandum posted on the website tions principally reflecting mandatory swedish legal require of the swedish corporate Governance Board (www.corporat ments. these exemptions are discussed in “nasDaQ corporate egovernanceboard.se). information on this website does not form Governance exemptions” below. Moreover, we comply with part of this document. applicable requirements of the sarbanesoxley act, including the certification of our annual report on the sec’s (securities and exchange commission’s) Form 20F by the chief executive officer and chief Financial officer. the sarbanesoxley act, commonly called soX, is a united states federal law establishing, among other things, enhanced corporate governance standards. soX applies to ericsson because we have securities quoted on nasDaQ. Application of the Swedish Code of Corporate Governance ericsson has applied the code since July 2005. to ensure com pliance with the code and to seek compliance with bestpractice provisions wherever possible, we are constantly evaluating and adapting our policies and directives as well as our procedures and internal processes. ericsson has never reported any deviations from the code, nor do we have any deviations to report in 2007. ericsson annual report 2007 157 corporate governance report 2007our CorPorate governan Ce struC ture 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 information on the shares of ericsson, please see “share infor mation” in the annual report. in accordance with the swedish companies act and ericsson’s the annual General Meeting gives shareholders the opportu articles of association, shareholders who exercise their voting nity to raise questions regarding the company and the results of rights at the annual General Meeting determine the composition the year under review. the members of the Board of Directors, of the Board of Directors and all other issues voted on at General the Group management as well as the external auditors are Meetings of shareholders. normally all present to answer such questions. the annual General Meeting is held in stockholm, generally at shareholders and other interested parties may also corre the end of March or beginning of april. the exact date is adver spond in writing with the Board of Directors or executive man tised, along with the agenda and information on how sharehold agement at any time. ers can give notice of attendance, on ericsson’s web site and in the Board of Directors’ secretariat can be contacted by e the swedish newspapers svenska Dagbladet, Dagens nyheter mail at boardsecretariat@ericsson.com, or by post: and post och inrikes tidningar, as well as in the euro pean edi telefonaktiebolaget lM ericsson tion of Financial times, as a courtesy to our shareholders abroad. the Board of Directors’ secretariat shareholders who cannot participate in person may be repre se164 83 stockholm, sweden sented by proxy (proxies are valid for a maximum of one year). to allow nonswedish speaking shareholders to participate, the Ericsson’s Annual General Meeting 2007 annual General Meeting is simultaneously interpreted into eng 1,409 shareholders, representing 57.2 percent of the votes, lish. all information material is also available in english. attended the annual General Meeting held on april 11, 2007, at there are three kinds of votes at General Meetings of share the annex to the Globe arena in stockholm. ericsson’s Board of holders: Yes, no and abstain. resolutions at General Meetings Directors, Group management and the external auditors were of shareholders are normally passed by simple majority. How present at the meeting. Decisions of the 2007 annual General ever, the swedish companies act requires special quorums and majorities in certain cases. For example, the resolution to transfer own shares to employees participating in ericsson’s stock pur Meeting include: • reelection of Michael treschow as chairman of the Board of Directors, reelection of Marcus Wallenberg and sverker chase plan must be approved by 90 percent of the votes cast Martinlöf as Deputy chairmen. and by 90 percent of the shares represented at the General • reelection of sir peter l. Bonfield, Börje ekholm, Katherine Meeting of shareholders. each class a share carries one vote Hudson, ulf J. Johansson, nancy McKinstry, anders nyrén and and each class B share carries onetenth of one vote. For more carlHenric svanberg as members of the Board of Directors. 158 ericsson annual report 2007 corporate governance report 2007 • resolution to adopt the income statements and the balance sheets of the parent company and the Group as of December nomination committee 31, 2006. • Discharge of liability of the members of the Board of Directors a nomination committee was elected by the annual General Meeting for the first time in 2001. since then, each annual Gener and the president and ceo for the fiscal year 2006. al Meeting has appointed a nomination committee, or resolved • resolution that a dividend of seK 0.50 per share be paid for the year 2006. • resolution that the number of Board members be 10 and that no deputies will be elected. • resolution that Board of Directors’ fees remain unchanged and be paid as follows: chairman seK 3,750,000; other on the procedure for appointing the nomination committee. the nomination committee represents the shareholders of the company. However, for obvious reasons, all shareholders cannot participate in the work of the nomination committee, nor is it possible for the nomination committee to liaise with all share holders. the annual General Meeting of shareholders 2007 has nonemployed Board members seK 750,000 each; in addition thus resolved that the nomination committee shall consist of the seK 350,000 to the chairman of the audit committee and seK chairman of the Board of Directors and representatives of the 250,000 each to the other two nonemployed members of the four largest shareholders as per the end of the month in which audit committee; and seK 125,000 each to the chairmen and the annual General Meeting is held. However, as further other nonemployed members of the Finance and remunera described in the procedure for appointing members to the tion committees. • approval of the nomination committee’s proposals for the procedure on appointing the members of the nomination committee and the assignment of the nomination committee. • approval of the nomination committee’s proposal to elect pricewaterhousecoopers as auditor of the company for the nomination committee, the nomination committee may comprise additional members pursuant to a request by a shareholder justified by changes in shareholder structure. Members of the Nomination Committeee the nomination committee, appointed on the basis of the pro period running from the close of the annual General Meeting cedure resolved by the annual General Meeting of shareholders 2007 until the close of the annual General Meeting 2011, and 2007, consists of four representatives appointed by the four to pay fees to the auditor against approved account. shareholders with the greatest voting power as of april 27, 2007: • approval of the principles on remuneration and other employ Jacob Wallenberg (investor aB), carlolof By (aB industrivärden, ment terms for Group management. chairman of the nomination committee), caroline af ugglas (livförsäkrings aktiebolaget skandia) and Mats lagerqvist (swed the Board of Director’s proposed implementation of a longterm bank robur Fonder) and further, Michael treschow (chairman of Variable compensation plan for 2007 did not obtain the majority the Board of Directors). requirement of 90 percent and was thus not approved by the annual General Meeting. Ericsson’s Extraordinary General Meeting 2007 The tasks of the Nomination Committee the tasks of the nomination committee have evolved over the years to comply with the requirements of the code and best the Board of Directors called an extraordinary Meeting of share practice provisions. since the inception of the nomination com holders to resolve on a revised longterm Variable compensa mittee, its main task has been to propose candidates for election tion program 2007. at the extraordinary General Meeting held on to the Board of Directors. the nomination committee must take June 28, 2007, the 126 shareholders, representing 58,6 percent into consideration all the various rules on independence of the of the votes, resolved to implement the revised compensation Board applicable to the company, which are further described in program as proposed by the Board of Directors. the end of this report. at this extraordinary General Meeting, the company intro the nomination committee also proposes a candidate for duced voting through voting units, socalled televoters. election of the chairman of General Meetings of shareholders. in Ericsson’s Annual General Meeting 2008 addition, the nomination committee prepares proposals con cerning the level of remuneration for Directors elected by the ericsson’s annual General Meeting 2008 will take place on annual General Meeting of shareholders not employed by erics april 9, 2008, at the Globe arena in stockholm. this was son, the auditors and members of the nomination committee for announ ced in conjunction with the release of the thirdquarter resolution by the annual General Meeting. to date, the nomina financial report in 2007. tion committee has not proposed that it should be paid any fees. ericsson annual report 2007 159 corporate governance report 2007Moreover, in years in which auditors are elected, the nomination committee proposes candidates based on the preparations Board of Directors carried out by the audit committee of the Board. the Board of Directors is ultimately responsible for the organiza any shareholder may submit recommendations to the nomi tion of the company and the management of the company’s nation committee at any time vie email (nomination.committee@ operations. it develops guidelines and instructions for the dayto ericsson.com) or post: telefonaktiebolaget lM ericsson the nomination committee c/o General counsel’s office se164 83 stockholm sweden Work of the Nomination Committee for the Annual General Meeting 2008 day management of the company, conducted by the president and ceo who ensures that the Board of Directors receives regu lar reports regarding the Group’s business development – its results, financial position and liquidity – and events of importance to the Group. according to the articles of association, ericsson’s Board of Directors shall consist of a minimum of five directors and a maxi mum of 12 directors, with no more than six deputies. Directors are elected by the shareholders at the annual General Meeting to make the right assessments, in terms of the competence and for the period from the close of the annual General Meeting until experience required by the Board, the nomination committee the close of the following annual General Meeting, but can serve has thoroughly familiarized itself with how the Board has any number of consecutive terms. in addition, under swedish law, functioned throughout the year and with the company’s strategy unions have the right to appoint three directors and their depu and future challenges. the nomination committee has per ties to the ericsson Board of Directors. formed a search process in view of identifying possible future ericsson abides by strict rules and regulations regarding candidates to the Board. More details on the work of the nomina conflicts of interest. Directors and the president and ceo cannot tion committee is envisaged to be published via the company participate in any decision regarding agreements between them website in connection with the notice of the annual General selves and the company, or between the company and any third Meeting of shareholders 2008. party or legal entity in which the individual has an interest. Further, the audit committee has implemented a procedure for complying with nasDaQ’s rules on relatedparty transactions as well as a preapproval process for nonaudit services carried out by the external auditors, in order to ensure their indepen dence. Members of the Board of Directors our Board of Directors consists of 10 Directors, including the chairman of the Board, elected by the shareholders at the an nual General Meeting for the period until the close of the next annual General Meeting, and three em ployee representatives, each with a deputy, appointed by the trade unions for the same period of time. While the president and ceo of the company may be elected as a director on the Board, the swedish compa nies act prohibits the president of a public company from being elected chairman of the Board. Work Procedure of the Board of Directors complementary to the provisions in the swedish companies act and the articles of association of the company, the Board of Directors has adopted a work procedure for its activities that outlines rules regarding the distribution of tasks between the Board and its committees as well as between the Board, its committees and the president and ceo. the work procedure is 160 ericsson annual report 2007 corporate governance report 2007reviewed, evaluated and adopted by the Board as required, at the president and ceo’s report on general business and market least once a year. Independence of the Directors developments, including the performance of the company. the Board is regularly informed of recent developments of legal and regulatory matters, and addresses, whenever necessary, the in connection with its proposal to the annual General Meeting of adoption and implementation of various corporate governance shareholders 2007, the nomination committee elected by the rules. Material for each Board meeting is distributed by the Board annual General Meeting of shareholders 2006 concluded that, of Directors’ secretariat according to a preestablished time plan. for the purposes of the swedish code of corporate Governance, the time plan is established with due regard for corporate gover at least the following Directors are independent of the company nance requirements including prompt distribution of minutes of and its senior management, as well as of the company’s major Board meetings. shareholders: sir peter l. Bonfield, Katherine Hudson, ulf J. unless exceptional circumstances prevent them from doing Johansson, nancy McKinstry and Michael treschow. so, all Directors participate in all Board meetings. Work of the Board of Directors the Board meets with ericsson’s external auditors at least once a year to receive and consider the auditors’ observations the work of the Board follows a yearly cycle, starting with the regarding the annual report and internal controls. the auditors statutory Board meeting held in connection with the annual also prepare reports to the management annually on the ac General Meeting. Members to each of the three committees of counting and financial reporting practices of the company and the Board are appointed at the statutory meeting, and the Board the Group. Moreover, the audit committee meets with the audi resolves on matters such as authorization to sign for the com tors to receive and consider the auditors’ observations on the pany. at the next ordinary meeting, the Board handles the first interim reports. the audit committe reports its findings to the interim report for the year along with the press release related to Board. the auditors have been instructed to reflect in their re the report. in June, a Board meeting generally takes place away ports whether the company and Group are organized such that from company headquarters, giving Directors a chance to visit the accounts, the management of funds and the financial posi major company operations. towards the end of July, the Board tion of the company and Group in other respects are up to good meets to handle the interim report for the second quarter of the standard and can be controlled in a prudent manner. the Board year. strategy matters are frequently addressed at any appropri has reviewed and assessed the company’s process for financial ate Board meeting but a twoday Board meeting in august is reporting, as described below in “internal control over financial entirely devoted to the overall strategy of the Group, bringing to a reporting for year 2007”. the Board’s own review of interim and close the strategy planning process initiated during the previous annual reports in combination with the company’s internal con year. the august meeting also addresses the overall risk man trols is deemed to give reasonable assurance regarding the agement of the Group. a third quarter interim report Board quality of the financial reporting. meeting is held at the end of october. towards the end of the year, the Board thoroughly evaluates its own work. this evalua Training of the Board of Directors tion serves as a guide for the work of the nomination committee. all new Directors receive comprehensive training tailored to their the conclusions of the Board work evaluation are presented and individual requirements. induction training includes meetings discussed at the Board meeting in December, which also ad with the heads of all the major businesses and functions and, if dresses budget and financial outlook. at the first meeting of the appropriate, training arranged by oMX nordic exchange stock calendar year, generally in the end of January, the Board focuses holm to enhance Directors’ knowledge regarding listing issues on the financial result of the entire year and also handles the and insider rules. in addition, fullday training sessions are gener fourth quarter report. and at the Board meeting in February, ally held twice a year for all Directors, to assist them in their work which closes the yearly cycle of work, the Board signs the annual for ericsson by enhancing their knowledge of Group operations report. and by covering specific issues, as needed. as the Board is responsible for financial oversight, financials Board training sessions organized by the company in 2007 are presented and evaluated at each board meeting. Further, have included the strategy process and decision structure, prod each Board meeting generally includes reports by the chairman uct management and market/customer driven development to of each of the three committees based on the minutes from the provide the Director’s with an indepth knowledge of the com committee meetings, which were distributed to all Directors prior pany’s products and their life cycles. to the Board meeting. Further, a Board meeting typically includes ericsson annual report 2007 161 corporate governance report 2007board of dIreCtors’ meetIngs 2007 Forecast 2008 meeting Extra meeting Q3 2007 meeting Extra meeting Q4 Dec Jan Q1 Annual Report meeting Q4 2006 meeting Nov Feb Oct Sep Board Meetings 2007 Mar Apr Long-term variable plan 2007 meeting Statutory meeting Q1 2007 meeting Extra meeting Two-day Strategy meeting Q2 2007 meeting Aug May Q3 Jul Jun Q2 Long-term variable program 2007 meeting Meeting in San José, California Work of the Board of Directors in 2007 nology with increased focus on content and multimedia and the the work of the Board of Directors has become increasingly changing competitive landscape among telephone operators, extensive calling for fourteen Board meetings in 2007. atten cable tV providers and other datanetwork operators. dance at Board and committee meetings is reflected in the table in terms of remuneration, the Board put forward a proposal “Directors’ attendance and Board of Directors’ Fees.” two for a longterm variable compensation program 2007 to the meetings were held away from the company headquarters, one annual General Meeting of shareholders 2007, and following this in san José, california, to meet with the management of newly compensation program not gaining approval, the Board submit acquired companies and to understand in further depth the ted a revised proposal for a longterm variable compensation operations of these companies, and one Board meeting was held program 2007 that to an extraordinary General Meeting of share at the premises of sony ericsson in lund, with a focus on sony holders. Moreover, the Board has during the year decided on a ericsson’s strategies. change in the financial reporting structure, with four reporting apart from regular matters addressed in line with the yearly operating segments: networks, professional services, Multime cycle outlined above, the Board addressed, inter alia, several dia, and phones. strategic matters such as the acquisition of entrisphere, tand the heads of the three Business units have been present at at berg television as and lHs aG. the Board further addressed least one meeting to make indepth presentations of their re long and shortterm objectives and strategies with regard to a spective areas of responsibility and to present major acquisitions continued operator and vendor consolidation, increased data projects. traffic in telephone networks, the effects of introducing ip tech the Board is mindful of the complexity, the dynamics and 162 ericsson annual report 2007 corporate governance report 2007rapid development within our industry and consequently moni organIZatIon of tHe board WorK toring and analyzing market trends and development is in focus. Despite this focus, the unexpected drop in sales, of in particu lar higher margin products, at the very end of the third quarter that resulted in the profit warning on october 16 came as a sur prise. Following the profit warning, the management and the Board have thoroughly analyzed the situation and have initiated actions to address the complex market dynamics going forward. Board work evaluation the chairman of the Board initiates and leads a thorough evalua tion of Board and committee work and procedures each year. the evaluation process includes detailed questionnaires as well as interviews and discussions. in 2007, the chairman held indi vidual meetings with each Director, and each Director responded to three separate written questionnaires; one that covered the Board work in general, one that covered the chairman’s perfor mance, and one that covered the performance of the president Board of Directors 13 Directors Finance Committee (4 Directors) • Financing • investing • customer credits Remuneration Committee (4 Directors) • remuneration policy • longterm variable remuneration • executive compensation Audit Committee (4 Directors) • oversight over financial reporting • oversight over internal control • oversight over auditing and ceo. the chairman and the president and ceo are neither The Audit Committee involved in the development, compilation or evaluation of the the audit committee, on behalf of the Board, monitors the integ questionnaires related to their respective performances, nor are rity of the financial statements, compliance with legal and regula they present when their respective performance is evaluated. tory requirements and the effectiveness of our systems of inter the results of the evaluation were presented to the Board in nal control over financial reporting. December and gave evidence that generally the Board works the audit committee is also primarily responsible for review well and in an effective manner. ing annual and interim financial reports and for overseeing the external audit process, including audit fees. Committees of the Board of Directors this involves: the Board of Directors has established three committees: the audit, Finance and remuneration committees. the Board ap • reviewing, with management and the external auditors, the financial statements including conformity with generally points each of the committee members amongst the Board accepted accounting principles; members. the work of the committees is principally preparatory, that is they prepare matters for final resolution by the Board. • reviewing, with management, the reasonableness of significant estimates and judgments made in preparing the financial However, the Board has authorized each committee to deter statements, as well as the quality of the disclosures in the mine certain issues in limited areas and may also provide extend financial statements; ed authorization to a committee to determine specific matters. the Board of Directors and each committee have the right to • reviewing matters arising from reviews and audits performed. engage external expertise, either in general or in respect to spe the audit committee itself does not perform audit work. erics cific matters, if deemed appropriate. son has an internal audit function, which reports to the audit prior to each Board meeting, each committee submits a committee and performs independent audits. report to the Board on the issues handled, resolved or referred to the audit committee is also involved in the preparatory work the Board since the previous ordinary Board meeting. the min of proposing candidates for the election of auditors, when appli utes of each committee meeting are attached to the minutes of cable, and monitors their ongoing performance and indepen the Board meeting following each committee meeting. dence, 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 preapproval process for transactions with related parties; and a “whistleblower” proce ericsson annual report 2007 163 corporate governance report 2007dure for the reporting of violations in relation to accounting, inter dIreCtors’ attendanCe and board nal controls and auditing matters. of dIreCtors’ fees 2007 alleged violations are investigated by ericsson’s internal audit function in conjunction with the relevant Group Function. infor mation regarding any incidents, including measures taken, de tails of the responsible Group Function and the status of any investigation are reported to the audit committee. Members of the Audit Committee the audit committee consists of four members appointed by the Board from among its members. in 2007, the audit committee comprised ulf J. Johansson (chairman of the committee since april, 2007), sverker Martinlöf (chairman of the committee until april, 2007), sir peter l. Bonfield, and Jan Hedlund. all members, except the employee representative, are independent from the company and senior management. each member is financially literate and familiar with the accounting practices of an interna tional company comparable to ericsson. at least one member must be an audit committee financial expert. the Board of Direc tors has determined that ulf J. Johansson, sverker Martinlöf and sir peter l. Bonfield all satisfy these requirements. the audit committee has appointed an external expert advi sor, Mr. peter Markborn, formerly authorized public accountant, to assist and advise the committee. Board Fin remun Meetings audit ance eration Fee Michael treschow sverker Martinlöf Marcus Wallenberg peter l. Bonfield Börje ekholm Katherine Hudson ulf J. Johansson nancy McKinstry anders nyrén carlHenric svanberg Monica Bergström Jan Hedlund torbjörn nyman anna Guldstrand Kristina Davidsson Karin Åberg 2) per lindh 1) Total 14 14 14 14 13 13 14 14 13 14 14 12 14 13 13 11 2 14 – 8 3) – 8 – – 8 4) – – – – 7 – – – – – 8 7 – 7 – – – – – 7 – – – 7 – – – – 7 1) resigned from the Board of Directors as of april 11, 2007. 2) Joined the Board of Directors as of april 11, 2007. 3) resigned as chairman as of april 11, 2007. 4) new chairman as of april 11, 2007. 8 4,000,000 – 1,000,000 – 875,000 – 1,000,000 875,000 8 750,000 – 1,100,000 875,000 8 875,000 – – – 19,600 8 16,900 – 19,700 – 18,000 – 18,000 – 16,500 – 2,000 8 11,460,700 Work of the Audit Committee The Finance Committee the audit committee held eight meetings in 2007 – attendance is reflected in the table “Directors’ attendance and Board of Direc tors’ Fees 2007.” During the year, the audit committee reviewed the Finance committee is primarily responsible for: • handling matters regarding acquisitions and divestments; • capital contributions to companies inside and outside the financial reports, the scope and execution of audits performed, ericsson Group; and the independence of the external auditors; approved the annual audit plan for the internal audit function; and reviewed its reports and monitored the external audit fees. Further, together with the external auditors, the audit committee reviewed each • raising of loans, issuances of guarantees and similar undertak ings and approvals of financing support to customers; and • continually monitoring the Group’s financial risk exposure. interim report prior to publishing. the unexpected shortfall in the Finance committee is authorized to determine matters such the third quarter caused the audit committee to analyze fore as direct or indirect financing, provision of credits, granting secu casting processes and possible new market trends. the com rities and guarantees and certain investments, divestments and mittee also monitors the company’s continued compliance with financial commitments, or can delegate this power. the sarbanesoxley act. in addition, certain services other than audits performed by the external auditors have been approved Members of the Finance Committee by the audit committee under the preapproval policies and the Finance committee consists of four members appointed by procedures. the committee has also approved certain related the Board from among its members. in 2007, the Finance com party transactions in accordance with the preapproval process mittee comprised Marcus Wallenberg (chairman of the commit implemented by the committee. tee), anders nyrén, torbjörn nyman and Michael treschow. 164 ericsson annual report 2007 corporate governance report 2007 Work of the Finance Committee Work of the Remuneration Committee the Finance committee held seven meetings in 2007 – atten the remuneration committee held eight meetings in 2007 – at dance is reflected in the table “Directors’ attendance and Board tendance is reflected in the table “Directors’ attendance and of Directors’ Fees 2007”. the work during the year mainly Board of Directors’ Fees 2007”. the committee reviewed and consisted of approving customer financing and credit facility prepared for the Board a proposal for a longterm variable com arrangements with a continued focus on capital structure, cash pensation plan 2007, which was not approved by the annual flow and cash generating ability. the Finance committee also General Meeting of shareholders in april. a revised proposal for monitored the financial risk exposure and risk limits and was a longterm variable compensation program was therefore pre regularly informed on a large amount of financerelated matters. pared and presented to the Board and ultimately to the share The Remuneration Committee holders at an extraordinary General Meeting of shareholders in June. the committee also prepared proposals for salaries and the remuneration committee’s main responsibility is to advise variable pay for 2007, including remuneration of the president the Board of Directors regarding salary and other remuneration, and ceo. towards the end of the year, the committee concluded including retirement compensation of the president and ceo, its analysis of the current longterm variable program structure executive Vice presidents and other officers reporting directly to and remuneration policy to be referred to the annual General Meeting of shareholders 2008 for resolution. For further informa tion on remuneration, fixed and variable pay, please see “notes to the consolidated Financial statements – note c29, informa tion regarding employees, Members of the Board of Directors and Management” in the annual report. the president and ceo. other responsibilities include: • developing and monitoring strategies and general guidelines for employee remuneration, including variable plans and retirement compensation; • approving variable pay under the previous year’s plan (beginning of each year); • preparation of the longterm variable remuneration program for referral to the Board and subsequent resolution by the General Meeting of 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 remunera tion reviews with representatives of the company to determine the direction to follow, allowing program designs and pay policies to be aligned with the business situation. consideration is given to trends in remuneration, legislative changes, disclosure rules and the general global environment surrounding executive pay. the committee reviews salary survey data to approve any base pay increase for executives, effective from the following January. Members of the Remuneration Committee the remuneration committee consists of four members ap pointed by the Board from among its members. in 2007, the remuneration committee comprised Michael treschow (chair man of the committee), nancy McKinstry, Monica Bergström and Börje ekholm. the remuneration committee has appointed an independent expert advisor, Mr. Gerrit aronson, to assist and advise the com mittee, in particular with regard to international trends and devel opments. ericsson annual report 2007 165 corporate governance report 2007Members of the Board of Directors Board members elected by the Annual General Meeting of Shareholders 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: unilever nV, and unilever plc. Board member: aBB ltd and the Knut and alice Wallenberg Foundation. Holdings in Ericsson 1): 820,043 class B shares Principal work experience and other information: Board chair man of the confederation of swedish enterprise 20042007, presi dent and ceo of aB electrolux 1997–2002 and chairman of its Board of Directors 2004–2007. 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, aB elec trolux, and international chamber of commerce (icc). Board member: astraZeneca plc, stora enso oy, the Knut and alice Wallenberg Foundation and FaMFoundation asset Man agement. Holdings in Ericsson 1): 710,000 class B shares Principal work experience and other information: positions within investor aB, where he served as president and ceo 1999–2005. 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 Member 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 chairman: industrivärden, the confederation of swedish enterprise and sven ska Handelsbanken. Holdings in Ericsson 1): 52,000 class B shares Principal work experience and other information: president and ceo of svenska cellulosa aktiebolaget sca 1990–2002, where he was employed 1977–1983 and 1986–2002. 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. Chairman of the supervisory Board nXp. Deputy Chairman: British Quality Foundation. Board member: Mentor Graphics inc., sony corporation, and tsMc. Hold- ings in Ericsson: 22,000 class B shares. Principal work experience and other information: ceo and chair man of the executive committee of British telecommunications plc (1996–2002). chairman and ceo of icl plc (1990–1996). positions with stc plc and texas instruments inc. Member of the international advisory Board of citi. Member of the advisory Boards of new Ven ture partners llp, and the longreach Group. nonexecutive Director of actis capital llp, Ministry of Justice, and Dubai international capital. Börje Ekholm (first 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: investor aB, aB chalmersinvest, Husqvarna aB, scania and KtH Holding aB. Hold- ings in Ericsson 1): 108,803 class B shares Principal work experience and other information: president and ceo of investor aB since 2005. 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 (first elected 2006) Born 1947, Bachelor of science in Management, indiana university, usa. Board member (and Lead Director): charming shoppes inc. Holdings in Ericsson 1): 102,000 class B shares Principal work experience and other information: president and ceo of Brady corporation 1994–2003. Management positions with eastman Kodak company, where she was employed for 24 years. Ulf J. Johansson (first elected 2005) Chairman 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, novo nordisk Foundation, and trimble navigation ltd. Board member: Jump tap inc. Holdings in Ericsson 1): 32,176 class B shares Principal work experience and other information: Founder of europolitan Vodafone aB, where he was the chairman of the Board 1990–2005. previous positions at spectraphysics aB, where he was the president and ceo, ericsson radio systems aB. Member of the royal academy of engineering sciences. 166 ericsson annual report 2007 corporate governance report 2007Nancy 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 tiasnimbas 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 Board of the university of rhode island, the advisory council of the amsterdam institute of Finance, the Dutch advisory council of inseaD, and the Board of overseers of columbia Business school. Anders Nyrén (first elected 2006) Member of the Finance Committee Born 1954, Graduate of stockholm school of eco nomics, 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): 33,428 class B shares Principal work experience and other information: president and ceo of industrivärden since 2001. cFo and eVp of skanska aB 1997–2001. nordbanken 1996–1997. cFo and eVp of securum aB 1992–1996. Managing Director of oM international aB 1987–1992. earlier positions at stc scandinavian trading co aB and aB Wilhelm Becker. Carl-Henric Svanberg (first elected 2003) Born 1952, 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, Melker schör ling aB and uppsala university. Holdings in Ericsson 1): 15,781,966 class B shares Principal work experience and other information: president and ceo of telefonaktiebolaget lM ericsson since 2003. prior to this, carlHenric svanberg was the president and ceo of assa abloy aB (1994–2003). Various positions within securitas aB (1986–1994) and aBB Group (1977–1985). carlHenric svanberg does not have mate rial shareholdings or part ownerships in companies with which the company has material business relationships. Board members and deputies appointed by the unions: Monica Bergström (first appointed 1998) Employee representative Member of the Remuneration Committee Born 1961. appointed by the siF union. Holdings in ericsson 1): 4,757 class B shares Jan Hedlund (first appointed 1994) Employee representative Member of the Audit Committee Born 1946. appointed by the iF Metall union. Hold ings in ericsson 1): 2,040 class B shares Torbjörn Nyman (first appointed 2004) Employee representative Member of the Finance Committee Born 1961. appointed by the swedish association of Graduate engineers union. Holdings in ericsson 1): 15,061 class B shares Kristina Davidsson (first appointed 2006) Deputy employee representative Born 1955. appointed by the iF Metall union. Hold ings in ericsson 1): 3,401 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): 4,723 class B shares, 900 options. Karin Åberg (first appointed 2007) Deputy employee representative Born 1959. appointed by the siF union. Holdings in ericsson 1): 4,877 class B shares 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 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. ericsson annual report 2007 167 corporate governance report 2007company Management The President and Chief Executive Officer – operational management the Board of Directors appoints the president and ceo and the executive Vice presidents. Management of daytoday 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 the three Business units: networks, Global services, and Multimedia. the role of the Group Management team is to • establish longterm vision, Group strategies and policies; • maximize the Group’s business • secure operational excellence and realize global synergies the Group Management team meets monthly to discuss business and decisions and to share information of common interest to ericsson. the extended Management team consists of the Group Management team and selected Market unit Managers. the extended Management team meets regularly to discuss strategic issues and operations. Group Functions ericsson’s Group Functions perform tasks pertaining to groupwide matters that logically do not fall into a specific document or directive will ”no organization, chart, in an organization. the attitudes of the people ever replace the values and our commitment and ability to cooperate will determine whether we will achieve our goals and strengthen our leading position Carl-Henric Svanberg operational unit: communications, Finance, Human resources & our financial performance is from 2007 reported in four business organization, legal affairs, technology, sales & Marketing, and segments: networks, professional services, Multimedia and strategy & operational excellence. phones; this replaces the previous structure with a large sys the Head of a Group Function acts on behalf of the president tems segment and other operations. segment phones, repre & ceo within the Group Function’s area. senting our share in earnings of our joint venture sony ericsson the Group Functions formulate Group strategy, issue direc Mobile communications, is unchanged. tives, perform business control, resource allocation and risk effective January 1, 2007, the company’s operational organi management. they are also responsible for consolidation and zation comprises three Business units responsible for product reporting of financial performance, financing and cash manage management, marketing, development, sourcing and supply of ment, legal issues, communication with stakeholders including their respective product portfolios: networks, Global services employees, investors, press and media as well as coordination and Multimedia; 24 Market units responsible for sales and cus and administration of a number of Groupwide issues. other tomer relations in different regions; and Group Functions for important Groupwide matters, such as corporate responsibility, coordination and support. are managed by Group Functions in conjunction with a network Management of each operating unit has significant authority of experts from various parts of the company. and responsibility in relation to daytoday operations, while Operating Units governance is carried out by steering committees that include representatives of the Group Management team, the extended Due to the increased focus on the new types of services made Management team and the unit’s own management. available in public telecommunication networks through the technical development, including iptechnology and highspeed broadband, and the growth in our professional services business, 168 ericsson annual report 2007 corporate governance report 2007Risk Management Members of the Group Management Team the company has implemented a management system to secure adequate risk management, operational efficiency and control. the system consists of three parts: • the company’s organization and mode of operations, with welldefined roles and responsibilities, segregation of duties and delegation of authority; • steering documents, such as policies and directives, and a code of business ethics; and • several welldefined business processes, including integrated controls supported by it applications. risk management is integrated into each business process and includes steps for identifying and assessing risk as well as for approval and control. risks are managed in three time horizons: • the annual strategy process defines objectives and assesses risks and opportunities in several dimensions (technology, products, markets, customers, subscriber and traffic growth, general economic development, operational efficiency, profitability, capital efficiency, resources, acquisitions) from a longterm (38 year) perspective. the Board develops and approves the strategies. • the annual targetsetting process identifies nearterm risks and opportunities for Business units, Market units, and Group Functions. the process uses a balancedscorecard approach, covering multiple dimensions: financial risks, markets/ customers, innovation/products and services, operational efficiency and employee competence/empowerment. • During daytoday business transactions. all parts of the organization require the approval of transactions to operate; that is, approval to develop new products, to offer contracts to customers, to grant credit to customers, and to make acquisitions and other investments. efficient operations are driven by the implementation of standardized processes across the entire Group and by appointed process owners, with responsibility for process development and performance. Carl-Henric Svanberg President and CEO and member of the Board of Directors (since 2003) Born 1952, Master of science, linköping institute of technology, Bachelor of science in Business admin istration, university of uppsala. carlHenric svanberg holds honorary doctorates at luleå university of technology, sweden and linköping university of technology, sweden. Chairman: sony ericsson Mobile communica tions aB. Deputy chairman: assa abloy aB Board member: the confederation of swedish enterprise, Melker schörling aB and university of uppsala. Holdings in Ericsson 1): 15,781,966 class B shares Background: president and ceo of assa abloy aB (1994–2003). Various positions within securitas aB (1986–1994) and aBB Group (1977–1985). Hans Vestberg Executive Vice President and Chief Financial Officer and head of Group Function Finance (since October 2007) and Executive Vice President and head of Business Unit Global Services (up to December 31, 2007) Born 1965, Bachelor in Business administration, university of uppsala. Board member: sony ericsson Mobile com munications aB, svenska Handbollsförbundet. Holdings in Erics- son 1): 45,999 class B shares. Background: prior to these positions Hans Vestberg was Vice president and head of Market unit Mexico (2002–2003). Hans Vest berg has held various positions in the company since 1988. Kurt Jofs Executive Vice President and head of Business Unit Networks (since 2007) Born 1958, Master of science, royal institute of technology, stockholm. Deputy board member: sony ericsson Mobile communications aB. Hold- ings in Ericsson 1): 260,106 class B shares Background: prior to assuming this position Kurt Jofs was execu tive Vice president and head of Business unit access (since 2004). other prior experiences include 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. Chairman: litos reprotryck i Malmö aB. Holdings in Ericsson 1): 57,841 class B shares Background: prior to assuming this position, Bert nordberg was head of Business unit systems and held other various positions within ericsson. ericsson annual report 2007 169 corporate governance report 2007Joakim Westh Senior Vice President and head of Group Function Strategy and Operational Excellence (since 2007) 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: sony ericsson Mobile communications aB, VKr Holding a/s. Hold- ings in Ericsson 1): 135,744 class B shares Background: prior to assuming this position, Joakim Westh was senior Vice president and head of Group Function operational excel lence. Member of assa abloy executive Management team. Before this, Joakim Westh was a partner with McKinsey & co. inc. Jan Wäreby Senior Vice President and head of Business Unit Multimedia (since 2007). Born 1956, Master of science, chalmers university, Göteborg. Board member: sony ericsson commu nications aB. Holdings in Ericsson 1): 167,746 class B shares. Background: From 2002 to 2006, Jan Wäreby was corporate executive Vice president, and head of sales and Market ing for sony ericsson Mobile communications. up to october 24, 2007, KarlHenrik sundström, former execu tive Vice president and chief Financial officer and head of Group Function Finance, was a member of the Group Management team of the company. 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, Members of the Board of Directors and Management” in the annual report. Björn Olsson Executive Vice President and deputy head of Business Unit Networks (since 2007) Born 1956, Master of science in industrial engineer ing and Management, linköping institute of technol ogy. Holdings in Ericsson 1): 60,196 class B shares Background: prior to assuming this position, Björn olsson was executive Vice president and head of Business unit systems (since 2004). since 2004 he was chief information officer. He has held various positions within ericsson since 1981. Marita Hellberg Senior Vice President and head of Group Function Human Resources & Organization (since 2003) Born 1955, Bachelor in Human resources Manage ment, stockholm university, advanced Management program, cedep, France. Board member: sony ericsson Mobile communications aB, utbildningsra dion and teknikföretagen. Holdings in Ericsson 1): 68,446 class B shares Background: prior to assuming this position Marita Hellberg was senior Vice president of Human resources of ncc Group. 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 70,424 class B shares Background: prior to assuming this position, carl olof Blomqvist was a partner of Mannheimer swar tling 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: stronghold, the swedish public relations association and the stockholm chamber of com merce. Holdings in Ericsson 1): 59,128 class B shares. Background: prior to assuming his position, Henry sténson was head of sas Group communication. Håkan Eriksson Senior Vice President, Chief Technology Officer and head of Group Function Technology (since 2007) Born 1961, Master of science and Honorary ph D, linköping institute of technology. Board member: linköping university and anoto. Holdings in Erics- son 1): 43,679 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. 170 ericsson annual report 2007 corporate governance report 2007Extended Management Team extended Management team members are not involved in any the extended Management team consists of the members in the business activities that compete with or in any other way Group Management team and: • cesare avenía, Vice president and head of Market unit south east europe and head of Global customer account telecom negatively affect ericsson’s business. none of the extended Management team members have been appointed by arrange ment or understanding with shareholders, customers, suppliers italia or other parties. • Boerik Dahlström, Vice president and head of Market unit Middle east • Mats Granryd, Vice president and head of Market unit india & sri lanka; • Jan embro, Vice president and head of Market unit sub saharan africa • Björn Hemstad, Vice president within Group Function sales & Marketing and chairman of the Market units central europe, Remuneration of Group management principles for remuneration and other employment terms for Group Management were approved by the annual General Meeting of shareholders 2007. For further information on remuneration, fixed and variable pay, see notes to the consoli dated Financial statements – note c29, “information regarding employees, Members of the Board of Directors and Manage eastern europe & central asia, israel & turkey, Middle east, ment” in the annual report. saudi arabia, sub saharan africa and northern africa • Jaqueline Hey, Vice president and head of Market unit north Western europe and head of Global customer account auditors Vodafone • ingemar naeve, Vice president and head of Market unit iberia ericsson’s external, independent auditors are elected by the shareholders at the annual General Meeting for a period of four and head of Global customer account telefónica; years. the auditors report to the shareholders at shareholders’ • Mats olsson, Vice president and head of Market unit Greater Meetings. china; • torbjörn possne, Vice president and head of Market unit northern europe and head of Global customer account 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; the auditors: • update the Board of Directors regarding the planning, scope and content of the annual audit; • examine the yearend 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 (nonauditing), the consideration paid and other issues that are needed to determine the auditors’ independence. For further During 2007, the officers below were also members of the information on the contacts between the Board and the extended Management team of the company: • sivert Bergman: head of integration & Governance within auditors, please see “Work of the Board of Directors” above. Business unit networks all ericsson’s quarterly reports are reviewed by the auditors. • rory Buckley: former Vice president and head of Market unit north east asia left the company in october 2007 • ragnar Bäck: former chairman of the Market units central Statutory auditors pricewaterhousecoopers aB was elected at the annual General europe, eastern europe & central asia, israel & turkey, Middle Meeting 2007 for a period of four years until the close of the east, saudi arabia, sub saharan africa and northern africa annual General Meeting 2011. retired in March 2007 pricewaterhousecoopers has appointed Bo Hjalmarsson, • Jan campbell: former Vice president and head of Market unit central europe. Jan campbell was appointed head of Market authorized public accountant, to serve as auditor in charge. Bo Hjalmarsson is also auditor in charge at other large companies unit eastern europe & central asia in october 2007 such as oMX, sony ericsson, lundin petroleum, Vostok nafta, • Jef Keustermans: former Vice president and head of Market unit northern europe left the company in June 2007 • Gerhard Weise: former Vice president and head of Market unit Mexico. Gerhard Weise retired in December 2007 Vostok Gas and Duni. ericsson annual report 2007 171 corporate governance report 2007Fees paid to external auditors ericsson paid the fees (including expenses) listed in the table in notes to the consolidated Financial statements – note c31, Disclosure controls and procedures “Fees to auditors” in the annual report for auditrelated and other ericsson has controls and procedures in place to make sure that services. information to be disclosed under the securities exchange act of the audit committee reviews and preapproves any nonaudit 1934, and under ericsson’s agreements with oMX nordic services to be performed by the external auditors to ensure the exchange stockholm, london stock exchange and nasDaQ, is auditors’ independence. audit committee preapproval policies and procedures the audit committee makes recommendations to the Board of 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 established Directors regarding the auditors’ performance and fees. it in 2003. one of the main tasks of the Disclosure committee is to reviews the scope and execution of audits performed (external monitor the integrity and effectiveness of the company’s and internal) and analyzes the result and the cost. disclosure controls and procedures. the audit committee has established preapproval policies Further, ericsson has investments in certain entities that and procedures for services other than audits performed by the ericsson does not control or manage. accordingly, our disclo external auditors. such services fall into two broad headings: sure controls and procedures with respect to such entities are General preapproval services that can be preapproved by necessarily substantially more limited than those we maintain the audit committee without consideration to specific caseby with respect to our subsidiaries. case service. tax, transaction, risk management, corporate During the year, management, with the participation of finance, attestation and accounting services and general ericsson’s president and ceo and cFo, respectively, supervised services have received a general preapproval of the audit and participated in an evaluation of the effectiveness of our committee, provided that the estimated fee level for the project disclosure controls and procedures. as a result, ericsson’s does not exceed seK 1 million. the external auditors must advise president and ceo and cFo concluded that the disclosure the audit committee of services rendered under the general controls and procedures were effective at a reasonable assur preapproval policy. ance level. specific preapproval – all other auditrelated, tax and other there were no changes to our internal control over financial services must receive specific preapproval. the audit commit reporting during the period covered by the annual report 2007 tee chairman has the delegated authority for specific preap that have materially affected, or are likely to materially affect, our proval, provided service fees do not exceed seK 2.5 million. the internal control over financial reporting. chairman reports any preapproval decisions to the audit committee at its scheduled meetings. For other matters, an auditor submits an application to the cFo. if supported by the ericsson’s Disclosure policies cFo, the application is presented to the audit committee for final ericsson’s financial disclosure policies are designed to give approval. transparent, informative and consistent communication with the preapproval authority may not be delegated to management. investment community on a fair and equal basis, which will the policies and procedures include a list of prohibited services. reflect in a fair market value for ericsson shares. We want our shareholders and potential investors to have a good understand ing of how our company works, our operational performance, what our prospects are and the risks we face that these opportunities may not be realized. to achieve these goals, our financial reporting and disclosure must be: • transparent – our disclosure should enhance understanding of the economic drivers and operational performance of our business, hence building trust and credibility. 172 ericsson annual report 2007 corporate governance report 2007 • 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 ericsson’s stakeholders or required by regulation or listing agreements, to avoid information overload. • timely – we utilize wellestablished disclosure controls and procedures to ensure that all disclosures are complete, accurate and performed on a timely basis. • Fair and equal – we publish all material information via press releases to ensure everyone receives the information at the same time. 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 member of the board. • a majority of the directors elected by the shareholders’ meetings must be independent of the company and its management. • at least two of the directors who are independent of the company and its management must also be independent of the company’s major shareholders. independence requirements on the audit committee: • the majority of audit committee members must be indepen dent of the company and senior management. • a reflection of best practice – we strive to ensure that our • at least one member of the committee must be independent of disclosure is in line with industry norms. the company’s major shareholders. • a board member who is part of senior management may not our website (www.ericsson.com/investors) includes comprehen be a member of the audit committee. sive information on ericsson, including an archive of our annual and interim reports, ondemandaccess to recent news and copies of presentations given by senior management at industry independence requirements on the remuneration committee: • committee members must be independent of the company conferences. information on our website does not form part of and the senior management. this document. independence requirements the ericsson Board of Directors is subject to, and complies with, a variety of independence requirements. However, it has sought 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. and received exemptions from those nasDaQ requirements that ericsson has obtained an exemption from nasDaQ allowing are contrary to swedish law, see “nasDaQ corporate Gover employee representative directors to be exempt from nasDaQ’s nance exemptions” below. independence requirements. Listing requirements of OMX Nordic Exchange Stockholm • only one person from senior management may be a member of the board (applies also to senior management in the company’s subsidiaries). • the majority of the directors elected by the shareholders’ meetings (employee representatives not included) must be 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 sarbanesoxley act of 2002. the sarbanesoxley act of 2002 includes a specific exemption independent of the company and its management. an overall for nonexecutive employee representatives. assessment should be made in each case in order to consider whether a director is independent or not. • at least two of the directors who are independent of the NASDAQ Corporate Governance Exemptions pursuant to a 2005 amendment to nasDaQ’s Marketplace rules, company and its management must also be independent of foreign private issuers such as ericsson may follow home coun the company’s major shareholders. one of these directors try practice in lieu of certain nasDaQ corporate governance must be experienced in requirements placed on a listed requirements. company. Before the amendment was adopted, nasDaQ’s Marketplace ericsson annual report 2007 173 corporate governance report 2007 rules provided that foreign private issuers could, upon applica reporting, outlined in soX section 404, apply. the company has tion, be exempt from certain of its corporate governance implemented detailed controls, documentation and testing requirements when these requirements were contrary to the laws, procedures in accordance with the coso framework, issued by rules or regulations, or generally accepted business practices of the committee of sponsoring organizations of the treadway the issuer’s home jurisdiction. commission, to ensure compliance with soX 404. Manage ericsson has received (and is entitled to continue to rely ment’s report according to soX 404 will be included in erics thereon under the 2005 amendment) exemptions from nas son’s annual report on Form 20F which will be filed with the DaQ’s corporate governance requirements under the Market sec in the united states. During 2007, the company has place rules in order to allow: • employee representatives to be elected to the Board of Directors and serve on its committees (including the audit committee), in accordance with swedish law. • shareholders to participate in the election of Directors and the nomination committee, in accordance with swedish law and continued to work with the design and execution of financial controls to improve the efficiency of the controls. Internal control over financial reporting ericsson has integrated risk management and internal control into its business processes. as defined in the coso framework common market practice respectively. for internal control, components of internal control are: a control • 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 environment, risk assessment, control activities, information and communication, and monitoring. decision making processes. Control environment in addition, ericsson relies on the exemption provided by the of labor between the Board of Directors and its committees and 2005 amendment to overcome contradictions between nasDaQ the president and ceo and a management system that is based the company’s internal control structure is based on the division and swedish law requirements regarding quorums for its meetings of holders of common stock. internal control over financial reporting for the year 2007 according to the swedish companies act and the swedish code of corporate Governance, the Board of Directors must • ensure that the company has satisfactory internal controls; • inform itself of the company’s internal control system; and • assess how well it is working. on: • the company’s organization and mode of operations, with welldefined roles and responsibilities and delegations of authority; • steering documents, such as policies and directives, and a code of Business ethics; and • several welldefined processes for planning, operations and support. the most essential parts of the control environment relative to financial reporting are included in steering documents for accounting and financial reporting. these steering documents this report has been prepared in accordance with the swedish are updated regularly to include, among other things, changes to code of corporate Governance, section 3.7.2, and is thereby laws, financial reporting standards and listing requirements, such limited to internal control over financial reporting. as iFrs and soX. the swedish corporate Governance Board has made a pro nouncement to the effect that the internal control report must be Risk assessment included as part of the corporate Governance report. the risks related to financial reporting are fraud and loss or embezz Board of Directors needs not state how well the internal control lement of assets, undue favorable treatment of counterparties at over financial reporting has worked; nor do the auditors have to the expense of the company, and other risks of material examine the internal control report. in accordance with this misstatements in the financial statements, for example, those pronouncement, we are not making any such statement in this related to recognition and measurement of assets, liabilities, report for 2007, and this report has not been examined by our revenue and cost or insufficient disclosure. ericsson is managed auditors. through common processes, where risk management is Because the company is listed in the united states, the integrated, applying various methods of risk assessment and assessed effectiveness of internal controls over financial control, to ensure that the risks to which the company is 174 ericsson annual report 2007 corporate governance report 2007exposed are managed according to established policies. management, including analysis and comments on financial accounting and financial reporting policies and directives cover performance and risks. the Board of Directors receives financial areas of particular significance to support correct accounting, reports monthly. the audit committee has established a “whistle reporting and disclosure. blower” procedure for reporting violations relative to accounting, internal controls and auditing matters. Control activities the company’s business processes include financial controls regarding the approval and accounting of business transactions. Monitoring the financial closing and reporting process has controls the company’s financial performance is reviewed at each Board regarding recognition, measurement and disclosure, including meeting. the committees of the Board fulfill important monitoring the application of critical accounting policies and estimates, in functions regarding remuneration, borrowing, investments, individual subsidiaries as well as in the consolidated accounts. customer financing, cash management, financial reporting and all legal entities, business units and market units in ericsson have internal control. the audit committee and the Board of Directors own dedicated controller functions which participate in planning review all interim and annual financial reports before they are and evaluating each unit’s performance. regular analysis of the released to the market. the audit committee also receives financial reports for their respective units covers the significant regular reports from the external auditors. the audit committee elements of assets, liabilities, revenues, costs and cash flow. follows up on any actions taken to improve or modify controls. together with analysis performed at the Group level, this the company’s process for financial reporting is reviewed important element of internal control ensures that the financial annually by Management and forms a basis for evaluating the reports do not contain material errors. internal management system and internal steering documents to For external financial reporting purposes, additional controls ensure that they cover all significant areas related to financial ensure that all disclosure requirements are fulfilled by a Disclo reporting. compliance with policies and directives is monitored sure committee established by company management. through annual selfassessments and representation letters from the company has implemented controls to ensure that the heads and controllers in all subsidiaries as well as from business financial reports are prepared in accordance with iFrs. to units and market units. the company’s internal audit function, ensure that ericsson’s ceo and cFo can assess the effective which reports to the audit committee, performs independent ness of the internal control in a way that is compliant with soX audits. requirements, the company also maintains detailed documenta tion on internal controls related to accounting and financial reporting, as well as on moni toring the execution and results of such controls. a thorough review of materiality levels related to the financial reports has resulted in the implementation of detailed control documentation in several subsidiaries with significant scale of operations. For other subsidiaries, the company has implemented overall controls which relate to the control environment and comply with the policies and directives related to financial reporting. Information and communication the company’s information and communication channels support completeness and correctness of financial reporting, for example, by making internal instructions and policies regarding accounting and financial reporting widely known and accessible to all employees concerned, as well as through regular updates and briefing documents regarding changes in accounting policies and reporting and disclosure requirements. subsidiaries and operations units make regular financial and management reports to internal steering groups and company ericsson annual report 2007 175 corporate governance report 2007Financial Terminology Capital employed Total assets less non-interest-bearing provisions and liabilities. Capital turnover Net sales divided by average Capital employed. Cash conversion Measures the proportion of profits that are converted to cash flow. Total cash flow from operating activities is divided by the sum of net income and adjustments to reconcile net income to cash – expressed in percent. Cash dividends per share Dividends paid divided by average number of shares, basic. Compound annual growth rate (CAGR) The year-over-year growth rate over a specified period of time. Days sales outstanding (DSO) Trade receivables balance at quarter end divided by Net Sales in the quar- ter and multiplied by 90 days. If the amount of trade receivables is larger than last quarter's sales, the excess amount is divided by Net Sales in the previous quarter and multiplied by 90 days, and total days outstanding (DSO) are the 90 days of the most current quarter plus the additional days from the previous quarter. Earnings per share Basic earnings per share; profit or loss attributable to stockholders of the Parent Company divided by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share; the weighted average number of shares outstanding are adjusted for the effects of all dilutive potential ordinary shares. EBITDA margin Earnings Before Interest, Taxes, De- preciation and Amortization, divided by Net sales. Equity ratio Equity, expressed as a percentage of total assets. Inventory turnover Cost of Sales divided by average Inventory. Net cash Cash and cash equivalents plus short-term cash investments less interest-bearing liabilities and post- employment benefits. Payable days The average balance of Trade payables at the beginning and at the end of the year divided by Cost of sales for the year, and multiplied by 360 days. Payment readiness Cash and cash equivalents and short- term investments less short-term borrowings plus long-term unused credit commitments. Payment readi- ness is also shown as a percentage of Net Sales. Return on capital employed 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). Return on equity Net income attributable to stock- holders of the Parent Company as a percentage of average Stockhold- ers’ equity (based on the amounts at January 1 and December 31). Stockholders’ equity per share Stockholders’ equity divided by the Number of shares outstanding, basic, at the end of the period. Trade receivables turnover Net sales divided by average Trade receivables. Value at Risk (VaR) A statistical method that expresses the maximum potential loss that can arise with a certain degree of prob- ability during a certain period of time. Working capital Current assets less current non-inter- est-bearing provisions and liabilities. 176 Financial terminology and glossary Stockholm, Sweden Connecting with friends Alfa Indah, Sumatra, Indonesia Delivering an order received via mobile phone Singapore Keeping in touch with relatives in New York Glossary Annual Report 2007 Operational Review 1 25 Letter from the Chairman 26 Board of Directors' Report* 45 Consolidated Financial Statements* 49 Notes to the Consolidated Financial Statements* 105 Risk Factors* 111 Parent Company Financial Statements* 116 Notes to the Parent Company Financial Statements* 134 Auditors' Report 135 Share Information 140 Shareholder Information 141 Remuneration 145 Information on the Company 155 Forward-looking Statements 156 Corporate Governance Report 2007 176 Financial Terminology and Glossary Annual publications The Ericsson Annual Report describes Ericsson’s financial and operational performance during 2007. 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. Our website www.ericsson.com is updated on a regular basis and contains information about the Company, including downloadable versions of each of the above reports. * Chapters covered by the Auditors' Report 2G First digital generation of mobile systems, includes GSM, TDMA, PDC and cdmaOne. 3G 3rd generation mobile system, includes WCDMA/HSPA, EDGE, CDMA2000 and TD-SCDMA. All-IP A single, common IP infrastructure that can handle all network services, including fixed and mobile communi- cations, for voice and data services and also video services such as TV. ARPU Average Revenue Per User. Broadband Data speeds that are high enough to allow transmission of multimedia services with good quality. Centrex solutions Centrex is a telephony service for enter- prises, delivered by a service provider. Downlink = to your device. DSL access Digital Subscriber Line technologies for broadband multimedia com- munications in fixed line telephone networks. Examples: IP-DSL, ADSL and VDSL. EDGE Third generation mobile standard, developed as an enhancement of GSM. Enables the transmission of data at speeds up to 250 kbps. Emerging market Defined as a country that has a GNP per capita index below the World Bank average and a mobile subscrip- tion pene tration below 60 percent. IMS (IP Multimedia Subsystem) A standard for offering voice and multimedia services over mobile and fixed networks using Internet technology (IP). IP (Internet Protocol) Defines how information travels between network elements across the Internet. GPON (Gigabit Passive Optical Network) Used for fiber-optic communication to the home (FTTH). IPTV (IP Television) A technology that delivers digital television via fixed broadband access. GPRS (General Packet Radio Service) A packet-switched technology that enables GSM networks to handle mobile data communications at rates up to 115 kbps, for instance Internet connections. Generally referred to as 2.5G. HSPA (High Speed Packet Access) Enhancement of 3G/WCDMA that en- ables mobile broadband. A subscriber can download files to a 3G mobile device at speeds of several Mbps. IPX (Internet Payment eXchange) The global payment and messaging delivery solution for SMS, MMS, Web and WAP. LTE (Long-Term Evolution) The term for the next evolutionary step of mobile technology beyond today’s HSPA networks. Main-remote concept A split radio base station, with radio units at the top of the mast, near antennas. Managed services Outsourcing of the management of operator networks and/or hosting of their services. Packet switching A method of switching data in a network where individual packets are accepted by the network and delivered to their destinations. The method is used by the Internet and will replace traditional circuit switching. Penetration The number of subscriptions divided by the population in a geographical area. Softswitch A software-based system for handling call management functionality. Inte- grates IP-telephony and the legacy circuit-switched part of the network. Uplink = from your device, e.g. to the Internet. WCDMA (Wideband Code Division Multiple Access) A 3G mobile communica- tion system that uses code division multiple access technology over a wide frequency band. WCDMA builds on the same core network infrastruc- ture as GSM. Uncertainties in the Future Some of the information provided in this material is or may contain forward-looking information such as statements about expectations, assumptions about future market conditions, projec- tions or other characterizations of future events. The words “believe”, “expect”, “anticipate”, “intend”, “may”, “plan”, the negative of such terms, and similar expressions are intended to identify these statements. Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct and actual results may differ materially. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law or stock exchange regulation. We advise you that Ericsson is subject to risks both specific to our industry and specific to our company that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, changing conditions in the telecom- munications industry, political economic and regulatory developments in our markets, our management’s ability to develop and execute a successful strategy, various financial risks such as interest rate changes and exchange rate changes, erosion of our market position, structure and financial strength of our customer base, our credit ratings, product development risks, supply constraints, and our ability to recruit and retain quality staff. WHERE YOU CAN FIND OUT MORE Our website: www.ericsson.com Our share: www.ericsson.com/investors Project Management Ericsson Investor Relations Design and production Publicis Stockholm and Paues Media Photography Andreas Lind, Felix Oppenheim (p.8-9), Marcel Pabst (p.19), Lars Nybom (p.23-24) Reprographics TBK Printing Elanders, Falköping A N N U A L R E P O R T 2 0 0 7 ERICSSON ANNUAL REPORT 2007 EVERY MOMENT COUNTS 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 9753 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2008

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