Ericsson
Annual Report 2008

Plain-text annual report

A N N U A L R E P O R T 2 0 0 8 ERICSSON ANNUAL REPORT 2008 UNLIMITED COMMUNICATION – OUR vEhICLE fOR gROwTh Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden www.ericsson.com Printed on Maxi Offset and Mysoll matt – chlorine free paper that meets international environmental standards EN/LZT 108 9933 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2009 Contents Annual publications The Ericsson Annual Report describes Ericsson’s financial and operational performance during 2008. This publication includes a Corporate Governance Report. We issue a separate Corporate Responsibility Report. 1 2 4 5 6 33 37 93 98 114 120 121 136 137 141 142 145 148 172 Annual Report 2008 This is Ericsson in 2008 Letter from the CEO Five-Year Summary Letter from the Chairman Board of Directors’ Report* Consolidated Financial Statements* Notes to the Consolidated Financial Statements* Parent Company Financial Statements* Notes to the Parent Company Financial Statements* Risk Factors* Auditors’ Report Information on the Company Forward-Looking Statements Share Information Shareholder Information Corporate Responsibility Remuneration Corporate Governance Report 2008 Glossary and Financial Terminology * Chapters covered by the Auditors’ Report, constituting the legal annual report. The Ericsson Vision Our vision is to be the prime driver in an all-communicating world. A world in which any person can use voice, text, images and video to share ideas and information whenever and wherever wanted. As the leading supplier of communication networks and services, Ericsson plays a vital role in making such a world a reality. This is Ericsson in 2008 As the world’s largest supplier of network equipment and related services to telecom operators, Ericsson has over 78,000 employees and customers in more than 175 countries. Innovation, technology leadership and sustainable business solutions advance a vision to be the prime driver in an all-communicating world. Long-term relationships with all major operators result in Ericsson serving well over 40 percent of all mobile subscribers. Ericsson manages a number of operator-owned networks with, altogether, 250 million subscribers globally. The Sony Ericsson joint venture is a major supplier of feature-rich mobile phones. Financial results in short Key developments • Sales grew by 11 percent to SEK 209 billion • 650 million new mobile subscriptions added to reach with global demand across the entire portfolio. the 4 billion mark. • Operating margin was 11.4 (16.3) percent, excluding restructuring charges, due to a gross margin decrease along with insignificant • Emerging markets fastest growing, with India and China now our largest markets. Record year for GSM network shipments. Weaker demand for replacement phones affecting contribution from Sony Ericsson compared to 2007. mobile phone market but usage grew. • Earnings per share 49 percent lower, SEK 3.52, negatively impacted by restructuring charges and Sony Ericsson. • Payment readiness improved from SEK 65 billion • Mobile broadband took off with tripled subscriptions and peak data rates of 21 Mbps. • Joint venture to build leading position in semiconductors and platforms for mobile devices. • Multimedia investments start to pay off with especially good progress in Revenue Management and Service to SEK 85 billion at year end, Delivery & Provisioning. with working capital efficiency improvements. LTE established as first true global mobile standard. • • • • • Introduced new multi-standard radio base station. Expanded presence in Silicon Valley to strengthen our position in IP technologies. SALES BY REGION 2008 OUR 10 LARGEST MARKETS 2008 Ericsson net sales (SEK billion) Percent of total sales and change (percent) year-over-year NET SALES (SEK billion) 153.2 132.0 208.9 23 187.8 179.8 17.9 34% 25% 2008 16% 63.3 51.6 53.1 –2% 9% 2004 2005 2006 2007 2008 Western Europe Central & Eastern Europe, Middle East and Africa Asia Pacific Latin America North America 7% 7% 7% 5% 4% 4% 4% 4% 3% 3% s e t a t S d e t i n U 3 i a d n I 1 i a n h C 2 i a s e n o d n I 5 n e d e w S 6 l y a t I 4 l i z a r B 7 i n a p S 8 i m o d n K d e t i n U 9 n a p a J 10 ERICSSON ANN uAL REPORT 2008 THIS IS ERICSSON 1 Dear fellow shareholders, We may be living in uncertain times, but there’s one thing that gives me a strong belief in the future of our business: the majority of people worldwide appreciate the benefits that our products and services bring. Mobile subscriptions have now reached the four billion mark, a remarkable achievement that reinforces our vision to be the prime driver in an all-communicating world. This was also the year that mobile broadband really took off and Ericsson was a key contributor to both of these milestones. As you can see from the results, our strategy and commitment to our vision are paying off. Financially strong We had a solid performance this year with robust sales growth and best-in-class margins. Ericsson’s strong financial position Performance was solid, with robust sales growth.” enables us to pursue strategic opportunities, such as quickly building a market-leading position in core mobile phone technologies from a joint venture with STMicroelectronics. The turmoil within the financial markets is leading to a macro- economic downturn that will eventually affect all parts of society. However, the vast majority of our customers are financially strong. Their networks are well dimensioned, but traffic is growing rapidly which drives the need for continued spending to maintain quality of service. So far, our network and services businesses have hardly been affected at all by the financial markets’ turmoil. This is not to say we take the macro-economic situation lightly, as it would be unreasonable to believe that we will not be affected in some way. We are therefore accelerating our move to all-IP technology to reduce our costs and prepare for tougher times. As the cost reductions largely come from more efficient ways of working, our strategy and unique capabilities should be unaffected. Weakening demand for replacement phones is, however, impacting Sony Ericsson, especially in Western Europe. The JV is adjusting to the deteriorating market conditions with significant cost reduction activities which will restore its capability for profitable growth. 2 LETTER fRoM THE CE o ERICSSon A nnuAL REP oRT 2008 “ This was the year that mobile broadband really took off.” Benefiting from long-term trends Trusted partner Being a trusted partner means working closely with our customers to fully understand their strategic needs and intentions. Customers tell us that we earn our competitive advantage by actively listening, sharing and exploring ways to cooperatively develop the most efficient solutions. our mobile communications infrastructure, technology leadership, and telecom services expertise are highly rated by our customers in Despite the current macro-economic environment, the independent studies. Trust in Ericsson helps us to outperform the fundamentals of our industry are sound and the underlying market and places Ericsson well ahead of the competition. demand drivers remain intact. Today, mobile communication is In closing, I am very excited about the potential of the just as essential to any nation’s infrastructure as water, telecommunications industry to improve the quality of life in transportation or electricity. societies around the world. I take great pride in Ericsson’s role in The socio-economic contributions of mobile communications making this happen. are well demonstrated with the importance of broadband increasing. The uS Senate Appropriations Committee estimates that for every uSD 1 invested in broadband networks, uSD 10 are returned to society. The returns could be even higher with mobile broadband networks as they are cheaper and faster to build than fixed networks. Ericsson plays a vital role in bringing the benefits of mobile broadband to the majority of people around the world. People in Carl-Henric Svanberg many parts of the world will soon be able to accomplish things President and CEo that were never possible before – share ideas and information whenever and wherever they want, get medical advice and e-learning, stay in touch with family and friends and much more. In many ways, 2008 was the year of mobile broadband. Data traffic increased dramatically in mobile broadband networks built by Ericsson, particularly for operators using bundled tariffs or a flat fee structure. We delivered software enhancements that tripled peak data rates, enabling a user experience and cost similar to fixed broadband. further enhancements are in the works. A new radio standard, Long Term Evolution (LTE), which offers even greater speeds, is now the first truly global mobile standard. However, GSM and WCDMA systems will coexist for some time and we have developed a new, more energy-efficient radio base station that also supports multiple standards. What’s more, our services business gained market share and we now manage a variety of operator networks, serving some 250 million subscribers worldwide. ERICSSon A nnuAL REP oRT 2008 LETTER fRoM THE CE o 3 five-year summary SEK million Income statement items 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 outstanding (in millions) – at end of period, basic – 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 1) for 2008, as proposed by the Board of Directors. for definitions of the financial terms used, see financial terminology. 2008 2007 2006 2005 2004 208,930 16,252 974 11,667 285,684 99,951 182,439 34,651 9,995 140,823 1,261 187,780 30,646 83 22,135 245,117 86,327 168,456 24,312 9,304 134,112 940 179,821 35,828 165 26,436 214,940 82,926 142,447 40,728 7,881 120,113 782 153,222 33,084 251 24,460 209,336 86,184 133,332 50,645 6,966 101,622 850 131,972 26,706 –540 17,836 186,186 69,268 115,144 42,911 5,845 80,445 1,057 40,354 33,404 21,552 30,860 33,643 3.54 3.52 1.85 1) 44.21 3,185 3,183 3,202 4,133 3,108 1,287 5,006 33,584 16.1% 7.8% 8.0% 11.9% 92% 8.2% 11.3% 49.7% 1.2 5.4 3.1 84,917 40.6% 6.87 6.84 2.50 42.17 3,180 3,178 3,193 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% 8.27 8.23 2.50 37.82 3,176 3,174 3,189 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% 78,740 20,155 109,254 74,011 19,781 102,486 63,781 19,094 98,694 7.67 7.64 2.25 32.03 3,173 3,169 3,181 3,365 2,804 2,250 3,269 24,059 15.7% 21.6% 20.1% 25.4% 47% 26.7% 28.7% 49.0% 1.2 5.1 4.1 78,647 51.3% 56,055 21,178 93,879 5.54 5.54 1.25 25.40 3,167 3,166 3,179 2,452 2,434 1,950 4,452 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% 50,534 21,296 86,510 4 five-year summary ericsson annual report 2008 letter from the chairman Dear shareholder, this year was marked by a series of dramatic macro-economic events which has created a difficult time for the world economy. however, ericsson remains well positioned and strong relative to its peers and i can assure you that all ericsson employees are working hard to bring value to customers – the ultimate path to success for the company and in turn for you. ericsson’s situation today is quite different from what it was during the market downturn earlier this decade. the company now has a healthy balance sheet and strong cash position. in addition, ericsson refinanced maturing loans and secured new loans before the financial market collapse – a decision that now offers benefits in terms of greater liquidity, making it possible to pursue opportunities created by the market situation. ericsson’s strategy to leverage its leading position and technological prowess to invest in future growth areas remains unchanged. however, adjustments to the global macro-economic environment will be necessary in the near term and the company’s cost base will be reduced to maintain margins. utmost care will be given to preserve ericsson’s longer-term prospects and technology leadership. the Board work in 2008 had a significant focus on strategic matters. a major decision was taken to form a joint venture, merging ericsson’s mobile platform activities and stmicroelectronics’ nXp-Wireless unit, to create a world-leading company in semiconductors and platforms for mobile the demand for mobile communications should only increase applications. the JV will build on the current relationship and will with technological advancements lowering costs for affordability have a strong combined offering and a broad customer base. to more and more consumers. By making mobile operator and consumer sensitivity to the macro-economy is an communications available to everyone, ericsson is fundamentally important factor for ericsson, closely monitored by the Board. contributing to socio-economic development in emerging the main impact observed so far has been a weakening demand markets and to a better environment globally. i am particularly for new mobile phones and the sony ericsson management is proud of this accomplishment and encourage the company to aggressively addressing this development, with significant cost continue on this path. reductions underway to restore profitability. i sincerely appreciate your support during the year. the debate around executive compensation has recently intensified following the macro-economic developments. Benchmarking with similar global companies shows that we have a conservative, but still competitive compensation scheme that rewards performance and aligns employee interests with the interests of shareholders. our principles for employee remuneration – performance, competitiveness, fairness – mirrors ericsson’s core values of respect, professionalism and perseverance. i am confident that these principles are appropriate and reasonable even during michael treschow these uncertain times. chairman of the Board ericsson annual report 2008 letter from the c hairman 5 Board of directors’ report This Board of Directors’ Report is based on Ericsson’s consolidated financial statements, prepared in accordance with IFRS. The application of reasonable but subjective judgments, contents estimates and assumptions to accounting policies and procedures affects the reported amounts of assets and liabilities summary .......................................................... 7 and contingent assets and liabilities at the balance sheet date as Vision and strategy ........................................... 8 well as the reported amounts of revenues and expenses during the reporting period. These amounts could differ materially under different judgments, assumptions and estimates. Please see Note C2 – “Critical Accounting Estimates and Judgments” (p. 47). Also non-IFRS measures are used to provide meaningful supplemental information to the IFRS results. Non-IFRS measures are meant to facilitate analysis by indicating Ericsson’s Business focus 2008 ........................................ 9 Goals and results ........................................... 10 Business results............................................. 11 financial results of operations ....................... 16 underlying performance, however, these measures should not be financial position ............................................ 18 viewed in isolation or as substitutes to the IFRS measures. A reconciliation of non-IFRS measures with the IFRS results can be cash flow ...................................................... 20 found on page 16. risk Management ........................................... 22 This report includes forward looking statements subject to risks and uncertainties. Actual developments could differ materially from those described or implied. Please see “Forward- looking Statements” (p. 136) and “Risk Factors” (p. 114). The external auditors review the quarterly interim reports, perform audits of the annual report and report their findings to the Board and its Audit Committee. other information ............................................ 24 corporate responsibility ................................. 28 corporate Governance .................................... 30 parent company ............................................. 31 The terms “Ericsson”, “the Group”, “the Company”, and similar post-closing events ........................................ 32 all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. Unless otherwise noted, numbers in parentheses refer to the previous year (i.e. 2007). Board assurance ............................................ 32 strong performance in strategically important areas. 6 Board of directors’ report ericsson annual report 2008 summary Increased sales by 11 (4) percent despite financial turmoil • operating margin was 11.4 (16.3) percent excluding • Networks’ margins have started to improve: a more favorable balance between new networks relative to expansions and upgrades. • Higher proportion of software sales: sales of software and intellectual property rights (ipr) restructuring charges and 7.8 (16.3) percent including continues to gain importance. restructuring charges. • net income attributable to shareholders of the parent • Increased market share in Professional Services: new managed services contracts, in particular, contributed to company was seK 11.3 (21.8) billion, and earnings per share the increased market share. (diluted) were seK 3.52 (6.84). • Maintained top tier in mobile phones: • cash flow from operating activities was seK 24.0 (19.2) billion. cash flow before financing activities was seK 15.4 (–8.3) billion With challenging business conditions, sony ericsson achieved breakeven results for the full year, excluding restructuring including acquisitions/divestments (net) of seK 0.6 (–26.2) billion charges. (cash flow effect). • Good progress in Multimedia: • a cash conversion rate of 92 (66) percent was achieved, well the company continues to invest for a leading market position above the target of at least 70 percent. in networked media and ip-based applications and services. Strong performance in strategically important areas • Divestments and new joint venture: during the year, the pBX part of the enterprise business was divested. plans to form a joint venture for mobile platforms and a significant number of new or expanded agreements to supply semiconductors with stMicroelectronics were announced. network equipment and/or related services to operators globally were announced. the aggregate value of these agreements was Solid financial position the highest in five years. • Leveraged mobile systems scale advantages: the company increased its mobile systems market share, especially in emerging markets. • Strengthened position in fixed broadband access and IP routing: the company strengthened its position within the networks segment with a newly formed product area headquartered in silicon Valley. although ericsson is well positioned and remains strong among its peers, there are several challenges to overcome in the near future. it is difficult to predict how consumer spending will change and the effect this may have on operator activities. the macro-economic development is negatively impacting sony ericsson but so far, ericsson’s infrastructure-related business has hardly been affected. However, it is likely that in due course this business will also be affected. cost adjustment plans have been decided and actions are already underway in preparation for such a development. SaLeS aND OPeRaTING MaRGIN 2004–2008 (seK billion) 25.0% 208.9 20.0% 187.8 179.8 153.2 132.0 2004 2005 2006 2007 2008 15.0% 10.0% 5.0% 0.0% ) n o i l l i b K E S ( l s e a S 250 200 150 100 50 0 ) t n e c r e p ( i n g r a m g n i t a r e p O Sales Operating margin excluding restructuring charges Net sales SEK 208.9 billion Growth was driven by Networks and Professional Services sales. Operating margin was 11.4 percent excluding restructuring charges. Net cash SEK 34.7 billion The improvement is a result of favorable cash flow from operations. ericsson annual report 2008 Board of directors’ report 7 Vision and strategy requires significantly high working capital to sales. With this in mind along with the company’s ambition to be the prime driver ericsson’s vision of an all-communicating world is rapidly in an all-communicating world, operations have been divided becoming a reality as the convergence of telecommunications, into segments that create competitive advantage and best meet internet and media industries gains momentum. the needs of ericsson’s global customer base. By helping operators to develop and improve their networks to Networks – technology leadership, a broad product portfolio and efficiently handle multimedia capabilities, ericsson is creating scale enable ericsson to excel in meeting the coverage, capacity a world in which any person can have affordable access to and network evolution needs of fixed and mobile operators. information, entertainment, social communities and more, Services – expertise in network design, rollout, integration, whenever and wherever wanted. in the course of making people’s operation and customer support within a global structure with lives easier and more productive ericsson is spurring socio- robust local capabilities enable ericsson to better understand economic development which brings the company’s vision ever and respond to the unique challenges of each customer and closer to reality. capitalize on the trend to outsource a broader range of activities our strategy is driven by the competitive dynamics of the to network equipment suppliers. network equipment market and ericsson’s position, the Multimedia – innovative application platforms, service delivery combination of which gives rise to three strategic imperatives: • economies of scale and scope are prerequisites for and revenue management solutions combined with leading content developer and application provider relationships enable sustainable value creation. industry standards govern product ericsson to uniquely help customers create exciting new and design and functionality, making it difficult for equipment differentiated multimedia services. suppliers to differentiate on product capabilities alone. Phones – the complementary strength of sony ericsson further • the bargaining power of equipment suppliers depends primarily on their installed base. operators not only look for the best enhances ericsson’s consumer perspective for superior end-to- end offerings. products but also for long-term business partnerships that the synergies generated by the combined strengths of the they can rely on to deliver end-to-end solutions for lower total segments differentiate ericsson through a continuous focus on cost of ownership, or the ability to minimize time-to-market, or operational excellence to better leverage an economy of scale the strength of professional services capabilities, or access to in technology development as well as in product and service world-class subject matter experts. if the incumbent supplier is delivery and customer support. performing well, operators are reluctant to seek alternatives. the three strategic imperatives show ericsson’s business • primary end-to-end suppliers with well-entrenched local dynamics and their effects on results. With its scale advantage presence, backed up by global resources and a proven track secured by being the primary supplier to more operators, the record, have a competitive advantage. company plans to balance growth with margins, focus on attainment of the strategic imperatives is essential to the success leveraging expanded primary supplier relationships and return to of ericsson but the business model creates high fixed costs and higher profitability levels. THe eRICSSON 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 8 Board of directors’ report ericsson annual report 2008 Business focus 2008 Reaching more people Expanding Ericsson’s role ericsson helped to bring telecommunications to many consumers ericsson is to supply, build, integrate, operate and manage that previously could not afford service or lived outside the broadband communications infrastructure for saudi arabia’s coverage area. the company implemented alternative energy high-tech flagship, King abdullah economic city. the sole- solutions for radio base stations in remote areas. ericsson radio supplier agreement with emaar, developer of the smart-city technology requires fewer cell sites for high-quality coverage. project, breaks new ground in saudi arabia as ericsson’s first in these ways, ericsson uses technology to reduce network Gpon-enabled iptV contract; the first contract where ericsson operators’ total cost of ownership, which enables them to expand provides systems integration and network rollout services for coverage and reach more consumers in new geographic areas. fiber optic solutions and fixed-network iMs. the contract Increasing speed and capacity brings together products from ericsson’s major acquisitions – entrisphere, Marconi, redback and tandberg television – and ericsson is at the forefront of broadband technology the company’s telecom services portfolio. development with solutions to meet the growing broadband traffic demand from business and residential customers. during Preparing for the future the year, the company introduced a 100 Gbe (gigabit ethernet) each year, ericsson’s consumerlab conducts more than 40,000 transport enhancement to existing WdM (Wavelength division interviews, representing opinions and behavior of over 1 billion Multiplexing) solutions and deployed a nationwide optical WdM people. this valuable insight on consumer trends is incorporated network in Germany, that enables 40 Gbps (gigabit per second) into product development, sales and marketing, and is provided connections. the first commercial 21 Mbps (Megabit per second) to operators for them to better understand their customers’ mobile broadband services were launched and the company needs. the company also works with entrepreneurial developers demonstrated the world’s first end-to-end Hspa solution with to bring new multimedia services to the mobile environment. speeds of up to 42 Mbps. the world’s first commercially available internally, the ericsson strategy function is working with lte-capable mobile platform was introduced, with peak data scenarios for market and technology developments with a mid- rates of up to 100 Mbps in the downlink and up to 50 Mbps in the term, i.e. five-year horizon, as well as a longer term, i.e. 10–15 uplink. With four times the bandwidth of existing systems, the year view. world’s first 10 Gbps Gigabit passive optical network (Gpon) system for iptV was demonstrated. SUBSCRIPTION PeNeTRaTION PeR ReGION (percent) 140% 120% 100% 80% 60% 40% 20% 0% % 9 % 3 9 2 Africa % 4 2 1 % 6 1 1 % 7 0 1 % 6 9 % 6 8 % 1 8 % 4 6 % 7 4 % 9 % 7 5 6 % 4 % 4 6 3 Latin America Asia Pacific Eastern Europe Western Europe Middle East North America Penetration 2007 Penetration 2008 4 billion The number of mobile subscriptions at year end 2008. 21 Mbps World’s fastest commercial 3G service, delivered by ericsson. 250 million The number of subscribers in ericsson-managed networks worldwide. ericsson annual report 2008 Board of directors’ report 9 Goals and results although the mobile systems market is likely to have exceeded the expectation of slight or no growth in usd terms, ericsson’s our ultimate goal is for the company to generate growth and networks’ sales grew much faster, at 10 percent. ericsson’s a competitive profit that is sustainable over the longer term. professional services sales grew by 13 (19) percent in local ericsson aims to be the preferred business partner to its currencies, compared with an estimated market growth of customers. as the market leader, the company develops approximately 10 percent. superior products and services that provide competitive • deliver best-in-class operating margin, i.e. better than the advantages. in addition, when ericsson’s network equipment and main competitors. operating margin for the Group, excluding associated services are combined with multimedia solutions and sony ericsson and excluding restructuring charges, was the mobile handsets from the sony ericsson joint venture, the scope highest among its main competitors. of ericsson’s operations extends to complete end-to-end telecommunication solutions. • Generate cash conversion of over 70 percent. the cash conversion for 2008 was 92 (66) percent. reflecting an the company performance is monitored according to three increased focus on cash flow, this longer-term target (i.e. 3–5 fundamental metrics: value creation, customer satisfaction and years) was first communicated during 2007. employee satisfaction. We believe that highly satisfied customers along with empowered and motivated employees help to assure Customer and employee satisfaction an enduring capability for competitive advantage and value every year, a customer satisfaction survey is independently creation. the company’s objective is to have a faster than market conducted in which approximately 9,300 (9,000) employees of sales growth, a best-in-class operating margin and a healthy some 380 (380) fixed and mobile operators around the world are cash conversion. polled to assess their satisfaction with ericsson compared to its Shareholder value creation main peers. ericsson maintained a level of excellence. every year, also an employee survey is independently although margins remain below recent historic levels, the conducted. in 2008, 90 percent of employees participated in the company is strengthening its market position and continues to survey. the results show that ericsson has maintained a level perform better than its peers. a strong balance sheet, flexible considered excellent by external benchmarking. the Human operational model and strengthened industry-leading position capital index, which measures employee contribution in adding provide the means for handling any near-term macro-economic value for customers and meeting business goals, was the same pressure. in the longer term, the increased market share and as for 2007. see graphs on next page. 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 its ambitions: • increase sales at a rate faster than the market growth. VALUE CREATION SALES AND OpERATINg mARgINS 2006–2008 Growth Grow faster than the market Sales up 11 percent Margin Best-in-class margins 11.4* percent *excluding restructuring charges Cash flow Cash conversion >70% 92 percent ) n o i l l i b K E S ( l s e a S 80 70 60 50 40 30 20 10 0 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% ) t n e c r e p ( i n g r a m g n i t a r e p O Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Sales Operating margin excluding restructuring charges Operating margin excluding Sony Ericsson and restructuring charges 10 Board of directors’ report ericsson annual report 2008 Business results our strategy for these further cost reductions is to leverage the synergies between different technologies, in-house and Group sales grew 11 (4) percent, driven by higher networks and acquired, and take advantage of the opportunities from the professional services sales. fluctuations in foreign exchange transformation to all-ip. the number of software platforms will be rates had a rather significant negative effect on reported sales reduced and the re-use of hardware increased. in addition, during the first nine months of the year although the trend shifted certain activities will be moved to low-cost countries. this will in the fourth quarter, resulting in a limited effect for the full year. result in a reduction in the number of consultants and other gROUp SALES SEK billion sales of which networks of which professional services of which Multimedia 2008 208.9 142.0 49.0 17.9 percent 2007 change 187.8 129.0 42.9 15.9 11% 10% 14% 13% in an increasingly challenging macro-economic environment, the company adjusts its cost base continuously. the cost reduction targets launched in 2008 were exceeded. in february 2008, a cost reduction plan of seK 4 billion in annual savings was announced, including estimated charges of the same size. all activities with related charges were launched by the third quarter, temporary staff, consolidation of r&d sites and layoffs. as the savings are largely the result of more efficient ways of working, the company’s strategy will remain intact and ericsson’s unique capabilities should not be affected. Networks SEgmENT NET wORKS SEK billion sales of which network rollout operating income operating margin operating margin* 2008 142.0 21.5 11.1 8% 11% percent 2007 change 129.0 18.5 17.4 13% 13% 10% 16% –36% – – and it was announced that further charges would be made in the *excl. restructuring charges fourth quarter. charges for the full year 2008 amounted to seK 6.7 billion in total. this has resulted in annual savings of approximately seK 6.5 billion from year end. We will continue to reduce costs, across all parts of the company at the same pace as in 2008 with restructuring charges of seK 6–7 billion, targeting annual savings of seK 10 billion from the second half of 2010, with an equal split between cost of sales and operating expenses. Mobile network buildouts, especially in high-growth markets, continue to represent the majority of sales. sales of mobile broadband solutions increased during the year, driven by consumer need for higher speeds and better coverage. WcdMa deployments have intensified in general, especially in certain regions like the americas, which has affected the business in a favorable way. ericsson’s market share, as a percentage of operator spending for GsM/WcdMa, remains in the mid-forties. GsM sales were flat and WcdMa sales increased. networks’ business continues to grow where network buildouts and break-in contracts are predominant and price CUSTOmER SATISfACTION EmpLOyEE SATISfACTION 80 70 60 50 40 Excellence Strength Potential Improvements needed 80 70 60 50 40 Excellence Strength Potential Improvements needed 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 ericsson annual report 2008 Board of directors’ report 11 competition is most intense. increased sales of fixed network products by leveraging although margins have started to improve, the proportion of ericsson’s strong mobile position. buildouts of new networks in high-growth markets, including operators are evolving from legacy circuit-switched networks accelerating volumes in india, remains high and continues to to ip, in both fixed and mobile networks, due to need for pressure networks’ margins. increased flexibility and cost savings. ericsson’s routing While some parts of the network equipment market declined technology and solutions from redback enable operators to this year, the mobile broadband equipment market continues to migrate to ip, allowing them to fully leverage investments in show good growth. legacy technology. Mobile packet core, mobile softswitching and backhaul redback is the platform for ericsson to combine and focus all transmission also showed good growth, driven by the migration of its ip efforts under one organization, headquartered in silicon to all-ip. Valley. ip technology gives operators lower cost and is reinforced With 3G subscribers providing significantly higher average in all mobile and fixed standardization bodies. as a result, revenue per user (arpu) than 2G, operators will most likely operators continue to evolve from legacy tdM and atM networks keep their mobile broadband plans and continue to invest. to ip, in both fixed and mobile networks. redback networks the majority of circuit-switched core network sales are now returned to growth, now in more diverse market segments mainly from softswitch solutions with healthy and stable margins. as a result of synergies with ericsson’s sales and marketing ericsson is established as a clear technology and industry leader organization. this indicates a growing acceptance of redback in the global softswitch market. the company has advanced its technology in additional market segments, which expands the market position even further with the introduction of a new- addressable market and creates an environment conducive to generation softswitch, based on blade cluster technology. revenue acceleration. ericsson has the largest installed base of softswitches, providing We remain optimistic regarding growth opportunities for all-ip a solid business from telephony and multimedia communications. networks with ip routing, iMs, broadband access and the future growth areas in core networks will increasingly be the transmission. the company continues to invest in these areas, next-generation user and service Management and ip with the ambition to be the first vendor to combine fixed and Multimedia subsystem (iMs) based applications. mobile networks on one platform – offering operators significant sales of optical and microwave transmission systems to fixed savings and new revenue opportunities. as well as mobile operators grew in line with the market. the company’s ambition to grow faster than the market remains. thus ericsson is investing in sales and marketing to enable it to sell a broader portfolio. ericsson’s Mini-linK micro-wave radio systems, complemented with the wireline access and optical portfolio, is an essential part of mobile broadband rollout, thus enabling Networks sales SEK 142.0 billion – out of which SEK 21.5 billion was network rollout. – Record year for GSM – Mobile broadband firmly established 11% operating margin excl. restructuring charges 10% sales growth NETwORKS SALES Of TOTAL NETwORKS SALES By REgION (seK billion and percent) 9% 23% 2008 68% SEK 142.0 billion E 12.1 D 16.1 11% 9% 18% A 25.6 2008 C 49.8 35% 27% B 38.4 Networks Professional Services Multimedia A Western Europe B Central & Eastern Europe, Middle East and Africa C Asia Pacific D Latin America E North America 12 Board of directors’ report ericsson annual report 2008 Professional Services SEgmENT pROfESSIONAL SERVICES SEK billion sales of which managed services operating income operating margin operating margin* *excl. restructuring charges 2008 49.0 14.3 6.3 13% 16% percent 2007 change 42.9 12.2 6.4 15% 15% 14% 17% – – – higher proportion of managed services. this is mainly due to successful transformation of operations undertaken to the ericsson ways of working and continuous cost optimization with a focus on operational excellence. common challenges faced by operators today are business growth, operational efficiency and network evolution towards ip. in a converging communications world, new complexity in business models must also be added to the challenges. this creates services opportunities for ericsson. services expertise and experience, in combination with technology professional services sales were particularly encouraging, leadership and business understanding enable partnering with growing at 14 percent to seK 49.0 billion. Growth measured in customers to take on a prime integrator role in complex deployment local currencies amounted to 13 percent compared with an and transformation projects. the company also support operators estimated market growth of some 10 percent. Managed services in creating an efficient environment for consumer service delivery sales grew by 17 percent to seK 14.3 (12.2) billion, as the through network and systems integration expertise. the largest company continued to win contracts for network operations and opportunity in meeting operator challenges is in managed services, hosting services. ericsson is a clear leader in Managed services providing efficiency gains and cost control. and at year end 2008, ericsson-managed network operations during the year, more than 60 percent of the professional served approximately 250 (185) million users. services business was recurring. as the professional services ericsson won several breakthrough managed services deals market develops there are many opportunities for project during the year, including an agreement with Mobily in saudi business, but operators are also seeking longer-term arabia (one of the largest managed services contracts in the partnerships to build competitive edge. combined with an Middle east), managed operations for tdc in denmark (the increasing managed services market, this will help sustain a largest nordic full-scope managed services contract), and healthy level of recurring business for ericsson. managed operations for the shared network between 3uK and an overall enabler of growth and efficiency is our continuous t-Mobile (Mobile Broadband network limited, MBnl) in the uK. work to improve processes, methods and tools. this, together in addition, more than 1,000 systems integration projects were with a strategically dimensioned and staffed services delivery carried out during the year, including a prime integrator contract organization, is what brings excellence to our operations. during for telefonica across latin america for a revenue assurance the year, two new global service delivery centers were opened, solution, end-to-end iptV integration for ote, Greece, telecom another evolutionary step in ericsson’s strategy for developing management transformation consulting for t-Mobile, Germany, global and local service and delivery capabilities, ensuring and a number of iMs and softswitch integrations. business readiness for the global market with increasing focus on operating margin is stable in the mid-teen range despite the emerging markets. pROfESSIONAL SERVICES pROfESSIONAL SERVICES SALES Of TOTAL SALES By REgION (seK billion and percent) SEK 49.0 billion 9% 23% 2008 68% Networks Professional Services Multimedia E 4.6 D 5.5 11% C 10.5 21% 9% A 18.5 38% 2008 20% B 9.8 A Western Europe B Central & Eastern Europe, Middle East and Africa C Asia Pacific D Latin America E North America Professional Services sales SEK 49 billion Managed Services, consulting and systems integration showed good growth. 16% 14% operating margin excl. restructuring charges sales growth ericsson annual report 2008 Board of directors’ report 13 Multimedia SEgmENT mULTImEDIA SEK billion sales operating income operating margin operating margin* *excl. restructuring charges 2008 17.9 –0.1 –1% 1% percent 2007 change 15.9 –0.1 –1% –1% 13% 13% – – organization (ote sa) to act as the end-to-end iptV systems integrator, solutions provider and business consultant. the multimedia market is quickly evolving with converging industries (telecom, media and internet), technologies and payment options. end-to-end revenue management solutions must handle convergent technologies including ip-based broadband services, a variety of business models and partner relationships, as well as be payment-option agnostic. ericsson acquired lHs to form a strong constellation of prepaid and Multimedia sales increased by 16 percent for comparable units, postpaid solutions to capture this opportunity. ericsson’s i.e. excluding divestment of the enterprise pBX operations. solutions for real-time charging and mediation, and billing and revenue Management and service delivery & provisioning customer care solutions, make it a leader in revenue management continued to show good growth while the mobile platform and significantly strengthen the overall multimedia offering. business was starting to experience effects of the weakening Within segment Multimedia, revenue Management (including handset market. operating income includes a seK 0.8 billion gain lHs) and service delivery & provisioning account for the majority from the divestment of shares in symbian. the segment is of sales and generate good growth and margins. tV solutions operating on a breakeven level due to investments to build a (including tandberg television) are also showing good growth leading position in iptV, consumer & Business applications and and have now established ericsson in the tV space. the strategy Multimedia Brokering. is to leverage these leading positions and invest in new areas for this was a year of consolidation and focusing the organization future growth, such as iptV, consumer & Business applications in a number of prioritized areas. as part of this effort, the pBX and Multimedia Brokering. part of the enterprise offering was divested. the retained parts sales opportunities for Multimedia show a positive trend and provide solutions to operators to address the enterprise segment. even though the segment is well established, ericsson continues in addition, the company announced plans to form a joint venture to invest in r&d in new business opportunities which affects with stMicroelectronics, in order to establish a world leader in profitability in the near term. mobile platforms and wireless semiconductors. With these changes, the segment is now focusing exclusively on multimedia Phones solutions for network operators and service providers. see sony ericsson Mobile communications under partnerships tV solutions made good progress with new business and joint ventures. development, especially with the launch of the world’s first iMs- integrated iptV middleware – an end-to-end iptV solution that supports ease of integration and delivers vendor choice for operators. ericsson was selected by Hellenic telecommunications Multimedia sales SEK 17.9 billion Revenue Management and Service Delivery & Provisioning continued to show good growth. 1% operating margin excl. restructuring charges 13% sales growth mULTImEDIA SALES mULTImEDIA SALES Of TOTAL SEK 17.9 billion 9% 23% 2008 68% Networks Professional Services Multimedia By REgION (seK billion and percent) E 1.3 D 1.4 7% 8% 41% A 7.4 17% 2008 C 3.0 27% B 4.9 A Western Europe B Central & Eastern Europe, Middle East and Africa C Asia Pacific D Latin America E North America 14 Board of directors’ report ericsson annual report 2008 Regional overview SALES pER REgION AND SEgmENT 2008 seK billion Western europe ceMa 1) asia pacific latin america north america total share of total percent change net- prof. Multi- works services media percent Total change 25.6 38.4 49.8 16.1 12.1 142.0 68% 10% 18.6 9.8 10.5 5.5 4.6 49.0 23% 14% 7.4 4.9 3.0 1.4 1.2 51.6 53.1 63.3 23.0 17.9 17.9 208.9 9% 13% 100% 11% –2% 9% 16% 25% 34% 11% 1) central and eastern europe, Middle east and africa. Asia pacific became Ericsson’s largest region with a sales increase of 16 (14) percent even though political unrest in certain countries within the region negatively affected sales growth. the company expanded its leading position in india which is now ericsson’s largest and fastest growing market. the chinese market rebounded after the olympic Games and 3G licenses are to be awarded in the beginning of 2009 with rollouts expected to start shortly thereafter. although chinese suppliers have increased their domestic market share, ericsson has maintained its strong market position in china. Japan and indonesia also showed strong development and are now among ericsson’s largest markets. Latin American sales increased 25 (12) percent. Growth western Europe sales decreased by 2 (1) percent with was driven by a combination of GsM enhancements and 3G increased sales of professional services and mobile broadband buildouts. professional services also contributed strongly to the network equipment still more than offset by lower sales of GsM. growth. Mexico and Brazil showed especially strong the high demand for mobile broadband and professional development with no signs of slow-down. the strong growth services is expected to continue as is the decline for GsM. the reported from the region over the last couple of years is not macro-economic development is affecting consumer spending sustainable and will eventually moderate to more normal levels. with a weakening demand for replacement handsets. Mobile North American sales increased by 34 (–15) percent and phone usage appears to be unaffected, requiring operator have stabilized at a higher quarterly level following the reduction spending to maintain network quality of service. of GsM spending in 2007. the recorded slower growth in the In Central and Eastern Europe, middle East and Africa fourth quarter is mainly an effect of a tough year-over-year (CEmA), sales grew by 9 (5) percent driven by continued 2G comparison despite positive effects of the increasing usd buildouts in many markets while a strong growth in russia was exchange rate. the full-year effects from changes in currency driven by ongoing 3G rollouts. Many countries within the ceMa exchange rates were limited. Mobile broadband is now well region have low penetration levels, similar to the rural areas of established with good consumer take-up, which is driving other emerging markets in latin america and asia pacific. Most continued rollouts as well as capacity enhancements. of central and eastern europe have GsM penetration levels on par with Western europe. although initial deployments of 3G are rapidly spreading throughout the region, GsM is expected to remain the predominant technology for the foreseeable future due to affordability of handsets. Sales of networks grew by approximately 15 percent in emerging markets, which now account for 57 (54) percent of Networks’ sales. Networks’ business continues to shift towards these markets. SALES By REgION 2008 ericsson net sales (seK billion) and change (percent) year-over-year 17.9 23.0 34% 25% 2008 16% 63.3 51.6 53.1 –2% 9% Western Europe Central & Eastern Europe, Middle East and Africa Asia Pacific Latin America North America ericsson annual report 2008 Board of directors’ report 15 financial results of operations AbbreviAted income StAtement with reconciliAtion iFrS – non- iFrS meASUre S total SeK billion net sales cost of sales Gross income Gross margin % operating expenses opex as % of sales other operating income and expenses share in earnings of JV and associated companies operating income operating margin % less share in sony ericsson operating income excl Sony ericsson operating margin % excl sony ericsson iFrS restructuring charges 2008 non-ifrs measures 2008 208.9 –134.6 74.3 35.5% –60.6 29% 3.0 –0.4 16.3 7.8% –0.5 16.8 8.0% – 2.5 2.5 4.2 – 0.9 7.6 0.9 6.7 208.9 –132.1 76.8 36.8% –56.4 27% 3.0 0.5 23.9 11.4% 0.4 23.5 11.3% ifrs 2007 187.8 –114.1 73.7 39.3% –52.0 28% 1.7 7.2 30.6 16.3% 7.1 23.5 12.5% non-ifrs measures are used in the income statement to provide meaningful supplemental information to the ifrs results. since there were significant restructuring costs during 2008, but with relatively little benefit and consequently a significant impact on reported results and margins, and as there were insignificant restructuring charges in 2007, non-ifrs measures excluding restructuring charges are presented to facilitate analysis by indicating ericsson’s underlying performance. However, these measures should not be viewed in isolation or as substitutes to the ifrs measures. performance with robust sales growth and best- in-class margins. “We had a solid ericsson annual report 2008” carl-Henric svanberg, president and ceo 16 Board of directors’ report Sales grew 11 percent to SEK 208.9 (187.8) billion Earnings per share (EPS) diluted SEK 3.52 (6.84) down 49 percent the sales growth was driven by strong demand across the portfolio and across all regions, with the exception of Western europe. fluctuations in currency exchange rates had a limited effect on reported sales for the full year. EARNINGS PER SHARE (EPS) eps diluted 2008 3.52 2007 6.84* * a reverse split was made in June 2008. comparative numbers are restated. Gross margin decreased to 36.8 (39.3) percent, excluding restructuring charges eps declined substantially as eps includes restructuring charges. Based on ericsson’s strengthened market position the decline is due to a business mix with high proportion of relative to its peers, the Board considers the underlying earnings network rollout projects which often also include significant third capacity and the financial position to be strong and proposes a party content. a higher proportion of managed services sales with dividend also for 2008, however reduced to seK 1.85 (2.50) per lower than group average gross margins contributed to the decline. share. Excluding restructuring charges, operating income declined by 22 percent to SEK 23.9 (30.6) billion with an operating margin of 11.4 (16.3) percent the main reasons are the decline in gross income, and a negative contribution from sony ericsson of seK –0.5 billion, compared with seK 7.1 billion in 2007. excluding also the result in sony ericsson, operating margin decreased less, to 11.3 (12.5) percent, reflecting the significant difference in the sony ericsson contribution compared to 2007. . ericsson annual report 2008 Board of directors’ report 17 financial position conS olidAted bAl Ance Sheet (AbbreviAted) december 31, SeK billion ASSetS non-current assets, total current assets, total – of which trade receivables – of which inventory total assets eQUitY And liAbilitieS equity non-current liabilities, total current liabilities, total – of which trade payables total equity and liabilities 1) 2008 2007 87.2 198.5 75.9 27.8 285.7 142.1 39.5 104.1 23.5 285.7 87.0 158.1 60.5 22.5 245.1 135.0 32.4 77.7 17.4 245.1 1) of which interest-bearing liabilities and post-employment benefits were seK 40.4 billion (seK 33.4 billion in 2007). Net cash SEK 34.7 (24.3) billion Days Sales Outstanding (DSO) 106 (102) days the improved net cash position is largely a result of the favorable High sales in the second half of the year as well as payment cash flow from operations reflecting working capital efficiency terms in network buildout contracts with retention of payments improvements. payment readiness was considerably strengthened until provisional and final acceptance have led to an increase in from seK 65 billion at the end of 2007 to seK 85 billion at year end. dso. the company has initiated a number of actions to improve such terms. However, adjusted for currency effects, dso showed Working Capital SEK 100 (86) billion a slight decrease compared to 2007. results of ongoing efforts to improve working capital efficiencies relating to receivables, inventories and payables have been partly Payable days 55 (57) days offset by strong movements in currency translation effects. the the slight deterioration is mainly a reflection of the vendor mix, improvement of cash contributed to the increase in working with shorter payment cycles related to subcontracted service capital. providers for network rollout services, in combination with a higher proportion of such contracts. dAYS SAleS oUtStAndinG (dSo) inventorY tUrnover (ito) PAYAble dAYS 106 102 110 90 85 81 70 75 50 2004 2005 2006 2007 2008 5.8 5.6 5.4 5.2 5.0 4.8 4.6 5.7 5.4 5.2 5.2 5.0 2004 2005 2006 2007 2008 58 57 56 55 54 53 52 51 50 49 48 57 55 54 52 51 2004 2005 2006 2007 2008 target is less than 90 days target is more than 5.5 target is more than 60 18 Board of directors’ report ericsson annual report 2008 Inventory Turnover (ITO) 5.4 (5.2) times Credit Ratings overall inventory turnover was improved slightly, with faster the company’s credit rating was maintained at “solid investment turnover in both product supply and customer order work in grade” by both Moody’s and standard & poor’s. process, partly offset by the higher proportion of work in progress inventory. Off balance sheet arrangements there are currently no material off-balance sheet arrangements Return on Equity (ROE) 8.2 (17.2) percent that have or would be reasonably likely to have a current or the return on equity, including restructuring charges, developed anticipated effect on the company’s financial condition, revenues unfavorably. this development is a major reason for the or expenses, results of operations, liquidity, capital expenditures continued efforts to improve profitability through continued focus or capital resources. on a more competitive product portfolio, harvesting of market share gains and of acquisitions made as well as continued cost reductions. Return on Capital Employed (ROCE), excluding restructuring charges, 16 (21) percent the decline is mainly a result of an increase in capital employed in combination with the reduced gross margin and the lower sony ericsson result which have reduced the operating income. roce improvements are being addressed in the company’s restructuring and capital efficiency activities. Debt maturity profile ericsson´s cash position of seK 75 billion is currently deemed to be sufficient to cover any short- and medium-term cash needs including debt repayment of usd 483 million and eur 471 million maturing in 2009 and 2010 respectively. during the year, maturing debt was refinanced with the european investment Bank (eiB) with a seK 4 billion loan maturing in 2015, to support r&d activities. in addition to cash in the balance sheet, there is an undrawn committed credit facility of usd 2 billion (maturing 2014) in place as a liquidity reserve. debt mAtUritY ProFile n o i l l i b K E S 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Notes and Bonds Other financial liabilities Loan from the European Investment Bank ericsson annual report 2008 Board of directors’ report 19 cash flow cASh Flow (AbbreviAted) jAnUArY–december SEK billion net 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 from financing activities cash conversion 1) 2008 26.0 –2.0 24.0 –8.5 15.5 –7.2 92% 2007 29.3 –10.1 19.2 –27.5 –8.3 6.3 66% 1) cash flow from operating activities divided by net income reconciled to cash. Cash flow from operations SEK 24.0 (19.2) billion Cash flow from financing activities SEK –7.2 (6.3) billion the improvement from last year is largely attributable to a more the negative cash flow is largely attributable to the dividend paid favorable development of net operating assets which grew to shareholders. Maturing borrowings were largely refinanced substantially less than net sales, as a result of increased focus through a new loan with the european investment Bank (eiB) to on working capital management. in 2008 ericsson received seK support r&d activities. 3.6 (3.9) billion in dividends from sony ericsson. Cash flow from investing activities SEK –8.5 (–27.5) billion Cash conversion 92 (66) percent the cash conversion rate relates income adjusted for non-cash items to operating cash flow. the cash conversion rate was during 2008, the company divested/acquired operations with favorably impacted by non-cash items related to provisions in less than seK 1 (–26) billion net cash received. this is partly combination with a high cash flow from operations and a offset by short-term investments of seK –7.2 (3.5) billion related dividend payment from sony ericsson related to 2007. to cash management. Restricted cash in certain countries, there are legal or economic restrictions on the ability of subsidiaries to transfer funds to the parent company in the form of cash dividends, loans or advances. such restricted cash amounted to seK 8.2 (5.8) billion. 20 Board of directors’ report ericsson annual report 2008 Capital expenditures (capex) We continuously monitor the company’s capital expenditures and evaluate whether adjustments are necessary in light of market conditions and other economic factors. capital expenditures are typically investments in test equipment used to develop, manufacture and deploy network equipment. However, capital expenditures in 2008 came mainly from investments needed to support the growing services business and establish stronger presence in certain markets. the table summarizes annual capital expenditures during the five years ending december 31, 2008. cAPitAl eXPenditUreS 2004 –2008 seK billion capital expenditures of which in sweden as percent of net sales 2008 4.1 1.6 2.0% 2007 4.3 1.3 2.3% 2006 3.8 1.0 2.2% 2005 3.4 1.0 2.2% 2004 2.5 1.1 1.9% We do not expect capital expenditures in relation to sales to differ significantly in 2009, remaining at roughly 2 percent. in addition to normal capital expenditures, there is a commitment to invest usd 1.1 billion to establish a new joint venture with stMicroelectronics. We believe the facilities that the company now occupies are suitable for its present needs in most locations. as of december 31, 2008, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness. payment readiness by more than seK 20 billion. “We increased our ” Hans Vestberg, cfo ericsson annual report 2008 Board of directors’ report 21 risk Management • to ensure competence in key technology areas and systems integration. the Board is actively engaged in risk management in conjunction with the annual strategy process, where risks related to set long- term objectives are discussed and strategies formally approved by the Board. risks related to annual targets for the company are • to safeguard continued technology leadership. • to improve margins by various actions. • to improve capital efficiency and ensure satisfactory cash flow. risks are categorized as operational risks or financial risks. the also reviewed by the Board as the targets are presented for company also manages risks related to financial reporting and to approval and then monitored continuously during the year. compliance with applicable laws and regulations. the approach to certain transactional risks require specific Board approval, e.g. risk management reflects the scale and diversity of the borrowing or customer finance in excess of pre-defined limits. company’s business activities and balances central coordination the general economic downturn during 2008 and the and support with delegated risk management responsibilities. consequences for the business were assessed in both strategy for more information on risks related to our business, see also and target setting. due to the increased difficulties of forecasting risk factors on page 114. customer demand, a continued focus on cost management and a strong liquidity were emphasized. Operational risk management for ericsson’s long-term performance, the following industry risk management is integrated within the ericsson Group fundamentals were analyzed and risks and opportunities evaluated: • a rapid technological development. • trends in subscriber and traffic growth, introduction and Management system and is based on the following principles: • risks are dealt with on three levels to ensure operational effectiveness, efficiency and business continuity – in the adoption of new types of services and devices, and effects of strategy process, in annual target setting, within ongoing changes in tariffs and subscription plans. operations by transaction (e.g. customer bids/contracts, • a changing competitive landscape, with consolidation among customers and vendors and new suppliers becoming stronger. • convergence of the telecom, datacom and media industries, resulting in new types of competition and customers. • regulatory impact regarding e.g. radio frequencies, licenses, and roaming charges. activities that were in focus this year include: • to capitalize on the acquisitions made and the broader product portfolio created. • in partnership with leading customers move forward in network acquisitions, investments, r&d projects). • risks are subject to various process controls, such as decision tollgates and approvals. • in the strategy and target setting processes, a balanced scorecard approach is used to ensure a comprehensive assessment of risks and opportunities across several perspectives: financial, customer/market, product/innovation, 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 convergence and full service broadband. achieve these objectives. to ensure that actions are taken to realize the strategies, focus areas are identified to be included STRATEGY, TARGET SETTING AND RISK MANAGEMENT CYCLE Board Target Approval Review of one-year risks Target Setting (12 month horizon) Related risk identification and mitigation Market Unit & Account Planning Board Strategy Approval Review of long-term risks Q4 Dec Jan Q1 Nov Feb Oct Sep NEW BUSINESS DEVELOPMENT Mar Apr Aug May Q3 Jul Jun Q2 Group Management Strategy directives Quantitative and qualitative situation analysis Group Strategy Development (five year perspective) Business Unit & Group Function Strategy planning Strategic risk identification and mitigation Quarterly risk monitoring Global Management Conference on Strategy 22 Board of directors’ report ericsson annual report 2008 in the near-term target setting and planning for the coming year. • each risk is owned and managed by an operational unit that is held accountable and monitored through unit steering groups • Market risks in securities included in pension plan assets. • liquidity and financing risks, where the company’s treasury function manages the company’s liquidity through monitoring and Group Management. of its payment readiness and refinancing needs and sources. • approval limits are clearly established with escalation according to defined delegations of authority. certain types of risk, such during 2008, there have not been any defaults in the payment of principal or interest, or any other material default relating to the as information security/it, corporate responsibility, physical indebtedness of ericsson. for further information on financial risk security, business continuity and insurable risks are centrally management, see notes to the consolidated financial coordinated. a crisis management council is established to deal statements – note c14, “trade receivables and customer with ad hoc events of a serious nature, as necessary. finance”, note c19, “interest-Bearing liabilities” and note c20, “financial risk Management and financial instruments”. Financial risk management the company has an established policy governing its financial Financial reporting risks risk management. this is carried out by the treasury function to ensure accurate and timely reporting that is compliant with within the parent company and by a customer finance function. financial reporting standards and stock market regulations, the these are both supervised by the finance committee of the company has adopted accounting policies and implemented Board of directors. the policy governs identified financial risk financial reporting and disclosure processes and controls. the exposures regarding: • 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 company must also comply with the sarbanes-oxley act. Compliance risks the company has implemented a number of Group policies and towards the usd and related currencies, with approximately directives to ensure compliance with applicable laws and 43 percent of sales and approximately 32 percent of spending regulations, including a code of Business ethics, covering among exposure in 2008. a variety of hedging activities are used to other areas: labor laws, trade embargoes, environmental manage foreign exchange risks. regulations, corruption, fraud and insider trading. regular training • interest rate risks, as the values of cash and bank deposits, borrowings and post-employment liabilities as well as related is conducted in this area in the form of seminars as well as e-learning on internal training web sites, where employees take interest income and expenses are exposed to changes in courses and tests and get certificates for passed courses. interest rates. • credit risks in trade and customer finance receivables, internal audits are routinely conducted regarding compliance with policies, directives and processes as well as in the areas of including credit risk exposures in identified high-risk countries, trade compliance, fraud, it, security, health and safety, as well as credit risks regarding counterparties in financial environment and supply chain management. transactions. ericsson annual report 2008 Board of directors’ report 23 other information Employees planned for 2009, including the transfer of ericsson’s mobile platforms operations into the new joint venture with stMicroelectronics. employee headcount at year end was 78,750 (74,011). Most of the RESEARCH AND DEVELOPMENT PROGRAM additions were due to outsourcing agreements with operators as a result of the growing managed services business. during the year, 3,415 (6,657) employees left the company while 8,144 (16,887) joined the company. please see notes to the consolidated financial statements – note c29, “information regarding employees, Members of the Board of directors and Management”. Credit ratings Both Moody’s and standard & poor’s (s&p) credit rating agencies maintained ericsson’s credit rating during 2008. at year end, ratings of ericsson’s creditworthiness were Baa1 for Moody’s and BBB+ for s&p, both of which are considered to be “investment Grade.” expenses (seK billion) 1) as percent of sales employees within r&d at december 31 2) patents 2) 2008 2007 2006 30.9 14.8% 28.8 15.4% 27.5 15.3% 19,800 19,300 17,000 24,000 23,000 22,000 1) excluding restructuring charges. 2) the number of employees and patents are approximate. during 2009, r&d expenses, including the amortization of intangible assets from acquisitions but excluding ericsson’s mobile platform activities and restructuring charges, are expected to be approximately seK 27–28 billion. currency translation effects could affect the actual level of reported spending. ERICSSON CREDIT RATINGS YEAR END 2006 –2008 Partnerships and joint ventures Moody’s 2008 Baa1 2007 Baa1 2006 Baa2 standard & poor’s BBB+ BBB+ BBB– Research and development Sony Ericsson suffered from weakening demand for mid to high-end phones in markets where it has a higher than average market share, especially in Western europe. units shipped and asp (average sales price) decreased which caused sales to decline. Weaker exchange rates for certain currencies (e.g. seK, GBp, Brl) relative to the eur also contributed to the lower sales. a robust r&d program is essential to ericsson’s competitiveness the sony ericsson gross margin declined significantly and future success. With most r&d invested in mobile reflecting lower volumes and lower prices. also the operating communications network infrastructure, ericsson’s program is margin was impacted by this. despite the breakeven results and one of the largest in the industry. the efficiency of the r&d necessary restructuring charges, sony ericsson has a healthy activities has been improved, enabling a faster time to market for balance sheet with a strong net cash position of eur 1,072 million. products and increased investment in new areas such as income before taxes was eur 92 (1,574) million, excluding multimedia solutions while decreasing r&d as a percentage of restructuring charges. a eur 480 million operating expense sales. a further reduction of approximately seK 3–4 billion is reduction program has been initiated with full effect expected by SONY ERICSSON million 2 . 1 5 3 . 2 4 4 . 3 0 1 6 . 6 9 8 . 4 7 million Euro 8 6 2 , 7 5 2 5 , 6 6 1 9 , 2 1 4 4 2 , 1 1 9 5 9 , 0 1 million Euro 4 7 5 , 1 8 9 2 , 1 6 8 4 2 1 5 3 3 8 8 – – 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 NuMBER Of uNITS SHIPPED SALES INCOME BEfORE TAXES 24 Board of directors’ report ericsson annual report 2008 the end of 2009. restructuring charges are estimated to eur the joint venture will acquire relevant assets from the owner 300 million of which eur 175 million were taken during 2008. companies. after these acquisitions, the joint venture will have a ericsson’s share in sony ericsson’s income before tax was seK cash position of about usd 0.4 billion. ericsson contributes usd –0.5 (7.1) billion. seK 3.6 billion was contributed to ericsson’s 1.1 billion net to the joint venture, out of which usd 0.7 billion is cash flow in the form of dividend payments related to 2007. paid to st. the joint venture is expected to become operational the joint venture results are accounted for in accordance with during the first quarter of 2009. the equity method. SONY ERICSSON RESuLTS 2006 –2008 units sold (millions) sales (eur m.) percent 2008 change 2007 2006 96.6 11,244 –7% –13% 103.4 12,916 74.8 10,959 income before tax (eur m.) net income (eur m.) ericsson’s share of income before tax (seK billion) –83 –73 –0.5 – – – 1,574 1,114 1,298 997 7.1 5.9 for more information on transactions with sony ericsson, please see also notes to the consolidated financial statements – note c30, “related party transactions”. Acquisitions and divestments in total, the company has spent seK 40.7 billion net in acquisitions/divestments during the last three years (2006–2008). acquisitions were insignificant in 2008, seK 26.3 billion in 2007 and seK 18.1 billion in 2006. divestments were made for seK 0.6 billion in 2008, seK 0.1 billion in 2007 and seK 3.1 billion in 2006. for more information, please see notes to the consolidated financial statements – note c26 “Business combinations”. Material contracts and contractual obligations Material contractual obligations are outlined in the following table. operating leases are mainly related to offices and production New joint venture. stMicroelectronics and ericsson agreed to facilities. purchase obligations are related mainly to outsourced establish a joint venture which will have one of the industry’s manufacturing, r&d and it operations and to components for strongest product offering in semiconductors and platforms for our own manufacturing. except for those transactions previously mobile devices. the businesses being combined are already described in this report, ericsson has not been a party to any major suppliers to four of the industry’s top five handset material contracts over the past three years other than those manufacturers, who together represent almost 80 percent of entered into during the ordinary course of business. handset shipments. the joint venture will have 8,000 employees with pro forma 2008 sales of usd 3.6 billion. the 50/50 joint venture, to be called st ericsson, will be headquartered in Geneva, switzerland. of the almost 8,000 employees, some 5,000 will be from st-nXp Wireless and approximately 3,000 will be from ericsson’s mobile platforms operations. ericsson annual report 2008 Board of directors’ report 25 CONTRACTuAL OBLIGATIONS 2008 Legal and tax proceedings (seK billion) 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 27.4 2.2 13.9 <1 year 4.4 0.2 3.4 1.6 – 13.1 23.5 13.1 23.5 3.8 3.8 payment due by period 1–3 years 5.5 3–5 years >5 years 3.7 13.8 0.4 4.9 0.1 – – – 0.3 2.7 – – – – 6.7 1.3 2.9 1.5 – – – in the fall of 2007, ericsson was named as a defendant in three putative class action suits filed in the united states district court for the southern district of new York. the complaints allege violations of the united states securities laws principally in connection with ericsson’s october 2007 profit warning. in february 2008, the court consolidated the three putative class actions into one. in June 2008, ericsson filed a motion to dismiss the complaint. in december, the court granted the defendant’s motion and dismissed the case in its entirety. in early January 2009, the plaintiffs appealed the court’s decision to dismiss the case. following issuance of the 2007 third-quarter profit warning, the nasdaQ oMX stockholm brought an inquiry to determine Total 85.5 48.4 10.9 19.5 whether the company appropriately issued the profit warning 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 receivables and customer financing”. ericsson is party to certain agreements which include provisions that may take effect, be altered or cease to be valid due to a change in control of the company, as a result of a public takeover offer. such provisions are not unusual for certain types of agreements such as joint-venture agreements, financing agreements and certain license agreements. However, none of the agreements that ericsson currently has in effect would entail any material consequences due to a change in control of the company. With a net cash position at year end of seK 34.7 (24.3) billion, we expect the company to be able to cover all capital expenditure plans and other financing commitments for 2009 by using funds generated from operations with no additional borrowing required. and made appropriate disclosure at the november 20, 2007, management briefing. the financial services authority (fsa) in england initiated a similar inquiry. ericsson has cooperated fully with the inquiries. in March 2008, the disciplinary committee of nasdaQ oMX stockholm announced that ericsson’s statements at the november 20, 2007, analyst meeting did not violate the exchange’s listing regulations. fsa has, in January 2009, informed ericsson that they do not intend to take formal action in relation to the matters. in october 2005, ericsson filed a complaint with the european commission requesting that it investigate and stop us-based Qualcomm’s anti-competitive conduct in the licensing of essential patents for 3G mobile technology, claiming Qualcomm was violating eu competition law and failing to meet the commitments Qualcomm made to international standardization bodies that it would license its technology on fair, reasonable and non-discriminatory terms. at the same time, Broadcom, nec, nokia, panasonic Mobile communications and texas instruments each filed similar complaints. the european 26 Board of directors’ report ericsson annual report 2008 commission opened a first-phase investigation in december of not appealed and thus has become final and binding. 2005 and in august 2007, it decided to conduct an in-depth for income tax purposes, swedish fiscal authorities have investigation of the case as a matter of priority. disallowed deductions for sales commission payments via together with most of the mobile communications industry, external service companies to sales agents in certain countries. ericsson has been named as a defendant in two class action Most of these taxes have already been paid. the decision lawsuits in the united states where plaintiffs allege that adverse covering the fiscal year 1999 was appealed. in december 2006, health effects could be associated with the use of mobile the county administrative court in stockholm rendered a phones. the cases are currently pending in the federal court in judgment in favor of the fiscal authorities. also this judgment pennsylvania and the superior court of the district of columbia. has been appealed. in september 2008, the federal court in pennsylvania dismissed plaintiffs’ claims as preempted by federal law. plaintiffs are appealing this decision to the third circuit court of appeals. the district of columbia case is stayed pending the outcome of the appeal. in January 2009, ericsson settled a patent infringement lawsuit brought by freedom Wireless inc. against ericsson and its us- based customers of prepaid wireless products and services alleging that ericsson’s pre-paid service and charging system products infringed the three patents-in-suit. the settlement was reflected in the accounts of december 31, 2008. in april 2007, an australian company, QpsX developments pty ltd., filed a patent infringement lawsuit against ericsson inc. and other defendants in the united states district court for the eastern district of texas alleging that ericsson infringed a patent related to asynchronous transfer mode (atM) technology. QpsX accused a number of ericsson products of infringement, including its WcdMa radio network controllers. a trial is scheduled for november 2010. in July 2008, the svea court of appeal upheld the december 2006 judgment of the stockholm city court to acquit all current or former employees of the parent company who had been indicted by the swedish national economics crimes Bureau for evasion of tax control. the svea court of appeal’s judgment was ericsson annual report 2008 Board of directors’ report 27 corporate responsibility Supply chain all suppliers must comply with the code of conduct to ensure The Company’s strong social, environmental and ethical the quality and integrity of the supply chain. the company standards helps to manage risks, create value and deliver a performs regular audits and works with suppliers to instil competitive advantage. Moreover, the commitment generates changes when incidents of non-compliance arise, and is positive business impacts that benefit society. committed to measurable and continuous improvements. ericsson’s approach to corporate responsibility (cr) and sustainability is integrated into its core business operations and in relationships with stakeholders. engagement starts at the top. the Board of directors considers these aspects in governance decision-making, and Group level policies and directives ensure consistency across global operations. ericsson publishes a separate corporate responsibility report which provides additional information about its approach, priorities and performance. the following priority areas have been identified as being the most relevant to the business strategy and sustainability performance. CR priority areas Responsible business practices an incident in Bangladesh highlighted the complexities of meeting code of conduct standards in a global supply chain with tens of thousands of suppliers. in May 2008, substandard labor and environmental practices were revealed at a local radio tower supplier used by ericsson in Bangladesh. code of conduct auditors were immediately sent to investigate. since then, the two main suppliers in Bangladesh have shown good progress in meeting our standards. another supplier was put on hold until sufficient improvements were made. during 2008, ericsson significantly increased the number of audits and assessments globally, trained more auditors, and strengthened the focus on local sourcing activities. Climate change and the environment ericsson’s most material environmental impact is energy ericsson supports the un Global compact and endorses its ten consumption by its products in operation. the company principles regarding human and labor rights, anti-corruption and develops energy-efficient products and services, and green site environmental protection. through the un Global compact, the solutions, which run on a variety of renewable power sources. in company is publicly committed to supporting universal values for 2008, a radio base station power-saving feature was deployed, conducting business. which can put parts of the network in “sleep mode” during low the ericsson Group Management system (eGMs) includes traffic periods. the ericsson tower tube, an energy-efficient site policies and directives in this area: the code of Business ethics, concept, was the winner in the technology design category of the code of conduct, anti-corruption measures and the Group- the 2008 Wall Street Journal technology innovation awards. wide certified environmental Management system. in 2008, ericsson set a new group-level target to reduce its the eGMs is reinforced by training, workshops and monitoring. life-cycle carbon footprint by 40 percent over the next five years, this includes a global assessment program run by an external starting with a 10 percent reduction in 2009. the footprint will assurance provider. assessments include cr-specific areas. include total co2 emission from: ERICSSON LIfE-CYCLE CARBON fOOTPRINT 2008 ~24 ~4 ~0.8 ~4 ~ –0.3 Supply chain Ericsson activities Operator activities Products operation End-of-life treatment Estimated emissions from operations, 2008 Estimated emissions from future life-time operations ~ = approximately n o t M e 2 O C 25 20 15 10 5 0 –5 28 Board of directors’ report ericsson annual report 2008 • ericsson in-house activities, such as production, transports, performance can be further developed. during 2008, ericsson sites and business travel by air. established a group-level program for improved reporting on • the lifetime use of the products sold by ericsson during the health and safety issues and performance. employees periodically year (portfolio energy-efficiency improvement). acknowledge that they understand the code of Business ethics. ericsson ranked second on the carbon disclosure project (cdp) swedish index. Radio waves and health We believe that the company is in compliance with all material ericsson provides public information on radio waves and health environmental, health and safety laws and regulations which and supports independent research to further increase pertain to its operations and business activities. for electronic knowledge in this area. ericsson currently co-sponsors about 40 waste, ericsson has set even more ambitious targets on a global different ongoing research projects related to electromagnetic level than required by the eu directive on Waste electrical and fields, radio waves and health; it has supported over 90 studies electronic equipment (Weee). since 1996. independent expert groups and public health ericsson is also in compliance with the eu directive on authorities, including the World Health organization (WHo), have restriction of Hazardous substances (roHs) and the eu reviewed the total amount of research and consistently regulation registration, evaluation, authorization and limitation of concluded that the balance of evidence does not demonstrate chemicals (reacH). any health effects associated with radio wave exposure from Meeting the Millennium Development Goals connectivity fuels economic growth, which is particularly vital for Ericsson Response either mobile phones or radio base stations. the billions of people living at the base of the economic pyramid ericsson response is a global employee volunteer initiative to – the markets of the future. to further this end, ericsson is rapidly roll-out communication solutions and provide committed to helping achieve the un Millennium development telecommunications experts to assist disaster relief operations. Goals (MdGs), eight goals to eliminate extreme poverty by 2015. efforts are coordinated through the un office for the as an example, ericsson is engaged in a public-private coordination of Humanitarian affairs, un World food programme partnership with pan-african mobile operators Mtn and Zain and and the international federation of red cross and red crescent columbia university’s earth institute to deliver voice and internet societies (ifrc). communications to more than 500,000 people in 10 countries in in 2008, ericsson response provided support to save the rural sub-saharan africa as part of the Millennium Villages project. children in southern sudan. after heavy flooding in panama, Employees communication support was provided to relief workers through ifrc and the panamanian red cross. ericsson response in 2008, 90 percent of employees took part in the annual continued to support the un in establishing operations in the employee opinion survey. By understanding how employees central african republic. perceive their work environment, the workforce satisfaction and SAM’S CORPORATE SuSTAINABILITY ASSESSMENT Ericsson is actively involved with a number of organizations that share the sustainability goals which gives the Company a deepened understanding of our markets. These include: • The Business Leaders’ Initiative on Human Rights (BLIHR) which seeks to find practical applications of the Universal Declaration of Human Rights within a business context. • The uN Global Compact. A signatory since its inception, Ericsson also supports its Caring for Climate Initiative. • The Global e-Sustainability Initiative (GeSI), a multi-stakeholder ICT industry initiative to find ways to apply technologies to more sustainable development. • The Prince of Wales’s Corporate Leaders’ Group on Climate Change, working toward an international framework to tackle climate change. • Ericsson is also actively engaged in related standardization activities. ericsson annual report 2008 Board of directors’ report 29 corporate Governance Board remuneration Members of the Board who are not employees of the company in accordance with the swedish code of corporate Governance, have not received any compensation other than the fees paid for a separate corporate Governance report including an internal Board duties as outlined in notes to the consolidated financial control section has been prepared. there have been no statements – note c29, ”information regarding employees, amendments or waivers to ericsson’s code of Business ethics Members of the Board of directors and Management”. for any director, member of management or any other employee. the 2008 aGM resolved that Board members may choose to the corporate bodies involved in the governance of ericsson receive part of their fees, exclusive of committee work, in the are: the shareholders, the Board of directors, the president and form of synthetic shares, as further described in note c29. ceo, the Group Management and the external auditors. Members and deputy Members of the Board who are employees the Board of directors works according to a work procedure (i.e. the ceo and the employee representatives) have not that outlines rules regarding the distribution of tasks between received any remuneration or benefits other than their normal the Board and its committees and between the Board, its employee entitlements, with the exception of a small fee paid to committees and the president and ceo. the external auditors the employee representatives for each Board meeting attended. examine the financial reports and certain aspects of the internal controls over financial reporting. Executive remuneration ericsson’s operations are governed by the ericsson Group principles for remuneration and other employment terms for top Management system, consisting of: • Management and control elements, i.e. objective setting and strategy formulation, Group policies and other steering documents. executives were approved by the 2008 aGM. the proposed remuneration policy for Group Management for 2009 remains materially the same as for 2008. see note c29, “information regarding employees, Members of the Board of directors • Group-wide standard business processes, including and Management”. operational processes and it tools. • organization and corporate culture. as of december 31, 2008, there were no loans outstanding from, and no guarantees issued to or assumed by ericsson for the benefit of any member of the Board of directors or senior Changes to the Board membership management. the Board of directors is elected each year at the annual General Meeting (aGM) for the period until the next aGM. three employee Long-Term Variable Compensation program representatives are appointed by the trade unions for the same the Board of directors’ proposal for implementation of a long- period of time. at the aGM on april 9, 2008, all board members term Variable compensation (ltV) program for 2008 and transfer were re-elected except for Katherine M. Hudson who had declined of shares in connection therewith was approved by the aGM. re-election. roxanne s. austin was elected as new member of the Board of directors. the Board is committed to high standards of corporate governance. 30 Board of directors’ report ericsson annual report 2008 parent company reverse split of the company’s shares in which five shares of the company’s a and B shares, respectively, were consolidated into the parent company business consists mainly of corporate one share of class a and one share of class B, respectively. in management, holding company functions and internal banking the third quarter, as decided at the annual General Meeting, a activities. the parent company business also includes customer stock issue and a subsequent stock repurchase was carried out. credit management, performed on a commission basis by 19.9 million of ericsson class c shares were issued and later ericsson credit aB. repurchased as treasury stock. these shares have been the parent company is the owner of the majority of ericsson’s converted into ericsson class B shares. intellectual property rights. it manages the patent portfolio, as per december 31, 2008, ericsson had 3,246,351,735 including patent applications, licensing and cross-licensing of shares. the shares were divided into 261,755,983 class a patents and defending of patents in litigations. shares, each carrying one vote, and 2,984,595,752 class B the parent company has 7 (7) branch offices. in total, the shares, each carrying one-tenth of one vote. the two largest Group has 62 (55) branch and representative offices. shareholders at year end were investor and industrivärden net sales for the year amounted to seK 5.1 (3.2) billion and holding 19.42 percent and 13.28 percent respectively of the income after financial items was seK 19.4 (14.7) billion. during voting rights in the company. the fourth quarter, shares in symbian ltd. were sold. in accordance with the conditions of the stock purchase plans exports accounted for 70 (59) percent of net sales. no and option plans for ericsson employees, 5,232,211 shares from consolidated companies were customers of the parent treasury stock were sold or distributed to employees during the company’s sales in 2008 or 2007, while 46 (46) percent of the year. the quotient value of these shares was seK 26.2 million, parent company’s total purchases of goods and services were representing less than 1 percent of capital stock, and from such companies. Major changes in the parent company’s compensation received amounted to seK 83.4 million. the financial position for the year include decreased investments in holding of treasury stock at december 31, 2008, was 61,066,097 subsidiaries of seK 6.8 billion, mostly attributable to write-downs class B shares. the quotient value of these shares is seK 305.3 of investments caused by payment of dividends of approximately million, representing 2 percent of capital stock and related the same amount; decreased current and non-current acquisition cost amounts to seK 589.8 million. receivables from subsidiaries of seK 3.1 billion; increased other current receivables of seK 1.5 billion; increased cash and bank Proposed disposition of earnings and short-term investments of seK 13.6 billion. current and the Board of directors proposes that a dividend of seK 1.85 non-current liabilities to subsidiaries decreased by seK 9.2 billion (2.50 in 2007, adjusted for the reverse split) per share be paid to and other current liabilities increased by seK 5.6 billion. at year shareholders duly registered on the record date april 27, 2009, end, cash and bank and short-term investments amounted to and that the parent company shall retain the remaining part of seK 59.2 (45.6) billion. non-restricted equity. the class B treasury shares held by the ericsson’s annual General Meeting 2008 resolved on a 1:5 parent company are not entitled to receive a dividend. ericsson annual report 2008 Board of directors’ report 31 assuming that no treasury shares remain within the parent company on the record date, the Board of directors proposes post-closing events that earnings be distributed as follows: Ericsson and STMicroelectronics completed the JV deal on february 3, 2009, ericsson and stMicroelectronics amount to be paid to the shareholders seK 6,005,750,710 announced the closing of their agreement merging ericsson’s amount to be retained by the parent company total non-restricted equity of the parent company seK 35,948,343,168 Wireless unit into a 50/50 joint venture, to be called st ericsson. mobile platform operations and stMicroelectronics’ unit st-nXp the deal was completed on the terms originally announced on seK 41,954,093,878 august 20, 2008. as a basis for its proposal for a dividend, the Board of directors has made an assessment in accordance with chapter 18, Board assurance section 4 of the swedish companies act of the parent the Board of directors and the president declare that the company’s and the Group’s need for financial resources as well consolidated financial statements have been prepared in as the parent company’s and the Group’s liquidity, financial accordance with ifrs, as adopted by the eu, and give a fair view position in other respects and long-term ability to meet their of the Group’s financial position and results of operations. the commitments. the Group reports an equity ratio of 50 (55) financial statements of the parent company have been prepared percent and a net cash amount of seK 34.7 (24.3) billion. in accordance with generally accepted accounting principles in the Board of directors has also considered the parent sweden and give a fair view of the parent company’s financial company’s result and financial position and the Group’s position position and results of operations. in general. in this respect, the Board of directors has taken into the Board of directors’ report for the ericsson Group and the account known commitments that may have an impact on the parent company provides a fair view of the development of the financial positions of the parent company and its subsidiaries. Group’s and the parent company’s operations, financial position the proposed dividend does not limit the Group’s ability to and results of operations and describes material risks and make investments or raise funds, and it is our assessment that uncertainties facing the parent company and the companies the proposed dividend is well-balanced considering the nature, included in the Group. scope and risks of the business activities as well as the capital requirements for the parent company and the Group. Sverker Martin-Löf Deputy Chairman Nancy McKinstry Member of the Board Börje Ekholm Member of the Board stockholm february 20, 2009 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 Marcus Wallenberg Deputy Chairman Anders Nyrén Member of the Board Roxanne S. Austin Member of the Board Monica Bergström Carl-Henric Svanberg Jan Hedlund Member of the Board President, CEO and member of the Board Member of the Board Anna Guldstrand Member of the Board 32 Board of directors’ report ericsson annual report 2008 consolidated income statement Years ended December 31, SEK million net sales cost of sales Gross income 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 operating margin % 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 2008 2007 2006 1) 208,930 –134,661 187,780 –114,059 179,821 –104,875 74,269 35.5% 73,721 39.3% 74,946 41.7% –33,584 –26,974 –28,842 –23,199 –27,533 –21,422 –60,558 –52,041 –48,955 2,977 –436 16,252 7.8% 3,458 –2,484 17,226 –5,559 11,667 1,734 7,232 30,646 16.3% 1,778 –1,695 30,729 –8,594 22,135 3,903 5,934 35,828 19.9% 1,954 –1,789 35,993 –9,557 26,436 11,273 394 21,836 299 26,251 185 c6 c12 c7 c7 c8 Other information average number of shares, basic (million) 2) earnings per share attributable to stockholders of the parent company, basic (seK) 2) earnings per share attributable to stockholders of the parent company, diluted (seK) 2) 1) 2006 year figures have been restated for comparability. 2) a reverse split 1:5 was made in June 2008. comparative figures are restated accordingly. c9 c9 c9 3,183 3.54 3.52 3,178 6.87 6.84 3,174 8.27 8.23 ericsson annual report 2008 consolidated financial statements 33 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 2008 2007 C10 2,782 24,877 20,587 3,661 22,826 23,958 property, plant and equipment C11, C26, C27 9,995 9,304 financial assets equity in joint ventures and associated companies other investments in shares and participations Customer finance, non-current other financial assets, non-current deferred tax assets Current assets inventories trade receivables Customer finance, 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 C12 C12 C12 C12 C8 C13 C14 C15 C20 C20 C16 C16 C17 C18 C8 C19, C20 C18 C19, C20 C22 C21 7,988 309 846 4,917 14,858 87,159 10,903 738 1,012 2,918 11,690 87,010 27,836 22,475 75,891 1,975 17,818 37,192 37,813 198,525 60,492 2,362 15,062 29,406 28,310 158,107 285,684 245,117 140,823 1,261 142,084 9,873 311 2,738 24,939 1,622 39,483 14,039 5,542 23,504 61,032 104,117 134,112 940 135,052 6,188 368 2,799 21,320 1,714 32,389 9,358 5,896 17,427 44,995 77,676 Total equity and liabilities 1) 285,684 245,117 1) of which interest-bearing liabilities and post-employment benefits seK 40,354 million (seK 33,404 million in 2007). 34 Consolidated finanCial statements eriCsson annual report 2008 consolidated statement of cash flows January–December, SEK million notes 2008 2007 2006 Operating activities net income adjustments to reconcile net income to cash changes in operating net assets inventories customer finance, current and non-current trade receivables provisions and post-employment benefits other operating assets and liabilities, net 11,667 22,135 26,436 1) c25 14,318 25,985 7,172 6,060 1) 29,307 32,496 –3,927 549 –11,434 3,830 8,997 –445 365 –7,467 –4,401 1,851 –2,553 1,186 –10,563 –3,729 1,652 –1,985 –10,097 –14,007 Cash flow from operating activities 24,000 19,210 18,489 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 c25, c26 c10 –4,133 1,373 –74 1,910 –1,409 944 –7,155 –4,319 152 –26,292 84 –1,053 396 3,499 –3,827 185 –18,078 3,086 –1,353 –1,070 6,180 Cash flow from investing activities –8,544 –27,533 –14,877 Cash flow before financing activities 15,456 –8,323 3,612 Financing activities proceeds from issuance of borrowings repayment of borrowings sale of own stock and options exercised dividends paid 5,245 –4,216 3 –8,240 15,587 –1,291 94 –8,132 1,290 –9,510 124 –7,343 Cash flow from financing activities –7,208 6,258 –15,439 effect of exchange rate changes on cash 1,255 406 58 Net change in cash 9,503 –1,659 –11,769 Cash and cash equivalents, beginning of period 28,310 29,969 41,738 Cash and cash equivalents, end of period c20 37,813 28,310 29,969 1) net income includes net income attributable to minority interest. prior to 2007, net income attributable to minority interest was reported within adjustments to reconcile net income to cash. 2006 comparatives have been restated to reflect this change. ericsson annual report 2008 consolidated financial statements 35 Consolidated statement of recognized income and expense Years ended December 31, SEK million 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 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 2008 2007 2006 –4,015 1,208 440 –7 2 –1 –5,080 1,192 – 8,528 2,330 584 –1,390 – –797 –73 4,100 –1,990 99 –3,119 –769 Total transactions reported directly in equity 2,948 –466 –1,240 net income 11,667 22,135 26,436 Total income and expense recognized for the period 14,615 21,669 25,196 attributable to: stockholders of the parent Company minority interest 13,988 627 21,371 298 25,101 95 36 Consolidated finanCial statements eriCsson annual report 2008 notes to the consolidated Financial statements contents c1 significant accounting policies ............................................................................................................................................................................................................................38 c2 critical accounting estimates and Judgments ........................................................................................................................................................................................... 47 c3 segment information .................................................................................................................................................................................................................................................. 49 c4 net sales ........................................................................................................................................................................................................................................................................... 53 c5 expenses by nature.................................................................................................................................................................................................................................................... 53 c6 other operating income and expenses .........................................................................................................................................................................................................53 c7 Financial income and expenses .......................................................................................................................................................................................................................... 54 c8 taxes .................................................................................................................................................................................................................................................................................... 54 c9 earnings per share ...................................................................................................................................................................................................................................................... 56 c10 intangible assets .......................................................................................................................................................................................................................................................... 56 c11 property, plant and equipment ............................................................................................................................................................................................................................ 58 c12 Financial assets, non-current ............................................................................................................................................................................................................................. 60 c13 inventories......................................................................................................................................................................................................................................................................... 61 c14 trade receivables and customer Finance ................................................................................................................................................................................................... 62 c15 other current receivables ..................................................................................................................................................................................................................................... 64 c16 equity ................................................................................................................................................................................................................................................................................... 64 c17 post-employment Benefits ..................................................................................................................................................................................................................................... 68 c18 provisions .......................................................................................................................................................................................................................................................................... 74 c19 interest-bearing liabilities ....................................................................................................................................................................................................................................... 75 c20 Financial risk Management and Financial instruments ........................................................................................................................................................................ 76 c21 other current liabilities ............................................................................................................................................................................................................................................ 80 c22 trade payables............................................................................................................................................................................................................................................................... 80 c23 assets pledged as collateral ................................................................................................................................................................................................................................. 80 c24 contingent liabilities .................................................................................................................................................................................................................................................. 80 c25 statement of cash Flows ........................................................................................................................................................................................................................................ 80 c26 Business combinations ............................................................................................................................................................................................................................................ 81 c27 leasing ............................................................................................................................................................................................................................................................................... 83 c28 tax assessment Values in sweden ...................................................................................................................................................................................................................83 c29 information regarding employees, Members of the Board of Directors and Management ...........................................................................................84 c30 related party transactions .................................................................................................................................................................................................................................... 91 c31 Fees to auditors ............................................................................................................................................................................................................................................................ 92 c32 events after the Balance sheet Date ................................................................................................................................................................................................................ 92 ericsson annual report 2008 37 notes to the consolidated financial statementsnote c 1 c1 significant accounting policies the consolidated financial statements comprise telefonaktiebolaget lM ericsson, the parent company, and its subsidiaries (“the company”) and the company’s interests in associated companies and joint ventures. the parent company is domiciled in sweden at torshamnsgatan 23, se-164 83 stockholm. the consolidated financial statements for the year ended December 31, 2008, have been prepared in accordance with international Financial reporting standards (iFrs) as endorsed by the eu and rFr 1.1 “additional rules for Group accounting”, related interpretations issued by the swedish Financial reporting Board (rådet för Finansiell rapportering), and the swedish annual accounts act. there is no effect on ericsson’s financial reporting 2008 due to differences between iFrs as issued by the iasB and iFrs as endorsed by the eu, nor is rFr 1.1 or the swedish annual accounts act in conflict with iFrs. the financial statements were approved by the Board of Directors on February 20, 2009. the balance sheets and income statements are subject to approval by the annual meeting of shareholders. new standards, amendments of standards and interpretations, effective as from January 1, 2008: • “reclassification of Financial assets (amendments to ias 39 Financial instruments: recognition and Measurement and iFrs 7 Financial instruments: Disclosures)” (effective from July 1, 2008). an amendment to the standard, issued in october 2008, permits an entity to reclassify non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the fair value through profit or loss category in particular circumstances. the amendment also permits an entity to transfer from the available-for-sale category to the loans and receivables category a financial asset that would have met the definition of loans and receivables (if the financial asset had not been designated as available for sale), if the entity has the intention and ability to hold that financial asset for the foreseeable future. a company shall disclose the amount reclassified into and out of each category and the reason for that reclassification. this amendment has had no impact on the company’s financial result or financial position as the company has not adopted this non- mandatory amendment. • “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 is mandatory for the company’s 2008 financial statements, with retrospective application required. it has not had any impact on the consolidated financial statements. • “iFric 12 service concession arrangements” provides guidance on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. this interpretation is still subject to endorsement by the eu. at present, iFric 12 is not applicable for the company. • “iFric 14/ias 19 – the limit on a Defined Benefit asset, Minimum Funding requirements and their interaction” clarifies when refunds from or reductions in future contributions to defined benefit plans should be regarded as available or firmly decided and provides guidance on the impact of minimum funding requirements (MFr) on such plans. iFric 14 also addresses when a MFr might give rise to a liability. iFric 14 is mandatory for iFrs users for 2008 financial statements with retrospective application required. it has had no material impact on the consolidated financial statements. Reverse split the annual General Meeting on april 9, 2008, decided on a reverse split 1:5 of the company’s shares. the reverse split had the effect that five shares of class a and five shares of class B, respectively, were consolidated into one share of class a and one share of class B, respectively. numbers of shares and earnings per share for comparison periods have been restated accordingly. Changes in financial reporting structure operations related to product area internet payment exchange (ipX) have been transferred from segment professional services to segment Multimedia, and are reported within Multimedia as from January 1, 2008. no restatement is made for year 2007, as the amounts are not material. 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, plan assets related to defined benefit pension plans, and share-based payments with related accruals for social security costs. non-current assets (or 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 the power to govern the financial and operating policies generally associated with ownership of more than one half of the voting rights or in which ericsson by agreement has control. the financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that 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 eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. 38 ericsson annual report 2008 notes to the consolidated financial statementsBusiness combinations at the acquisition of a business, the cost of the acquisition, being the purchase price, is measured as the fair value of the assets given, and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. the acquisition cost is allocated to acquired assets, liabilities and contingent liabilities based upon appraisals made, including assets that were not recognized on the acquired entity’s balance sheet, for example intangible assets such as customer relations, brands and patents. Goodwill arises when the purchase price exceeds the fair value of recognizable acquired net assets. Associated companies and joint ventures investments in associated companies, i.e. 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 obtained through agreement, are accounted for in accordance with the equity method. under the equity method, the investment in an associate is initially recognized at cost and the carrying amount is increased or decreased to recognize 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 these interests are held for operating rather than investing or financial purposes. ericsson’s share of income taxes related to associated companies and joint ventures is reported under the line item taxes in the income statement. unrealized gains on transactions between the company and its associated companies and joint ventures are eliminated to the extent of the company’s interest in these entities. unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. undistributed shares in earnings of associated companies and joint ventures included in consolidated equity are reported as retained earnings. 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 presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period- end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, unless deferred in equity under the hedge accounting practices as described below. 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 note c 1 security. translation differences related to changes in the amortized cost are recognized in profit or loss, and other changes in the carrying 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 translated 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. on consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are accounted for in stockholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded 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. there is no significant impact due to a currency of a hyperinflationary economy. Statement of cash flows the cash flow statement is prepared in accordance with the indirect method. cash flows in foreign subsidiaries are translated at the average exchange rate during the period. payments for subsidiaries acquired or divested are reported as cash flow from investing activities, net of cash and cash equivalents acquired or disposed of, respectively. cash and cash equivalents consist of cash, bank, and short-term investments that are highly liquid monetary financial instruments with 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 professional 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. • licence agreements 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 sold 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 customer. ericsson annual report 2008 39 notes to the consolidated financial statementsnote c 1 sales are recorded net of value added taxes, goods returned, Earnings per share 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 companies, 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 18 “revenue” or ias 11 “construction contracts”, 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: • 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 software as well as services such as network rollout. revenue is recognized when risks and rewards have been transferred to the customer, normally stipulated in the 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, the company defers the recognition of revenue until all elements essential to the functionality have been delivered. • contracts for various types of services include services such as: training, consulting, engineering, installation, multi-year managed 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. • contracts generating licensing fees for the use of the company’s technology or intellectual property rights, i.e. not being a part of a sold product. these are mainly fees related 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 sold by the customer/licensee. the contract type that falls under ias 11 is: • construction-type contracts. in general, a construction type contract is a contract where the company supplies to a customer, 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, generally using the milestone output method. Basic earnings per share are calculated by dividing net income attributable to stockholders of the parent company by the weighted average number of shares outstanding (total number of shares less treasury stock) during the year. Diluted earnings per share are calculated by dividing net income attributable to stockholders of the parent company, when appropriate adjusted by the sum of the weighted average number of ordinary shares outstanding and dilutive potential ordinary shares. potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share. stock options and rights to matching shares are considered dilutive when the actual fulfillment of any performance conditions as of the reporting date would give a right to ordinary shares. Furthermore, stock options are considered dilutive only when the exercise price is lower than the period’s average share price. Financial assets Financial assets are recognized when the company becomes a party to the contractual provisions of the instrument. regular purchases and sales of financial assets are recognized on the settlement date. 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 company classifies its financial assets in the following categories: 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. Financial assets 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. 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 acquired principally for the purpose of selling or repurchasing in the near term. Derivatives are classified as held for trading, unless they are designated as hedges. assets in this category are classified as current assets. Gains or losses arising from changes in the fair values of the “financial assets at fair value through profit or loss”-category (excl derivatives) are presented in the income statement within Financial income in the period in which they arise. Derivatives are presented in the income statement either as cost of sales, financial income or financial expense, depending on the intent with the transaction. 40 ericsson annual report 2008 notes to the consolidated financial statementsnote c 1 Loans and receivables receivables are subsequently measured at amortized cost using the effective interest rate method, 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. recoveries of amounts previously written off are credited against selling expenses in the income statement. Financial Liabilities Financial liabilities are recognized when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities are derecognized when they are extinguished, i.e. when the obligation specified in the contract is discharged, cancelled or expires. Available-for-sale financial assets Borrowings available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. 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 company’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 monetary 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 recognized 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 impaired. 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. impairment losses recognized in the income statement on equity instruments 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 receivable. significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. the amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the 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 receivable is finally established as uncollectible, it is written off against the allowance account for trade receivables. subsequent 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 statement either as cost of sales, financial income or financial expense depending on the intent of the transaction. 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 designated 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, “Financial risk Management and Financial instruments”. Movements in the hedging reserve in stockholders’ equity are shown in note c16, “equity”. the fair value of a hedging derivative is classified as a non-current ericsson annual report 2008 41 notes to the consolidated financial statementsnote c 1 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 derivatives are classified as current assets or liabilities. a) Fair value hedges changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. the company only applies fair value hedge accounting for hedging fixed interest risk on borrowings. Both gains and 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 carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the period to maturity. 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 expense. 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, inventory or fixed assets), the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement 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 recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within financial income or expense. c) Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. any gain or loss on the hedging instrument 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 expense. Gains and losses deferred in equity are included in the income 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 measured at the higher of • the amount determined as the best estimate of the net expenditure required to settle the obligation according to the guarantee contract, 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. risks of obsolescence have been measured by estimating market value based on future customer demand and changes in technology and customer acceptance of new products. Intangible assets a) Intangible assets other than goodwill intangible assets other than goodwill comprise 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 acquired intangible assets are stated at initially recognized amounts less accumulated amortization and impairment. amortization and any impairment losses are included in research and development expenses, mainly for capitalized development expenses and patents, in selling and administrative expenses, mainly for customer relations and brands, and in cost of sales. costs incurred for development of products to be sold, leased or otherwise marketed or intended for internal use are capitalized as from when technological and economical feasibility has been established until the product is available for sale or use. these capitalized expenses are mainly generated internally and include direct labor and directly attributable overhead. amortization of capitalized development expenses begins when the product is available for general release. amortization is made on a product or platform basis according to the straight-line method over periods not exceeding five years. research and development expenses directly related to orders from customers are accounted for as a part of cost of sales. other research and development expenses are charged to income as incurred. amortization of acquired intangible assets, such as patents, customer relations, brands and software, is made according to the straight-line method over their estimated useful lives, normally not exceeding ten years. the company has not recognized any intangible assets with indefinite 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 the value in use and the 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. application of after tax amounts in calculation, both in 42 ericsson annual report 2008 notes to the consolidated financial statementsrelation to cash flows and discount rate is applied due to that available models for calculating discount rate include a tax component. 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 and if the recoverable amount is higher than the carrying value. an impairment loss is reversed only to the extent that the asset’s carrying amount after reversal does not exceed the carrying amount, net of amortization, which would have been reported if no impairment loss had been recognized. b) Goodwill as from the acquisition date, goodwill acquired in a business combination is allocated to each cash-generating unit (cGu) of the company expected to benefit from the synergies of the combination. three of ericsson’s four operating segments have been identified as cGus. no goodwill is assigned to segment phones. an annual impairment test for the cGus to which goodwill has been allocated is performed in the fourth quarter, or when there is an indication of impairment. impairment testing as well as recognition of impairment of goodwill is performed in the same manner as for intangible assets other than goodwill, see description under “intangible assets other than goodwill” above. an impairment loss in respect of goodwill is not reversed. certain specific disclosures are required in relation to goodwill impairment testing. these disclosures are given in note c2, ”critical accounting estimates and Judgments” below and in note c10, “intangible assets”. Property, plant and equipment property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is charged to income, generally on a straight-line basis, over the estimated useful life of each 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, 3–10 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 of 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 recognized within other operating income and expenses in the income statement. note c 1 Leasing Leasing when the Company is the lessee leases on terms in which the company assumes substantially all the risks and rewards of ownership are classified as finance leases. upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that type of asset, although the depreciation period must not exceed the lease term. other leases are operating leases, and the leased assets under such contracts are not recognized on the balance sheet. costs under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Leasing when the Company is the lessor leasing contracts with the company as lessor are classified as finance leases when the majority of risks and rewards are transferred to the lessee, and otherwise as operating leases. under a finance lease, a receivable is recognized at an amount equal to the net investment in the lease and revenue 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 carry forwards. a deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences and tax loss carry forwards can be utilized. Deferred tax is not recognized for the following temporary differences: goodwill not deductible for tax purposes, for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and for 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. ericsson annual report 2008 43 notes to the consolidated financial statementsnote c 1 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 utilization of unused tax losses in different tax jurisdictions. all deferred tax assets are subject to annual review of probable utilization. the largest amounts of tax loss carry forwards relate to 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. When the effect of the time value of money is material, discounting is made of estimated outflows. However, the actual outflows as a result of the obligations may differ from such estimates. the provisions are mainly related to warranty commitments, restructuring, projects and other obligations, 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 finance guarantees. product warranty commitments consider probabilities of all material 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 the reporting date. a restructuring obligation is considered to have arisen when the company has a detailed formal plan for the restructuring (approved by management), which has been communicated in such a way that a valid expectation has been raised among those affected. project related provisions include estimated losses on onerous contracts, contractual penalties and undertakings. For losses on customer contracts, a provision equal to the total estimated loss is recorded when a loss from a contract is anticipated and possible to estimate reliably. these contract loss estimates include any probable penalties to a customer under a loss contract. other provisions include provisions for income taxes, value added tax issues, litigations, supplier claims, customer finance and other provisions. the company provides for estimated future settlements related to patent infringements based on the probable outcome of each infringement. 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 with the counterpart. certain present obligations are not recognized as provisions as it is not probable that an economic outflow will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. such obligations are reported as contingent liabilities. For further detailed information we refer to c24 contingent liabilities. 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 expenses 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 employees. the related actuarial and investment risks fall on the company. the present value of the defined benefit obligations for current and former employees is calculated using the projected unit credit Method. the discount rate for each country is determined by reference to market yields on high-quality corporate bonds that have maturity dates approximating the terms of the company’s obligations. in countries where there is no deep market in such bonds, the market yields on government bonds are used, considering the medium term trend of such bonds. 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 possible 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 employee turnover, changed life expectancy, salary changes, changes in the discount rate and differences between actual and expected return on plan assets. actuarial gains and losses are recognized in equity in the period in which they occur. the company’s net liability for each defined benefit plan consists of the present value of pension commitments less the fair value of plan assets and is recognized net on the balance sheet. When the result is a 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 contributions 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. in the ordinary course of business, the company is subject to payroll taxes related to actuarial gains and losses are reported in equity together with the recognition of actuarial gains and losses. proceedings, lawsuits and other unresolved claims, including proceedings 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 possible losses. provisions are recognized when it is probable that an obligation has arisen and the amount can be reasonably estimated based on a detailed analysis of each individual issue. 44 ericsson annual report 2008 notes to the consolidated financial statementsShare-based compensation to employees and the Board of Directors share-based compensation is related to remuneration to employees, including key management personnel and the Board of Directors. under iFrs, a company shall recognize compensation costs for share-based compensation programs to employees based on a measure of the value to the company of services received from the employees under the plans. a) Compensation to employees Stock option plans 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 is applied to the equity settled employee option program granted after november 7, 2002 (i.e. on program where the vesting period ended 2005). ericsson recognizes 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 is calculated using an option-pricing model. the total costs are recognized during the vesting period, i.e. the period during which the employees had to fulfill vesting requirements. When the options are exercised, social security charges are to be paid in certain countries on the value of the employee benefit; generally based on the difference between the market price of the share and the strike price. such social security charges are accrued during the vesting period. Stock purchase plans For stock purchase plans, compensation costs are recognized during the vesting period, based on the fair value of the ericsson share at the employee’s investment date. the fair value is based upon the share price at investment date, adjusted for the fact 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. When calculating the compensation costs for shares under performance- based matching programs, the company at each reporting date assesses the probability of meeting the performance targets. compensation expenses are based on estimates of the number of shares that will match at the end of the vesting period. When shares are matched, social security charges are to be paid in certain countries on the value of the employee benefit. the employee benefit is generally based on the market value of the shares at the matching date. During the vesting period, estimated amounts for such social security charges are accrued. b) Compensation to the Board of Directors During 2008, the company introduced a share-based compensation program as a part of the remuneration to the Board of Directors. the program gives non-employed Directors elected by the General Meeting of shareholders a right to receive part of their remuneration as a future payment of an amount which corresponds to the market value of a share of class B in the company at the time of payment, as further disclosed in note c29, “information regarding employees, Members of the Board of Directors and Management”. the cost for note c 1 cash settlements is measured based on the estimated costs for the program on a pro rata basis during the service period, being one year. the estimated costs are remeasured during and at the end of the service period. 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: • Differences in products and services regarding: technology and standardization, research and development, production and service. • For which market and to what type of customers the segment’s products and/or services are aimed. • through which distribution channels products and services are sold. Secondary segments secondary, geographical segments are defined based on differences 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. Non-current assets (or disposal group) held for sale to be classified as an asset (or disposal group) held for sale, the asset (or disposal group) 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 (or disposal groups) held for sale are measured at the lower of carrying amount and fair value less costs to sell. Government grants Government grants are recognized when there is a reasonable assurance of compliance with conditions attached to the grants and that the grants will be received. For the company, government grants are linked to performance of research or development work or to capital expenditures that are subsidized as governmental stimulus to employment or investments in a certain country or region. Government grants linked to research and development are normally deducted in reporting the related expense, whereas grants related to assets are accounted for deducting the grant when establishing the acquisition cost of the asset. ericsson annual report 2008 45 notes to the consolidated financial statementsnote c 1 New standards and interpretations not yet adopted a number of issued new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2008, and have not been applied in preparing these consolidated financial statements: • iFrs 8 “operating segments”. this standard prescribes measurement 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 will apply this new standard as from January 1, 2009. the new standard will not result in any changes of the reportable segments. However, the new 50/50 joint venture, st ericsson, established February 1, 2009, will be reported as a separate segment. • ias 1 (revised), ‘presentation of financial statements’ (effective from January 1, 2009). the revised standard will prohibit the presentation of items of income and expenses (that is, ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. all non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. the company will apply this revised standard as from January 1, 2009. • revised ias 23 “Borrowing costs” removes the option to expense borrowing costs as incurred and requires that a company capitalizes borrowing costs directly attributable to the acquisition, construction or production 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. in accordance with the transitional provisions, the company will apply the revised ias 23 prospectively to design or construction of qualifying assets from the effective date January 1, 2009. the revised standard is not expected to have a significant impact on the financial statements of the company. • ias 27 (amendment) “consolidated and separate Financial statements” (effective from July 1, 2009). the amendment to the standard is still subject to endorsement by the eu. 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 remaining interest should be revalued to fair value. the change in the standard will influence the accounting of future transactions. at present, the company plans to apply the standard from January 1, 2010. • ias 32 and ias 1 (amendments) “puttable Financial instruments” and “obligations arising on liquidation” (effective from January 1, 2009). the amended standards require entities to classify puttable financial instruments and instruments, or components of instruments, that impose an obligation on the entity to deliver to another party a pro rata share of the net assets of the entity only on liquidation, as equity, provided the financial instruments have particular features and meet specific conditions. the amendments are not expected to have any impact on the company’s financial statements. • ias 39 (amendment) “Financial instruments: recognition and Measurement – eligible hedged items” (effective from July 1, 2009). the amendment to the standard is still subject to endoresement by the eu. the amendment clarifies how the existing principles underlying hedge accounting should be applied in two particular situations. it clarifies the designation of: a) a one-sided risk in a hedged item (hedging with options), and b) inflation in a financial hedged item. it is not expected to have a material impact on the company’s financial statements. • iFrs 1 and ias 27 (amendments) “cost of an investment in a subsidiary, Jointly controlled entity or associate” (effective from January 1, 2009). the amended standard allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements. these amendments are not applicable, as the company is not a first-time adopter. • iFrs 2 (amendment), “share-based payment“ (effective from January 1, 2009). the amended standard deals with vesting conditions and cancellations. it clarifies that vesting conditions are service conditions and performance conditions only. other features of a share-based payment are not vesting conditions. as such these features would need to be included in the grant date fair value for transactions with employees and others providing similar services, that is, these features would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. the company will apply iFrs 2 (amendment) from January 1, 2009, but is not expected to have a material impact on the consolidated financial statements. the company will 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 endorsement by the eu. the amendment will have an effect on how future business combinations are accounted for, i.e. the accounting of transaction costs, possible contingent considerations, and business combinations achieved in stages. at present, the company plans to apply the standard from January 1, 2010. • iFric 13 “customer loyalty programmes” addresses the accounting by companies that operate, or otherwise participate in, customer loyalty programmes for their customers. 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 15 “agreements for construction of real estate” (effective from January 1, 2009). the interpretation clarifies whether ias 18, ‘revenue’, or ias 11,’construction contracts’ should be applied to particular transactions. it is likely to result in ias 18 being applied 46 ericsson annual report 2008 notes to the consolidated financial statementsto a wider range of transactions. iFric 15 is not expected to have significant impact on the company’s financial result and position. this interpretation is still subject to endorsement by the eu. • iFric 16 “Hedges of a net investment in a Foreign operation” (effective from october 1, 2008). iFric 16 clarifies the accounting treatment in respect of net investment hedging. this includes the fact that net investment hedging relates to differences in functional currency, not presentation currency, and hedging instruments may be held anywhere in the company. the requirements of ias 21, ‘the effects of changes in foreign exchange rates’, do apply to the hedged item. the company will apply iFric 16 from January 1, 2009. it is not expected to have a material impact on the company’s financial statements. • iFric 17, ”Distributions of non-cash assets to owners” (mandatory for accounting periods beginning on or after July 1, 2009). this interpretation is still subject to endorsement by the eu. iFric 17 clarifies that a dividend payable should be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity, and that this payable should be measured at the fair value of the net asset to be distributed. When an entity settles the dividend payable, it should recognize the difference between the dividend paid and the carrying amount of the net asset distributed in profit or loss. iFric 17 also clarifies that iFrs 5 “non-current assets Held for sale and Discontinued operations” should be applied for non-current assets classified as held for distribution to owners. the company will apply iFric 17 to distributions of non-cash assets, as well as pro rata distributions of non-cash assets, prospectively from January 1, 2010. • iFric 18 ”transfers of assets from customers” (effective for transfers of property, plant and equipment or cash from a customer, received on or after July 1, 2009). this interpretation is still subject to endorsement by the eu. iFric 18 clarifies the requirements for agreements in which an entity receives an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services. the interpretation clarifies e.g. the circumstances in which the definition of an asset is met, the recognition of the asset and the measurement of its cost on initial recognition, and also the recognition of revenue. the evaluation of this interpretation is not finalized. • improvements to iFrss, published in May 2008 and effective from January 1, 2009. none of these improvements are expected to have a material impact on the company’s financial statements. note c 1–c2 c2 critical accounting estimates and Judgments the preparation of financial statements and application of accounting standards often involve management’s judgment and the use of estimates and assumptions deemed to be reasonable at the time they are made. However, other results may be derived with different judgments 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 and the key sources of estimation uncertainty that the company believes could have the most significant impact on the reported results and financial position. the information in this note is grouped as per: • Key sources of estimation uncertainty. • Judgments management has made in the process of applying the company’s accounting policies. Revenue recognition Key sources of estimation uncertainty. estimates are necessary in evaluation of contractual performance 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. Judgments made in relation to accounting policies applied. parts of the company’s sales are generated from large and complex customer contracts. Managerial judgment is applied regarding, among other aspects, conformance with acceptance criteria and if transfer of risks and rewards to the buyer has taken place to determine if revenue and costs should be recognized in the current period, degree of completion and the customer credit standing to assess whether payment is likely or not to justify revenue recognition. Trade and customer finance receivables Key sources of estimation uncertainty. the company monitors the financial stability of its customers and the environment in which they operate to make estimates regarding the likelihood that the individual receivables will be paid. total allowances for estimated losses as of December 31, 2008, were seK 1.8 (1.6) billion or 2.2 (2.5) percent of gross trade and customer finance receivables. credit risks for outstanding customer finance credits are regularly assessed as well, and allowances are recorded for estimated losses. ericsson annual report 2008 47 notes to the consolidated financial statementsnote c 2 Inventory valuation Judgments made in relation to accounting policies applied. Key sources of estimation uncertainty. inventories are valued at the lower of cost and net realizable value. estimates are required in relation to forecasted sales volumes and inventory balances. in situations where excess inventory balances are identified, estimates of net realizable values for the excess volumes are made. inventory allowances for estimated losses as of December 31, 2008, amounted to seK 3.5 (2.8) billion or 11 (11) percent of gross inventory. Deferred taxes Key sources of estimation uncertainty. Deferred tax assets are recognized for temporary differences between the carrying amounts for financial reporting purposes of assets and liabilities and the amounts used for taxation purposes and for tax loss carry-forwards. the largest amounts of tax loss carry- forwards are reported in sweden, with an indefinite period of utilization (i.e. with no expiry date). the valuation of tax loss carry- forwards, 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. For further detailed information, please refer to note c8, “taxes”. at December 31, 2008, the value of deferred tax assets amounted to seK 14.9 (11.7) billion. the deferred tax assets related to loss carryforwards are reported as non-current assets. Accounting for income-, value added- and other taxes Key sources of estimation uncertainty. accounting for these items is based upon evaluation of income-, value added- and other tax rules in all jurisdictions where we perform activities. the total complexity of rules related to taxes and the accounting for these require management’s involvement in judgments regarding classification of transactions and in estimates of probable outcomes of claimed deductions and/or disputes. Capitalized development expenses Key sources of estimation uncertainty. 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 impairment amounts are based on estimates of future cash flows for the respective products. at December 31, 2008, the amount of capitalized development expenses amounted to seK 2.8 (3.7) billion. an impairment charge of seK 0.5 billion was recognized as a part of the restructuring program. under this program decisions where taken to phase out certain products. the impairment charge relates to balances for these products. Development costs that meet iFrs’ intangible asset recognition criteria for products that will be sold, leased or otherwise marketed as well as those intended for internal use are capitalized. the starting point for capitalization is based upon management’s judgment that technological and economical feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. capitalization ceases and amortization of capitalized development costs begins when the product is available for general release. the definition of amortization periods as well as the evaluation of impairment indicators also requires management’s judgment. Acquired intellectual property rights and other intangible assets, including goodwill Key sources of estimation uncertainty. 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. 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 impairment charges. one source of uncertainty related to future cash flows is long-term movements in exchange rates. the market capitalization of the company as per year end 2008 well exceeded the value of net assets of the company. For further discussion on goodwill, see note c1, “significant accounting policies” and c10, “intangible assets”. estimates related to acquired intangible assets are based on similar assumptions and risks in assumptions as for goodwill. at December 31, 2008, the amount of acquired intellectual property rights and other intangible assets amounted to seK 45.5 (46.8) billion, including goodwill of seK 24.9 (22.8) billion. Judgments made in relation to accounting policies applied. at initial recognition and subsequent measurement, management judgments are made, both for key assumptions and regarding impairment indicators. in the purchase price allocation made for each acquisition, the purchase price shall be assigned to the identifiable assets, liabilities and contingent liabilities based on fair values for theses net assets. any remaining excess value is reported as goodwill. this allocation requires management judgment as well as the definition of cash generating units for impairment testing purposes. other judgments might result in significantly different results and financial position in the future. 48 ericsson annual report 2008 notes to the consolidated financial statementsnote c 2 –c3 Provisions Judgments made in relation to accounting policies applied. Pension and other post-employment benefits Key sources of estimation uncertainty. 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 as close as possible 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, 2008 defined benefit obligations for pensions and other post-employment benefits amounted to seK 28.0 (25.2) billion and fair value of plan assets to seK 19.0 (20.2) billion. For more information on estimates and assumptions, see note c17, “post-employment Benefits”. Warranty provisions Key sources of estimation uncertainty. 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 estimates 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 product warranties as of December 31, 2008, amounted to seK 1.9 (1.8) billion. Provisions other than warranty provisions Key sources of estimation uncertainty. provisions, other than warranty provisions, mainly comprise amounts related to contractual obligations and penalties to customers and estimated losses on customer contracts, restructuring, risks associated with patent and other litigations, supplier or subcontractor claims and/or disputes, as well as provisions for unresolved income tax and value added tax issues. the estimates related to the amounts of provisions for penalties, claims or losses receive special attention from the management. at December 31, 2008, provisions other than warranty commitments amounted to seK 12.4 (7.9) billion. For further detailed information, see note c18, “provisions”. Judgments made in relation to accounting policies applied. Whether a present obligation is probable or not requires judgment. the nature and type of risks for these provisions differ and management’s judgment is applied regarding the nature and extent of obligations in deciding if an outflow of resources is probable or not. Financial instruments and hedge accounting Hedge accounting and foreign exchange risks Key sources of estimation uncertainty. Foreign exchange risk in highly probable sales and purchases 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 and purchases estimates for future periods as well as analyzing actual outcome to estimates on a regular basis in order to fulfill effectiveness testing requirements for hedge accounting. changes in estimates of sales and purchases might result in that hedge accounting is discontinued. For further information regarding risks in financial instruments see, note c20, “Financial risk Management and Financial instruments”. c3 segment information Primary segments ericsson has the following business segments: Networks delivers products and solutions for mobile and fixed broadband access, core networks and transmission as well as related network rollout services. the offering includes: • radio access solutions interconnect with devices such as mobile phones, notebooks and pcs, supporting different standardized mobile technologies, such as GsM and WcDMa on the same platform. • access solutions, recently expanded by acquisitions, increase the customers’ ability to modernize fixed networks to enable new ip-based services with higher bandwidth. • our core network solutions include industry-leading softswitches, ip infrastructure for eDGe- and core routing, ip Multimedia subsystem (iMs) and media gateways. • transmission; microwave and optical transmission solutions for mobile and fixed networks. • related network rollout services. GsM and WcDMa share a common core network, preserving investments. iMs is a platform that enables converged services to be transparently provided indepent of the type of access used. Professional Services delivers managed services, systems integration, consulting, education and general customer support services. the offering includes: • managed services comprise network operations (the managment of day-to-day operations of customer networks) and hosting of service layer platforms and applications. • systems integration; ericsson integrates equipment from multiple suppliers and handles technology change programs as well as design and integration of new solutions. • consulting; experts in business and technology strategy provide support (decision making, planning and execution) to customers in improving and growing their business. • education; tailored programs to ensure operator personnel have the right skills and competence to manage their increasingly complex systems. • customer support services; staff world-wide provide around-the- clock support and advice to ensure network uptime and performance. Multimedia delivers enablers and applications that the operators need to deliver a rich user experience seamlessly on any device, any time and anywhere. the offering includes: ericsson annual report 2008 49 notes to the consolidated financial statementsnote c 3 • tV solutions, end-to-end solutions for operators, service providers, advertisers and content providers. • customer and business applications; multimedia solutions for the consumer and enterprise markets. • multimedia brokering solutions which facilitate payment and distribution of content. • service delivering and provisioning platforms enabling operators and service providers to create, sell and manage multimedia offerings and multi-play offerings. • mobile platforms; platform technology for GsM/eDGe and WcDMa/Hspa used in mobile devices and pcs. Phones, consisting of ericsson’s investment and share in earnings of the sony ericsson Mobile communications joint venture. sony ericsson delivers innovative and feature-rich mobile phones, accessories and pc-cards. Secondary segments ericsson operates in five main geographical areas: (1) Western europe, (2) central and eastern europe, Middle east and africa, (3) asia pacific, (4) north america and (5) latin america. these areas represent the geographical segments. BuSiNeSS SegM eNtS (PriMary ) 2008 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 professional services 142,050 – 48,978 – Multi- media 17,902 – 142,050 48,978 17,902 –25 11,145 8% 92 6,346 13% –2 –118 –1% phones unallo- cated elimi- nations – – – –503 –503 – – – – – –618 – – – – – – – Group 208,930 – 208,930 –436 16,252 8% 3,458 –2,484 17,226 –5,559 11,667 assets 1) 2) equity in joint ventures and associated companies total assets Liabilities 3) 4) 119,351 852 42,701 322 20,771 120 120,203 43,023 20,891 58,739 25,868 5,363 – 6,694 6,694 – 94,873 – 94,873 53,630 – – – – 277,696 7,988 285,684 143,600 1) segment assets include property, plant and equipment, intangible assets, current and non-current customer finance, 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 restructuring expenses Gains/losses from divestments ge OgraPhicaL SegMeN tS (SecONdary ) 2008 Western europe – of which Sweden central and eastern europe, Middle east and africa asia pacific – of which China – of which India north america – of which United States latin america total – of which EU 3,085 693 –2,347 –3,210 –547 6 –5,131 9 735 11 –532 –368 – 1 –1,272 –16 257 583 –228 –1,429 –19 – –337 992 – – – – – – –846 – 56 – –1 1 – – –20 113 – – – – – – – – 4,133 1,287 –3,108 –5,006 –566 7 –7,606 1,098 net sales 51,570 8,876 53,080 63,307 15,068 15,176 17,925 14,132 23,048 208,930 57,601 additions/capitalization of pp&e and intangible assets total assets 214,501 189,827 13,628 38,407 13,937 12,705 8,164 7,761 10,984 285,684 222,401 4,065 2,909 93 370 140 85 739 697 153 5,420 4,101 For employee information, see note c29, “information regarding employees, Members of the Board of Directors and Management”. 50 ericsson annual report 2008 notes to the consolidated financial statements note c 3 Group 187,780 0 – –44 –44 187,780 – – – 7,232 30,646 16% 1,778 –1,695 30,729 –8,594 22,135 – – – – 234,214 10,903 245,117 110,065 BuSiNeSS SegM eNtS (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 professional services Multi- media 1) phones unallo- cated elimi- nations 128,985 32 42,892 10 15,903 2 129,017 42,902 15,905 61 17,398 13% 66 6,394 15% –3 –135 –1% – – – 7,108 7,108 – – – – – –119 – assets 2) 3) equity in joint ventures and associated companies 107,819 850 36,974 298 18,739 206 – 9,549 70,682 – total assets Liabilities 4) 5) 108,669 37,272 18,945 9,549 70,682 39,819 19,101 4,915 – 46,230 1) Multimedia figures include the enterprise pBX business which was divested in 2008. 2) segment assets include property, plant and equipment, intangible assets, current and non-current customer finance, accounts receivable, inventory, prepaid expenses, accrued revenues, derivatives and other current assets. 3) unallocated assets include mainly cash and cash equivalents, short-term investments and deferred tax assets. 4) segment liabilities include accounts payable, provisions, accrued expenses and deferred revenues, advances from customers and other current liabilities. 5) 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 ge OgraPhicaL SegMeN tS (SecONdary ) 2007 Western europe – of which Sweden central and eastern europe, Middle east and africa asia pacific – of which China – of which India 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 net sales 52,685 8,395 48,661 54,629 13,598 10,517 13,422 10,529 18,383 187,780 58,978 additions/capitalization of pp&e and intangible assets total assets 160,606 117,887 10,737 26,852 9,915 6,642 32,815 31,573 14,107 245,117 161,251 12,127 2,671 230 1,124 704 71 20,528 17,668 148 34,157 10,609 For employee information, see note c29, “information regarding employees, Members of the Board of Directors and Management”. ericsson annual report 2008 51 notes to the consolidated financial statements note c 3 BuSiNeSS SegM eNtS (PriMary ) 2006 1) net sales inter-segment sales total net sales networks professional services Multi- media 2) phones unallo- cated elimi- nations 127,518 176 36,813 34 13,877 17 127,694 36,847 13,894 – – – 1,613 2 – –229 Group 179,821 0 1,615 –229 179,821 share in earnings of JV and associated companies 18 21 Operating income operating margin (%) Financial income Financial expenses income after financial items taxes Net income 21,722 5,309 17% 14% 43 714 5% 5,852 5,852 – – 2 231 7) – – – – 5,934 35,828 20% 1,954 –1,789 35,993 –9,557 26,436 assets 3) 4) equity in joint ventures and associated companies total assets Liabilities 5) 6) 100,792 918 21,141 170 6,657 280 101,710 21,311 6,937 – 8,041 8,041 76,941 – 76,941 42,837 17,718 4,011 – 29,479 – – – – 205,531 9,409 214,940 94,045 1) ericsson has reorganized its operating structure as of January 1, 2007. comparative figures for 2006 are restated accordingly. For further details see note c1, significant accounting policies. 2) Multimedia figures include the enterprise pBX business which was divested in 2008. 3) segment assets include property, plant and equipment, intangible assets, current and non-current customer finance, accounts receivable, inventory, prepaid expenses, accrued revenues, derivatives and other current assets. 4) unallocated assets include mainly cash and cash equivalents, short-term investments and deferred tax assets. 5) segment liabilities include accounts payable, provisions, accrued expenses and deferred revenues, advances from customers and other current liabilities. 6) unallocated liabilities include accrued interests, tax liabilities, interest-bearing liabilities and post-employment benefits. 7) 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 ge OgraPhicaL SegMeN tS (SecONdary ) 2006 Western europe – of which Sweden central and eastern europe, Middle east and africa asia pacific – of which China – of which India 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) additions/capitalization of pp&e and intangible assets total assets 53,182 7,809 46,413 47,884 11,776 7,359 15,862 13,878 16,480 179,821 58,983 158,773 125,578 8,139 24,853 9,088 5,936 10,893 10,231 12,282 214,940 160,074 20,704 17,819 147 419 206 39 798 739 78 22,146 20,763 1) revenues from intellectual property rights (ipr) related to products are as from 2007 reported in net sales with related costs reported as cost of sales. comparative figures for 2006 have been restated accordingly. 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”. 52 ericsson annual report 2008 notes to the consolidated financial statements c4 net sales sales of products and network rollout services of which: – Delivery-type contracts – construction-type contracts professional services sales license revenues Net sales export sales from sweden 2008 2007 2006 1) 150,846 138,011 137,758 148,358 130,890 123,206 14,552 2,488 36,813 48,978 5,250 9,106 7,121 42,892 6,877 208,930 187,780 179,821 98,694 109,254 102,486 1) revenues from intellectual property rights (ipr) related to products are as from 2007 reported in net sales with related costs reported as cost of sales. comparative figures for 2006 have been restated accordingly. c5 expenses by nature 2008 2007 2006 note c 4–c6 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 losses on sales of investments and operations capital gains/losses, net 2008 2007 2006 1) 302 78 27 –190 –104 –158 1,236 296 3,038 –138 1,210 –16 –93 254 2,814 other operating revenues 1,767 1,480 1,089 Total other operating income and expenses 2,977 1,734 3,903 1) revenues from intellectual property rights (ipr) related to products are as from 2007 reported in net sales with related costs reported as cost of sales. comparative figures for 2006 have been restated accordingly. Goods and services amortization and depreciation impairments, net of reversals employee remunerations interest expenses taxes 138,298 113,195 108,033 7,244 876 42,821 1,789 9,557 8,114 2,680 51,297 2,484 5,559 8,554 1,435 44,771 1,695 8,594 Expenses incurred less: inventory changes 1) additions to capitalized development 208,432 178,244 170,320 3,761 1,409 802 1,053 3,791 1,353 Expenses charged to the Income Statement 203,262 176,389 165,176 1) the inventory changes are based on changes of inventory values prior to allowances (gross value). the change in impairments, net of reversals, mainly relate to an increase of obsolescence allowances in inventories, impairments of capitalized development expenses and an increase in impairments of trade receivables. For 2008, restructuring charges amounted to seK 6.7 billion. restructuring charges are included in the expenses presented above. Restructuring charges by function 2008 2007 cost of sales r&D expenses selling and administrative expenses Total restructuring charges 2,540 2,648 1,572 6,760 – – – – 2006 1,566 595 747 2,908 ericsson annual report 2008 53 notes to the consolidated financial statements note c 7–c8 c7 Financial income and expenses 2008 2007 2006 Financial income Financial expenses Financial income Financial expenses Financial income Financial 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: 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 2,938 2,282 – 322 – – 191 – 7 -2,023 280 –32 – – –656 –85 2,293 1,094 1,952 1,190 –1,543 – –1,416 – –181 –60 –60 –366 – – –342 – 8 –7 – – 11 –103 – – – – 62 –414 – –160 383 –230 total 3,458 –2,484 1,778 –1,695 1,954 –1,789 1) excluding net loss from operating assets and liabilities which was seK 4,234 (762) million reported as cost of sales. c8 taxes on December 10, 2008 the swedish parliament decided to reduce the company tax rate from 28 percent to 26,3 percent. this new tax rate will become applicable from the income year of 2009, and has affected the assessment of deferred tax assets and deferred tax debts. in summary, the Group tax expense for the year was seK 5,559 (8,594) million or 32.3 (28.0) percent 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 2008 2007 2006 –5,574 –4,115 –4,565 167 –297 –294 –2,227 –169 –3,582 145 –1,958 –1,241 –5,559 –8,594 –9,557 Reconciliation of actual income ta x Rate to the SwediSh income ta x Rate: 2008 2007 2006 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% –0.4% 0.2% 0.1% 1.0% –1.0% –0.5% –1.0% –0.7% 1.2% 0.4% 1.5% 0.2% –5.7% 1.8% –0.9% –2.6% 2.8% –0.2% –3.7% 4.5% 0.1% actual tax rate –32.3% –28.0% –26.6% 54 ericsson annual report 2008 notes to the consolidated financial statements note c 8 Deferred tax balances tax effects of temporary differences and unutilized tax loss carryforwards are attributable as shown in the table below: ta x effectS of tempoRaRy diffeRenceS and unutilized ta x loSS caRRyfoR waRdS 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 deferred tax assets 2008 deferred tax liabilities net balance Deferred tax assets 2007 Deferred tax liabilities net balance 313 2,056 1,054 2,473 2,941 3,743 4,736 17,316 –2,458 14,858 4,081 80 138 – – 897 1) – 5,196 –2,458 2,738 12,120 438 1,878 1,121 1,693 708 3,647 5,219 14,704 –3,014 11,690 4,044 14 100 5 97 1,553 – 5,813 –3,014 2,799 8,891 Tax loss carryforwards Deferred tax assets regarding 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, 2008, these unutilized tax loss carryforwards amounted to seK 16,327 (17,734) 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 2009 2010 2011 2012 2013 2014 or later total 345 199 223 173 408 14,979 16,327 tax effect 83 33 36 32 81 4,471 4,736 1) refer mainly to r&D credits and intellectual property rights change in defeRRed ta xeS: opening balance, net recognized in income statement recognized in equity acquisitions/disposals of subsidiaries translation differences closing balance, net 2008 2007 8,891 –296 2,330 861 334 13,182 –2,227 –73 –2,120 129 12,120 8,891 tax effects reported directly in equity amount to seK 2,330 million, of which hedge accounting seK 1,399 million, and actuarial gains/ losses on pensions seK 931 million. Deferred tax assets are only recognized in countries where the company expects 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 4,736 million, seK 2,436 million relate to sweden with indefinite time of utilization. With our strong current financial position and profitability during 2008, we have been able to utilize part of our tax loss carryforwards during the year, and we are convinced that ericsson will be able to generate sufficient income in the coming years to utilize also remaining parts. Investments in subsidiaries Due to losses in certain subsidiary companies, the book value of certain investments in those subsidiaries are less than the tax value of these investments. since deferred tax assets have been reported with respect also to losses in these companies, and due to the uncertainty as to which deductions can be realized in the future, no additional deferred tax assets are reported. ericsson annual report 2008 55 notes to the consolidated financial statements note c 9 –c10 c9 earnings per share 2008 2007 1) 2006 1) Basic, earnings per share net income attributable to stockholders of the parent company (seK million) average number of shares outstanding, basic (millions) Earnings per share, basic (SEK) Diluted, earnings per share net income attributable to stockholders of the parent company (seK million) average number of shares outstanding, basic (millions) Dilutive effect for stock option plans Dilutive effect for stock purchase plans average number of shares outstanding, diluted (millions) Earnings per share, diluted (SEK) 11,273 21,836 26,251 3,183 3.54 3,178 6.87 3,174 8.27 11,273 21,836 26,251 3,183 1 18 3,178 2 13 3,174 4 11 3,202 3.52 3,193 6.84 3,189 8.23 1) a reverse split 1:5 was made in June 2008. comparative figures are restated accordingly. c10 intangible assets Capitalized development expenses Goodwill marks and other intangible assets Intellectual property rights (IPR), trade- For internal use to be marketed acquired costs internal costs Total ipr, trademarks and similar rights patents and acquired r&D 12,478 1,107 – –8,067 – – 1,640 181 1,096 121 15,214 1,409 22,826 – 10,372 20 19,758 – – – – – – – – – – –8,067 – – 30 –60 –912 2,993 –172 –1,212 1) –209 630 – –31 – 723 Total 30,130 20 –172 –1,243 –209 1,353 2008 Accumulated acquisition costs opening balance acquisitions/capitalization Balances regarding divested/ acquired businesses sales/disposals reclassification 2) translation difference Closing balance 5,518 1,821 1,217 8,556 24,877 9,429 20,450 29,879 Accumulated amortization opening balance amortization sales/disposals translation difference –7,911 –1,726 8,067 – –1,562 – – – –1,042 – – – –10,515 –1,726 8,067 – Closing balance –1,570 –1,562 –1,042 –4,174 Accumulated impairment losses opening balance impairment losses Closing balance Net carrying value –974 –534 3) –1,508 2,440 –38 –17 –55 204 –26 –11 –37 138 –1,038 –562 –1,600 – – – – – – – – –2,072 –674 496 –175 –2,425 – – – –4,086 –2,606 8 –169 –6,853 –14 – –14 –6,158 –3,280 504 –344 –9,278 –14 – –14 2,782 24,877 7,004 13,583 20,587 1) Divestment of data centers in the uK. 2) reclassification of deferred tax assets, goodwill and intangible assets due to finalized purchase price allocation. For more information, see note c26, “Business combinations”. 3) part of the restructuring program. 56 ericsson annual report 2008 notes to the consolidated financial statements note c 10 the goodwill is allocated to the business segments networks (seK 15.3 billion), professional services (seK 2.8 billion) and Multimedia (seK 6.8 billion). the recoverable amounts for cash-generating units are established as the present value of expected future cash flows. estimation of future cash flows includes assumptions mainly for the following key financial parameters: • sales growth, • development of operating income (based on operating margin or cost of goods sold and operating expenses relative to sales), • development of working capital and capital expenditure requirements. the assumptions, approved by group management and each business segment’s management, regarding revenue growth are based on industry sources and projections made within the company for the development 2008-2013 for key industry parameters: • the number of global mobile subscriptions is estimated to grow from 3.9 billion by the end of 2008 to approximately 6.5 billion. • fixed and mobile broadband subscriptions from 0.6 billion to approximately 3 billion. • mobile traffic volume as well as fixed internet traffic and fixed iptV traffic is estimated to increase approximately 10 times. the demand for professional services is also driven by an increasing business and technology complexity. therefore, operators review their business models and look for vendor partners that can take on a broader responsibility, including outsourcing of network operations. the assumptions are also based upon information gathered in the company’s long-term strategy process, including assessments of new technology, the company’s competitive position and new types of business and customers, driven by the continued integration of telecom, data and media industries. the impairment testing is 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 percent per year thereafter. the impairment test for goodwill did not result in any impairment. a number of sensitivity tests have been made, for example applying lower levels of revenue and operating income. also when applying these estimates no goodwill impairment is indicated. as per year end 2008, the market capitalization of the company well exceeded the value of net assets of the company. an after-tax discount rate of 12 percent has been applied for the discounting of projected after-tax cash flows. the application of one rate is made due to that differences in risks between the cash generating units have been considered in the estimated cash flows. the demand for multimedia solutions is driven by the opportunities for new types of service offerings enabled by ip technology and high-speed broadband. in note c1, “significant accounting policies” and note c2, “critical accounting estimates and Judgments”, further disclosures are given regarding goodwill impairment testing. Capitalized development expenses Goodwill marks and other intangible assets Intellectual property rights (IPR), trade- 2007 Accumulated acquisition costs opening balance acquisitions/capitalization Balances regarding divested/ acquired businesses sales/disposals translation difference For internal use to be marketed acquired costs internal costs Total ipr, trademarks and similar rights patents and acquired r&D 12,388 989 1,602 38 1,070 26 15,060 1,053 – –899 – – – – – – – – –899 – 6,824 – 16,917 –1 –914 5,317 178 5,132 1) –57 –198 13,479 63 6,495 1) –1 –278 Closing balance 12,478 1,640 1,096 15,214 22,826 10,372 19,758 Accumulated amortization opening balance amortization sales/disposals translation difference –6,439 –2,371 899 – –1,562 – – – –1,042 – – – –9,043 –2,371 899 – Closing balance –7,911 –1,562 –1,042 –10,515 Accumulated impairment losses opening balance impairment losses Closing balance Net carrying value –958 –16 –974 3,593 –38 – –38 40 –26 – –26 28 –1,022 –16 –1,038 – – – – – – – – –1,180 –913 41 –20 –1,953 –2,149 – 16 –2,072 –4,086 – – – –14 – –14 3,661 22,826 8,300 15,658 23,958 1) During 2007, ericsson acquired redback, tandberg and lHs. the acquisitions consist of ipr, seK 6.4 billion, trademarks and customer relationships, seK 4.8 billion and goodwill, seK 16 billion. the amortization period related to the intellectual property rights, trademarks and other intangible assets from redback, tandberg and lHs is between five and ten years. ericsson annual report 2008 57 Total 18,796 241 11,627 –58 –476 30,130 –3,133 –3,062 41 –4 –6,158 –14 – –14 notes to the consolidated financial statements NOTE C11 C11 Property, Plant and Equipment 2008 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 Real estate Machinery and other technical assets Other equipment, tools and installations Construction in process and advance payments 4,611 210 – –1,208 21 420 4,054 –1,470 –241 – 308 –1 –141 –1,545 –117 – – 78 –8 –47 2,462 5,697 805 –5 –775 –50 459 6,131 –4,013 –865 5 875 55 –268 –4,211 –118 –4 – – –3 –125 1,795 16,672 1,729 –21 –2,835 1,284 1,229 18,058 –12,485 –2,002 18 2,407 –54 –851 –12,967 –148 – 7 – –7 –148 4,943 675 1,389 – –33 –1,255 19 795 – – – – – – – – – – – – – 795 Contractual commitments for the acquisition of property, plant and equipment as per December 31, 2008, amounted to SEK 229 (176) million. The reversal of impairment losses have been reported under Cost of sales. Total 27,655 4,133 –26 –4,851 – 2,127 29,038 –17,968 –3,108 23 3,590 – –1,260 –18,723 –383 –4 7 78 –18 –320 9,995 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ERICSSON ANNUAL REPORT 2008 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 Real estate Machinery and other technical assets Other equipment, 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 –4,013 –154 – 9 27 – –118 15,135 2,111 104 –1,795 864 253 16,672 –11,738 –2,302 17 1,759 8 –229 –12,485 –178 –6 25 10 1 –148 457 1,120 – –77 –813 –12 675 – – – – – – – – – – – – – 1,566 4,039 675 NOTE C11 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 ERICSSON ANNUAL REPORT 2008 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 59 note c 12 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 2008 2007 9,549 –503 151 1,084 36 4 –3,627 – – – – 8,041 7,108 –1,957 304 4 –2 –3,949 – – – – associated companies 2008 1,354 67 –6 130 – – –236 46 – –1 –60 2007 1,368 124 –1 55 – – –273 103 –19 – –3 total 2008 10,903 –436 145 1,214 36 4 4 –3,863 46 – –1 – –60 2007 9,409 7,232 –1,958 359 –2 –4,222 103 –19 –3 closing balance 6,694 9,549 1,294 1) 1,354 1) 7,988 10,903 1) Goodwill, net, amounts to seK 16 million (seK 19 million in 2007). ericsson’s share of assets, liabilities and income in joint venture sony ericsson mobile communications ericsson’s share of assets, liabilities and income in associated company ericsson nikol a tesl a d.d. 1) non-current assets current assets non-current liabilities current liabilities net assets net sales income after financial items income taxes net income 2008 2007 3,228 21,190 157 17,593 2,701 22,714 121 15,745 non-current assets current assets non-current liabilities current liabilities 6,668 9,549 net assets 54,377 –400 151 59,700 7,276 –1,957 net sales income after financial items income taxes –249 5,319 net income net income attributable to: stockholders of the parent company Minority interest assets pledged as collateral contingent liabilities –353 104 – 20 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. 2008 2007 394 695 6 253 830 1,182 139 –5 134 134 – 5 172 363 728 1 263 827 1,100 124 –1 123 123 – 5 64 60 ericsson annual report 2008 notes to the consolidated financial statements other financial assets, non – current other investments in shares and participations 2007 2008 customer finance, non-current 2007 2008 Derivatives, non-current 2008 2007 other financial assets, non-current 2007 2008 note c12– c13 accumulated acquisition costs opening balance additions Business combinations Disposals/repayments/deductions change in value in funded pension plans 1) reclassifications revaluation translation difference 2,019 3 – –469 – – – 37 1,999 – – – – – – 20 1,221 623 – –761 – – – –1 2,270 892 – –1,940 – – – –1 closing balance 1,590 2,019 1,082 1,221 accumulated impairment losses/allowances opening balance impairment losses/allowance Business combinations Disposals/repayments/deductions reclassifications translation difference closing balance net carrying value –1,281 – – – – – –1,278 2 – – – –5 – –1,281 –209 –48 – 21 – – –236 –349 41 – 98 – 1 –209 96 – – – – – 2,718 – 2,814 – – – – – – – 116 – – – – – –20 – 96 – – – – – – – 4,092 292 – –713 –307 – – 193 3,447 175 166 –245 447 – – 102 3,557 4,092 –1,270 –14 – – – –170 –1,154 –58 – – – –58 –1,454 –1,270 309 2) 738 846 1,012 2,814 96 2,103 2,822 1) For further information, see note c17, “post–employment benefits”. 2) Fair value per December 31, 2008, for listed shares was seK 0 (11) million with a net carrying value of seK 0 (11) million. c13 inventories 2008 2007 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) 2008 2007 2,156 9,599 971 204 406 2,007 733 1,643 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 were not finalized as per December 31, 2008, and include all costs incurred since the start of these projects, including any costs incurred prior to January 1, 2008. net sales for construction-type contracts for 2008 amount to seK 2,488 (7,121) million, see note c4, “net sales”. raw materials, components, consumables and manufacturing work in progress Finished products and goods for resale contract work in progress less advances from customers 1) inventories, net 7,413 7,616 12,807 – 7,476 5,338 10,338 –677 27,836 22,475 1) effective from this annual report, advances from customers are presented under note c21, “other current liabilities”. contract work in progress includes amounts related to delivery-type contracts, service contracts and construction-type contracts with ongoing work in progress. reported amounts are net of obsolescence allowances of seK 3,493 (2,752) million. movements in obsolescence allowances opening balance additions, net utilization translation difference Balances regarding acquired/divested businesses closing balance 2008 2007 2,752 1,553 –1,039 250 2,578 1,276 –1,114 17 2006 2,519 857 –693 –81 –23 –5 –24 3,493 2,752 2,578 the amount of inventories recognized as an expense and included in cost of sales was seK 58,155 (52,864) million. ericsson annual report 2008 61 notes to the consolidated financial statements note c 14 c14 trade receivables and customer Finance 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 allowances for impairment Customer finance, net Of which short term 2008 2007 76,827 60,669 –1,351 –1,471 75,356 59,318 535 1,174 75,891 60,492 3,147 –326 2,821 1,975 3,649 –275 3,374 2,362 credit commitments for customer finance 3,811 4,185 Days sales outstanding were 106 (102) in December, 2008. MOVEMENTS IN ALLOWANCES FOR IMPAIRMENT opening balance additions utilization reversal of excess amounts reclassification translation difference Balances regarding acquired/divested business Closing balance AgINg ANALySIS AS PER dECEMbER 31, 2008 trade receivables excluding associated companies and joint ventures allowances for impairment of receivables customer finance allowances for impairment of customer finance AgINg ANALySIS AS PER dECEMbER 31, 2007 2008 1,351 651 –492 –81 –69 115 –4 1,471 trade receivables 2007 2006 customer finance 2007 2008 1,372 564 –554 –137 56 50 – 1,351 1,382 686 –139 –527 56 –86 – 1,372 275 90 –3 –74 – 38 – 326 418 49 –43 –141 – –8 – 275 2006 1,755 79 –284 –1,082 –5 –45 – 418 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 76,827 –1,471 3,147 –326 67,482 – 2,530 – 157 –121 347 –97 4,003 – 5 – 2,711 – 27 – 844 –362 47 –38 1,630 –988 191 –191 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 allowances for impairment of customer finance 60,669 –1,351 3,649 –275 52,560 – 2,476 – – – 305 –110 3,723 – 410 – 1,577 – 293 – 773 –422 1 –1 2,036 –929 164 –164 62 ericsson annual report 2008 notes to the consolidated financial statements note c 14 risk provisions related to customer finance risk exposures are only made upon events occuring after the financing arrangement has become effective, which are expected to have a significant 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 deteriorating creditworthiness. as of December 31, 2008, ericsson’s total outstanding exposure related to customer finance was seK 3,147 (3,649) million. as of that date, ericsson also had unutilized customer finance commitments of seK 3,811 (4,185) million. customer finance is arranged for infrastructure projects in different geographic markets and to a large number of customers. as of December 31, 2008, there were a total of 69 (75) customer finance arrangements originated by or guaranteed by ericsson. the five largest facilities represented 44 (48) percent of the total credit exposure. of ericsson’s total outstanding customer finance exposure as of December 31, 2008, 58 (47) percent were related to central and eastern europe, Middle east & africa, 20 (23) percent to latin america, 18 (14) percent to Western europe, 2 (14) percent to asia pacific and 2 (2) percent to north america. the effect of risk provisions and reversals for customer finance affecting the income statement amounted to a net negative impact of seK 16 million in 2008 compared to a positive impact of seK 92 million in 2007. credit losses incurred were seK 3 (43) million. security arrangements for customer finance facilities 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. if available, third-party risk coverage may also be arranged. “third-party risk coverage” means that a financial payment guarantee covering the credit risk has been issued by a bank, an export credit agency or other financial institution. 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. During 2008, ericsson has not taken possession of any collateral it holds as security or called on any other credit enhancements. the table below summarizes ericsson’s outstanding customer finance as of December 31, 2008 and 2007. OUTSTANd INg CUSTOMER FINANCE total customer finance accrued interest less third-party risk coverage ericsson’s risk exposure 2008 3,147 81 –162 2007 3,649 63 –511 3,066 3,201 Credit risk credit risk is divided into three categories: credit risk in trade receivables, 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 legal entities in ericsson. the purpose of the policy is to: • avoid credit losses through establishing internal standard credit approval routines in 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. • Define 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 past due receivables are higher than permitted levels. release of credit block requires authorization. letters of credits are used as a method for securing payments from customers operating in emerging markets, in particular in markets with unstable political and/or economic environment. By having banks confirming the letters of credit, the political and commercial credit risk exposures to ericsson are mitigated. trade receivables amounted to seK 76,827 (60,669) million as of December 31, 2008. provisions for expected losses are regularly assessed and amounted to seK 1,471 (1,351) million as of December 31, 2008. ericsson’s nominal credit losses have, however, historically been low. the amounts of trade receivables follow closely the distribution of ericsson’s sales and do not include any major concentrations of credit risk by customer or by geography. the top 5 largest customers represent 27 percent of the total trade receivables. 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 facilities reported as customer finance, an internal credit risk assessment is conducted in order to assess the credit rating (for political and commerical risk) of each transaction. the credit risk analysis is made by using an assessement tool, where 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, is reviewed using information from export credit agencies and prevailing pricing in the bank loan market for structured financed deals. the objective is that the internally set risk margin shall reflect the assessed risk and that the pricing is as close as possible to the current market pricing. a reassessment of the credit rating for each customer finance facility is made on a regular basis. ericsson annual report 2008 63 notes to the consolidated financial statements note c15– c16 c15 other current receivables Dividend proposal prepaid expenses accrued revenues advance payments to suppliers Derivatives with a positive value taxes other Total c16 equity Capital stock 2008 2008 3,134 1,885 1,278 2,796 4,130 4,595 2007 2,527 1,661 679 1,530 4,610 4,055 17,818 15,062 the Board of Directors will propose to the annual General Meeting 2009 a dividend of seK 1.85 per share. Additional paid in capital relates to payments made by owners and includes share premiums paid. Revaluation of other investments in shares and participations 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. capital stock at December 31, 2008, consisted of the following: 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 instruments related to hedged transactions that have not yet occurred. Cumulative translation adjustments 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 currency as well as from the translation of liabilities that hedge the company’s net investment in foreign subsidiaries. Retained earnings retained earnings, including net income for the year, comprise the earned profits of the parent company and its share of net income in subsidiaries, joint ventures and associated companies. parent company class a shares class B shares Total number of shares 261,755,983 2,984,595,752 3,246,351,735 capital stock 1,309 14,923 16,232 the capital stock of the company is divided into two classes: class a shares (quota value seK 5.00) and class B shares (quota value seK 5.00). 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. at December 31, 2008, the total number of treasury shares was 61,066,097 (46,398,3091) in 2007 and 50,202,7781) in 2006) class B shares. there were 19,900,000 shares repurchased by ericsson in 2008, 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 Jan 1, 2008 number of shares Dec 31, 2008 3,226,452,736 1) 3,246,351,735 number of shares capital stock 16,132 16,232 1) the annual Meeting on april 9, 2008, decided on a reverse split 1:5 of the company’s shares. the reverse split has the effect that five shares of class a and five shares of class B, respectively, are consolidated into one share of class a and one share of class B, respectively. numbers of shares and earnings per share for comparison periods have been restated accordingly. 64 ericsson annual report 2008 notes to the consolidated financial statements  revalua- tion of other invest- ments in shares and partici- addi- tional capital paid in cumula- tive transla- tion cash flow stock capital pations hedges ments adjust- retained holders’ Minority interests earnings equity stock- note c 16 Total equity 307 -6,345 99,282 134,112 940 135,052 2008 January 1, 2008 actuarial gains and losses related to pensions Group Joint ventures and associates Revaluation of other investments in shares and participations Fair value measurement reported in equity Group Joint ventures and associates cash flow hedges Fair value remeasurement of derivatives reported in equity Group Joint ventures and associates transferred to income statement for the period changes in cumulative translation adjustments Group Joint ventures and associates tax on items reported directly in/or transferred from equity Total transactions reported directly in equity net income Group Joint ventures and associates Total income and expenses recognized for the period stock issue sale of own shares repurchase of own shares stock purchase and stock option plans Group Joint ventures and associates Dividends paid Business combinations December 31, 2008 16,132 24,731 – – – – – – – – – – – – – – 100 – – – – – – – – – – – – – – – – – – – – – – – – – – – 5 – – –6 –1 – – – – – – – – – –5,116 36 1,192 1) – – – – – – – – – 7,081 2) 1,214 –4,019 4 –4,019 4 – – – – – – – –6 –1 –5,116 36 1,192 7,081 1,214 2,330 2,715 1 1,225 174 3) 930 –6 –2,663 8,469 –3,085 – – – – – – 11,564 –291 11,564 –291 – – – – – – 233 – – 233 394 – –4,019 4 –6 –1 –5,116 36 1,192 7,314 1,214 2,330 2,948 11,958 –291 –6 –2,663 8,469 8,188 13,988 627 14,615 – – – – – – – – – – – – – – – – – – – – – – 88 –100 589 – –7,954 – 100 88 –100 589 – –7,954 – – – – – – – –286 –20 100 88 –100 589 –8,240 –20 16,232 24,731 –1 –2,356 2,124 100,093 140,823 1,261 142,084 1) seK 416 million is recognized in net sales and seK 776 million is recognized in cost of sales. 2) changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of seK 2,993 million (seK –914 million in 2007, seK –701 million in 2006), gain/loss from hedging activities of foreign entities, seK –660 million (seK –52 in 2007, seK 123 million in 2006) and seK 13 million (seK –70 million in 2007, seK –1 million in 2006) of realized gain/losses net from sold/liquidated companies. 3) Deferred tax on gains/losses on hedges on investments in foreign entities. ericsson annual report 2008 65 notes to the consolidated financial statements  cumula- tive transla- tion cash flow stock capital pations hedges ments adjust- retained holders’ Minority interests earnings equity Total equity 877 –5,569 83,939 120,113 782 120,895 stock- note c 16 2007 January 1, 2007 actuarial gains and losses related to pensions Group Joint ventures and 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 Joint ventures and associates transferred to income statement for the period changes in cumulative translation adjustments Group Joint ventures and associates tax on items reported directly in/or transferred from equity Total transactions reported directly in equity net income Group Joint ventures and associates Total income and expenses recognized for the period sale of own shares stock purchase and stock option plans Group Joint ventures and associates Dividends paid Business combinations December 31, 2007 revalua- tion of other invest- ments in shares and partici- addi- tional capital paid in 16,132 24,731 – – 3 – – – 2 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16,132 24,731 – – – – 580 4 – –1,390 – – – – – 1,210 –2 1,210 –2 2 – – – – – 580 4 –1,390 –1,155 359 – – –1,155 359 236 20 –570 –776 –329 879 –73 –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 21,371 298 21,669 – – – – – – – – – – 62 62 – 62 528 –19 –7,943 – 528 –19 –7,943 – – – –189 49 528 –19 –8,132 49 307 –6,345 99,282 134,112 940 135,052 – – – 2 – – 2 – – – – – 5 66 ericsson annual report 2008 notes to the consolidated financial statements  revalua- tion of other invest- ments in shares and partici- addi- tional capital paid in cumula- tive transla- tion cash flow stock capital pations hedges ments adjust- retained holders’ Minority interests earnings equity 16,132 24,731 5 –704 –2,493 63,951 101,622 850 102,472 stock- note c 16 Total equity – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –2 – – – – – – – – – – 4,133 –33 –1,990 99 – – – – – – – – – –2,597 –431 –628 –48 –2 1,581 –3,076 437 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 –93 347 –769 –1,150 – –769 –90 –1,240 – – – – – – 20,317 5,934 20,317 5,934 185 20,502 5,934 –2 1,581 –3,076 26,598 25,101 95 25,196 – – – – – 3 – – – – – – – – – – 58 473 –7,141 – – 58 473 –7,141 – – – – –202 70 –31 58 473 –7,343 70 –31 877 –5,569 83,939 120,113 782 120,895 2006 January 1, 2006 actuarial gains and losses related to pensions Group Joint ventures and 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 Joint ventures and associates transferred to income statement for the period transferred to balance sheet for the period changes in cumulative translation adjustments Group Joint ventures and associates tax on items reported directly in/or transferred from equity Total transactions reported directly in equity net income Group Joint ventures and 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 16,132 24,731 ericsson annual report 2008 67 notes to the consolidated financial statements note c 17 c17 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 2008 was characterized by the economic turmoil affecting the return on plan assets and the fluctuation of discount rates. this note is divided into the following sections: 1. amount recognized in the consolidated Balance sheet 2. total pension expenses 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 2008 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) 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) sweden uK euro zone us other total 14,866 8,181 6,685 – 6,685 – 6,685 12,512 9,463 3,049 – 3,049 – 3,049 4,867 4,407 460 – 460 35 495 5,606 4,854 752 – 752 39 791 3,557 2,330 1,227 1 1,228 304 1,532 3,079 2,104 975 – 975 426 1,401 2,789 2,289 1,931 1,830 500 – 500 171 671 2,238 1,779 459 – 459 99 558 101 –75 26 464 490 1,791 2,036 –245 –83 –328 717 389 28,010 19,037 8,973 –74 8,899 974 9,873 25,226 20,236 4,990 –83 4,907 1,281 6,188 1) For details on DBo, please refer to section three of this note. 2) For details on plan assets, please refer to section four 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. 68 ericsson annual report 2008 notes to the consolidated financial statements note c 17 Section Two: Total Pension Expenses Recognized in the Income Statement the expenses 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 2008 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 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 1) see cost details in table below. 1,607 625 2,232 1,166 471 1,637 1,350 347 1,697 40 156 196 265 279 544 – 249 249 345 179 524 370 128 498 195 300 495 114 35 149 105 42 147 93 49 142 72 33 105 148 100 248 82 44 126 2,178 1,028 3,206 8.3% 2,054 1,020 3,074 9.0% 1,720 989 2,709 8.4% CosT deTails for defined BenefiT Pl ans reCognized in The inCome sTaTemenT sweden uK euro zone us other total 2008 current service cost interest cost expected return on plan assets past service cost curtailments and settlements 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 539 549 –431 – –32 625 473 435 –412 – –25 471 431 406 –352 – –138 347 186 299 –310 – –19 156 257 307 –285 – – 279 228 177 –169 31 –18 249 141 160 –143 11 10 179 186 135 –125 – –68 128 279 133 –103 – –9 300 29 142 –137 – 1 35 33 139 –135 3 2 42 47 146 –140 5 –9 49 122 133 –201 8 –29 33 140 109 –163 8 6 100 92 104 –145 13 –20 44 1,017 1,283 –1,222 19 –69 1,028 1,089 1,125 –1,120 11 –85 1,020 1,077 966 –909 49 –194 989 ericsson annual report 2008 69 notes to the consolidated financial statements note c 17 Sections three to six focus on the defined benefit plans Section Three: Change in the Defined Benefit Obligation, DBO the DBo is the gross pension liability. 2008 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 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 sweden uK euro zone us other total 12,512 539 549 – –74 1,372 – –32 – – – 14,866 – 11,772 473 435 – –72 –71 – –25 – – – 5,606 186 299 43 –87 –436 – –19 – –7 –718 4,867 – 5,713 257 307 59 –119 –777 – – 440 –8 –266 12,512 5,606 – – 3,079 141 160 4 –133 –185 – 10 –14 7 488 3,557 – 3,241 186 135 4 –89 –482 – –68 20 –9 141 3,079 – 2,238 29 142 – –144 38 – 1 – 19 466 2,789 639 2,399 33 139 – –195 –12 –2 2 – 22 –148 2,238 533 1,791 122 133 12 –86 25 –16 –13 – –7 –30 1,931 – 1,487 140 109 15 –68 83 –40 6 –6 –42 107 1,791 – 25,226 1,017 1,283 59 –524 814 –16 –53 –14 12 206 28,010 639 24,612 1,089 1,125 78 –543 –1,259 –42 –85 454 –37 –166 25,226 533 1) Business combinations in 2008 are related to the divestiture of the enterprise Business. Business combinations in 2007 are related to the acquisition of tandberg television asa. Funded Status the funded ratio, defined as total plan assets in relation to the total defined benefit obligation (DBo), was 68.0 percent in 2008, compared to 80.2 percent in 2007. the following table summarizes the value of the DBo per geographical area in relation to whether or not there are plan assets wholly or partially funding each pension plan. 2008 DBo, closing balance Of which partially or fully funded Of which unfunded 2007 DBo, closing balance Of which partially or fully funded Of which unfunded sweden uK euro zone us other total 14,866 14,375 491 12,512 12,043 469 4,867 4,867 – 5,606 5,606 – 3,557 2,355 1,202 3,079 1,945 1,134 2,789 2,118 671 2,238 1,680 558 1,931 1,522 409 1,791 1,440 351 28,010 25,237 2,773 25,226 22,714 2,512 70 ericsson annual report 2008 notes to the consolidated financial statements Section Four: Change in the Plan Assets a majority of pension plans have assets managed by local pension trust funds, whose sole purpose is to secure the future pension payments to the employees. 2008 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 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 note c 17 sweden uK euro zone us other total 9,463 431 –1,713 – – – – – – – 8,181 9,141 412 –89 –1 – – – – – – 9,463 4,854 310 –595 527 43 –95 – – – –637 4,407 3,897 285 – 622 59 –127 – 349 – –231 4,854 2,104 143 –343 132 4 –30 – –2 – 322 1,779 137 19 61 – –88 – – – 381 2,330 2,289 1,959 125 –173 128 4 –19 – – –10 90 2,104 1,818 135 73 13 – –142 –2 – – –116 1,779 2,036 201 –320 85 12 –73 –16 – –5 –90 1,830 1,580 163 130 83 15 –55 –41 3 –18 176 20,236 1,222 –2,952 805 59 –286 –16 –2 –5 –24 19,037 18,395 1,120 –59 845 78 –343 –43 352 –28 –81 2,036 20,236 1) Business combinations in 2008 are related to the divestiture of the enterprise Business. Business combinations in 2007 are related to the acquisition of tandberg television asa. refunds from or reductions in future contributions to plan assets are recognized if they are available and firmly decided. aCTual reTurn on Pl an asseTs 2008 2007 asseT alloCaTion 2008 equities interest-bearing securities other Total Of which Ericsson securities 2007 equities interest-bearing securities other Total Of which Ericsson securities sweden uK euro zone –1,283 323 –284 285 –200 –48 us 156 208 other –119 293 total –1,730 1,061 sweden uK euro zone us other total 2,577 5,604 – 8,181 – 2,943 6,520 – 9,463 – 1,674 2,161 572 4,407 – 1,874 2,387 593 4,854 – 900 1,291 139 2,330 – 1,159 847 98 2,104 – 831 1,256 202 2,289 – 1,442 316 21 1,779 – 306 1,258 266 1,830 – 479 1,381 176 6,288 11,570 1,179 19,037 – 7,897 11,451 888 2,036 20,236 – – equity instruments amount to 33 percent of the total assets, interest bearing instruments amount to 60.8 percent of the total assets, and other instruments amount to 6.2 percent of the total assets. the expected contributions to the defined benefit plans during 2009 will be slightly higher than in 2008. ericsson annual report 2008 71 notes to the consolidated financial statements note c 17 Section Five: Actuarial Gains and Losses Reported Directly in Equity 2008 2007 mulTi-year summary 2008 2007 2006 2005 2004 plan assets DBo 19,037 20,236 18,395 24,612 28,010 25,226 16,784 22,314 5,764 16,820 Deficit/surplus (–/+) –8,973 actuarial gains and losses (–/+) experience-based adjustments of pension obligations experience-based adjustments of plan assets 2,952 57 –4,990 –6,217 –5,530 –11,056 –76 232 –415 –56 59 –358 –706 –146 sweden uK euro zone 1) us other 1) 4.00% 4.55% 3.25% 2.00% n/a 21 24 4.40% 4.55% 3.25% 2.00% n/a 21 24 5.50% 6.40% 4.30% 3.00% n/a 21 24 5.60% 6.75% 4.60% 3.30% n/a 21 24 5.86% 6.51% 3.00% 2.25% n/a 22 25 5.42% 6.14% 3.08% 2.17% n/a 22 25 6.25% 7.50% 4.50% 2.50% 9.00% 18 20 6.25% 7.50% 4.50% 2.50% 9.50% 18 20 8.53% 10.05% 6.81% 4.23% n/a 18 22 8.84% 9.75% 6.76% 4.10% n/a 18 22 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: 1 percent 1 percent increase decrease net periodic post-employment medical cost accumulated post-employment benefit obligation for medical costs 3 –3 57 –50 cumulative gain/loss (–/+) at beginning of year recognized gain/loss (–/+) during the year other 1) translation difference cumulative gain/loss (–/+) at end of year 1,806 3,065 3,765 –7 –162 –1,200 –4 –55 5,402 1,806 1) the gain in 2008 is related to terminated pension plans. the gain in 2007 is related to the acquisition of tandberg television asa. since January 1, 2006, ericsson applies immediate recognition of actuarial gains and losses directly in equity, as disclosed in the statement 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 2008 Discount rate expected return on plan assets for the year Future salary increases inflation Health care cost inflation, current year life expectancy after age 65 in years, males life expectancy after age 65 in years, females 2007 Discount rate expected return on plan assets for the year Future salary increases inflation 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 • 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 country’s risk free rate with the addition of a risk premium. • salary increases are partially affected by fluctuations in inflation rate. • 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, where the objective is to spread the cost of each employee’s benefits over the period that the employee works for the company. 72 ericsson annual report 2008 notes to the consolidated financial statements note c 17 Section Seven: Summary Information on Pension Plans per Geographical Zone applicable to all countries: in 2008, the global economic turmoil has led to an overall lower than expected performance of plan assets, resulting in a significant actuarial loss and a decrease in the total value of the plan assets. the actuarial loss on plan assets is the difference between the expected return on plan assets and the actual return on plan assets. the expected return for 2008 was a positive seK 1,222 million, and the actual return was a negative seK 1,730 million. consequently the actuarial loss was a seK 2,952 million. changes in discount rate have also resulted in an overall actuarial loss, and an increase in the defined benefit obligation. all geographical regions were affected by the actuarial loss on plan assets. Mostly affected by the actuarial loss on both plan assets and defined benefit obligation was sweden. Sweden: in 2008, the swedish discount rate decreased, resulting in an increase in the defined benefit obligation and an actuarial loss. sweden was also negatively affected by the performance of the plan assets, which has resulted in a decrease in the value of the assets and an actuarial loss. the voluntary redundancy plans reduced the defined benefit obligation by seK 32 million. 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 accounting, and therefore, it has been accounted for as a defined contribution plan. at the end of 2008, alecta reported a surplus of 12 procent (52 percent in 2007). 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. UK: the decrease in the future salary increases’ percentage resulted in an actuarial gain, while the decrease in discount rate resulted in an actuarial loss. these two changes together resulted in an overall decrease in the defined benefit obligation, and consequently an actuarial gain. Euro zone: Germany, italy and ireland are the countries with the most significant defined benefit pension plans within the euro zone. the discount rate for the euro zone increased, resulting in a decrease in the defined benefit obligation and an actuarial gain. the divestment of the enterprise business decreased the defined benefit obligation by seK 14 million. US: the discount rate is unchanged compared to 2007. the actuarial loss was purely due to experience-based adjustments of pension obligations and plan assets. Other: Brazil is the country included in other with the most significant defined benefit pension plan. ericsson annual report 2008 73 notes to the consolidated financial statementsnote c 18 c18 provisions Warranty commit- ments restruc- turing 2008 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 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 Provisions 1,814 1,568 –392 –1,150 –30 1 120 1,931 2,961 1,472 –861 –1,755 22 –24 –1 1,814 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 2008 was seK 6.0 billion compared with the estimated seK 6 billion. For 2008, new or additional provisions amounting to seK 12.0 billion were made, and seK 1.8 billion were reversed. of the total provisions, seK 311 (368) million are classified as non-current. in certain circumstances, provisions are no longer required due to more favo rable outcomes than anticipated, which affect the provisions balance as a reversal. in other cases the outcome can be negative, and if so, a charge is recorded in the income statement. the expected utilization in 2009 is approximately seK 9 billion. For more information, see note c1, “significant accounting policies” and note c2, “critical accounting estimates and Judgments”. Warranty commitments Warranty provisions are based on historic quality rates for established 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 2008 was seK 1.2 billion and in line with the expected seK 1 billion. provisions amounting to seK 1.6 billion were made and due to more favorable outcomes in certain cases reversals of seK 0.4 billion were made. the expected utilization of warranty provisions during year 2009 is approximately seK 1 billion. project related 2,619 3,960 –799 –2,164 –51 45 184 3,794 3,272 1,795 –1,080 –1,383 – –5 20 2,619 other Total 4,242 2,105 –493 –970 –15 –173 99 4,795 5,372 1,216 –1,409 –1,490 –11 510 54 4,242 9,726 11,961 –1,815 10,146 –6,040 –98 –56 672 14,350 13,882 5,159 –3,750 1,409 –6,308 11 604 128 9,726 1,051 4,328 –131 –1,756 –2 71 269 3,830 2,277 676 –400 –1,680 – 123 55 1,051 Restructuring in the first quarter 2008, a cost reduction plan of seK 4 billion in annual savings was announced, including estimated charges of the same size. in the third quarter it was announced that further charges would be taken in the fourth quarter. as part of this cost reduction plan seK 4.3 billion in provisions were made. the actual utilization was seK 1.8 billion, where seK 0.6 billion was related to restructuring programs before 2008. the expected utilization for 2009 is estimated to approximately seK 3 billion. Project related project related provisions include estimated losses on onerous contracts, contractual penalties and undertakings. the utilization of project related provisions were seK 2.2 billion and in line with the estimated seK 2 billion. provisions amounting to seK 4.0 billion were made and seK 0.8 billion were reversed due to a more favorable outcome than expected. the expected utilization for 2009 is estimated to be approximately seK 3 billion. Other other provisions include provisions for income taxes, value added tax issues, litigations, supplier claims, off balance-customer finance and other provisions. the utilization was seK 1.0 billion in 2008 compared to the estimate of seK 2 billion. During 2008 new provisions amounting to seK 2.1 billion were made and seK 0.5 billion were reversed during the year due to a more favorable outcome. For 2009, the expected utilization is approximately seK 2 billion. 74 ericsson annual report 2008 notes to the consolidated financial statements note c 19 c19 interest-Bearing liabilities ericsson’s outstanding interest-bearing liabilities were seK 30.5 (27.2) billion as of December 31, 2008. 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 2008 2007 3,903 1,639 3,065 2,831 5,542 5,896 18,879 6,060 19,380 1,940 24,939 21,320 Total interest-bearing liabilities 30,481 27,216 1) including notes and bond loans of seK 3,794 (2,898) million. all outstanding notes and bond loans are issued by the parent company under its euro Medium term note program. Bonds issued at a fixed interest rate are swapped to a floating interest rate using interest rate swaps, resulting in a weighted average interest rate of 6.46 percent at December 31, 2008. these bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in ias 39. on June 5, 2008, the GBp bond issued in 2001 of 226 million matured and was repaid. With this GBp bond repaid, ericsson does not have any interest rate payments on bonds linked to credit rating. on July 2, 2008, ericsson signed a seven year loan of seK 4.0 billion with the european investment Bank. the loan supports ericsson’s r&D activities to develop the next generation of mobile broadband technology at sites in Kista, Gothenburg and linköping in sweden. NOTES AND BOND LOANS Issued–maturing 1999–2009 2003–2010 2004–2012 2007–2012 2007–2012 2007–2017 2007–2014 Total nominal amount 483 471 1) 450 1,000 2,000 500 375 coupon currency Book value (seK m.) Maturity date (yy-mm-dd) unrealized hedge gain/loss (incl. in book value) 6.500% 6.750% 3.340% 5.100% 2.728% 5.380% 3.319% usD eur seK seK seK eur eur 3,794 2) 5,256 2) 450 1,079 2) 2,000 5,987 2) 4,107 22,673 09-05-20 10-11-28 12-12-07 3) 12-06-29 12-06-29 4) 17-06-27 14-06-27 5) –62 –189 –80 –547 –878 1) 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. 2) interest rate swaps are designated as fair value hedges. 3) contractual repricing date 2009-06-08. 4) contractual repricing date 2009-03-29. 5) contractual repricing date 2009-03-27. ericsson annual report 2008 75 notes to the consolidated financial statements ericsson classifies financial risks as: • foreign exchange risk. • interest rate risk. • credit risk. • liquidity and refinancing risk. • market price risk in own and other equity instruments. the Board of Directors has established risk limits for defined exposures to foreign exchange and interest rate risks as well as to political risks in certain countries. For further information about accounting policies, 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 are impacted by currency fluctuations. 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. • the carrying value of assets and liabilities. • reported cash flows. the results of operations and financial position of non-swedish subsidiaries are reported in other currencies than seK, and translated into seK upon consolidation. CurrenCy exposure overall exposure Currency net sales purchases 32% usD 1) 25% eur 3% GBp 19% seK 2% JpY 1% auD 3% inr cnY 5% other 10% 9% 43% 25% 3% 4% 3% 2% 4% 7% transaction exposure in seK entities internal sales 2) purchases 3) 52% 27% 2% 1% 7% 2% 0% 0% 9% 38% 23% 0% 37% 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) 41 percent of overall purchases, offsetting internal sales. note c 20 c20 Financial risk Management and Financial instruments ericsson’s financial risk management is governed by a policy approved by the Board of Directors. the Finance committee of the Board of Directors is responsible for overseeing the capital structure and financial management of the company and approving certain matters (such as acquisitions, investments, customer finance commitments, 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, investment grade rating, low leverage and ample liquidity is deemed important. this provides the financial flexibility and independence to operate and manage variations in working capital needs as well as to capitalize on business opportunities. the company’s overall capital structure should support the financial targets: to grow faster than the market, deliver best-in-class margins and generate a healthy cash flow. the capital structure is managed 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. • to maintain a positive net cash position. • to maintain a solid investment grade rating by Moody’s and standard & poor’s. Capital objeCtives rel ated information capital (seK billion) equity ratio (percent) cash conversion rate (percent) positive net cash (seK billion) Credit rating Moody’s standard & poor’s 2008 2007 142 50 92 34.7 135 55 66 24.3 baa1 bbb+ Baa1 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 exposures in a manner consistent with underlying business risks and financial policies. Hedging activities, cash management and insurance management are largely centralized to the treasury function in stockholm. ericsson also has a customer finance function with the main objective to find suitable third-party financing solutions for customers and to minimize recourse to ericsson. to the extent customer loans are not provided directly by banks, the parent company provides or guarantees vendor credits. the customer finance function monitors the exposure from outstanding vendor credits and credit commitments. 76 ericsson annual report 2008 notes to the consolidated financial statements outstandinG derivatives Fair value Currency derivatives Maturity within 3 months Maturity between 3 and 12 months Maturity 1 to 3 years Maturity 3 to 5 years Maturity more than 5 years total currency derivatives of which designated in cash flow hedge relations of which designated in net investment hedge relations interest rate derivatives Maturity within 3 months Maturity between 3 and 12 months Maturity 1 to 3 years Maturity 3 to 5 years Maturity more than 5 years total interest rate derivatives of which designated in fair value hedge relations 2008 asset liability 2007 asset liability 2,671 2,489 432 537 1,639 40 – – 4,022 589 – – 413 145 – – 474 83 – – 4,350 2) 7,100 990 1,094 – 8 – 3,503 416 179 –69 1) – – 315 129 105 711 1,260 2) 121 25 – 53 199 194 226 32 184 636 2) 116 1,152 – 478 – 13 10 1 53 56 3 3 1) negative amounts relate to effects from one exposure of a derivative that is positive/negative while the total effect of the derivative is the opposite. 2) of which 2,814 million is reported as non-current assets for 2008 and 96 million for 2007. net sales and operating income are affected by changes in foreign exchange rates from two different kinds of exposures: 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. Translation exposure • sales and cost of sales in foreign entities are translated into seK. • these exposures cannot be addressed by hedging. the current policy for hedging transaction exposures and the fact that translation exposure related to forecasted results cannot 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 net sales, cost of sales and operating expenses. Transaction exposure Foreign exchange risk is as far as possible concentrated to swedish group companies, primarily ericsson aB. sales to foreign subsidiaries are normally denominated 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 revenues or expenditures, committed and forecasted future sales and purchases in major currencies are hedged, for the coming 6–12 months. according to company policy, transaction exposure in note c 20 subsidiaries’ balance sheets (i.e. trade receivables and payables and customer finance receivables) should be fully hedged, except for unhedgable currencies. Group treasury has a mandate to leave selected transaction exposures in local companies’ balance sheets un-hedged up to an aggregate Value at risk (Var) of 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, 2008, outstanding foreign exchange derivatives hedging transaction exposures had a negative net market value of seK 2.9 (positive 0.1) 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 negative balance corresponds to the change in value of trade receivable balances being remeasured at higher 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 quarters are hedged to a higher degree than later 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 results and net assets of such companies are exposed to exchange rate fluctuations, which affect the consolidated income statement and balance sheet when translated to seK. translation risk related to forecasted results from foreign operations cannot be hedged, but net assets can be addressed by hedging. translation exposure in foreign subsidiaries is hedged according to the following policy established by the Board of Directors: translation risk related to net assets in foreign subsidiaries is hedged up to 20 percent in selected companies. the translation differences reported in equity during 2008 were positive, seK 8.5 billion, including hedging loss of seK 0.7 billion. 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 fluctuations in certain balance sheet items and through changes in interest revenues and expenses. the net cash position was seK 34.7 (24.3) billion at the end of 2008, consisting of cash, cash equivalents and short-term investments of seK 75.0 (57.7) billion and interest- ericsson annual report 2008 77 notes to the consolidated financial statements note c 20 bearing liabilities and post-employment benefits of seK 40.4 (33.4) 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 10 and 14 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, 2008, 87 (92) percent of ericsson’s interest- bearing liabilities and 100 (100) percent of ericsson’s interest-bearing assets had floating interest rates, i.e. interest periods of less than 12 months. When managing the interest rate exposure, ericsson uses derivative instruments, such as interest rate swaps. Derivative instruments used for converting fixed rate debt into floating rate debt are designated 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 Var methodology to measure foreign exchange and interest rate risks in portfolios managed by treasury. 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 2008 was for the interest rate mandate seK 20.5 (16.1) million and for the transaction exposure mandate seK 14.4 (13.5) million. no Var-limits were exceeded during 2008. Financial credit risk Financial instruments carry an element of risk in that counterparts may be unable to fulfill their payment obligations. this exposure arises in the investments in cash, cash equivalents, short-term investments and from derivative positions with positive unrealized results against banks and other counterparties. at December 31, 2008, the credit risk in financial cash instruments was equal to the instruments’ carrying value. credit exposure in derivative instruments was seK 5.6 (1.6) 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 obligations, please see the Board of Directors’ report. the current cash position is deemed to satisfy all short-term liquidity requirements. During 2008, cash and bank and short-term investments increased by seK 17.3 billion to seK 75.0 billion. the increase was mainly due to positive operating cash flow and issuance of non-current debt. CasH and sHort-term investments (seK billion) 2008 2007 remaining time to maturity < 3 months 43.5 29.8 < 1 year 23.7 18.0 1–5 years >5 years 5.9 8.9 1.9 1.0 total 75.0 57.7 the instruments are either classified as held for trading or as 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 outstanding debt at reasonable terms and conditions, or at all, at a given point in time. repayment sCHedule of lonG -term borrowinGs 1) nominal amount (seK billion) current maturities of long- term debt notes and bonds (non-current) liabilities to financial institutions (non-current) total 2009 2010 2011 2012 2013 2014 2015 2016 2017 total 3.7 – – – – – – – – 3.7 – 5.1 – 3.5 – 4.1 – – 5.5 0.1 0.2 0.1 0.1 0.1 – 4.0 – – 3.8 5.3 0.1 3.6 0.1 4.1 4.0 – 5.5 18.2 4.6 26.5 1) excluding finance leases reported in note c27, “leasing”. Debt financing is mainly carried out through borrowing in the swedish and international debt capital markets. ericsson mitigates these risks by investing cash primarily in well- Bank financing is used for certain subsidiary funding and to obtain rated securities such as treasury bills, commercial papers, and mortgage covered bonds with short-term ratings of at least a-1/p-1 and long-term ratings of aaa. separate credit limits are assigned to each counterpart in order to minimize risk concentration. We have had no sub-prime exposure in our investments. all derivative transactions are covered by isDa netting agreements to reduce the credit risk. no credit losses were incurred during 2008, neither on external investments nor on derivative positions. committed credit facilities. 78 ericsson annual report 2008 notes to the consolidated financial statements fundinG proG rams 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.) european investment Bank (seK m.) indian commercial paper program (inr m.) amount utilized unutilized 5,000 2,730 2,270 1,500 5,000 2,000 – – – 1,500 5,000 2,000 4,000 4,000 – 5,000 200 4,800 at year-end, ericsson’s creditratings remained at Baa1 (Baa1) by Moody’s and BBB+ (BBB+) by standard & poor’s, both considered to be “solid investment Grade”. Financial instruments carried at other than fair value in the following tables, carrying amounts and fair values of financial instruments that are carried in the financial statements at other than fair values are presented. assets valued at fair value through profit or loss showed a net loss of seK 0,3 billion. For further information about valuation principles, please see note c1, “significant accounting policies”. finanCial instruments, CarryinG amounts note c 20 other financial assets c12 other current receivables c15 other current liabilities c21 2.8 –7.3 4.5 0.3 2008 2007 41.6 87.4 0.3 39.1 67.8 1.1 customer finance c14 receiv- ables trade short- cash and term invest- c14 ments equiva- lents cash Borrow- trade ings payables c22 c19 seK billion assets at fair value through profit or loss loans and receivables available for sale assets Financial liabilities at amortized cost 2.8 75.9 37.2 8.9 4.2 –30.5 total 2.8 75.9 37.2 13.1 –30.5 –23.5 –23.5 4.8 2.8 –7.3 75.3 63.4 –54.0 –44.6 finanCial instruments Carried at otHer tHan fair value1) Fair value carrying amount Market price risk in own shares and other listed equity investments seK billion 2008 2007 2008 2007 Risk related to our own share price current maturities of non-current borrowings notes and bonds other borrowings non-current total 3.9 18.9 4.6 27.4 2.9 19.4 – 22.3 4.0 15.9 3.7 23.6 3.1 19.4 – 22.5 1) excluding finance leases reported in note c27, “leasing”. Financial instruments excluded from the tables, such as trade receivables and payables, are carried at amortized cost which is deemed to be equal to fair value. When a market price is not readily available and there is insignificant interest rate exposure affecting the value, the carrying value is considered to represent a reasonable estimate of fair value. 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. ericsson annual report 2008 79 notes to the consolidated financial statements NOTE C21–C25 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 1) Deferred revenues Derivatives with a negative value Other 2) Total 2008 2007 2,213 4,412 93 421 24,289 10,369 13,920 9,204 7,299 13,101 1,126 3,419 49 466 21,369 9,443 11,926 5,961 1,210 11,395 61,032 44,995 1) Major balance relates to accrued expenses for customer projects. 2) Includes items such as VAT and withholding tax payables, social security payables and other payroll deductions and liabilities for delivered goods where invoice is not yet received. C22 Trade Payables Payables to associated companies and joint ventures Other Total 2008 2007 83 23,421 90 17,337 23,504 17,427 C23 Assets Pledged as Collateral Interest paid in 2008 was SEK 1,689 million (SEK 1,513 million in 2007, SEK 1,353 million in 2006) and interest received was SEK 2,375 million (SEK 1,864 million in 2007, SEK 1,539 million in 2006). Taxes paid, including withholding tax, were SEK 4,274 million (SEK 5,116 million in 2007, SEK 3,649 million in 2006). For more information regarding the disposition of cash and cash equivalents and unutilized credit commitments, see Note C20, “Financial Risk Management and Financial Instruments”. Cash restricted due to currency restrictions or other legal restrictions in certain countries amounted to SEK 8,197 million (SEK 5,797 million in 2007, SEK 5,794 million in 2006). In 2008 the divestment of shares in Symbian, with a cash flow effect of SEK 1,256 million, is included in divestments in subsidiaries and other operations. 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 2008 2007 2006 3,108 3,121 3,007 –3 –207 30 3,105 2,914 3,037 1,726 2,371 2,277 Assets pledged as collateral Chattel mortgages Bank deposits Total 2008 – 149 267 416 2007 1,639 130 230 1,999 and other intangible assets 3,280 3,062 1,960 Total amortization Impairments 5,006 5,433 4,237 Capitalized development expenses 562 16 242 Total 5,568 5,449 4,479 C24 Contingent Liabilities Contingent liabilities Total 2008 1,080 2007 1,182 1,080 1,182 Contingent liabilities assumed by Ericsson include guarantees of loans to other companies of SEK 72 (73) million. Ericsson has SEK 568 (492) million issued to guarantee the performance of a third party. All ongoing legal and tax proceedings have been evaluated, their potential economic outflows and probability estimated and necessary provisions made. 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 Gains/losses on sales of investments and operations, intangible assets and PP&E, net Other non-cash items 1) Total adjustments to reconcile net income to cash 8,673 8,363 7,516 1,032 1,119 4,282 3,863 4,223 1,262 291 –5,636 –4,233 –1,210 1,669 –254 –643 –2,815 48 14,318 7,172 6,060 1) Refers mainly to unrealized foreign exchange on financial instruments. 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ERICSSON ANNUAL REPORT 2008 note c 26 TandbERg businE ss (2007) 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 Fair value Book value adjustments Fair value – – – – 227 124 1,938 –62 –924 742 2,712 276 1,486 5,442 2,712 276 1,486 5,442 – – – – 227 124 1,938 –62 –1,432 –2,356 9,787 – 742 9,045 the determination of purchase price 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 businEss (2007) 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 Cash flow effect Book Fair value value adjustments Fair value – – – – 32 866 –82 –252 249 367 43 777 1,293 – – – –380 367 43 777 1,293 32 866 –82 –632 2,664 – 249 2,415 the determination of purchase price allocation and fair values of assets acquired and liabilities assumed is based on preliminary appraisal; therefore, these values may be subject to minor adjustments. 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 Cash flow effect 2008 –209 – –882 887 2007 2006 11,627 15,648 1,257 163 4,422 325 16,917 4,266 – 278 – – –127 –6,227 45 2,387 –812 –2,689 89 1,781 74 29,213 19,859 – – 2,387 534 1,781 – 74 26,292 18,078 in 2008, ericsson made acquisitions with a cash flow effect amounting to seK 74 million (seK 26,292 million in 2007). the preliminary purchase price allocations made in 2007 related to acquired businesses were finalized in 2008 with the following effects: • Redback: an increase in deferred tax assets of seK 593 million, goodwill decreased correspondingly. • Tandberg: Decreased intangible assets by seK 209 million, increased goodwill by seK 71 million and increased deferred tax assets by seK 138 million. • Entrisphere (included in Other): an increase in deferred tax assets of seK 130 million, goodwill decreased correspondingly. in addition goodwill decreased by seK 260 million, regarding entrisphere, since the additional consideration never was materialized. REdbaCk businEss (2007) 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 Book Fair value 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 price 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 2008 81 notes to the consolidated financial statements note c 26 Divestments net assets disposed of property, plant and equipment other assets provisions, including post- employment benefits other liabilities Gains from divestments less: cash and cash equivalents Cash flow effect 2007 2006 EnTERpRisE businEss 2008 3 1,005 – –456 552 296 13 498 253 2,946 –19 –89 –234 –2,079 258 280 1,031 2,945 194 654 454 890 84 3,086 1) net assets disposed of property, plant and equipment other assets other liabilities Gains from divestments less: cash and cash equivalents Cash flow effect 2008 3 783 –300 486 151 – 637 1) the amount mainly relates to the sale of the Defense business. in 2008, ericsson made divestments with a cash flow effect amounting to seK 654 million (seK 84 million in 2007), primarily: • Enterprise: as per May 1, 2008, the pBX solutions business was sold to aastra technologies. sales in 2007 amounted to approximately seK 3.0 billion. aCquisiTiOns 2006 –2008 company Mobeon Hyc lHs Drutt Description swedish company. acquisition of shares. spanish company with around 110 employees that specializes 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 Mar 31, 2008 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 business, with around 130 employees that develops 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 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. diVEsTMEn Ts 2006 –2008 company enterprise Description pBX solutions business. cash flow effect seK 0.6 billion. ericsson Microwave systems swedish provider of radar, command and control systems for defense applications. cash flow effect seK 3.1 billion. Feb 12, 2007 Jan 23, 2007 aug 31, 2006 aug 11, 2006 Jan 23, 2006 Date May 1, 2008 sept 1, 2006 82 ericsson annual report 2008 notes to the consolidated financial statements note c 27–c28 c27 leasing Leases with the Company as lessor Leasing with the Company as lessee assets under finance leases, recorded as property, plant and equipment, consist of: leasing income mainly relates to subleasing of real estate. these leasing contracts vary in length from 1 to 10 years. at December 31, 2008, future minimum payment receivables were distributed as follows: Finance leases acquisition costs real estate Machinery accumulated depreciation real estate Machinery accumulated impairment losses real estate 2008 2007 2,059 4 2,063 –763 –4 –767 1,743 4 1,747 –589 –2 –591 –10 –80 2009 2010 2011 2012 2013 2014 and later Total unearned financial income uncollectible lease payments net investments in financial leases Finance leases operating leases – – – – – – – – – – 122 72 25 1 1 3 224 n/a n/a n/a net carrying value 1,286 1,076 leasing income in 2008 was seK 205 (160) million. as of December 31, 2008, future minimum lease payment obligations for leases were distributed as follows: c28 tax assessment Values Finance operating leases leases in sweden land and land improvements Buildings Total 2008 2007 58 265 323 58 265 323 2009 2010 2011 2012 2013 2014 and later Total Future finance charges 1) present value of finance lease liabilities 208 199 156 144 144 1,381 3,429 2,757 2,153 1,673 984 2,951 2,232 13,947 –804 n/a 1,428 13,947 1) average effective interest rate on lease payables is 5.78 percent. expenses in 2008 for leasing of assets were seK 4,708 (2,878) million, of which variable expenses were seK 1 (8) million. the leasing contracts vary in length from 1 to 20 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 stockholders’ equity of at least seK 25 billion. ericsson annual report 2008 83 notes to the consolidated financial statements note c 29 c29 information regarding employees, Members of the Board of Directors and Management Number of employees AverAge number of employees men Women 2008 Total Men Women 2007 total 32,289 9,167 41,456 32,118 8,961 41,079 7,028 12,111 6,151 4,556 8,751 5,483 1,596 7,079 1,723 3,343 15,454 10,952 2,844 13,796 7,486 4,779 1,058 5,837 1,335 1,286 5,842 4,329 1,225 5,554 Western europe 1) central and eastern europe, Middle east and africa asia pacific latin america north america Total 2) 62,135 16,854 78,989 57,661 15,684 73,345 number of employees rel ATed To cosT of sAles And operATing expenses cost of sales operating expenses Total employee movemenTs 2008 2007 2006 35,717 33,904 43,023 27,682 40,107 36,099 78,740 74,011 63,781 Head count at year-end employees who have left the company employees who have joined the company temporary employees 2008 2007 78,740 3,415 8,144 1,124 74,011 6,657 16,887 1,415 Remuneration WAges And sAl Aries And sociAl securiT y expenses Wages and salaries social security expenses Of which pension costs 2008 2007 38,607 12,690 3,206 34,111 10,660 3,074 1) Of which Sweden 2) Of which EU 14,685 34,100 4,990 19,675 14,128 4,618 18,746 9,633 43,733 33,563 9,351 42,914 amounts related to the president and ceo and the Group Management team are included. number of employees AT yeAr end WAges And sAl Aries per region employees by region Western europe 1) central and eastern europe, Middle east and africa asia pacific latin america north america Total 2) 1) Of which Sweden 2) Of which EU employees per segment networks professional services Multimedia Total 2008 2007 41,618 41,517 7,976 15,165 8,247 5,734 7,329 13,120 6,547 5,498 78,740 74,011 20,155 43,093 19,781 42,387 2008 2007 45,823 44,661 19,790 23,244 9,560 9,673 78,740 74,011 employees by gender And Age AT yeAr end 2008 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 790 6,099 6,730 2,530 799 2,502 21,757 23,754 10,562 3,237 4% 35% 39% 17% 5% 21% 79% 100% Western europe 1) central and eastern europe, Middle east and africa asia pacific latin america north america 2) Total 3) 1) Of which Sweden 2) Of which United States 3) Of which EU 2008 2007 24,138 22,278 3,354 4,594 1,879 4,642 2,520 3,714 1,431 4,168 38,607 34,111 11,825 3,296 11,025 2,904 24,699 22,603 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 2008 2007 316 41 36 266 43 28 boArd members, presidenTs And group mAnAgemenT by gender AT ye Ar end 2008 2007 Females Males Females Males parent company Board members and president 38% Group Management 9% subsidiaries Board members and presidents 12% 62% 91% 38% 10% 62% 90% 88% 11% 89% 84 ericsson annual report 2008 notes to the consolidated financial statements note c 29 The principal terms of variable remuneration the annual variable remuneration is through a cash based program with specific business targets derived from the annual business plan approved by the Board of Directors. the exact nature of the targets will vary depending on the specific job but may include financial targets at either corporate level or at a specific business unit level, operational targets, employee motivation targets and customer satisfaction targets. Pension pension benefits shall follow the competitive level in the home country. For Group Management 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. Additional remuneration arrangements By way of exception, additional arrangements can be made when deemed required in order to attract or retain key competences or 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 Group Management 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. 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 2008. 2008 Remuneration Policy for Group Management remuneration of Group Management in ericsson is based on the principles of performance, competitiveness and fairness. Different remuneration elements are designed to reflect these principles. therefore a mix of several remuneration elements is applied in order to reflect the remuneration principles in a balanced way. the Group Management’s total remuneration consists of fixed salary, variable components in the form of annual short-term variable remuneration and long-term variable remuneration, pension and other benefits. together these elements constitute an integral remuneration package. if the size of any of the elements should be increased or decreased, at least one other element has to be decreased or increased if the competitive position of the total package should remain unchanged. the annual report 2008 sets out details on the total remuneration and benefits awarded to the Group Management during 2008 including previously decided long-term variable compensation that has not yet become due for payment. Relative importance of fixed and variable components of the remuneration of Group Management and the linkage between performance and remuneration ericsson takes account of global remuneration practice together with the practice of the home country of each member of the Group Management. Fixed salary is set to be competitive. its absolute level is determined by the size and complexity of the job and the year to year performance of the individual jobholder. performance is specifically reflected in the variable components, both in an annual variable component and in a long-term variable part. although this may vary over time to take account of pay trends, currently the target level of the short-term variable remuneration for Group Management is 30–40 percent of the fixed salary. the long- term variable remuneration 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 specific 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. all variable remuneration plans have maximum award and vesting limits. With the current composition of Group Management, the company’s cost during 2008 for the short-term variable and the long-term variable remuneration of Group Management can, at constant share price, amount to between 0 and 125 percent of the aggregate fixed salary cost, all excluding social security costs. ericsson annual report 2008 85 notes to the consolidated financial statementsnote c 29 Remuneration to the Board of Directors remunerATion To members of The boArd of direcTors during 2008 seK board member Michael treschow Marcus Wallenberg sverker Martin-löf roxanne s. austin peter l. Bonfield Börje ekholm ulf J. Johansson nancy McKinstry anders nyrén carl-Henric svanberg Jan Hedlund Monica Bergström Karin Åberg anna Guldstrand Kristina Davidsson pehr claesson torbjörn nyman amount of Board fee 3,750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 – – – – – – – – employee number commit- represen- total fees synthetic of synthetic shares paid out tative fee tee fee shares portion of Board fee in effect of accounted debt for changed synthetic market shares 2) price 1) Total costs recognized 250,000 125,000 250,000 – 250,000 125,000 350,000 125,000 125,000 – – – – – – – – – 1,187,500 – 687,500 – 1,000,000 187,500 – 812,500 – 312,500 – 537,500 – 312,500 – 875,000 – – – – 16,500 – 15,000 – 16,500 – 15,000 – 15,000 – 12,000 – 4,500 75% 38,323.80 2,554.80 25% – 0% 7,664.60 75% 2,554.80 25% 7,664.60 75% 7,664.60 75% 7,664.60 75% – 0% – – – – – – – – – – – – – – – – – 567,145 – 37,817 – – 113,438 – 37,817 – 113,438 – 113,438 – 113,438 – – – – – – – – – 2,245,355 149,683 – 449,062 149,683 449,062 449,062 449,062 – – – – – – – – – 3,432,855 837,183 1,000,000 636,562 962,183 761,562 986,562 761,562 875,000 – 16,500 15,000 16,500 15,000 15,000 12,000 4,500 Total 9,750,000 1,600,000 94,500 6,007,000 74,091.80 – 1,096,531 4,340,969 10,347,969 social security fees Total 1,706,764 7,713,764 1) Difference of the B share value on December 31, 2008 and at grant date. 2) Based on the B share value on December 31, 2008. 1,232,388 2,939,152 5,573,357 13,287,121 Comments to the table • the chairman of the Board was entitled to a Board fee of seK 3,750,000. the chairman also received seK 125,000 for each Board committee on which he served. • the other Directors appointed by the annual General Meeting were entitled to 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 the Board, who are not employees of the company, have not received any remuneration other than the fees and synthetic shares as above. • Members and Deputy Members of the Board who are ericsson employees received no remuneration or benefits other than their entitlements as employees. However, a fee of seK 1,500 per attended Board meeting was paid to each employee representative on the Board. •the annual General Meeting 2008 resolved that non-employed Directors can choose to receive the fee in respect of the Board assignment (exclusive of committee work) as follows: i) 25 percent of the fee in cash and a number of synthetic shares, the value of which at the time of allocation corresponds to 75 percent of the fee, ii) 50 percent of the fee in cash and 50 percent in the form of synthetic shares, or iii) 75 percent in cash and 25 percent in the form of synthetic shares. Directors may also choose not to participate in the synthetic share program. the number of synthetic shares is based on a volume weighed average of the market price of ericsson class B shares on the nasDaQ oMX stockholm exchange during the five trading days immediately following the publication of the company’s interim report for the first quarter of 2008 (april 28 – May 5): seK 14.6775 (after the reversed split seK 73.3875). Following the reverse split of shares 1:5, the number of synthetic shares was recalculated by an independent accounting firm appointed by the stockholm chamber of commerce in accordance with the terms and conditions for the synthetic shares resolved by the annual General Meeting 2008. the Directors’ right to receive payment with regard to the allocated synthetic shares occurs after the publication of the company’s year-end financial statement during the fifth year following the annual General Meeting which resolved on the allocation of the synthetic shares, i.e. in 2013. the amount payable shall be determined based on the volume weighed average price for shares of class B during the five trading days immediately following the publication of the year-end financial statement. the total accounted debt for the synthetic share program per December 31, 2008, is seK 5,573,357. 86 ericsson annual report 2008 notes to the consolidated financial statements Remuneration to the Group Management remunerATion pAid To The presidenT And ceo And oTher members of group mAnAgemenT during 2008 seK salary annual variable remuneration earned 2007 and paid 2008 long-term variable remuneration other benefits other Members of Group president Management the Total 15,886,500 59,759,989 75,646,489 1,216,000 8,652,714 9,868,714 3,264,551 56,340 7,901,861 11,166,412 2,294,217 2,350,557 Total 20,423,391 78,608,781 99,032,172 Comments to the table • the annual fixed salary for the president and ceo was adjusted from seK 15,200,000 to seK 15,750,000 from January 1, 2008. the salary amount stated in the table includes vacation salary. • the Board of Directors has appointed four executive Vice presidents, of whom two have 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, Jan Frykhammar, Marita Hellberg, torbjörn possne (from February 1, 2008), Henry sténson, Joakim Westh (until December 31, 2008), Johan Wibergh (from July 1, 2008) and Jan Wäreby. Kurt Jofs and Björn olsson both left the Group Management team as of July 1, 2008, and are included during their notice periods up to December 31, 2008. Karl-Henrik sundström left the Group Management team on october 25, 2007, but is included up to april 24, 2008, as he was fulfilling his six months notice period. Joakim Westh left the Group Management team as of January 1, 2009, but is fulfilling his 6 months notice period up to June 30, 2009. • “long-term variable remuneration” refers for the president and ceo to the value of matching shares received during 2008 (45,003 class B shares) under the stock purchase plans 2003 and 2005 and under the executive performance stock plan 2004 (three of four quarterly matchings). For other members of Group Management “long-term variable remuneration” refers to the value of exercised stock options during 2008 ( 22,000 options) under the stock option plan 2002 and to the value of matching shares received during 2008 (100,948 class B shares) under the stock purchase plans 2003 and 2005 and under the executive performance stock plan 2004. the values are based on the share price at matching respectively at exercise. note c 29 remunerATion cosTs incurred during 2008 for The presidenT And ceo And oTher members of group mAnAgemenT seK salary provisions for annual variable remuneration earned 2008 to be paid 2009 long-term variable remuneration provision other benefits pension costs the president other Members of Group Management Total 15,886,500 59,759,989 75,646,489 630,000 16,287,601 16,917,601 7,458,319 56,340 8,815,150 12,905,987 20,364,306 2,350,557 33,831,233 42,646,383 2,294,217 social security fees 9,004,627 35,581,309 44,585,936 Total 41,850,936 160,660,336 202,511,272 Comments to the table • the provisions for the annual variable remuneration 2008 correspond to 4 percent of the fixed salary for the president and ceo and to 34 percent for other members of the Group Management • “long-term variable remuneration provision” includes the compensation cost during 2008 for share based programs, which represent Group Management’s part of total compensation costs as disclosed 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 Management 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 a contribution of between 25 and 35 percent per year of the executive’s pensionable salary in excess of 20 base amounts (during 2008, one base amount was seK 48,000). For the president and ceo, the annual pension contribution is 35 percent of the pensionable salary above 20 base amounts. During 2008, this contribution was seK 7,510,125 and the fee in the itp plan seK 1,305,025. 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 temporary disability and survivor’s pensions until retirement age. the pensionable salary consists of the annual fixed salary including vacation and the target value of the annual variable remuneration. • ericsson’s commitments for benefit based pensions per December 31, 2008, under ias 19 amounted to seK 1,984,193 for the president and ceo which refers to the itp plan. For other members of Group Management the company’s commitments amounted to seK 44,093,845, of which seK 34,575,648 refers to the itp plan and the remaining seK 9,518,197 to temporary disability and survivor’s pensions until retirement age. • social security fees include payroll tax on pension premiums. • For previous presidents, the company has made provisions for defined benefit pension plans in connection with their active service periods within the company. ericsson annual report 2008 87 notes to the consolidated financial statements note c 29 ouTsTAnding sTocK opTions And mATching righTs The Key Contributor Retention Plan the Key contributor retention plan was introduced in 2004. the plan is part of ericsson talent management strategy and is designed to give recognition for performance, critical skills and potential as well as encourage retention of key employees. under the program, up to 10 percent of employees (2008: 6,717 employees) are selected through a nominations process that identifies individuals according to performance, critical skills and potential. participants selected obtain one extra matching share in addition to the ordinary one matching share for each contribution share purchased under the stock purchase plan during a twelve-month program period. The Executive Performance Stock Plan the executive performance stock plan was introduced in 2004. 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 matching shares) in addition to the ordinary one matching share for each contribution share purchased under the stock purchase plan. up to 0.5 percent of employees (2008: 223 executives) are offered to participate in the plan. as from the 2006 program, the ceo has been allowed to invest up to 9 percent 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 matching is subject to the fulfillment of a performance target of average annual earnings per share (eps) growth. As per december 31, 2008 number of class b shares stock option plan 2002 stock purchase plans 2005, 2006, 2007 and 2008 executive performance stock plans 2006, 2007 and 2008 the president other Members of Group Management – 88,000 320,321 574,552 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 the applicable plan. • For strike price for the option plan, see “long-term variable remuneration”. • the number of matching rights presumes maximum performance matching under executive performance stock plans 2006, 2007 and 2008. Long-term variable remuneration Stock Purchase Plan the first stock purchase plan was introduced in 2002. the plans are designed to offer an incentive for all employees to participate in the company where practicable, which is consistent with industry practice and with our ways of working. employees can save up to 7.5 percent (ceo 9 percent) of gross fixed salary for purchase of class B contribution shares at market price on the nasDaQ oMX stockholm or aDss 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 ericsson Group continues during that time, the employee’s shares will be matched with a corresponding number of class B shares or aDss free of consideration. employees in 94 countries participate in the plans. the below table shows the contribution periods and participation details for ongoing plans. number of contribution participants take-up rate – % of at launch all employees plan stock purchase plan 2005 stock purchase plan 2006 stock purchase plan 2007 stock purchase plan 2008 period august 2005 – July 2006 august 2006 – July 2007 august 2007 – July 2008 august 2008 – July 2009 16,000 17,000 19,000 19,000 29% 29% 26% 25% 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 continued employment, and hence the matching spans over two financial years and two tax years. 88 ericsson annual report 2008 notes to the consolidated financial statements execuTive performAnce sTocK pl Ans plan Base year eps 1) target average annual eps growth range 2) Matching share vesting range 3) Maximum opportunity as percentage of fixed salary 4) performance stock plan 2004 5) 3.45 5% to 25% performance stock plan 2005 6) 6.68 3% to 15% performance stock plan 2006 7.58 3% to 15% performance stock plan 2007 8.83 5% to 15% performance stock plan 2008 4.43 5% to 15% 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 0.67 to 4 1 to 6 1.33 to 8 30% 45% 30% 45% 30% 45% 72% 30% 45% 72% 30% 45% 72% note c 29 percen- tage vesting 100% 100% 0% 0% 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. 6) no vesting and therefore no performance share plan matching for 2005 plan. sTocK opTion pl Ans ongoing plans 2008 Grant/expiry date 14 May 01/14 May 08 exercise price 1) (seK) 152.50 stock option plan 2001 – May Grant stock option plan 2001 – november Grant 19 nov 01/19 nov 08 128.50 stock option plan 2002 2) 11 nov 02/11 nov 09 39.00 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 number of participants at grant 15,000 900 number of participants end of 2008 – – 12,800 1,324 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 2008, the weighted average share price was seK 67.23. Shares for all plans all plans are funded with treasury stock. treasury stock for all plans has been issued in a directed cash issue of class c shares at the quotient value and purchased under a public offering at the subscription price 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 nasDaQ oMX stockholm to cover the social security payments when arising due to exercise of options or matching of shares. During 2008, 676,630 shares were sold at an average price of seK 70.03. sale of shares is recognized directly in equity. if all options outstanding as of December 31, 2008, were exercised, all shares allocated for future matching under the stock purchase plan were transferred, and shares designated to cover social security payments were disposed of as a result of the exercise and the matching, approximately 44 million class B shares would be transferred, corresponding to 1.4 percent of the total number of shares outstanding, 3,185 million. as per December 31, 2008, 61 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 2008. it also shows compensation cost charged for each plan. the total compensation cost charged for the long term Variable compensation plans during 2008 amount to seK 572 million. For a description of compensation cost, including accounting treatment, see note c1, “significant accounting policies, share- based employee compensation”. ericsson annual report 2008 89 notes to the consolidated financial statements note c 29 shAres for All pl Ans plan (million shares) 2001 stock option plan – May Grant 2001 stock option plan – november Grant 2002 stock option plan 2003 stock purchase plan (2–year plan) and 2004 Key contributor and executive performance stock plans 2005 stock purchase plan, Key contributor and executive performance stock plans 2006 stock purchase plan, Key contributor and executive performance stock plans 2007 stock purchase plan, Key contributor and executive performance stock plans 2008 stock purchase plan, Key contributor and executive performance stock plans out- exer- cised/ originally beginning of 2008 designated 1) standing Granted matched Forfeited during 2008 during 2008 during 2008 compen- sation costs expired standing options charged end of exercis- during 2008 2) number of during 2008 out- able 2008 9.0 0.5 10.8 4.5 0.2 4.1 30.3 2.9 6.3 4.4 6.4 4.9 – – – – – – – – 0.3 – – – 4.5 0,2 – – – 3.8 – – 3.8 – – – 2.8 0.1 1.0 0.2 0.2 0.1 – – – – – – – 50 4) 3.2 3) – 129 4) 4.6 3) – 190 4) 9.4 3) – 196 4) 3.7 3) – 7 4) 9.7 2.0 7.7 0.2 0.1 16.5 – 3.7 – – 1) adjusted for rights offering and reverse split when applicable. 2) all outstanding options in the 2001 stock option plans expired during 2008. 3) presuming maximum performance matching under the executive performance stock plans. 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 executive performance stock plans, the company assesses the probability of meeting the performance targets when calculating the compensation cost. Fair value of the class B share at each investment date during 2008 was: February 15 seK 62.50, May 15 seK 73.45, august 15 seK 62.01, and november 17 seK 45.82. 90 ericsson annual report 2008 notes to the consolidated financial statements note c 30 c30 related party transactions Ericsson Nikola Tesla d.d. During 2008, various related party transactions were executed pursuant to contracts based on terms customary in the industry and negotiated on an arm’s length basis. Sony Ericsson Mobile Communications AB (SEMC) in october 2001, seMc was organized as a joint venture between sony corporation and ericsson, and a substantial portion of ericsson’s handset operations was sold to seMc. as part of the formation of the joint venture, contracts were entered into between ericsson and seMc. Major transactions are as follows: • License revenues. ericsson receives license revenues regarding mobile phone platform design from seMc. Both owners of seMc, sony corporation and ericsson, receive license revenues 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 ericsson, receive dividends. Related party transactions license revenues purchases ericsson’s share of dividends Related party balances receivables liabilities 2008 2007 5,856 261 3,627 5,743 333 3,949 1,002 176 932 204 ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward sony ericsson Mobile communications aB. ericsson nikola tesla d.d. is a joint stock company for design, sales and service of telecommunication 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. • License revenues. ericsson receives license revenues for ericsson nikola tesla d.d.’s usage of trademarks. • Purchases. ericsson purchases development resources from ericsson nikola tesla d.d. • Dividends. ericsson receives dividends from ericsson nikola tesla d.d. Related party transactions sales license revenues purchases Dividends Related party balances receivables liabilities 2008 2007 1,020 9 547 227 1,010 9 506 267 85 58 103 55 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 Management, see note c29, “information regarding employees, members of the Board of Directors and Management”. ericsson annual report 2008 91 notes to the consolidated financial statements note c 31–c32 c31 Fees to auditors c32 events after the Balance sheet Date Ericsson and STMicroelectronics completed the JV deal on February 3, 2009, ericsson and stMicroelectronics announced the closing of their agreement merging ericsson mobile platforms and st-nXp Wireless unit into a 50/50 joint venture, to be called st ericsson. the deal was completed on the terms originally announced on august 20, 2008. st ericsson will acquire relevant assets from the owner companies. after these acquisitions, the joint venture will have a cash position of about usD 0.4 billion. ericsson contributed usD 1.1 billion net to the joint venture, out of which usD 0.7 billion was paid to st. st ericsson is expected to become operational during the first quarter of 2009. 2008 audit fees audit related fees tax services fees other fees Total 2007 audit fees audit related fees tax services fees other fees Total 2006 audit fees audit related fees tax services fees other fees Total price- waterhouse- coopers others Total 97 7 14 1 119 102 4 13 – 119 98 14 19 1 132 4 – 2 5 11 7 – 12 6 25 11 – 3 3 17 101 7 16 6 130 109 4 25 6 144 109 14 22 4 149 During the period 2006–2008, in addition to audit services, pricewaterhousecoopers provided certain audit related services and tax services to the company. the audit related services include consultation on financial accounting, services related to acquisitions and assessments of internal control. the tax services include general expatriate services and corporate tax compliance work. audit fees to other auditors largely consist of local statutory audits for minor companies. 92 ericsson annual report 2008 notes to the consolidated financial statements parent company income statement Years ended December 31, SEK million net sales 1) cost of sales Gross income 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 2008 5,086 –669 4,417 –1,113 –1,271 –2,384 3,065 5,098 24,131 –9,791 19,438 –251 –227 –478 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 –206 –1,072 –1,278 2,339 3,377 12,811 –2,549 13,639 –631 543 –88 –1,733 17,227 –1,315 13,145 –1,189 12,362 1) license revenues are from 2007 included in net sales, instead of in other operation income and expenses, and 2006 has been restated accordingly. 2) selling expenses include the net effect of risk provisions for customer finance of seK 39 million in 2008 (seK 133 million in 2007 and seK 1,262 million in 2006). ericsson annual report 2008 parent c ompany Financial statements 93 Parent Company Balance Sheet December 31, SEK million ASSETS Fixed assets intangible assets tangible assets Financial assets investments Subsidiaries Joint ventures and associated companies other investments receivables from subsidiaries Customer finance, non-current Deferred tax assets other financial assets, non-current Current assets inventories receivables trade receivables Customer finance, current receivables from subsidiaries Current income taxes other current receivables Short-term investments Cash and bank notes 2008 2007 P6 P7, P26 P8, P9 P8, P9 P8 P8,P12 P8, P11 P5 P8 P10 P11 P11 P12 P13 P19 P19 2,604 695 2,989 443 74,571 4,466 11 15,781 910 68 3,030 81,406 4,466 475 18,433 751 589 358 102,136 109,910 80 84 576 835 24,676 351 4,686 44,770 14,444 90,418 42 263 25,130 278 3,160 38,891 6,717 74,565 ToTAl ASSETS 192,554 184,475 94 Parent ComPany FinanCial StatementS eriCSSon annual rePort 2008 December 31, SEK million SToCKholDErS’ EquiTy, proviSionS AnD liAbiliTiES Stockholders’ equity notes P14 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 credit institutions liabilities to subsidiaries other non-current liabilities Current liabilities Current maturities of long-term borrowings trade payables liabilities to subsidiaries other current liabilities ToTAl SToCKholDErS’ EquiTy, proviSionS AnD liAbiliTiES assets pledged as collateral Contingent liabilities P15 P16 P17 P18 P18 P12 P18 P21 P12 P20 P22 P23 2008 2007 16,232 20 31,472 47,724 24,727 17,227 41,954 89,678 16,132 20 31,472 47,624 22,080 13,145 35,225 82,849 1,817 1,339 403 656 1,059 18,941 4,000 – 27,866 187 50,994 3,732 605 35,266 9,403 49,006 192,554 414 13,029 402 655 1,057 19,372 30,921 164 50,457 2,906 626 41,413 3,828 48,773 184,475 359 9,650 eriCSSon annual rePort 2008 Parent ComPany FinanCial StatementS 95 Parent Company Statement of Cash Flows Years ended December 31, SEK million notes 2008 2007 2006 OpEratiOnS net income adjustments to reconcile net income to cash Changes in operating net assets inventories Customer finance, 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 17,227 13,145 12,362 P24 5,146 –891 22,373 12,254 4 –478 –464 –49 2,268 7 1,041 –155 –442 944 –285 12,077 –31 446 358 –401 261 23,654 13,649 12,710 –388 8 – –305 2,122 1,541 31 –262 6 –579 –35,918 6,189 3,839 –19 3,009 –26,744 –132 57 –3,092 –541 5,654 20,657 59 22,662 Cash flow before financing activities 26,663 –13,095 35,372 Financing activities 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 effect from remeasurement in cash net change in cash and cash investments –470 4,000 –3,119 89 –7,954 –7,582 –7 2,417 11,050 – 64 –7,943 –3,324 – –36,519 – –9,511 63 –7,141 –1,296 – –15,043 2,264 –54,404 1,986 13,606 2,453 –8,378 –1,944 –20,976 Cash and short-term investments, beginning of period 45,608 53,986 74,962 Cash and short-term investments, end of period P19 59,214 45,608 53,986 From 2008 the effect from remeasurement in cash and other adjustments to reconcile net income to cash have been included, and 2007 and 2006 have been restated accordingly. 96 Parent ComPany FinanCial StatementS eriCSSon annual rePort 2008 parent company statement of changes in stockholders’ equity December 31, SEK million Opening balance stock issue sale of own shares stock purchase and stock option plans repurchase of own shares contributions from/to (–) subsidiaries tax on contributions Dividends paid Revaluation of other investments in shares Fair value remeasurement reported in equity, net of taxes transferred to income statement at sale, net of taxes Cash flow hedges Fair value remeasurement of derivatives reported in equity, net of taxes net income Closing balance For further information, see note p14 “stockholders’ equity”. notes p14 2007 80,611 62 41 –4,263 1,194 –7,943 2 2008 82,849 100 – 88 36 –100 – –4,288 1,155 –7,954 – –4 – 569 – 17,227 89,678 13,145 82,849 ericsson annual report 2008 parent c ompany Financial statements 97 notes to the parent company Financial statements contents p1 significant accounting policies ...........................................................................................................................................................................................................................99 p2 segment information.................................................................................................................................................................................................................................................99 p3 other operating income and expenses ........................................................................................................................................................................................................99 p4 Financial income and expenses ..................................................................................................................................................................................................................... 100 p5 taxes................................................................................................................................................................................................................................................................................ 100 p6 intangible assets ...................................................................................................................................................................................................................................................... 100 p7 tangible assets ......................................................................................................................................................................................................................................................... 101 p8 Financial assets ........................................................................................................................................................................................................................................................ 102 p9 investments.................................................................................................................................................................................................................................................................. 103 p10 inventories .................................................................................................................................................................................................................................................................... 104 p11 trade receivables and customer Finance ............................................................................................................................................................................................... 105 p12 receivables and liabilities – subsidiary companies .......................................................................................................................................................................... 106 p13 other current receivables ................................................................................................................................................................................................................................. 106 p14 stockholders’ equity .............................................................................................................................................................................................................................................. 106 p15 untaxed reserves ................................................................................................................................................................................................................................................... 107 p16 pensions ........................................................................................................................................................................................................................................................................ 107 p17 other provisions ....................................................................................................................................................................................................................................................... 108 p18 interest-bearing liabilities ................................................................................................................................................................................................................................... 109 p19 Financial risk Management and Financial instruments .................................................................................................................................................................... 110 p20 other current liabilities......................................................................................................................................................................................................................................... 111 p21 trade payables ........................................................................................................................................................................................................................................................... 111 p22 assets pledged as collateral ............................................................................................................................................................................................................................. 111 p23 contingent liabilities ............................................................................................................................................................................................................................................... 111 p24 statement of cash Flows .................................................................................................................................................................................................................................... 112 p25 leasing ........................................................................................................................................................................................................................................................................... 112 p26 tax assessment Values in sweden ............................................................................................................................................................................................................... 112 p27 information regarding employees ................................................................................................................................................................................................................. 112 p28 related party transactions ................................................................................................................................................................................................................................ 113 p29 Fees to auditors ........................................................................................................................................................................................................................................................ 113 p30 events after the Balance sheet Date ............................................................................................................................................................................................................ 113 98 ericsson annual report 2008 notes to the parent company financial statementsp1 significant accounting Segment information note p1–p3 policies the financial statements of the parent company, telefonaktiebolaget lM ericsson, have been prepared in accordance with rFr 2.1 “reporting in separate financial statements”. rFr 2.1 requires the parent company to use the same accounting principles as for the Group, i.e. iFrs to the extent allowed by rFr 2.1. 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 performed 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 uFr 2 issued by the swedish Financial reporting Board. contributions to/from swedish subsidiaries are reported directly in equity, net of taxes, as these transactions are aimed at reducing swedish taxes. shareholders’ contributions increase the parent company’s investments. Classification and measurement of financial instruments ias 39 Financial instruments: recognition and Measurement is adopted, except regarding financial guarantees where the exception allowed in rFr 2.1 is chosen. Financial guarantees are included in assets pledged as collateral. 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 rFr 2.1, ias 19 shall be adopted regarding supplementary disclosures when applicable. segment information is reported according to requirements in the swedish annual accounts act regarding business segments and geographical areas. 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 see notes to the consolidated Financial statements – note c2, “critical accounting estimates and Judgments”. Major critical accounting estimates and judgments applicable to the parent company include “trade and customer finance 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 2008 2007 2006 1,603 1,478 1,093 – 1,254 2,192 37 33 1,383 304 38 543 915 31 19 5,086 3,236 2,601 1,506 1,603 1,336 1,478 964 1,093 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. p3 other operating income and expenses license revenues and other operating revenues subsidiary companies other net losses (–) on sales of tangible assets total 2008 2007 2006 2,407 659 2,058 667 2,018 323 –1 –2 –2 3,065 2,723 2,339 ericsson annual report 2008 99 notes to the parent company financial statements note p4–p6 p4 Financial income and expenses ReCONCIlIatION OF aCtUal INCOM e ta X Rate tO tHe SWeDISH INCOMe ta X Rate 2008 2007 2006 2008 2007 2006 –28.0% –28.0% –28.0% total 24,131 13,747 12,811 Deferred tax balances – –213 –222 tax effects of temporary differences have resulted in deferred tax assets as follows: 7,027 –1,061 –556 Deferred tax assets 2008 68 2007 589 – – – – – –3 Deferred tax assets refer mainly to pensions and customer finance. taxes reported directly to equity amount to seK -203 million and refer to hedge accounting. Deferred tax assets have been reduced with this amount. 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 net gains on sales other interest income and similar profit/loss items subsidiary companies other 14,465 676 4,308 2,345 4,830 3,673 3,854 – 4,216 20 1,258 – 807 – – 1,233 3,096 1,641 1,217 1,611 1,439 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 1,068 1,655 41 –995 –918 –75 –1,067 –652 –49 9,791 –3,262 –2,549 14,340 10,485 10,262 interest expenses on pension liabilities are included in the interest expenses shown above. p5 taxes Income taxes recognized in the income statement the following items are included in taxes: current income tax on contributions, net other current income taxes for the year current income taxes related to prior years Deferred tax income/expense (–) taxes 2008 2007 2006 –1,155 –1,194 –548 –250 –259 –291 –21 –307 –49 187 124 –474 –1,733 –1,315 –1,189 –0.1% 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 –10.3% tax effect of change in deferred tax rate –0.3% 29.7% –0.1% –0.3% 0.9% –0.8% –0.9% 22.0% 20.4% –2.0% –1.2% – – actual tax rate –9.1% –9.1% –8.8% on December 10, 2008 the swedish parliament decided to cut the company tax rate from 28 percent to 26.3 percent, applicable from January 1, 2009. Deferred tax assets and liabilities have been calculated with the new tax rate. p6 intangible assets PateNtS, l ICeNSeS, t RaD eMaRk S aND SIMIl aR RIgH tS accumulated acquisition costs opening balance acquisitions sales/disposals Closing balance accumulated amortization opening balance amortization sales/disposals Closing balance Net carrying value 2008 2007 3,893 – –5 3,314 579 – 3,888 3,893 –904 –385 5 –514 –390 – –1,284 –904 2,604 2,989 the balances relate mainly to Marconi and redback trademarks acquired during 2006 and 2007. the useful life and amortization period for these trademarks has been set to 10 years. 100 ericsson annual report 2008 notes to the parent company financial statements p7 tangible assets land and buildings other equipment and installations construction in process and advance payments 2008 accumulated acquisition costs opening balance additions sales/disposals reclassifications Closing balance accumulated depreciation opening balance Depreciation sales/disposals reclassifications Closing balance Net carrying value 2007 accumulated acquisition costs opening balance additions sales/disposals reclassifications Closing balance accumulated depreciation opening balance Depreciation sales/disposals Closing balance Net carrying value 13 – – – 13 – – – – – 13 23 – –10 – 13 –2 – 2 – 13 711 77 –19 344 1,113 –454 –127 10 – –571 542 576 45 –1 91 711 –344 –111 1 –454 257 173 311 – –344 140 – – – – – 140 47 217 – –91 173 – – – – 173 note p7 total 897 388 –19 – 1,266 –454 –127 10 – –571 695 646 262 –11 – 897 –346 –111 3 –454 443 ericsson annual report 2008 101 notes to the parent company financial statements note p8 p8 Financial assets investments in subsidiary companies, joint ventures and associated companies opening balance acquisitions and stock issues shareholders’ contribution Write-downs Disposals closing balance other financial assets subsidiary companies 2007 2008 Joint ventures 2007 2008 associated companies 2007 2008 81,406 176 141 –7,027 –125 51,124 35,463 –3,439 –1,061 –681 74,571 81,406 4,136 – – – – 4,136 4,136 – – – – 4,136 330 – – – – – – – 330 333 –3 330 other investments in shares and participations 2007 2008 receivables from subsidiaries, non-current 2007 2008 customer finance, other financial non-current 1) assets, non-current 2007 2007 2008 2008 accumulated acquisition costs opening balance effect of changed accounting principle, ias 39 additions Disposals/repayments/deductions reclasifications translation difference closing balance accumulated write-downs/allowances opening balance Write-downs/allowances Disposals/repayments/deductions translation difference closing balance net carrying value 484 – 1 –466 – – 19 –9 – 1 – –8 11 28 3 453 – – – 484 –9 – – – –9 18,433 – 271 –3,243 – 320 17,211 – 1,203 – –233 252 15,781 18,433 – – – – – – – – – – 475 15,781 18,433 800 – 620 –502 – 56 974 –49 –34 24 –5 –64 910 1,765 – 646 –1,593 – –18 358 – – 2,716 – –44 – – – – 401 –43 800 3,030 358 –203 –8 160 2 –49 751 – – – – – – – – – – 3,030 358 1) From time to time, customer finance 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. 102 ericsson annual report 2008 notes to the parent company financial statements note p 9 p9 investments the following listing shows certain shareholdings owned directly and indirectly by the parent company as of December 31, 2008. a complete listing of shareholdings, prepared in accordance with the swedish annual accounts act and filed with the swedish companies registration office (Bolagsverket), may be obtained upon request to: telefonaktiebolaget lM ericsson, external reporting, se-164 83 stockholm, sweden. shares owned directly by the parent c ompany type company reg. no. Domicile percentage of ownership par value in local currency, carrying value, million seK million i i i ii i i i ii i ii i ii i i ii subsidiary companies ericsson aB i ericsson shared services 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 JVD GmbH ericsson Hungary ltd. lM ericsson Holdings ltd. ericsson telecomunicazioni s.p.a. ericsson Holding international B.V. ericsson a/s tanDBer G 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 556056-6258 556251-3266 556329-5657 556404-4286 556030-9899 556326-0552 sweden sweden sweden sweden sweden sweden austria Denmark Finland France Germany 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 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 50 361 100 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 2,216 102 306 6 5 1,299 665 216 196 524 3,884 104 120 15 3,151 3,200 237 1,788 5 – 4,094 208 28,956 10 1,550 59 100 2 475 147 4 1 20 17 244 – 74,571 50 65 – 4,136 330 4,466 ericsson annual report 2008 103 notes to the parent company financial statements note p 9 –p10 shares owned by subsidiary companies type company reg. no. Domicile percentage of ownership 556000-0365 556044-9489 subsidiary companies i ii i i i ii i i i i i i i i i 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. 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. sweden sweden France Germany ireland 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 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 2008 2007 80 80 84 84 104 ericsson annual report 2008 notes to the parent company financial statements note p11 p11 trade receivables and customer Finance credit risk management is governed on a Group level. For further information, see notes to the consolidated Financial statements – note c14, “trade receivables and customer Finance” and note c20, “Financial risk Management and Financial instruments”. 2008 2007 movements in allowances for impairment 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 allowances for impairment customer finance, net 576 –2 574 54 –12 42 2 – 576 1,838 –93 42 1,078 –64 1,745 1,014 aging analysis as per december 31, 2008 trade receivables 2007 2008 customer finance 2007 2008 opening balance additions utilization reversal of excess amounts translation difference closing balance 12 – –10 – – 2 12 – – – – 12 64 53 –3 –29 9 94 221 19 –74 –100 –2 64 trade receivables excluding associated companies and joint ventures allowances for impairment of receivables trade receivables related to associated companies and joint ventures customer finance allowances for impairment of customer finance aging analysis as per december 31, 2007 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 576 –2 2 1,838 –93 535 – 2 1,577 – – – – 230 –67 35 – – 5 – 4 – – – – 2 –2 – 2 –2 – – – 24 –24 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 34 796 263 –46 6 1 2 – – 1 –1 12 –12 17 –17 trade receivables excluding associated companies and joint ventures allowances for impairment of receivables customer finance allowances for impairment of customer finance outstanding customer finance on-balance sheet customer finance off-balance sheet customer finance total customer finance accrued interest less third-party risk coverage parent company’s risk exposure on-balance sheet credits, net carrying value Of which short term credit commitments for customer finance 2008 1,838 168 2,006 24 –148 1,882 1,745 835 956 54 –12 1,078 –64 2007 1,078 185 1,263 6 –163 1,106 1,014 263 988 ericsson annual report 2008 105 notes to the parent company financial statements note p12– p14 p12 receivables and liabilities p13 other current receivables – subsidiary companies payment due by period >5 years 1–5 years < 1 year total 2008 total 2007 15,781 – 3,781 12,000 18,433 1,008 1,008 23,668 23,668 24,676 24,676 – – – – 908 – 24,222 – 25,130 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 541 541 34,725 34,725 35,266 35,266 – – – – 678 – 40,735 – 41,413 1) including non interest-bearing receivables and liabilities, net, amounting to seK –15,866 million (seK –20,959 million in 2007). interest-free transactions involving current receivables and liabilities may also arise at times. Cha Nges iN sToC kholders’ equiT y revalua- receivables from associated companies and joint ventures prepaid expenses accrued revenues Derivatives with a positive value other Total 2008 2007 669 666 535 2,498 318 874 703 418 850 315 4,686 3,160 p14 stockholders’ equity Capital stock 2008 class a shares 1) class B shares 1) total number of shares 261,755,983 2,984,595,752 3,246,351,735 capital stock 1,309 14,923 16,232 1) class a-shares (quota value seK 5.00) and class B-shares (quota value seK 5.00). 27,866 – – 27,866 30,921 capital stock at December 31, 2008, consisted of the following: capital stock tion statutory restricted equity reserve reserve Total Disposi- tion reserve Fair value other Non- retained restricted equity reserves earnings Total 2008 January 1, 2008 revaluation of other investments in shares transferred to income statement at sale Cash flow hedges Fair value remeasurement of derivatives reported in equity tax on items reported directly in equity stock issue sale of own shares stock purchase and stock option plans repurchase of own shares contributions from/to (–) subsidiary companies tax on contributions Dividends paid net income 2008 december 31, 2008 16,132 20 31,472 47,624 100 4 35,121 35,225 82,849 – – – 100 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 100 – – – – – – – – –6 – – – – – – – – – – 773 –202 – – – – – – – – – – – – 88 36 –100 –6 –6 773 –202 – 88 36 –100 773 –202 100 88 36 –100 –4,288 1,155 –7,954 –4,288 –4,288 1,155 –7,954 –7,954 1,155 17,227 17,227 17,227 16,232 20 31,472 47,724 100 569 41,285 41,954 89,678 106 ericsson annual report 2008 notes to the parent company financial statements Cha Nges iN sToC kholders’ equiT y revalua- capital stock tion statutory restricted equity reserve reserve Total Disposi- tion reserve note p15– p16 Fair value other Non- retained restricted equity reserves earnings Total 2007 January 1, 2007 revaluation of other investments in shares Fair value remeasurement 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 16,132 20 31,472 47,624 100 2 32,885 32,987 80,611 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 3 –1 – – – – – – – – 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 16,132 20 31,472 47,624 100 4 35,121 35,225 82,849 p15 untaxed reserves p16 pensions 2008 accumulated depreciation in excess of plan intangible assets tangible assets Total accumulated depre- ciation in excess of plan other untaxed reserves reserve for doubtful receivables Total other untaxed reserves Total untaxed reserves additions/ Jan 1 withdrawals (–) Dec 31 1,068 13 1,081 258 258 1,339 192 59 1,260 72 251 1,332 227 227 478 485 485 1,817 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 183 million in 2007. Deferred tax liability on untaxed reserves, not accounted for in deferred taxes, amounts to seK 478 million (seK 375 million in 2007). 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 contributions if the entities do not hold sufficient assets to pay all employee benefits relating to employee service. the expenses for defined contribution plans are recognized during the period when the employee provides service. • Defined benefit plans: post-employment benefit plans where the parent company’s undertaking is to provide predetermined benefits that the employee will receive on or after retirement. the FpG/pri plan for the parent company is partly funded. FpG is a swedish credit insurance company for pension obligations and pri is a pension registration institute. pension obligations are calculated annually, on the balance sheet date, based on actuarial assumptions. defiNed Be Nefi T oBligaTioN- amouNT reCogNized i N The Bal aNCe sheeT present value of wholly or partially funded pension plans 1) Fair value of plan assets unfunded/net surplus(-) of funded pension plans present value of unfunded pension plans excess from plan assets reclassified Closing balance provision for pensions 2008 2007 551 –530 21 382 – 403 515 –613 –98 397 103 402 1) this FpG/pri obligation is covered by the swedish law on safeguarding of pension commitments. the defined benefit obligations are calculated based on the actual salary levels at year-end and based on a discount rate of 4.0 percent. Weighted average life expectancy after the age of 65 is 24 years for women and 21 years for men. in 2005, seK 524 million was transferred into the swedish pension trust, of which seK 0 (103) million is accounted for as prepaid expense. the parent company utilizes no assets held by the pension trust. return on plan assets for 2008 is –13.8 (3.5) percent. ericsson annual report 2008 107 notes to the parent company financial statements note p16– p17 pl an asseTs allocaTion equities interest-bearing securities Of which Ericsson securities change in The defined BenefiT oBligaTion opening balance pension costs, excluding taxes, related to defined benefit obligations accounted for in the income statement pension payments return on plan assets for the year return on plan assets not accounted for prior years previous excess from plan assets reclassified closing balance provision for pensions 2008 2007 167 363 530 – 190 423 613 – 2008 2007 402 419 67 –48 85 – –103 403 70 –55 –21 –11 – 402 ToTal pension cosT and income recognized in The income sTaTemenT defined benefit obligations costs excluding interest and taxes interest cost credit insurance premium total cost defined benefit plans excluding taxes defined contribution plans pension insurance premium total cost defined contribution plans excluding taxes return on plan assets Total pension cost, net excluding taxes 2008 2007 24 43 –5 62 86 86 85 233 35 36 –24 47 98 98 –32 113 of the total pension cost seK 105 million (seK 109 million in 2007) is included in operating expenses and seK 128 million (seK 4 million in 2007) in the financial net. estimated pension payments for 2009 are seK 45 million. p17 other provisions 2008 opening balance additions reversal of excess amounts utilization/cash out reclassification closing balance 2007 opening balance additions reversal of excess amounts utilization/cash out closing balance Warranty commitments restruc- turing customer finance other total other provisions 1) 1 – – – – 1 1 – – – 1 114 47 –9 –31 –12 109 228 20 –73 –61 114 177 21 – –36 – 162 188 – –11 – 177 363 181 –112 –60 12 384 778 21 –374 –62 363 655 249 –121 –127 – 656 1,195 41 –458 –123 655 1) of which seK 150 million (seK 208 million in 2007) are expected to be utilized within one year. 108 ericsson annual report 2008 notes to the parent company financial statements note p18 p18 interest-Bearing liabilities the parent company’s outstanding interest-bearing liabilities, excluding liabilities to subsidiaries, were seK 26.7 billion as per December 31, 2008. iNTeres T-BeariNg liaBiliTies Borrowings, current current maturities of long-term borrowings Total current borrowings Borrowings, non-current notes and bond loans liabilities to credit institutions Total non-current interest- bearing liabilities 2008 2007 3,732 2,906 3,732 2,906 18,941 4,000 – 19,372 22,941 19,372 Total interest-bearing liabilities 26,673 22,278 NoTes aNd BoNd loaNs issued-maturing 1999–2009 2003–2010 2004–2012 2007–2012 2007–2012 2007–2017 2007–2014 Total nominal amount 483 471 1) 450 1,000 2,000 500 375 coupon currency Book value (seK million) Maturity date (yy-mm-dd) unrealized hedge gain/loss (incl. in book value) 6.500% 6.750% 3.340% 5.100% 2.728% 5.380% 3.319% usD eur seK seK seK eur eur 3,794 2) 5,256 2) 450 1,079 2) 2,000 5,987 2) 4,107 22,673 09-05-20 10-11-28 12-12-07 3) 12-06-29 12-06-29 4) 17-06-27 14-06-27 5) –62 –189 –80 –547 –878 1) 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. 2) interest rate swaps are designated as fair value hedges. 3) contractual repricing date 2009-06-08. 4) contractual repricing date 2009-03-29. 5) contractual repricing date 2009-03-27. 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 6.46 percent at December 31, 2008. these bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in ias 39. on June 5, 2008, the GBp bond issued in 2001 of 226 million matured and was repaid. With this GBp bond repaid, ericsson does not have any interest rate payments on bonds linked to credit rating. on July 2, 2008, ericsson signed a seven year loan of seK 4.0 billion with the european investment Bank. the loan supports ericsson’s r&D activities to develop the next generation of mobile broadband technology at sites in Kista, Gothenburg and linköping in sweden. ericsson annual report 2008 109 notes to the parent company financial statements note p19 p19 Financial risk Management and Financial instruments Financial risk management ericsson’s financial risk management is governed on a Group level. For further information see notes to the consolidated Financial statements – note c20, “Financial risk Management and Financial instruments”. the instruments are classified as held for trading and are therefore short-term investments. During 2008, cash and bank and short-term investments increased by seK 13.6 billion to seK 59.2 billion mainly due to positive operating cash flow and issuance of non-current debt. Repayment schedule of long-teRm boRRowings nominal amount seK billion current maturities of long- term debt Borrowings (non-current) 3.7 – 5.1 – 3.5 – 13.6 total 3.7 5.1 – 3.5 – 13.6 3.7 22.2 25.9 2009 2010 2011 2012 2013 2014 and later total 2008 asset liability 2007 asset liability 2,562 2,742 559 993 4,887 167 – – 4,054 700 – – 408 145 – – 915 79 – – Debt financing is mainly carried out through borrowing in the swedish and international debt capital markets. 7,616 1) 3) 7,496 2) 1,112 1,987 funding pRog Rams – 8 – 10 179 – 11 – – 315 129 105 711 1,260 3) 121 25 – 53 199 194 226 32 184 636 3) 116 1,152 – 478 – – 10 1 53 56 3 3 amount utilized unused euro Medium-term note program (usD million) euro commercial paper program (usD million) swedish commercial paper program (seK million) long-term committed credit facility (usD million) european investment Bank (seK million) 5,000 2,730 2,270 1,500 5,000 2,000 – – – 1,500 5,000 2,000 4,000 4,000 – at year-end ericsson’s credit rating remained at Baa1 (Baa1) by Moody’s and BBB+ (BBB+) by standard & poor’s, both considered to be “solid investment Grade”. outstanding deR iVatiV es Fair value currency derivatives Maturity within 3 months Maturity between 3 and 12 months Maturity 1 to 3 years Maturity 3 to 5 years Maturity more than 5 years total currency derivatives of which designated in cash flow hedge relations of which designated in net investment hedge relations interest rate derivatives Maturity within 3 months Maturity between 3 and 12 months Maturity 1 to 3 years Maturity 3 to 5 years Maturity more than 5 years total interest rate derivatives of which designated in fair value hedge relations 1) of which internal counterparts 3,564. 2) of which internal counterparts 427. 3) of which 2,814 million is reported as non-current assets for 2008 and 96 million for 2007. cash, cash equiValents and shoRt-teRm inVestments remaining time to maturity seK billion Bank deposits type of issuer/ counterpart Governments Banks corporations Mortgage institutes total < 3 months < 1 year years years 2008 2007 1–5 > 5 14.5 – – – 14.5 6.7 6.5 4.9 0.7 – 15.3 1.3 0.9 7.0 26.6 24.5 0.6 – – 5.5 6.1 1.5 23.9 12.8 6.2 20.5 3.9 1.6 1.7 13.0 – – 0.5 2.0 59.2 45.6 110 ericsson annual report 2008 notes to the parent company financial statements note p19 –p22 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 2.8 billion. For further information about valuation principles, see notes to the consolidated Financial statements – note c1, “significant accounting policies”. financial instR uments caRRying amount trade receiva- bles p11 2.3 short- term invest- ments 44.8 receiva- bles and liabilities subsidia- ries p12 3.1 36.9 Borrow- ings p18 trade payables p21 Financial assets p8 other current receiva- bles p13 2.8 2.5 0.7 other current liabilities p20 –7.3 2008 2007 45.9 39,9 – 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 2.3 44.8 –62.7 –22.7 –26.7 –26.7 –0.6 –0.6 2.8 3.2 –7.3 –4.2 –10.7 –90.0 –94.3 financial instRuments caRRied at otheR than faiR Value Fair value carrying amount seK billion 2008 2007 2008 2007 p22 assets pledged as collateral current maturities of long-term borrowings Borrowings non-current 3.7 23.0 26.7 2.9 19.4 22.3 3.9 19.0 22.9 3.1 19.4 22.5 Bank deposits total 2008 2007 414 414 359 359 the major item in bank deposits is the internal bank’s clearing and settlement commitments of seK 266 million (seK 229 million in 2007). p23 contingent liabilities total contingent liabilities 2008 2007 13,029 9,650 contingent liabilities include pension commitments of seK 10,783 million (seK 8,199 million in 2007) and guarantees for subsidiary companies’ borrowing from financial institutions of seK 9 million (seK 18 million in 2007). 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 2008 was seK 20,997 million (seK 16,312 million in 2007). potential payments due under these bonds are related to ericsson’s performance under applicable contracts. Financial instruments excluded from the tables, such as trade receivables and payables, are carried at amortized cost which is deemed to be equal to fair value. When a market price is not readily available and there is insignificant interest rate exposure affecting the value, the carrying value is considered to represent a reasonable estimate of a fair value. p20 other current liabilities liabilities to associated companies and joint ventures accrued interest accrued expenses, of which employee related other 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. 2008 2007 – 411 7 445 266 45 1,252 7,268 161 237 818 1,007 1,151 163 9,403 3,828 2008 2007 605 605 626 626 ericsson annual report 2008 111 notes to the parent company financial statements note p24–p27 p24 statement of cash Flows interest paid in 2008 was seK 2,376 million (seK 1,977 million in 2007 and seK 1,887 million in 2006) and interest received was seK 3,520 million (seK 3,066 million in 2007 and seK 3,123 million in 2006). income taxes paid were seK 370 million (seK 559 million in 2007 and seK 364 million in 2006). adjustments to Reconcile net income to cash 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 finance, net additions to/withdrawals from (–) untaxed reserves unsettled dividends other non-cash items 2008 2007 2006 127 127 385 385 512 1,363 111 111 389 389 500 756 92 92 310 310 402 825 5,545 –1,088 –2,889 478 –5 –2,747 265 – –1,324 88 – 1,289 total adjustments to reconcile net income to cash 5,146 –891 –285 p25 leasing Leasing with the Parent Company as lessee at December 31, 2008, future payment obligations for leases were distributed as follows: 2009 2010 2011 2012 2013 2014 and later operating leases 1,133 1,004 753 565 385 1,210 5,050 at December 31, 2008, future minimum payment receivables were distributed as follows: 2009 2010 2011 2012 2013 2014 and later operating leases 36 4 1 1 1 2 45 the operating lease income is mainly income from sublease of real estate. see notes to the consolidated Financial statements – note c27, “leasing”. p26 tax assessment Values in sweden land and land improvements total 2008 2007 8 8 8 8 p27 information regarding employees aVeRage numbeR of employees 2007 Men Women total Men Women total 2008 181 149 330 173 140 313 Western europe 1) 2) central and eastern europe, Middle east and africa total 3 184 1) Of which Sweden 181 2) Of which EU 181 1 4 150 334 149 330 149 330 104 277 173 173 9 113 149 426 140 140 313 313 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 2008 2007 0% 2% 1% 1% 0% 2% 1% 1% long-term absence due to illness total 1) 0.6% 0.5% 1) Defined as absence during a consecutive period of time of 60 days or more. Remuneration wages and sal aRies and social secuRit y expenses Wages and salaries social security expenses Of which pension costs Western europe 1) 2) central and eastern europe, Middle east and africa total 1) Of which Sweden 2) Of which EU 2008 2007 353 404 265 431 253 139 2008 2007 351 315 2 353 351 351 113 428 315 315 remuneration in foreign currency has been translated to seK at average exchange rates for the year. Leasing with the Parent Company as lessor wages and sal aRies pe R geogRaphical aRea 112 ericsson annual report 2008 notes to the parent company financial statements note p27–p30 Remuneration policy and remuneration to the Board of Directors and the President and CEO p29 Fees to auditors see notes to the consolidated Financial statements – note c29, “information regarding employees, Members of the Board of Directors and Management”. Long-term incentive plans The Stock Purchase Plan compensation costs for all employees of the parent company amounted to seK 5.6 million in 2008 (seK 14.5 million in 2007). p28 related party transactions During 2008, various transactions were executed pursuant to contracts based on terms customary in the industry and negotiated on an arm’s length basis. Sony Ericsson Mobile Communications AB (SEMC) in october 2001, seMc was organized as a joint venture between sony corporation and ericsson. a substantial portion of ericsson’s handset operations was sold to seMc. as part of the formation of the joint venture, contracts were entered into between the parent company and seMc. For the parent company, the major transactions are license revenues for seMc’s usage of trademarks and patents and received dividends. Related party transactions license revenues Dividends Related party balances receivables 2008 2007 2,011 3,627 3,039 3,949 626 871 Ericsson Nikola Tesla d.d. ericsson nikola tesla d.d. is a joint stock company for design, sales and service 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 major transactions are license revenues for ericsson nikola tesla d.d.’s usage of trademarks and received dividends. Related party transactions license revenues Dividends Other related parties 2008 2007 9 227 9 267 For information regarding the remuneration of management, see notes to the consolidated Financial statements – note c29, “information regarding employees, Members of the Board of Directors and Management”. 2008 audit fees audit related fees tax services fees total 2007 audit fees audit related fees tax services fees total 2006 audit fees audit related fees tax services fees other fees total price- waterhouse- coopers others total 33 2 1 36 37 3 – 40 41 8 1 1 51 – – – – – – – – 2 – – – 2 33 2 1 36 37 3 – 40 43 8 1 1 53 During the period 2006–2008, in addition to audit services, pricewaterhousecoopers 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 acquisitions. 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 2006 are included in others. p30 events after the Balance sheet Date effective January 1, 2009, the parent company has entered into an agreement with ericsson aB, a wholly owned subsidiary company, to transfer the right to all license revenues from third parties related to patent licenses. consequently, the parent company will report insignificant net sales from 2009. ericsson and stmicroelectronics completed the jV deal on February 3, 2009, ericsson and stMicroelectronics announced the closing of their agreement merging ericsson mobile platforms and st-nXp Wireless unit into a 50/50 joint venture, to be called st ericsson. the deal was completed on the terms originally announced on august 20, 2008. st ericsson will acquire relevant assets from the owner companies. after these acquisitions, the joint venture will have cash position of about usD 0.4 billion. the parent company contributed usD 1.1 billion net to the joint venture, out of which usD 0.7 billion was paid to st. st ericsson is expected to become operational during the first quarter of 2009. ericsson annual report 2008 113 notes to the parent company financial statements risk factors You should carefully consider all the information in this annual report and in particular the risks and uncertainties outlined below. Any of the factors described below, or any other factors discussed elsewhere in this report, could have a material negative effect on our business, operational and after-tax results, financial position, cash flows, liquidity, credit rating, reputation and/or our share price. Furthermore, our operational results may have a greater variability than in the past and we may have difficulties in accurately predicting future developments. See also “Forward-looking Statements”. contents risks associated with the industry and market conditions ........................................................ 114 strategic and operational risks ......................... 116 risks associated with owning ericsson shares ............................................... 119 Risk associated with the industry and market conditions Current turmoil in the financial markets and macro-economic downturn may have an impact on our business. the extent of the current financial market turmoil and the accompanying economic downturn may exacerbate some of the risk factors we are exposed to, although our customers currently have relatively strong financial results and positions. traffic volumes are increasing and the networks well utilized compared to the industry downturn 2001–2003. the effects of a tighter credit market on consumer and operator spending may have several adverse effects, such as: • reduced demand for products and services, resulting in increased price competition or deferment of purchases and orders by customers; • risk of excess and obsolete inventories and excess manufacturing capacity and risk of financial difficulties or failures among suppliers; • increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterparty failures; • decline in the value of the assets in the company’s pension plans; • increased difficulties to forecast sales and financial results as well as increased volatility in our reported results. We are subject to political, economic and regulatory risks in the various countries in which we operate. sales, as developing nations and regions around the world increase their investments in telecommunications. We already have extensive operations in many of these countries, which involve certain risks, including volatility in gross domestic product, civil disturbances, economic and political instability, nationalization of private assets and the imposition of exchange controls. changes in regulatory requirements, tariffs and other trade barriers, price or exchange controls or other governmental policies in the countries in which we conduct business could limit our operations and make the repatriation of profits difficult. in addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights. We also must comply with the export control regulations of the countries in which we operate and trade embargoes in force at the time of sale. although we seek to comply with all such regulations, even unintentional violations could have material adverse effects on our business, operational results and reputation. We are subject to the market conditions affecting the capital and operating expenditures of our customers, making demand for our products and services highly unpredictable. adverse economic conditions could cause network operators to postpone investments or initiate other cost-cutting initiatives to improve their financial position, which could result in significantly reduced capital expenditures for network infrastructure. if operator spending for network equipment and associated rollout services declines substantially, our business and operating We conduct business throughout the world and are subject to results would suffer. We have established flexibility to cost the effects of general global economic conditions as well as effectively accommodate to fluctuations in demand. However, if conditions unique to a specific country or region. We conduct demand were to fall in the future, we may experience material business in more than 140 countries, with a significant proportion adverse effects on our revenues and may even incur operating of our sales to emerging markets in asia pacific, latin america, losses. if demand is significantly weaker or more volatile than eastern europe, the Middle east and africa. We expect that sales expected, this may have a material adverse impact on the trading to such emerging markets will be an increasing portion of total price of our shares. 114 risk factors ericsson annual report 2008 Industry convergence between telecom, data and media represents opportunities but also risks. of services offered by operators could also affect their ability to invest in network infrastructure, which in turn could affect the We are affected by market conditions within the sales of our systems and services. radio frequency spectrum telecommunications industry. We are also affected by the allocation between different types of usage may affect operator convergence of the telecom-, data-, and media industries, which spending adversely or force us to develop new products to be is largely driven by technological development related to ip- able to compete in such market. based communications. this change impacts our addressable license fees, environmental, health and safety, privacy and market, competition, and our objective setting and strategies, as other regulatory changes may increase costs and restrict well as the need to consider risks to achieve our set objectives. operations of network operators and service providers. the should we not succeed in understanding the market indirect impact of such changes could affect our business development or acquire the necessary competence or develop adversely even though the specific regulations may not directly and market products and solutions that are competitive in this apply to our products or us. changing market, our future results will suffer. Consolidation among network operators may increase our Our business essentially depends upon the continued dependence on a limited number of key customers. growth of mobile communications and the success of new types of services offered in broadband networks. the market for mobile network equipment is highly concentrated, with the 10 largest operators representing more than 40 percent Most of our business depends on continued growth in mobile of the total market. network operators have undergone communications in terms of both number of subscriptions and significant consolidation, resulting also in a significant number of usage per subscriber, which in turn requires the continued operators with activities in several countries. this trend is deployment of our network systems by customers. in particular, expected to continue, while also intra-country consolidation is we are dependent on operators in highly penetrated markets to likely to accelerate as a result of competitive pressure. successfully introduce services that cause a substantial increase a market with fewer and larger operators will increase our in usage for both voice and data. in emerging markets, we are, to reliance on key customers and, due to the increased size of these a certain extent, dependent on the availability of lower-cost companies, may negatively impact our bargaining position and handsets in addition to affordable tariffs by operators to support profit margins. Moreover, if the combined companies operate in a continued increase of mobile subscribers. if operators are not the same geographic market, networks may be shared and less successful in their attempts to increase the number of network equipment and associated services may be required. subscribers and/or stimulate increased usage, our business and another possible consequence of customer consolidation is that operational results could be materially adversely affected. it could cause a delay in their network investments while they fixed and mobile networks converge and new technologies, negotiate merger/acquisition agreements, secure necessary such as ip and broadband, enable operators to deliver a range of approvals, or are constrained by efforts to integrate the new types of services in both fixed and mobile networks. We are businesses. a recent development is also that network dependent upon the market acceptance of such services, e.g. operators, without legal consolidation but through cooperation iptV, and on the outcome of regulatory and standardization agreements, share parts of their network infrastructure, which activities in this field, such as spectrum allocation. if delays in may adversely affect demand for network equipment. standardization or market acceptance occur, this could adversely affect our business and operational results. Consolidation among equipment and services suppliers may lead to increased competition and a different Changes in the regulatory environment for competitive landscape. telecommunications systems and services could negatively impact our business. industry consolidation among equipment suppliers could potentially result in stronger competitors that are competing as telecommunications is a regulated industry and regulatory end-to-end suppliers as well as competitors more specialized in changes affect both our customers’ and our operations. for particular areas. consolidation may also result in competitors example, changes in regulations that impose more stringent, with greater resources, including technical and engineering time-consuming or costly planning, zoning requirements or resources, than we have or reduce existing scale advantages for building approvals regarding the construction of radio base us. this could have a material adverse effect on our business, stations and other network infrastructure could adversely affect operating results, and financial condition. the timing and costs of new network construction or expansion and the commercial launch and ultimate commercial success of these networks. similarly, tariff regulations that affect the pricing ericsson annual report 2008 risk factors 115 We operate in a highly competitive industry, which is subject to competitive pricing and rapid technological change. cause no adverse effects to human health. However, any perceived risk or new scientific findings of adverse health effects of mobile communication devices and equipment could adversely the markets for our products are highly competitive in terms of affect us through a reduction in sales. although ericsson’s pricing, functionality and service quality, the timing of products are designed to comply with all current safety development and introduction of new products and services and standards and recommendations regarding electromagnetic terms of financing. We face intense competition from significant fields, we cannot assure you that we or the jointly owned sony competitors, and chinese companies in particular, have become ericsson Mobile communications will not become the subject of relatively stronger in recent years. our competitors may product liability claims or be held liable for such claims or be implement new technologies before we do, allowing them to offer required to comply with future regulatory changes that may have more attractively priced or enhanced products, services or an adverse effect on our business. see also “legal and tax solutions, or may offer other incentives that we do not provide. proceedings” in the Board of Directors’ report. some of our competitors may have greater resources in certain business segments or geographic markets than we do. We may Strategic and operational risks also encounter increased competition from new market entrants, alternative technologies or evolving industry standards. the rapid technological change also results in shorter life-cycles for products, increasing the risk in all product investments. our operating results significantly depend on our ability to compete in this market environment, in particular on our ability to introduce new products to the market and to continuously enhance the functionality while reducing the cost of new and existing products, in order to cope with the continuous price erosion that is a result of the rapid technological change. Our current and historical operations are subject to a wide range of environmental, health and safety regulations. We are subject to certain environmental, health and safety laws and regulations that affect our operations, facilities and products in each of the jurisdictions in which we operate. We believe that we are in compliance with all material environmental, health and safety laws and regulations related to our products, operations Short-term volatility in business mix may have impact on sales and gross margins. our sales to network operators are a mix of equipment, software and services, which normally generate different gross margins. 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 civil works and/or third-party products with lower gross margins than own products; • as subsequent network expansions (added geographical coverage or increased capacity) and upgrades to higher functionality, where the deliverables include higher shares of software and less rollout services and therefore normally have higher margins; and • as professional services, which have lower gross margins than equipment and software. and business activities. However, there is a risk that we may have as a consequence, reported gross margin in a specific period will to incur expenditures to cover environmental and health liabilities be affected by the overall mix of equipment, software and to maintain compliance with current or future environmental, services as well as the relative content of third party products. health and safety laws and regulations or to undertake any network expansions and upgrades have much shorter leadtimes necessary remediation. it is difficult to reasonably estimate the for delivery than initial network buildouts. such orders are future impact of environmental matters, including potential normally placed with short notice by customers, i.e. less than a liabilities due to a number of factors especially the lengthy time month, and consequently, variations in demand are difficult to intervals often involved in resolving them. forecast. as a result, changes in our product and service mix may affect our ability to forecast and may also impact our ability to detect in advance whether actual results will deviate from those forecasted. Liability claims related to and public perception of the potential health risks associated with electromagnetic fields could negatively affect our business. the mobile telecommunications industry is subject to claims that mobile handsets and other telecommunications devices that generate electromagnetic fields expose users to health risks. at present, a substantial number of scientific studies conducted by various independent research bodies have indicated that electromagnetic fields, at levels within the limits prescribed by public health authority safety standards and recommendations, 116 risk factors ericsson annual report 2008 Most of our business is derived from a limited number of We make strategic acquisitions to get access to customers. technology, competence or new markets. We derive most of our business from large, multi-year network in our industry, which requires huge investments in technology build-out agreements with a limited number of significant and at the same time is exposed to rapid technological and customers. although no single customer currently represents market changes, we make strategic investments in order to more than 10 percent of sales, the loss of, or a reduced role with, obtain various benefits, e.g. to reduce time-to-market, to gain a key customer for any reason could have a significant adverse access to technology and/or competence, to increase our scale impact on sales, profit and market share for an extended period. or to broaden our product portfolio or expand our customer 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 base. there are no guarantees that such acquisitions are successful or that we succeed in integrating the acquired entities to gain the expected benefits at all or in the timeframe we expect. We enter into joint ventures, strategic alliances and third commitments to future price reductions. in order to maintain the party agreements to offer complementary products and gross margin even with such lower prices, we continuously strive services. 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 and productivity in production. However, there can be no assurance that our actions to reduce costs will be sufficient or timely to maintain our gross margin in such contracts. frame agreements often also provide for penalties and termination rights in the event of our failure to deliver ordered products on time or if our products do not perform as promised, which may affect our results negatively. We expend significant resources on product and technology R&D which may not be successful in the market. Developing new products or updating existing products and solutions requires significant levels of financial and other commitments to research and development, which may not always result in success. We are also actively engaged in the development of technology standards that we are incorporating into our products and solutions. in order to be successful, those if our partnering arrangements fail to perform as expected, whether as a result of having incorrectly assessed our needs or the capabilities of our strategic partners, our ability to work with these partners or otherwise, our ability to develop new products and solutions may be constrained and this may harm our competitive position in the market. additionally, our share of any losses from, or commitments to contribute additional capital to, joint ventures has and may continue to adversely affect our financial position or results of operations. our solutions may also require us to license technologies from other companies and successfully integrate such technologies with our products. it may be necessary in the future to seek or renew licenses relating to various aspects of these products. there can be no assurance that the necessary licenses would be available on acceptable terms, or at all. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a non-exclusive basis could limit our ability to protect our proprietary rights in our products. Our products incorporate intellectual property rights (IPR) developed by us that may be difficult to protect or may be standards must be accepted by relevant standardization bodies found to infringe on the rights of others. and by the industry as a whole. our sales and earnings may suffer if we invest in development of technologies and technology standards that do not function as expected, are not adopted in the industry or are not accepted in the marketplace within the timeframe we expect, or at all. please also see section “research and Development” in the Board of Directors’ report and in information on the company. While we have been issued a large number of patents and other patent applications are currently pending, there can be no assurance that any of these patents will not be challenged, invalidated, or circumvented, or that any rights granted under these patents will in fact provide competitive advantages to us. in 2005, the european union considered placing restrictions on the patentability of software. although the european union ultimately rejected this proposal, we cannot guarantee that they will not revisit this issue in the future. We rely on many software patents, and any limitations on the patentability of software may materially affect our business. We utilize a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements in addition to relying on patent, copyright and trademark laws to ericsson annual report 2008 risk factors 117 protect our intellectual property rights. However, these measures of components and production capacity could occur. in many may not be adequate to prevent or deter infringement or other cases, some of our competitors also utilize the same contract misappropriation. Moreover, we may not be able to detect manufacturers, and we could be blocked from acquiring the unauthorized use or take appropriate and timely steps to needed components or from increasing capacity if they have establish and enforce our proprietary rights. in fact, existing laws purchased capacity ahead of us. this factor could limit our ability of some countries in which we conduct business offer only to supply our customers or could increase our costs. at the same limited protection of our intellectual property rights, if at all. time, we commit to certain capacity levels or component Many key aspects of telecommunications and data network quantities, which, if unused, will result in charges for unused technology are governed by industry-wide standards, which are capacity or scrapping costs. 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 We are dependent upon hiring and retaining highly qualified employees. of intellectual property rights also increases. third parties have We believe that our future success depends in large part on our asserted, and may assert in the future, claims against us alleging continued ability to hire, develop, motivate and retain engineers that we infringe their intellectual property rights. Defending such and other qualified personnel needed to develop successful new claims may be expensive, time consuming and divert the efforts products, support our existing product range and provide of our management and/or technical personnel. as a result of services to our customers. competition for skilled personnel and litigation, we could be required to pay damages and other highly qualified managers in the telecommunications industry compensation, develop non-infringing products/technology or remains intense. We are continuously developing our enter into royalty or licensing agreements. However, we cannot remuneration and benefit policies as well as other measures. be certain that any such licenses, if available at all, will be However, we may not be as successful at attracting and retaining available to us on commercially reasonable terms. such highly skilled personnel in the future. Adverse 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 business operations. Moreover, the results of complex legal development and customer finance programs or we cannot raise proceedings are difficult to predict. an unfavorable resolution of a sufficient amounts of capital at the times and on the terms particular lawsuit could have a material adverse effect on our required by us, our business will likely be adversely affected. business, reputation, operating results, or financial condition. access to short-term funding may decrease or become more as a publicly listed company, ericsson is exposed to class- expensive as a result of our operational and financial condition action lawsuits, in which plaintiffs allege that the company or its and market conditions or due to deterioration in our credit rating. officers have failed to comply with securities laws, stock market We cannot assure you that additional sources of funds will be regulation or any other laws, regulations or requirements. available or available on reasonable 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 settlement or compensation to the plaintiffs may have significant As a Swedish company operating globally, we have 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 involved, see “legal and tax proceedings” in the Board of than sek, and many subsidiaries outside sweden, our foreign Directors’ report. We rely on a limited number of suppliers for the majority of our components and electronic manufacturing services. exchange 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 our ability to deliver according to market demands depends in rate fluctuations through a variety of hedging activities may not large part on obtaining timely and adequate supply of materials, be sufficient or successful, resulting in an adverse impact on our components and production capacity on competitive terms. results. failure by any of our suppliers could interrupt our product supply a stronger sek exchange rate would generally have a negative and could significantly limit our sales or increase our costs. if we effect on our competitiveness compared to competitors with fail to anticipate customer demand properly, an over/undersupply costs denominated in other currencies. 118 risk factors ericsson annual report 2008 A significant interruption or other failure of our information technology (IT) operations or communications networks could have a material adverse affect on our operations and results. our business operations rely on complex it operations and communications networks which are vulnerable to damage or 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. disturbance from a variety of sources. Having outsourced a Because our shares are quoted in swedish kronor (sek) on significant portion of our it operations, we depend partly on nasDaQ oMX stockholm (our primary stock exchange), but on security and reliability measures of external companies. nasDaQ (aDss) in usD, fluctuations in exchange rates between regardless of protection measures, essentially all it systems and sek and usD may affect the value of your investment. in communications networks are susceptible to disruption from addition, because we pay cash dividends in sek, fluctuations in equipment failure, vandalism, computer viruses, security exchange rates may affect the value of distributions if breaches, natural disasters, power outages and other events. arrangements with your bank, broker or depositary, in the case of although we have assessed these risks and implemented aDss, call for distributions to you in currencies other than sek. controls and selected reputable companies for outsourced services, we cannot be sure that interruptions with material adverse effects will not occur. Risks associated with owning Ericsson shares Our share price has been and may continue to be volatile. our share price has been volatile due in part to the high volatility in the securities markets generally and for telecommunications and technology companies in particular, and in part due to the development 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 investigations 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 ericsson annual report 2008 risk factors 119 auditors’ report To the Annual General Meeting of the shareholders well as evaluating the overall presentation of information in the of Telefonaktiebolaget LM Ericsson (publ), annual accounts and the consolidated accounts. as a basis for organization number 556016-0680 our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the We have audited the annual accounts, the consolidated company in order to be able to determine the liability, if any, to accounts, the accounting records and the administration of the the company of any Board Member or the President and cEo. Board of directors and the President and cEo of We also examined whether any Board Member or the President telefonaktiebolaget lM Ericsson (publ) for the year 2008. (the and cEo has, in any other way, acted in contravention of the company’s annual accounts are included in the printed version companies act, the annual accounts act or the articles of on pages 6–119). the Board of directors and the President and association. We believe that our audit provides a reasonable cEo are responsible for these accounts and the administration of basis for our opinion set out below. the company as well as for the application of the annual the annual accounts have been prepared in accordance with accounts act when preparing the annual accounts and the the annual accounts act and give a true and fair view of the application of international financial reporting standards iFrss as company’s financial position and results of operations in adopted by the Eu and the annual accounts act when preparing accordance with generally accepted accounting principles in the consolidated accounts. our responsibility is to express an sweden. the consolidated accounts have been prepared in opinion on the annual accounts, the consolidated accounts and accordance with international financial reporting standards, the administration based on our audit. iFrss, as adopted by the Eu and the annual accounts act and We conducted our audit in accordance with generally give a true and fair view of the group’s financial position and accepted auditing standards in sweden. those standards results of operations. the Board of directors’ report is consistent require that we plan and perform the audit to obtain reasonable with the other parts of the annual accounts and the consolidated assurance that the annual accounts and the consolidated accounts. accounts are free of material misstatement. an audit includes We recommend to the annual general meeting of share holders examining, on a test basis, evidence supporting the amounts and that the income statements and balance sheets of the Parent disclosures in the accounts. an audit also includes assessing the company and the Group be adopted, that the profit of the Parent accounting principles used and their application by the Board of company be dealt with in accordance with the proposal in the directors and the President and cEo and significant estimates Board of directors’ report and that the members of the Board of made by the Board of directors and the President and cEo when directors and the President and cEo be discharged from liability preparing the annual accounts and consolidated accounts as for the financial year. stockholm, February 20, 2009 Bo Hjalmarsson authorized Public accountant Pricewaterhousecoopers aB lead Partner Peter clemedtson authorized Public accountant Pricewaterhousecoopers aB 120 auditor’s r EPort Ericsson annual rEPort 2008 information on the company company history, development and strategy Introduction our origins date back to 1876 when lars magnus ericsson opened a small workshop in stockholm to repair telegraph instruments. that same year in the united states, alexander Graham Bell filed a patent application for the telephone. lars magnus ericsson soon recognized the great potential of voice- based telecommunications and realized that the technology could be improved. he started to develop and sell his own telephone equipment and within a few years reached an agreement to supply telephones and switchboards to sweden’s first telecom operator. stockholm soon had the highest telephone density in the world. today, ericsson is a leading provider of communications equipment and related professional services and multimedia solutions to operators of mobile and fixed networks worldwide. over 1,000 networks in more than 175 countries utilize our equipment and we are one of the few companies worldwide that support end-to-end solutions for all the main global standards of the Gsm/WcDma track. 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. also reflecting our ongoing commitment to technology leadership, we have one of the industry’s most comprehensive intellectual property portfolios containing approximately 24,000 patents. ericsson is a leading provider of communications equipment and related professional services and multimedia solutions. contents company history, development and strategy ... 121 General facts on the company ......................... 122 market trends .................................................. 124 Business overview ........................................... 130 supply ............................................................. 134 organization .................................................... 135 Technical milestones 1878 telegraph to telephone 1923 manual switching to automatic switching 1956 first mobile phone system 1968 electro-mechanical to computer control 1978 analog switching to digital switching 1981 fixed communications to mobile communications 1991 1G analog to 2G digital mobile technology 1998 integration of voice and data in mobile networks 1999 narrowband circuit to broadband packet switching 1999 fixed telephony softswitch 2001 2G narrowband to 3G wideband mobile technology 2003 mobile softswitch 2004 launch of WcDma (3G) networks in Western europe 2005 launch of hsDpa mobile broadband networks in north america 2006 launches of hspa mobile broadband networks globally 2007 fiber access, VDsl and iptV in broadband networks 2008 multi-standard radio base stations and lte technology Vision, goal and strategy ericsson’s vision is to be the prime driver in an all-communicating world – a world in which any person can use voice, text, images and video to share ideas and information whenever and wherever he/she wants. our business goal is to create value for our stakeholders and generate growth, profit and cash flow that are sustainable over the longer term. We measure performance in three fundamental metrics: customer satisfaction, employee satisfaction and financial returns for our owners. We believe that highly satisfied customers, empowered employees and an enduring capability for value creation for our shareholders help to assure a competitive advantage. ericsson annual report 2008 information on the company 121 We strive to be the preferred business partner to our subscriber base and traffic, and in mature markets for customers and we are a major supplier to most of the world’s managing the growing mobile broadband subscriber base and leading mobile operators and many of the world’s leading wireline data traffic. operators. We believe that our ability to offer superior end-to-end solutions – network infrastructure, professional services, • from a technology perspective, the ongoing migration to one all-ip-based broadband network combining broadband multimedia solutions and core handset technology – together internet, voice and image traffic is a primary challenge. further, with our in-depth knowledge of consumer requirements, make us operators desire energy-efficient multi-technology solutions, well positioned to assist operators with their network driven by environmental and cost improvement opportunities development and operations. We are a market leader in Gsm and WcDma/hspa network equipment and related rollout services, systems integration and as well as ability for effective forward migration. • from an operational perspective, operators seek solutions and support to gain flexibility, reduce operating expenses and managed services. We are growing in the area of wireline improve efficiency for network operation and maintenance. broadband networks, in metro ethernet solutions and in optical transport, and we are a provider of multimedia solutions for both With our significant scale advantage, tailored end-to-end wireless and wireline operators. solutions and local presence we are able serve as a true partner our strategy to realize our vision and business goal is to: • excel in network infrastructure, • expand in services, and • establish a position in multimedia solutions – providing fast time to market (ttm) and competitive total cost of ownership (tco) – and help our customers to fulfill their business objectives. Innovation for technology leadership to make people’s lives easier and richer, provide affordable innovation is an important element of our corporate culture and is communication for all and enable new ways to do business. key to our competitiveness and future success. We have a long successful execution of the strategy is built on (1) addressing tradition of developing innovative communication technologies, customer needs; (2) innovation for technology leadership and (3) including technologies that form the base for industry standards. operational excellence in all we do. By early involvement in creating new standards and technologies Addressing customer needs we are often first to market with new solutions – a distinct competitive advantage. the foundation for our business is the strong and long-term Within our ambitious r&D program, we have approximately relationships we have with our customers, and we work closely to 19,800 (19,300) employees in 17 (17) countries worldwide and we understand their business and technology needs. needs invested seK 31 billion (excluding seK 3 billion restructuring naturally vary among the customer base, however, with some charges) or 15 percent of sales on research and development apparent general needs: • from a market perspective, operators need solutions and during 2008. the vast majority is invested in product development, of which the majority in mobile communications support in emerging markets for managing the growing voice network infrastructure. We have continued to invest in General facts on the company our telephone number is +46 10 719 0000. our web site is www.ericsson.com. Legal name: telefonaktiebolaget lm ericsson (publ) Agent in the US: ericsson inc., Vice president legal affairs, Organization number: 556016-0680 6300 legacy Drive, plano, texas 75024. telephone number: Legal form of the Company: a swedish limited liability +1 972 583 0000. company organized under the swedish companies act. the Shares: our class a and class B shares are traded on nasDaQ terms “ericsson”, “the company”, “the Group”, “us”, “we”, “our” omX stockholm. 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 1 underlying class B share, are traded on nasDaQ. incorporated on august 18, 1918, as a result of a merger between Parent Company operations: the business of the parent aB lm ericsson & co. and stockholms allmänna telefon aB. company, telefonaktiebolaget lm ericsson, consists mainly of Domicile: our registered address is telefonaktiebolaget lm corporate management, holding company functions and internal ericsson, se–164 83 stockholm, sweden. our headquarters are banking activities. parent company operations also include located at torshamnsgatan 23, Kista, sweden. customer credit management activities performed by ericsson 122 information on the company ericsson annual report 2008 strategically important areas of broadband access, mobile systems like lte, converged networks, service layer, ip technology and multimedia. our ability to generate world-class innovations is enhanced through cooperation with a variety of partners including customers, universities and research institutes. Intellectual property rights (IPR) and licensing through many years of involvement in the development of new technologies, we have built up a considerable portfolio of intellectual property rights (ipr) relating to telecommunications technologies. as of December 31, 2008, we held approximately 24,000 (23,000) patents worldwide, including patents essential to the standards Gsm, Gprs, eDGe, WcDma, hspa, mBms, tD-scDma, cdma2000, WimaX and next-generation lte. We also hold essential patents for many other areas, e.g ims, Voice- over-ip, atm, messaging, Wap, Bluetooth, sDh/sonet, WDm “ innovation is an important element of our corporate culture and is key to our competitiveness and future success.” håkan eriksson, cto and carrier ethernet. Operational excellence in all we do our intellectual property rights are valuable business assets. We are convinced that operational excellence is a competitive We license these rights to many other companies including advantage. therefore we are continuously focusing on how to infrastructure equipment suppliers, embedded module suppliers, improve our internal processes, support systems and ways of handset suppliers and mobile application developers, in return working. our mission to take our customers forward in the best for royalty payments and/or access to additional intellectual possible way requires well developed change capabilities, property rights. in addition, we acquire rights via licenses to efficient and effective processes that consistently yield utilize intellectual property rights of third parties. We believe that innovative, high-quality products and services with low cost of we have access to all related patents that are material to our ownership. business in part or in whole. no matter how far we have come, we will always continue to for more information please see risk factors, “strategic and drive operational excellence across the company. By operational risks” and Board of Directors’ report, “research continuously learning from our experiences and the needs of our and Development”. customers we will become an even better company. credit aB on a commission basis. you may order any of these reports from their web site Subsidiaries and associated companies: for a listing of our www.bolagsverket.se. if you access these reports, please be significant subsidiaries, please see notes to the parent company aware that the information included may not be indicative of our financial statements – note p9, “investments”. in addition to our published consolidated results in all aspects. other than joint venture with sony corporation, we are engaged in a information related to the parent company, only consolidated number of other minor joint ventures, cooperative arrangements numbers for the Group totals are included in our reports. and venture capital initiatives. for more information regarding Filing in the US: annual reports and other information are filed risks associated with joint ventures, strategic alliances and third with the securities and exchange commission (sec) in the party agreements please see risk factors, “strategic and united states pursuant to the rules and regulations that apply to operational risks”. foreign private issuers. electronic access to these documents Documents on display: We file annual reports and other may be obtained from the sec’s website, www.sec.gov/edgar/ information (normally in swedish only) for certain domestic legal searchedgar/webusers.htm, where they are stored in the eDGar entities with Bolagsverket (swedish companies registration database. office) pursuant to swedish rules and regulations. ericsson annual report 2008 information on the company 123 market trends 2008 was another growth year for mobile communications with some 675 (586) million new subscriptions and approximately as the global economy braces for a contraction in the near term, 1,190 (1,100) million mobile phones shipped. using mobile we look longer term to the opportunities of broadband operator capital expenditures (capex) estimates as a proxy for everywhere and the operator investments required for network the mobile network equipment market, we believe the mobile transformation to all ip. systems market grew somewhat better than the planning network infrastructure is addressing operators’ capex while assumption of almost zero growth in 2008. professional services mainly addresses operators’ opex. mobile at the end of 2008, the 4.0 (3.3) billion mobile subscriptions phones are addressed via the sony ericsson JV directly to worldwide represented a global subscription penetration of 59 consumers but most often with operators as distributors. mobile (49) percent. (note: the number of actual individual mobile platforms are sold to handset and pc manufacturers. subscribers is significantly lower, perhaps some 15–20 percent ericsson believes the following key technologies will drive but possibly more, because of inactive subscriptions and people operator spending for the next several years: mobile and fixed having multiple subscriptions.) of these subscriptions, nearly broadband access; ip and multi-service switching; ip multimedia 290 (180) million subscriptions were on 264 (197) mobile subsystems (ims) based services like iptV and Voip; metro broadband (3G/WcDma) networks, out of which ericsson is a optical and radio transmission. ericsson expects operators to supplier of 149 (129). accelerate the transition from legacy technologies such as tDm the high speed packet access (hspa) version of 3G/WcDma (circuit) switching and atm (packet) in favor of ip- (ethernet) is now deployed within 247 (166) commercial networks in 110 (75) based technologies for both switching and transmission; all countries. ericsson is a supplier of 115 (81) of these networks, areas in which the company continues to invest heavily. which represent the majority of hspa users. Despite this growth, We expect the company to continue to benefit from the the number of subscribers covered by commercial 3G/WcDma underlying demand drivers for communications services, networks is only around one third of those covered by 2G/Gsm especially mobile broadband, that improve productivity and services. this provides a significant opportunity for equipment contribute to sustainable economic, societal and environmental suppliers to upgrade 2G networks to 3G where ericsson has development. already secured a market-leading position. Mobile communication the company expects the number of mobile subscriptions to grow to more than 4.5 billion during 2009. this will create mobile communication has become the consumer service of continued need for new and expanded mobile networks and choice for the majority of the world’s population over the last few corresponding professional services. although Gsm years. We expect people to continue to use their mobile phones, subscriptions continue to represent the majority of the mobile even during economic downturns . and, with the opportunities systems market, Gsm growth will slow as 3G/WcDma is made available by high-speed mobile data services, we believe accelerating. there is still considerable growth potential for the mobile communications industry. MOBILE SUBSCRIPTIONS MOBILE SUBSCRIPTIONS PENETRATION PER REGION 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 ) n o i l l i m ( s n o i t p i r c s b u S d e t r o p e R n o s s c i r e : e c r u o s 0 2007 2008 2009 2010 2011 2012 2013 2014 140% 120% 100% 80% 60% 40% 20% 0% % 9 % 3 9 2 Africa % 4 2 1 % 6 1 1 % 7 % 1 0 6 9 % 9 % 7 5 6 % 4 % 4 6 3 % 6 8 % 1 8 n o s s c i r e : e c r u o s % 4 6 % 7 4 Latin America Asia Pacific Eastern Europe Western Europe Middle East North America LTE WCDMA/HSPA/TDSCMA GSM/GPRS/EDGE CDMA Penetration 2007 Penetration 2008 124 information on the company ericsson annual report 2008 Weakening economy affecting mobile handset sales Positive correlation between broadband penetration and GDP levels comments from operators suggest that economic pressures are although emerging markets represent around one third of global altering their priorities to pursue a number of cost reduction GDp, our network sales in emerging markets grew an estimated initiatives. handset replacement tends to go in tandem with 15 percent and now represents more than half of the networks contract renewal. in mature markets this is operator driven via sales. mature markets sales increased an estimated 4 percent. subsidies in exchange for multi-year commitments. now, many as already demonstrated by the mobile telephone, the ubiquitous operators are pushing sim card-only plans to reduce subsidies availability of affordable communication services has a positive and preserve cash. this is slowing the demand for replacement effect on a country’s economy. Broadband services are expected phones especially in the mid-to-high end price range as to show similar benefits. a higher GDp level obviously enables consumers postpone upgrading their mobile phones. the drop in more broadband adoption but studies of the relationship replacement rates is most noticeable in Western europe. between broadband penetration and economic development in emerging markets, operators subsidize multi-sim card plans indicate that broadband plays a fundamental role in accelerating rather than handsets. this has stimulated the used phone market the economic and social development of a country. however, rather than curtailing subscription growth or mobile phone usage. inadequate fixed network infrastructure and low pc penetration With inflationary and other economic pressures rising in these inhibits fixed broadband adoption in most emerging markets. markets, consumers are buying more used-phones or repairing mobile broadband networks along with suitable devices and the ones they have. there are many small enterprises whose appropriate applications can improve broadband penetration by business is retailing/wholesaling refurbished phones or repairing avoiding the relatively more expensive and time consuming phones for consumers. deployments of fixed network technologies. sony ericsson is responding to the decreasing demand and increased price competition with a eur 480 million annual cost reduction program with full effect expected by the second half of 2009. ericsson annual report 2008 information on the company 125 Fixed and mobile broadband main market driver Broadband access creates bottlenecks in other parts of the network We expect the number of fixed and mobile broadband the deployment of access nodes that can connect devices at subscriptions to increase by a factor of 7 between 2008 and ever faster speeds quickly creates bottlenecks in other parts of 2014 to almost 3.5 billion. Broadband internet access the network with subscriber uptake. the increased capacity of revenues for fixed operators (including cable operators) are the access nodes brings pressure on the backhaul part of the expected to grow from 20 percent to 35 percent of total transport network. the additional backhaul capacity must be revenues in the next five years. similarly, data’s share of provided more dynamically and more efficiently than possible mobile operators’ revenue, which is currently some 20 with traditional backhaul solutions. support for multiple services percent, is expected to account for a progressively more is required to ensure continuity for existing services as well as significant portion of global mobile revenues over the next new services. this enables operators to maximize investments in five years. existing infrastructure. the dynamic nature of multi-service these projections assume the cost for mobile data services broadband access along with the mix of services will require aligns with subscriber expectations, i.e. data must be priced changes in the network technology used – ip/ethernet via optical lower than voice when comparing the amount of bandwidth fiber or microwave radio transmission will become the transport consumed. operator revenues will likely become uncoupled technology of choice. ericsson already has a market leading from the traditionally linear returns on capacity provisioning position in microwave radio systems and with the acquisitions of for voice minutes of use growth. hence, operators may marconi and redback is now well positioned with optical implement cost-efficient solutions for delivering more transmission systems and ip/ethernet products. network capacity with revenues based on service value rather than the amount of capacity. this motivates a new generation network that offers fixed and mobile convergence and leverages ip technology for a lower cost, higher performance broadband service. BROADBAND SUBSCRIPTIONS MOBILE TRAFFIC, vOICE AND DATA ) n o i l l i m ( s n o i t p i r c s b u S 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2007 2008 2009 2010 2011 2012 2013 2014 30 25 20 15 10 5 s e t y b a x E y l r a e Y 0 2007 n o s s c i r e : e c r u o s n o s s c i r e : e c r u o s Mobile PC Mobile Handheld Mobile Voice 2008 2009 2010 2011 2012 2013 2014 Fixed Mobile Subscriber traffic on mobile access networks 126 information on the company ericsson annual report 2008 The future of TV the vision of the television industry is a simple one: to let you Mobility is changing the Internet today, less than 40 percent of mobile subscribers also use the watch whatever you want, whenever you want, and wherever you internet. however, the increasing use of high-speed applications want, as well as to help you discover what else might be in the fixed environment is stimulating a parallel expectation on interesting to watch and to share your favorites as well as the mobile side. When people become accustomed to using comments with other people. We believe that the best way to bandwidth-intensive applications at home or in the office, they achieve this is to use internet technology enhanced with telecom tend to want them everywhere they go. grade performance. multimedia-capable mobile internet devices and affordable consumers are already using the internet to find new ways of mobile broadband access are harbingers of change. users will accessing tV with interactive on-demand capabilities a basic be able to create and discover content of personal interest and to expectation. Despite this trend, we do not expect operators to instantaneously share ideas and information with friends and become marginalized as bit pipe providers. efficient bit pipes will colleagues. We see mobile internet devices helping to accelerate be needed, but to differentiate their services, operators will need consumer demand for wireless internet access. to continue to leverage their network capabilities and this is this will have the greatest impact on emerging markets where where ims comes into play to provide the reliability and household penetration of pcs is slightly more than 10 percent combination of services required for differentiated services and compared with 60 percent in mature markets. and there are applications. more than three times as many households in emerging markets today some 850 million households have television services of as in mature ones. the company has established a product unit which only 20 million are currently served by iptV. this number is to provide mobile broadband connectivity for notebook pcs and expected to grow to above 100 million by end of 2014. in the mobile internet devices. three of the world’s largest notebook same time period, Dsl- based broadband access is forecasted manufacturers are already using ericsson embedded modules. in to grow from some 270 million to 400 million households while addition, intel, among others, has signed an agreement to use cable-tV-based broadband access is estimated to almost ericsson’s mobile broadband technology. double from 90 million to 175 million households. fttx-based broadband access is estimated to increase from 25 million households to some 90 million households. Building on the acquisitions of tandberg television and entrisphere, the company continues to invest for a leading position in iptV and fttx broadband access. FIXED DATA TRAFFIC – LAST MILE 1,600 1,400 1,200 1,000 800 600 400 200 s e t y b a x E y l r a e Y 1,600 1,400 1,200 1,000 800 600 400 200 s e t y b a x E y l r a e Y n o s s c i r e : e c r u o s n o s s c i r e : e c r u o s 0 2007 2008 2009 2010 2011 2012 2013 2014 0 2007 2008 2009 2010 2011 2012 2013 2014 Fixed IPTV traffic - last mile access Fixed Internet traffic - last mile access ericsson annual report 2008 information on the company 127 Convergence and network transformation in focus ongoing operator consolidation, especially in Western europe, where the technology shift for more efficient networks, as well as placing greater emphasis on smarter networks and bundled changing regulations, such as price caps for roaming and lower service offerings, operators have accelerated the conversion to call termination fees, is affecting operator willingness and need all-ip broadband networks with increased deployments of to increase network investments in the near term. this trend is broadband access, routing and transmission along with next- most pronounced for highly penetrated Gsm networks, in which generation service delivery and revenue management systems to demand for upgrades and expansions has rapidly diminished as enable a better service to main customer segments – business, operators spend more to expand and enhance their 3G networks. consumer and wholesale – as each requires a different and Despite the trend of operator consolidation across many varying mix of fixed, mobile and converged services. regions, the number of mobile operators within a region has ericsson has developed a network architecture that meets actually increased except in the americas over the past several consumer desire as well as operator requirements for converged years. the introduction of mobile number portability in many services and covers the device ecosystems, fixed and mobile markets has simplified service substitution, leading to fierce broadband access, transport, control, applications, revenue competition and declining market shares for the top two players management, services and operations management. all of the in each market. consequently, mobile operator margins are components have been integrated for a high performance and under pressure from the more intense competition which drives a scalable end-to-end solution. ericsson’s full-service broadband need for lower costs to compensate. solution has been built from in-house development, e.g. mobile network sharing offers potentially significant capex and opex broadband and ims, complemented by the acquisitions of ip savings to operators. however, the overall impact of network routing products (redback), optical transport (marconi), deep sharing should ultimately be neutral for mobile equipment fiber access systems (entrisphere) and iptV (tandberg). vendors. to a certain extent, short-term disruption of capital furthermore, the company has developed a comprehensive expenditure plans or re-negotiation of contracts with the network network transformation service that leverages professional sharing companies may be somewhat compensated by services such as business consulting and systems integration. increased sales of professional services, especially network Operator consolidation and network sharing buildout and an earlier entry into expansion phases. over the operator consolidation continues across all regions. in the longer term, the majority of savings will come from shared plant americas, consolidation has substantially reduced the number of and property rather than the equipment, as the equipment still operators. in europe, mergers continue as well as other types of has to be dimensioned for the peak traffic demand of the integration and managed operations as well as faster coverage combinations, such as network sharing and outsourcing of combined networks. network operations. in other regions, operator consolidation has led to the emergence of rapidly growing pan-regional operators, particularly in the cema markets (central and eastern europe, middle east and africa). ARCHITECTURE CONCEPT-NETWORK TRANSFORMATION Service Network Core Network Fixed broadband access Mobile broadband access k r o w t e n s s e e r i l W k r o w t e n d e x F i k r o w t e n t e n r e t n I / a t a D k r o w t e n V T e b a C l 187.8 BEFORE NOW Connectivity to any device 128 information on the company ericsson annual report 2008 Opportunities for managed services another form of consolidation is outsourcing of network strengthened their balance sheets, growth expectations are more realistic and network utilization is materially higher. capital operations where an operator is able to tap into the global scale intensity has been at historically low levels with many major offered by a company like ericsson via managed services. operators for several years. We expect slowing GDp to cause ericsson is well positioned to benefit from operator consolidation less than proportionate declines in mobile and broadband with a suite of solutions for network sharing, a well proven revenue. We believe this for several reasons: 1) there are better capability for outsourcing network operations and strong substitutes for traditional fixed telephone services (e.g. mobile, presence with consolidating companies. compared with network deployment services, which tend to grow more or less in line with the equipment market, demand for managed services (i.e., network operation and hosting services) as well as systems integration is growing more rapidly. the potential market for network operation services is larger than the potential market for network equipment and related deployment services. a mature operator is estimated to typically spend some Voip) than previously; 2) term contracts and bundling make it more difficult (or at least slower) for subscribers to reduce spending; and 3) mobile communications and the internet are much more pervasive and engrained in today’s society. While most regional markets are resilient so far, some operators in Western europe have shown a progressive deterioration in their business during the year, which has negatively affected suppliers, especially mobile phone manufacturers including sony ericsson. 5–6 percent of annual sales on network equipment, but spends there are, however, several aspects similar to prior downturns, approximately 10–12 percent of sales to operate its network. such as capital preservation. operators’ need for free cash flow more than two thirds of network operation expenses today are was the primary cause of the declines in both fixed and mobile believed to be handled in-house by operators but network spending on network equipment in 2001–2003 while operation is increasingly being outsourced as operators realize overcapacity played a secondary role. We expect a similar the competitive advantages and potential cost savings. the dynamic in this economic cycle, but less dramatic. market for such managed services is thus expected to continue We understand that certain operator spending, for example in to show good growth prospects. network upgrades, is subject to deferrals if not cancellations. Effects of the macro-economic slowdown it is too early to say how the economic recession will affect even capacity expansions can be suspended for a period of time if operators choose to lower service quality levels. this was the case also 2001–2003. however, if operators do not keep their ericsson’s business development but operational efficiency, a networks up to date, they run a risk of higher opex and customer market leading position, scale and a solid balance sheet place the churn negatively affecting revenues as well as earnings. company in a good position to meet tougher market conditions. the macro-economic developments are externally driven and Despite similarities to the 2001–2003 market downturn, we do not beyond the control or the influence of the company. But the anticipate as major of a slowdown for the mobile telecoms company does control the cost structure and is adjusting to a industry. several factors leading to the last downturn in operator challenging market environment to manage through a prolonged capex are not in place today. operators have significantly global recession. OPERATOR REvENUES vS GDP AND CHANGE IN CAPEX 30% 20% 10% 0% -10% -20% -30% -40% 0 8 9 1 2 8 9 1 4 8 9 1 6 8 9 1 8 8 9 1 0 9 9 1 2 9 9 1 4 9 9 1 6 9 9 1 8 9 9 1 0 0 0 2 2 0 0 2 4 0 0 2 6 0 0 2 8 0 0 2 Nominal GDP growth Operator total revenue growth Capex growth ericsson annual report 2008 information on the company 129 Business overview Business segments (primary) and pcs and can easily be upgraded with the latest radio technology to support new revenue streams at the same time as maintaining existing mobile business. these solutions support ericsson is a telecommunications company developing and different standardized mobile technologies on the same selling a variety of solutions aimed largely at customers in the platform, which simplifies for operators to manage the ever more telecommunications industry. When determining our business complex mobile business cost-efficiently and with less effort. segments, we have looked at which market and to what type of the recent expansion of our wireline broadband access customers our products and services are aimed, and through offering, enabled by our acquisitions of marconi and entrisphere, what distribution channels they are sold as well as to has been an important step in reinforcing our ability to address commonality regarding technology, research and development. network operators as they begin integrating their fixed and mobile to best reflect our business focus and to facilitate comparability networks. We provide wireline access solutions, based on both with peers we report four business segments: • networks. • professional services. • multimedia. • phones – the joint venture sony ericsson. Segment Networks Business segment networks includes products and solutions for wireless and wireline access, core networks and transmission as well as management systems. related network rollout services are also included. segment networks accounted for 68 percent of total sales in 2008. Wireless and wireline access ericsson provides wireless access solutions to network operators that enable reliable, efficient and cost effective mobile telephony networks as well as wireless broadband for mobile, nomadic and fixed users in urban and rural areas. our leadership in Gsm, WcDma/hspa and lte technologies grants us to offer tailored solutions to network operators, regardless of the existing network standard used. our radio access networks are interconnecting with devices such as mobile phones, notebooks “ our mini-linK micro- wave radio systems is one of the world’s most widely deployed mobile backhaul solutions.” Johan Wibergh, head of Business unit networks fiber and copper, which make it possible for operators to efficiently modernize or expand their fixed access network business and thereby enable them to offer attractive user services such as high Definition tV, Video on Demand and other ip-based services with high demand on bandwidth and cost-efficiency. IP core network (switching, routing and control) the evolution to ip starts in the core network. our core network solutions include industry-leading softswitches, ip infrastructure for edge and core routing, ip-based multimedia subsystem (ims) and gateways. our acquisition of redback networks has further strengthened our ip product portfolio with broadband routers to manage broadband, 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 products have industry-leading scalability and capacity. many of our core network switching systems are built upon common platforms. ericsson ip multimedia subsystem (ims) is a complete end-to- end offering that enables consumers to access the same content and services using a multitude of access technologies and devices. ims is an open service layer and control platform that enables standardized services and enablers such as rich communication suite, multimedia telephony etc. since our ims solution is common for both fixed and mobile networks, converged services can be transparently provided independent of the type of access. Transmission microwave and optical transport solutions provide cost-effective management of voice and data traffic for both fixed and mobile networks. our mini-linK micro-wave radio systems is one of the world’s most widely deployed mobile backhaul solutions and, complemented with the wireline access and optical portfolio based on fiber and copper, we offer operators cost-efficient and scalable transport solutions supporting the increasing mobile broadband traffic. transport networks (e.g. mini-linK, metro optical networks) are essential elements of our end-to-end solutions. 130 information on the company ericsson annual report 2008 Network rollout services Education fast rollout of large volumes involves a heavy ramp-up of We provide our customers with tailored education programs to resources. ericsson’s Global services organization uses a mix of ensure that their employees have the skills and competence local, in-house capabilities, subcontractors and central necessary for managing today’s and tomorrow’s complex resources. We manage our capabilities in a way that has proven technologies. to be highly successful, providing precise projects and satisfied customers. Customer support services Segment Professional Services ericsson’s professional services capabilities include expertise in managed services, systems integration, consulting, education and customer support services. segment professional services accounted for 23 percent of total sales in 2008. Managed services We offer the most comprehensive managed services capabilities within the telecom industry. through outsourcing our customers can reduce cost of operations and gain flexibility in resources and shorten time to market – all with an assured quality of service. our offering covers • 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 service layer platforms and applications; we enable operators to launch new services in a simple, fast and cost- effective manner. having experienced professionals available around-the-clock to provide customer support is a crucial part of our service offering. our staff, across the world, supports operators that in total have over 1 billion customers. Giving advice on how to maximize efficiency in day-to-day operations ensures network uptime and lowers total cost of ownership. Segment Multimedia ericsson provides the enablers and the applications operators and service providers require in order to deliver a richer user- experience. We understand the new multimedia ecosystem and with the growing demand for enriched communication and personalized content the mass market for multimedia services are rapidly increasing. users want services that can be delivered seamlessly over any screen, at any time, anywhere. segment multimedia accounted for 9 percent of total sales in 2008. TV solutions We enable the future of digital television through technology We are the industry leader in managed services, managing leadership, an open architecture, and integrated hardware and networks with 250 million subscribers. since managed services software solutions. our end-to-end tV solution provides the are often signed as multi-year agreements, a major part of technology, services and offerings necessary for successful managed services sales is of a recurring nature. traditional (linear), on-demand or podcast tV, making an Systems integration operators can minimize risk by engaging ericsson to integrate equipment from multiple suppliers and handle technology change programs, as well as to design and integrate new solutions. more and more operators who introduce multimedia services or face challenging technology transformations are asking us to serve as a prime integrator, i.e. acting as the primary interface and program manager, ensuring successful deployment of the total solution. Consulting our consultants with expertise in business and technology strategy support our customers in the decision-making, planning and execution to improve and grow their business. our industry programs package the expertise into end-to-end solutions in the key areas of multimedia, 3G rollout, broadband, value creation and revenue assurance. individual tV experience possible at home or on the move, via a mobile phone or a laptop. our end-to-end solution provides “ through outsourcing our customers can reduce cost of operations and gain flexibility – all with an assured quality of service.” Jan frykhammar, head of Business unit Global services ericsson annual report 2008 information on the company 131 opportunities for all players in the tV field – operators and service and service providers to effectively and efficiently create, sell, providers, advertisers as well as content providers. and manage multimedia services and multi-play offerings, closely ericsson is a founding member of the open iptV forum and interacting with standard services and Bss/oss (business/ continues to drive industry-wide standardization in bodies operations support systems) management systems. working with tV-enabling technologies, such as ims and Dlna thanks to our ability to combine products, solutions, systems (Digital living network alliance). integration and business consulting into one offering we are able to create a multimedia marketplace according to each customer’s Consumer and business applications specific needs. We provide our customers with the latest multimedia solutions for both the consumer and the business communication market. for Revenue management the consumer segment we offer video and mobile tV solutions, We are a leading provider of revenue management solutions. We enriched messaging, community communications and location- help our customers capture and secure their revenue streams based services like “family finder” or finding the nearest and leverage the business opportunities, by providing expertise restaurant. in the business communication segment we provide and solutions to manage the revenues from traditional services network operators with converged, fixed-mobile, business like voice and sms as well as multimedia services. communication solutions to target enterprises’ needs for cost one of the leading solutions within revenue management is control, accessibility and staff efficiency. convergent charging and billing that enables operators to handle Multimedia brokering our multimedia brokering offering, based on ipX, is serving more than 1,000 content, services, and media companies. With live premium services in 25 countries, our solution reaches two billion subscribers and our messaging service covers more than 500 networks reaching more than 96 percent of all mobile phone users worldwide. We offer leading multimedia brokering solutions – facilitating payment and distribution of content by seamlessly interconnecting content and media companies, information and search services as well as consumer brands and a variety of enterprises with the network operators. Service delivery and provisioning our service delivery and provisioning platforms enable operators “ users want services that can be delivered seamlessly over any screen, at any time, anywhere – and we have the enablers and solutions to provide this.” Jan Wäreby, head of Business unit multimedia all users and services in the same way, independent of payment options or access technologies. We are gaining momentum from our majority stake in lhs. Mobile platforms We are a leading supplier of platform technology for Gsm/eDGe and WcDma/hspa used in devices such as mobile handsets, pc-cards, and other mobile devices. ericsson licenses open- standard, end-to-end interoperability tested Gsm/eDGe and WcDma/hspa technology platforms. in august 2008, ericsson and stmicroelectronics announced plans to establish a joint venture which will have one of the industry’s strongest product offering in semiconductors and platforms for mobile devices. Segment Phones sony ericsson delivers innovative and feature-rich mobile phones, accessories and pc-cards, which allow us to provide end-to-end solutions to our customers. the joint venture, formed in october 2001, combines the mobile communications expertise of ericsson with the consumer electronic devices and content expertise of sony corporation and forms an essential part of our end-to-end capability for mobile multimedia services. sony ericsson is responsible for product design and development, as well as marketing, sales, distribution and customer services. sales for sony ericsson are not included in our reported sales, as their operating results are reported according to the equity method under “share in earnings of joint ventures and associated companies” in the income statement. please also see notes to the consolidated financial statements – note c3, “segment information”. 132 information on the company ericsson annual report 2008 Geographical segments (secondary) scale associated with market share leadership give us We group sales into five geographical segments; Western competitive advantages. Global presence is an important factor, europe, cema (central and eastern europe, middle east and particularly when working as a business partner to operators africa), asia pacific, north america and latin america. working in multiple markets or globally. We are utilizing our strong there is a good distribution of sales between geographical international reach and core competence in mobile and fixed segments, mitigating volatility, as a decrease in one area is often communications to expand into growth areas such as systems offset by an increase in another. in addition, no individual country integration, service applications and managed services, as well accounts for more than 8 percent of sales. the segments have as to develop alliances with suppliers and manufacturers in many different characteristics in terms of penetration of fixed and countries in order to increase our combined effectiveness. mobile telephony, network traffic, sophistication of services and average country GDp and other economic factors. Customers We strongly believe that affordable and generally available We are supplying equipment, integrated solutions and services to telecommunication services are a prerequisite for social and almost all major operators globally. We derive most of our sales economic development, which improves the welfare of all people from large, multi-year agreements with a limited number of in any given country. as one of the world’s largest providers of significant customers. out of a customer base of more than 425 communications equipment and services, we have implemented network operators, the ten largest customers account for 42 (42) a strict trade compliance program throughout the company in percent of our net sales, while the 20 largest customers account order to comply with foreign and domestic laws and regulations, for 61 (58) percent of our net sales. our largest customer trade embargoes and sanctions in force. in no way should our accounted for approximately 6 (6) percent of sales during 2008. business activities be construed as supporting a particular our customers have different needs in interacting with us, political agenda or regime. SALES PER REGION AND SEGMENT 2008 profess- ional multi- networks services media ranging from support in identifying and capturing business opportunities to complex system deliveries including systems integration or outsourced operation of the customer’s network to simple add-on deliveries of equipment or spare parts to “do-it- total yourself” fulfillment. We use three different sales approaches that seK million Western europe cema 1) asia pacific latin america north america Total 25,642 38,364 49,843 16,096 12,105 18,537 9,843 10,507 5,522 4,569 51,570 7,391 4,873 53,080 2,957 63,307 1,430 23,048 17,925 1,251 acknowledge these different needs; • project sales – interactive relationship selling with high involvement of the customer to identify and capture business opportunities, where the solution is not known at the point of 142,050 48,978 17,902 208,930 sales, 1) central and eastern europe, middle east and africa. Market environment • system sales – interactive relationship selling of solutions configured for specific customer needs, and • product sales – the outcome of relationship sales and frame agreements, where customers may call-off well-defined Long-term customer relationships and global scale products and services electronically. We have been present in most of our markets for more than 100 years, building strong, long-term relationships with the world’s leading operators. our scale advantage, end-to-end offerings, and a local presence in every major market enable us to serve as a true partner for cost-effective delivery of solutions and support to a diverse base of customers. as operators are striving to reduce the number of different key suppliers they rely on, the responsiveness of our employees and the power of our portfolio of products and services are key to our future success. We work closely with our customers to understand their businesses and technology needs, and provide tailored solutions to help them fulfill their business objectives. our expertise and experience in all major telecommunication standards along with our proven track record for quality and innovation have allowed “ We work closely with our customers to understand their needs and help them fulfill their business objectives.” us to develop our business on a worldwide basis. We believe that torbjörn possne, head of sales and marketing our widespread geographical presence and the economies of ericsson annual report 2008 information on the company 133 system sales has historically been our most common sales emerge, possibly including some network operators attempting approach to best meet our customers’ needs, however, as their to expand into new segments. needs evolve, the two other sales approaches will grow in in the multimedia segment, our competitors vary widely importance. depending on the product or service being offered, and we face for more information, see risk factors, “risks associated with significant competition for substantially all of these products and the industry and market conditions”. services. competitors include many of the traditional Seasonality communication equipment suppliers mentioned above as well as companies from other industries, such as acision, amdocs, our quarterly sales, income and cash flow from operations are comverse, harmonic, oracle and thomson. seasonal in nature and generally lowest in the first quarter of the Within the segment phones, the primary competitors include year and highest in the fourth quarter. this is mainly a result of nokia, motorola, samsung and a number of other companies the seasonal purchase patterns of network operators. the table such as lG electronics, nec and sharp as well as companies below illustrates the long-term average seasonal effect on sales like apple, htc and rim for smartphones. We believe that our for the period 1994 through 2008. mobile phone joint venture with sony corporation creates a 15-YEAR AvERAGE SEASONALIT Y first second fourth quarter quarter quarter quarter third distinctive competitive advantage. for more information, see risk factors, “risks associated with the industry and market conditions”. sequential change share of annual sales –26% 21% 16% 24% –4% 23% 32% 31% supply the table below illustrates the average seasonal effect on sales for the last three years. Manufacturing and assembly MOST RECENT 3-YEAR AvERAGE SEASONALIT Y first second fourth quarter quarter quarter quarter third sequential change share of annual sales –18% 22% 12% 24% –5% 23% 31% 30% Competitors most of our node production, i.e., assembly, integration and testing of modular subsystems into complete system nodes such as radio base stations, mobile switching centers etc., is done in-house. the major part of our module production, i.e., production of subsystems such as circuit boards, radio frequency (rf) modules, antennas etc., is outsourced to a group of electronics manufacturing services companies (ems), of which the vast majority is in low-cost countries. in networks, we compete mainly with large and well-established We also purchase customized and standardized equipment, communication equipment suppliers. although competition varies components and services from several global providers as well depending on the products, services and geographical regions, as from numerous local and regional suppliers. a number of our our most significant competitors in mobile communication include suppliers design and manufacture highly specialized and alcatel/lucent, huawei, nokia/siemens and Zte. With respect to customized components for our end-to-end solutions as well as fixed communications equipment, the competition is also highly for individual nodes. concentrated and includes, among others, alcatel/lucent, cisco, We generally attempt to negotiate global supply agreements huawei and nokia/siemens. We also compete with numerous with our primary suppliers. While we are not dependent on any local and regional manufacturers and providers of communication one supplier for the provision of standardized equipment or equipment and services. We believe the most important components and seek to avoid single source supply situations, a competitive factors in this industry include existing customer need to switch to an alternative supplier may require us to relationships, the ability to cost-effectively upgrade or migrate an allocate additional resources to ensure that our technical installed base, technological innovation, product design, standards and other requirements are met. this process could compatibility of products with industry standards, and the take some time to complete. accordingly, a need to switch to an capability for end-to-end systems integration. alternative supplier could potentially have an adverse effect on competition in professional services includes not only many of our operations in the short term. for more information, see risk the traditional communication equipment suppliers mentioned factors, “strategic and operational risks”. above, but also a number of large companies from other industry We intend to continue to outsource module production where sectors, such as is/it, for example accenture, hp/eDs and iBm adequate manufacturing capacity and expertise are available on as well as a large number of smaller but specialized companies favorable terms. such outsourcing of the major part of volume operating on a local or regional basis. as the professional module manufacturing provides us greater flexibility to adapt to services segment grows, we expect to see additional competitors economic and market changes. the timing and level of 134 information on the company ericsson annual report 2008 outsourcing is a balance between short-term demand and longer-term flexibility. organization We manage our own production capacity on a global basis by Company structure and organization allocating production to sites where capacity is available and ericsson is organized in business units, market units and group costs are competitive. We work with shortening of lead-times and functions. Business units are innovators, developers and regionalization in order to reduce total distribution cost and co2 suppliers of high-quality products, services and customer emission. at year-end 2008, our overall utilization was close to offerings. market units are marketing & sales channels and the 100 percent as we continuously adjust our production capacity company’s representative in the local market environment. to meet expected demand. the table “primary manufacturing Group functions coordinate the company’s strategies, operations and assembly facilities” summarizes where we have our major and resource allocation and define the necessary directives, manufacturing and assembly facilities as well as the total square processes and organization for the effective governance of the meters of floor space at year-end. in sweden, the majority of the Group. floor space within our production facilities is used for node for more information please see, corporate Governance assembly and verification. report, “company structure and organization”. Sources and availability of materials We purchase components, ready-made products and services from a significant number of domestic and foreign suppliers. Changes in the Organization: • on may 1, 2008, ericsson divested its enterprise pBX solutions to aastra technologies. Variations in market prices for copper, aluminum, steel, precious metals, plastics and other raw materials have a limited effect on our total cost of goods sold. to a limited extent, we are involved Changes in the Group Management Team: • as per January 1, 2008, Jan frykhammar was appointed senior Vice president and head of business unit Global in the production of certain components such as power modules services and was included in the Group management team. and cables, which are used in our systems products as well as • as per february 1, 2008, torbjörn possne was appointed sold externally to other equipment manufacturers. senior Vice president and head of group function sales and to the extent possible, we rely on alternative supply sources for the purchased elements of our products to avoid sole source marketing and was included in the Group management team. • as per July 1, 2008, Johan Wibergh was appointed senior Vice situations and to secure sufficient supply at competitive prices. president and head of business unit networks and was assuming there will only be moderate increase in market included in the Group management team. demand, we do not foresee any supply constraints to meet our • as per July 1, 2008, Kurt Jofs and Björn olsson left the Group expected production requirements during 2009. for more management team. information, see risk factors, “strategic and operational risks”. • as per December 31, 2008, Joakim Westh left the Group management team. for more information about management, please see notes to the consolidated financial statements – note c29, “information regarding employees, members of the Board of Directors and management”. PRIMARY MANUFACTURING AND ASSEMBLY FACILITIES sweden china italy Brazil Germany india usa other Total 2008 sites sq meters 2007 sites sq meters 2006 sites sq meters 2005 sites sq meters 8 4 2 1 1 1 1 0 226,000 38,500 20,100 18,000 300 9,000 5,000 0 8 4 2 1 1 1 1 0 244,300 33,900 20,100 25,900 300 6,400 5,000 0 8 3 2 1 1 1 1 1 231,500 20,860 20,100 18,400 13,900 5,364 5,000 3,100 9 3 0 1 0 1 0 0 256,615 15,200 0 15,840 0 5,364 0 0 18 316,900 18 335,900 18 317,560 14 293,019 ericsson annual report 2008 information on the company 135 forward-looking statements this annual report includes “forward-looking statements”, electromagnetic fields, cost of radio licenses for our customers, including statements reflecting management’s current views allocation of radio frequencies for different purposes and relating to the growth of the market, future market conditions, results of standardization activities within telecommunications; future events and expected operational and financial performance. the words “believe”, “expect”, “anticipate”, “intend”, “may”, “could”, “plan”, “estimate”, “will”, “should”, “could”, “aim”, “target”, “might” or, in each case, their negative, • the effectiveness of our strategies and their execution, including partnerships, acquisitions and divestitures; • financial risks, including changes in foreign exchange rates or interest rates, lack of liquidity or access to financing, changes and similar words are intended to help identify forward-looking in tax liabilities, credit risks in relation to counterparties, statements. forward-looking statements may be found customer defaults under significant customer finance throughout this document, but in particular in the sections arrangements and risks of confiscation of assets in foreign captioned “Board of directors’ report” and “information on the countries; company”, and include statements regarding: • our goals, strategies and operational or financial performance • the impact of the consolidation in the industry, and the resulting (i) reduction in the number of customers, and adverse expectations; • development of corporate governance standards, stock market regulations and related legislation • the growth of the markets in which we operate; • our liquidity, capital resources, capital expenditures and our credit ratings and the development in the capital markets, affecting our industry; consequences of a loss of, or significant decline in, our business with a major customer; (ii) increased strength of a competitor or the establishment of new competitors; • the impact of changes in product demand, price erosion, competition 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 • the expected demand for our existing as well as new products not sell at the rates or levels we anticipate; and services; • the expected operational or financial performance of our sony ericsson and st ericsson joint ventures and other strategic cooperation activities; • technology and industry trends including regulatory and standardization environment, competition and our customer structure; and • our plans for new products and services including research • 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 license them to others and defend them against infringement, and results of patent litigation; • supply constraints, including component or production capacity shortages, suppliers’ abilities to cost effectively and development expenditures. deliver quality products on time and in sufficient volumes, and risks related to concentration of proprietary or outsourced although we believe that the expectations reflected in these and production in a single facility or sole source situations with a other forward-looking statements are reasonable, we cannot single vendor; and assure you that these expectations will materialize. Because • our ability to successfully manage operators’ networks to their forward-looking statements are based on assumptions, satisfaction with satisfactory margins; judgments and estimates, and are subject to risks and uncertainties, actual results could differ materially from those described or implied herein. important factors that could affect • our ability to maintan a strong brand and good reputation and to be acknowledged for good corporate governance practices; • our ability to recruit and retain qualified management and other whether and to what extent any of our forward-looking key employees. statements materialize include, but are not limited to: • our ability to respond to changes in the telecommunications certain of these risks and uncertainties are described further in market and other general market conditions in a cost effective “risk factors”. we undertake no obligation to publicly update or and timely manner; • developments in the political, economic or regulatory revise any forward-looking statements included in this annual report, whether as a result of new information, future events or environment affecting the markets in which we operate, otherwise, except as required by applicable law or stock including trade embargos, changes in tax rates, changes in exchange regulation. patent protection regulations, allegations of health risks from 136 forward-looking statements ericsson annual report 2008 share information stock exchange trading Share data 2008 2007 2006 2005 2004 ericsson’s class a and class B shares are traded on nasDaQ omX stockholm and in the united states, the class B shares are traded on nasDaQ in the form of american Depositary shares (aDs) evidenced by american Depositary receipts (aDr) under the symbol eric. each aDs represents one class B share. on april 15, 2008, the ericsson class B-share was de-listed from the london stock exchange. approximately 20 (44) billion shares were traded in 2008, of which about 84 (83) percent on nasDaQ omX stockholm and about 16 (16) percent on nasDaQ. trading volume in ericsson shares decreased by approximately 54 percent on nasDaQ omX stockholm and decreased by approximately 58 percent on nasDaQ as compared to 2007. (note that ericsson had a reversed split of shares 1:5, and a B-share/aDs ratio change from 10:1 to 1:1, in 2008.) share price trend in 2008, ericsson’s total market value decreased by about 22 (45) percent to approximately seK 191 billion (seK 245 billion in 2007). the omXsp index on nasDaQ omX stockholm decreased by 42 percent, the nasDaQ telecom index (cutl) decreased by approximately 43 percent and the nasDaQ composite index (ccmp) decreased by approximately 41 percent in 2008. 7.47 9.50 6.84 3.52 earnings per share, diluted (seK) 1) 3) operating income per share (seK) 1) 3) cash flow from operating activities per share (seK) 1) 3) 7.50 stockholders’ equity per share (seK) 1) 3) p/e ratio, class B 11 shares 1) total shareholder return 1) 3) –0.18 –0.44 2.50 Dividend per share (seK) 2) 3) 1.85 5.95 17 8.23 7.64 5.54 11.10 10.25 8.30 5.75 5.15 6.95 17 0.02 2.50 18 0.31 2.25 19 0.64 1.25 44.21 42.17 37.82 32.03 25.40 1) for 2004 restated in accordance with ifrs. 2) for 2008 as proposed by the Board of Directors. 3) for 2004, 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. Share priceS on naSdaQ omx Stockholm (Sek) 2008 2007 2006 2005 2004 class a at last day of trading 1) class a high for year (may 19, 2008) 1) class a low for year (october 10, 2008) 1) class B at last day of trading 1) class B high for year (may 19, 2008) 1) class B low for year (october 10, 2008) 1) 59.30 76.80 138.00 137.50 108.50 83.60 148.50 154.50 143.50 130.50 40.60 73.00 104.50 99.00 70.00 58.80 75.90 138.25 136.50 106.00 83.70 149.50 155.00 145.00 122.50 40.60 72.65 104.50 97.00 63.50 1) for 2004, 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. Share trend, naSdaQ omx Stockholm, Share trend, naSdaQ omx Stockholm, 2005–2008 (Sek) JanUarY–decemBer 2008 (Sek) 200 150 100 75 50 90 80 70 60 50 40 30 2005 2006 2007 2008 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Class B share, SEK OMXSP Index Class B share, SEK OMXSP Index ericsson annual report 2008 share information 137 offer and listing details NASDAQ OMX Stockholm and NASDAQ Principal trading market – NASDAQ OMX Stockholm share prices period the table to the right states the high and low sales prices for our class a and class B shares as reported by nasDaQ omX stockholm for the last five years. the equity securities listed on the nasDaQ omX stockholm official price list of shares currently comprise the shares of 263 companies. trading on the exchange generally continues until 5:30 p.m. (cet) each business day. in addition to official trading on the exchange, there is also trading off the exchange during official trading hours and also after 5:30 p.m. (cet). trading on the exchange tends to involve a higher percentage of retail clients, while trading off the exchange often involves larger swedish institutions, banks arbitraging between the swedish market and foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to swedish institutions. nasDaQ omX stockholm publishes a daily official price list of shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. the official price list of shares reflects price and volume information for trades completed by the members. Host market NASDAQ ADS Prices the table to the right states the high and low sales prices quoted for our aDss on nasDaQ for the last five years. the nasDaQ quotations represent prices between dealers, not including retail mark-ups, markdowns or commissions, and do not necessarily represent actual transactions. market priceS on naSdaQ omx Stockholm and naSdaQ nasDaQ omX stockholm seK per seK per class a share class B share low high high low annual high and low 2004 2) 2005 2) 2006 2) 2007 2) 2008 130.50 70.00 122.50 63.50 143.50 99.00 145.00 97.00 154.50 104.50 155.00 104.50 72.65 148.50 73.00 149.50 83.70 40.60 83.60 40.60 nasDaQ usD per aDs 1) low high 17.29 18.60 20.57 21.71 14.00 8.97 13.89 14.44 11.12 5.49 142.00 117.70 143.70 118.20 148.50 119.75 149.50 119.00 Quarterly high and low 2007 2) first Quarter 21.07 second Quarter 139.30 124.25 140.30 125.00 20.26 21.71 third Quarter fourth Quarter 134.00 73.00 135.20 72.65 20.98 2008 51.10 78.90 50.25 first Quarter 79.50 57.50 83.70 58.70 second Quarter 83.60 75.80 third Quarter 61.20 61.60 75.80 66.60 40.60 65.90 40.60 fourth Quarter 12.28 14.00 12.65 9.15 monthly high and low august 2008 74.40 63.30 september 2008 75.80 63.00 october 2008 66.60 40.60 november 2008 60.60 46.50 December 2008 65.50 52.00 65.90 January 2009 74.50 62.90 75.80 63.00 65.10 40.60 61.10 46.40 52.10 68.10 55.50 67.90 55.40 11.71 11.60 9.15 8.03 8.16 8.49 1) one aDs = 1 class B share. 2) for 2004, 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. 16.97 18.05 16.83 11.12 8.52 9.76 9.03 5.49 10.17 9.03 6.05 5.49 6.27 6.81 Share trend, naSdaQ, JanUarY–decemBer 2008 (USd) Share tUrnover 2008 (million ShareS) 14 12 10 8 6 4 2 0 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ADS, USD NASDAQ composite index (CCMP) NASDAQ OMX Stockholm NASDAQ 1 aDs = 1 class B share. a reverse split 1:5 was made in June 2008. 138 share information ericsson annual report 2008 changeS in nUmBer of ShareS and capital Stock 2004 –2008 2004 2005 2006 2007 2008 2008 July 23, new issue. (class c-shares, later converted to class B) 2008 December 31 (no changes) December 31 (no changes) December 31 (no changes) December 31 (no changes) June 2, reverse split 1:5 December 31 number of shares share capital 16,132,258,678 16,132,258,678 16,132,258,678 16,132,258,678 3,226,451,735 19,900,000 3,246,351,735 16,132,258,678 16,132,258,678 16,132,258,678 16,132,258,678 16,132,258,678 99,500,000 16,231,758,678 share capital shareholders on april 9, 2008 the annual General meeting decided on a as of December 31, 2008, ericsson had 728,333 shareholders reverse split of shares 1:5 and a B-share/aDs ratio change from registered at euroclear sweden aB (former Vpc aB) (the swedish 10:1 to 1:1. the last day of trading in the company´s shares on securities register center), of which 1,469 holders with a us nasDaQ omX stockholm before the reverse split was may 30, address. according to information provided by citibank, there 2008 and the first day of trading after the reverse split was June were 329,803,670 aDss outstanding as of December 31, 2008, 2, 2008. at the same time the quotient value of the share was and 5,192 registered holders of such aDss. a significant number increased from seK 1 to seK 5. the first day of trading with of the aDss are held of record by banks, brokers and/or aDss on nasDaQ with ratio 1:1 to the consolidated shares was nominees for the accounts of their customers. as of December June 10, 2008. 31, 2008, banks, brokers and/or nominees held aDss on behalf as of December 31, 2008, ericsson’s share capital was seK of 361,915 accounts. 16,231,758,678 (16,132,258,678) represented by 3,246,351,735 according to information known at year-end 2008, almost 80 (16,132,258,678) shares. the quotient value of each share is seK percent of our class a and class B shares were owned by 5,00 (seK 1.00). as of December 31, 2008, the shares were institutions, swedish and international. divided into 261,755,983 (1,308,779,918) class a shares, each our major shareholders do not have different voting rights than carrying one vote, and 2,984,595,752 (14,823,478,760) class B other shareholders holding the same classes of shares. shares, each carrying one-tenth of one vote. as of December 31, as far as we know, the company is not directly or indirectly 2008, ericsson held 61,066,097 class B shares as treasury owned or controlled by another corporation, by any foreign shares. government or by any other natural or legal person(s) severally or there were 19,900,000 shares repurchased by ericsson in jointly. 2008. ten largeSt coUntrieS, ownerShip top execUtiveS and directorS, ownerShip percent of capital sweden united states united Kingdom luxembourg switzerland Belgium france Denmark Japan australia other countries source: euroclear sweden aB (former Vpc aB) as of December 31, 2007 2008 46.0% 28.5% 11.8% 3.6% 1.3% 1.3% 1.1% 0.8% 0.8% 0.7% 4.1% 46.1% 32.3% 6.7% 3.9% 1.9% 0.5% 1.3% 1.0% 0.8% 0.3% 5.2% number of class a shares number of class B shares Voting rights, percent top executives and directors as a group (27 persons) 1,216 3,788,765 0.07 for individual holdings, see “corporate Governance report”. the table shows the total number of shares in the company owned by top executives and directors as a group as of December 31, 2008. ericsson annual report 2008 share information 139 the following table sets forth share information, as of December 31, 2008, with respect to our 15 largest shareholders, ranked by voting rights, as well as percentage of voting rights as of December 31, 2008, 2007 and 2006. l argeSt ShareholderS, decemBer 31, 2008 and percentage of voting rightS, decemBer 31, 2008, 2007 and 2006 number of class a shares percentage of total class a shares number percentage 2006 of class B of total class Voting rights Voting rights Voting rights percent B shares percent percent shares 2008 2007 identity of person or group 1) investor aB aB industrivärden shB pensionsstiftelse skandia liv, aB swedbank robur fonder aB pens. kassan shB förs.fören. Brandes investment partners lp amf pension oppenheimer funds inc. seB trygg försäkring shB fonder aB Dodge & cox, inc. seB asset management allianceBernstein lp Barclays Global inv. n.a. others 102,664,038 74,400,000 16,780,600 14,436,459 1,492,591 12,672,000 0 800,000 0 4,656,819 92,030 0 480,909 0 0 33,280,537 61,414,664 39.22 0 28.42 0 6.41 17,617,586 5.52 121,941,859 0.57 0 4.84 116,436,174 0.00 78,794,438 0.31 73,368,079 0.00 11,493,600 1.78 56,083,016 0.04 55,174,800 0.00 50,071,310 0.18 50,296,033 0.00 0.00 49,773,521 12.71 2,303,572,336 2.06 0.00 0.00 0.59 4.09 0.00 3.90 2.64 2.46 0.39 1.88 1.85 1.68 1.68 1.67 77.18 100 19.42 13.28 3.00 2.89 2.44 2.26 2.08 1.55 1.31 1.04 1.02 0.98 0.98 0.90 0.89 45.96 100 19.49 13.36 3.01 2.75 1.67 2.27 1.73 0.89 1.57 1.04 1.08 0.00 0.78 0.00 0.67 49.69 100 19.46 13.35 3.01 2.54 1.71 2.27 0.00 1.07 1.20 1.01 0.99 0.00 0.77 0.00 1.05 51.57 100 total 261,755,983 100 2,984,595,752 1) sources: capital precision, December 2008. euroclear sweden aB (former Vpc aB), December 31, 2008, 2007 and 2006. earningS per Share, dilUted StockholderS’ eQUitY per Share 2004–2008 (Sek) 2004–2008 (Sek) 10 8 6 4 2 0 8.23 7.64 6.84 5.54 3.52 2004 2005 2006 2007 2008 50 40 30 20 10 0 42.17 44.21 37.82 32.03 25.40 2004 2005 2006 2007 2008 140 share information ericsson annual report 2008 shareholder information the annual General meeting of shareholders will take place at the annex to the ericsson Globe, Globentorget, stockholm, at Dividend the Board of directors has decided to propose the annual 3.00 p.m. on Wednesday, april 22, 2009. General meeting of shareholders to resolve on a dividend of seK 1.85 per share for the year 2008 and monday, april 27, 2009 Entitled to attend and notice of attendance as record day for dividend. shareholders, who wish to attend the annual General meeting of shareholders, must • have been entered into the share register kept by euroclear sweden aB (former Vpc aB) (the swedish securities registry) Financial information from Ericsson • interim reports 2009: april 30, 2009 (Q1) as of thursday, april 16, 2009; and • give notice of attendance to the company at the latest on thursday, april 16, 2009, at the company’s web site July 24, 2009 (Q2) october 22, 2009 (Q3) January 25, 2010 (Q4) www.ericsson.com, at telephone no.: +46 8 402 90 54 weekdays between 10 a.m. and 4 p.m. or at fax no.: +46 8 21 60 87. • annual report 2009: march, 2010 • form 20-f for the us market 2009: during Q2, 2010 annual reports and other financial reports are available on our web site: www.ericsson.com/investors. notice of attendance may also be given by mail to: telefonaktiebolaget lm ericsson, General meeting of shareholders For printed publications, contact: strömberg distribution i huddinge aB Box 7835, se-103 98 stockholm, sweden se – 120 88 stockholm, sweden When giving notice of attendance, please state name, date of phone: +46 8 449 89 57 birth, address, telephone no. and number of assistants. e-mail: ericsson@strd.se the meeting will be simultaneously interpreted into english. in the united states, ericsson’s transfer agent citibank: citibank shareholder services Shares registered in the name of a nominee registered holders: +1 877 881 59 69 shareholders, whose shares are registered in the name of a interested investors: +1 800 808 80 10 nominee, must request the nominee to enter temporarily the e-mail: ericsson@shareholders-online.com shareholder into the share register as of thursday april 16, 2009, www.citibank.com/adr to be entitled to participate at the annual General meeting of ordering a hard copy of the annual report: shareholders. the shareholder is requested to inform the phone toll free: +1 866 216 046 nominee well before that day. http://proxy.georgeson.com/annualreport/ericsson.htm Proxy Contact information: shareholders represented by proxy shall issue a power of investor relations for europe, middle east, africa and asia pacific: attorney for the representative. to a power of attorney issued by telefonaktiebolaget lm ericsson a legal entity, a copy of the certificate of registration (or, if no such se-164 83 stockholm, sweden certificate exists, a corresponding document of authority) of the telephone: +46 10 719 00 00 legal entity shall be attached. the documents must not be older e-mail: investor.relations@ericsson.com than one year. in order to facilitate the registration at the annual investor relations for the americas: General meeting, the power of attorney in its original, certificates ericsson of registration and other documents of authority should be sent the Grace Building to the company at the address above so as to be available by 1114 ave of the americas, suite #3410 tuesday, april 21, 2009. forms of power of attorney in swedish new York, nY 10036, usa and english are available at our website: www.ericsson.com/ telephone: +1 212 685 40 30 investors. e-mail: investor.relations@ericsson.com ericsson annual report 2008 shareholder information 141 Corporate Responsibility Sustainability and corporate responsibility (CR) are integral survey, close to 80 percent stated that CR had a positive parts of our business strategy, company culture and overall influence on how they felt about working for Ericsson. ways of working. Proactive engagement builds trust and creates opportunities with stakeholders. Our focus areas Sustainable business approach Five priority areas are most relevant to our business strategy. These are monitored by our primary stakeholder groups, Ericsson’s core business boosts social and economic including customers, investors and analysts, employees, and development. Telecommunications enables access to basic media. Our challenge is to manage effectively the associated services that improve livelihoods and productivity. by replacing risks and opportunities. energy-intensive travel and delivering virtual products and services, it helps to create a carbon-lean economy. Responsible Business Our integrated approach to CR is about maintaining the A strong governance commitment helps ensure integrity. it starts necessary controls to minimize risks, while at the same time at the top, from the board of Directors and CEO, and extends to creating positive social, economic and environmental business every operation and employee. impacts. This makes the Company more competitive and resilient Our governance framework is built on the global Ericsson in today’s uncertain economic climate. Group Management system (EGMs). This includes corporate Building business advantage responsibility elements such as the Code of business Ethics, the Code of Conduct, anti-corruption measures and our Group-wide Energy-optimization and due diligence along the supply chain certified Environmental Management system. EGMs is reinforced help differentiate us in a competitive market. increasingly, by training, workshops and monitoring, including a Global customers evaluate us on sustainability performance and many Assessment Program run by assurance provider Det norske customers have introduced ambitious goals to cut C02 emissions, and want to secure their supply chains. investors recognize good Veritas (DnV). in an increasingly global marketplace, actions in one region governance as a proxy for a well-run company. several indices have worldwide implications. Company-wide policies build trust and ratings organizations rank Ericsson highly, including the and help protect us from reputational risks. FTsE4Good, the Carbon Disclosure Project and the sAM 2008 performance highlights: Corporate sustainability Assessment. • The Ericsson board of Directors participated in the annual Our employees value a responsible company. in a recent corporate responsibility training. annual co2 emissions per subscriber per year in ericsson networks, kG (kg) 200 First generation mobile systems NMT, AMPS (180 kg) 150 100 50 0 Second generation D-AMPS, GSM (90 kg) GSM 1997 (48 kg) GSM 2002 (33 kg) First 3G system (55 kg) 3G 2005 (35 kg) 3G 2006 (29 kg) 3G 2008 (25 kg) GSM 2005 (25 kg) GSM 2006 (24 kg) GSM 2008 (20 kg) 1985 1990 1995 2000 2005 2010 First and second generation mobile systems Third generation mobile systems 142 CORPORATE REPOnsibiliT y ERiCssOn A nnuAl REPORT 2008 • An anti-corruption course was rolled out to employees worldwide. • An internal employee awareness and engagement program for CR was launched, which included support for the Every Human has Rights campaign by the Elders. the target that over 90 percent of strategic sourcing personnel should complete training. • Joined Global e-sustainability E-TAsC program, an industry initiative to inform customers about our own performance as a Supply chain Ericsson’s stakeholders expect the same high environmental and social standards, irrespective of whether production is in our own facilities or outsourced. Every supplier must comply with the supplier. • Code of Conduct implementation verified by DnV as part of global assessment plan and CR Report assurance process. Climate change and the environment Ericsson Code of Conduct and the requirements are an integral life-cycle assessment shows that our most material part of our overall supplier evaluation process. environmental impact is energy use. Our greatest carbon impact During 2006–2008, we have established a more intensified derives from our products in operation – over two-thirds of total supplier Code of Conduct Program, to prioritize higher-risk suppliers and encourage and monitor supplier improvement. energy consumed occurs when our products are in use. C02 emissions from our own operations is just 2–3 percent of our total increased supplier awareness and actions have improved carbon footprint. working conditions, reduced environmental impact, and lessened Ericsson maintains a leadership position in energy efficiency. the suppliers’ and Ericsson’s overall business risk. For us, as for our customers, low energy consumption offers The focus on local suppliers in 2008 was further intensified competitive advantage. Ericsson is also creating new revenue following media attention on working conditions with tower streams by helping markets like China and india leapfrog to suppliers in bangladesh. some 85–90 percent of the tower carbon-lean technologies. We have also developed services suppliers world-wide have been audited or assessed, and aimed to support operator energy-consumption analysis on both continual improvement is ensured through systematic follow-up. new and deployed networks. in 2009, we will monitor critical supplier operations, such as being climate-smart strengthens our ability to handle risks. tower manufacturing, installation of equipment at telecom sites, Although Ericsson is less vulnerable than most companies, we surface treatment of parts, power supply and printed circuit need to be prepared to address changing legislative demands. board manufacturing. local auditor training is also an ongoing With products that have a long life-cycle, being at the forefront of priority, as is local capacity building among suppliers. technology is critical. 2008 performance highlights: • Eight auditor training sessions were held, bringing the number 2008 performance highlights: • Energy-efficiency target for GsM exceeded by 7.5 percent and of supplier Code of Conduct auditors to over 50. for WCDMA by 15 percent in 2008. • Performed more than 400 on-site audits and assessments. • On-line supplier Code of Conduct “observer” training course completed by more than 1,300 Ericsson employees, exceeding • new Group target was set to reduce life-cycle carbon footprint by 40 percent by 2012. UN Global Compact Ericsson endorses the united nations Global Compact ten principles on human rights, fair labor practices, the environment and anti-corruption. These principles guide the continuous development of Group policies and practices. 100 80 60 40 20 0 2005–2008 enerGy efficiency Goals for radio base station development (improvement in percent for the annual product portfolio delivery) –5% –13% –20% –35% –55% > –60% 2005 (baseline) 2006 2007 2008 2005 (baseline) 2006 2007 2008 GSM Goal 2006: –5% Goal 2008: –15% WCDMA Goal 2006: –25% Goal 2008: –50% ERiCssOn A nnuAl REPORT 2008 CORPORATE REsPO nsibiliT y 143 • new sustainable innovations were developed, including Wind Turbine Tower Tube prototype, diesel battery hybrid solution to understand the impact mobile broadband and internet has on lives in emerging markets. The research showed clear for off-grid radio sites, and a green site in Cambodia, where for benefits related to development, resource management and the first time ever both radio and transmission equipment is networking for businesses, institutions and people. powered by solar energy. • new energy optimization services were introduced. • Joined the un Global Compact’s Caring for Climate Coalition. • Electronic waste recovery program processed globally via ecology management; over 90 percent of collected electronics • Ericsson joined the business Call for Action to support the MDGs by uK Prime Minister Gordon brown and was one of only three companies invited to address the un General Assembly on the MDGs in september. were recovered; less than 10 percent directed to landfill. Employees Meeting the Millennium Development Goals by ensuring a fair and safe environment, Ericsson minimizes business risks and positively contributes to our main asset – our Connectivity fuels economic growth. Ericsson is extending the people. Ericsson’s core values of professionalism, respect and benefits of telecom by providing affordable access to basic perseverance remain constant. services that can improve livelihoods, health care, education and With 73 percent of the workforce located outside sweden, other fundamental human rights. in future, the bulk of new mobile diversity is a hallmark of Ericsson’s culture. it enhances subscriptions are expected to come from emerging markets such competitiveness by stimulating creativity and openness to as Africa, China and india. change. it also minimizes risks by equipping the Company to Through our presence in emerging markets, we strive to be a meet the demands of a global, dynamic and diverse marketplace. force for good. Ericsson is committed to help achieve the eight Currently, women represent 21 percent of the Group’s un Millennium Development Goals (MDGs), to eliminate extreme employees and hold 18 percent of managerial positions. Our poverty by 2015. 2008 performance highlights: • Together with Columbia university’s Earth institute, we are challenge is to encourage greater female representation. in 2008, 90 percent of employees participated in our annual employee opinion surveys. The results showed that the Company’s Human delivering connectivity to more than half a million people living Capital index scores highly according to external benchmarks. in the Millennium Villages across 10 African countries. 2008 performance highlights include: • We conducted market research on mobile content services in india and uganda. Results showed that 96 percent of the respondents expressed a positive intention to use mobile data services. However, information requirements concerning user’s livelihoods are not met today and lack of applications in local languages are still a barrier to using the services for many. • Market research done in indonesia, Rwanda and south Africa • Completed individual Performance Management for 91 percent of employees. • Established global diversity parameters and integrated diversity into individual Performance Management. • implemented global on-line “Diversity i-Check” training to increase awareness of why diversity is important. • Health and safety Group reporting structure was established. 25,000 20,000 15,000 10,000 5,000 0 employees by aGe and Gender X% X% Under 25 25–34 35–46 45–54 Over 55 Male Female Community engagement Community-level contributions to society and the environment demonstrate our commitment. local initiatives inspire employees and instill pride in the benefits telecommunications can bring. Through Ericsson Response, now in its nineth year, our employees engage in response activities, contributing our expertise to relief efforts. in 2008, Ericsson Response was on-site in relief efforts in sudan, Panama and Central African Republic. Ericsson Response activities are coordinated through the un. 144 CORPORATE REPOnsibiliT y ERiCssOn A nnuAl REPORT 2008 remuneration Remuneration at Ericsson is based on the principles of employee remuneration. the committee considers pay and performance, competitiveness and fairness and our employment conditions throughout the company when dealing remuneration policy together with the mix of several with Group management remuneration. remuneration elements are designed to reflect these the remuneration committee is chaired by michael treschow remuneration principles in a balanced way by creating an and its other members are nancy mcKinstry, Börje ekholm and integral remuneration package. For our senior management, monica Bergström, all of whom are non-executive directors and total remuneration consists of fixed salary, short-term and independent as required by the swedish code of corporate long-term variable remuneration, pension and other Governance. the chairman continues to ensure that the benefits. If the size of any of these elements should be company maintains contact, as necessary, with its principal increased or decreased, at least one other element has to shareholders on the subject of remuneration. change where the competitive position should remain the company’s General counsel acts as secretary to the unchanged. committee and the ceo, the senior Vice president Human resources & organization and the Vice president compensation & Benefits attend the remuneration committee meetings by this chapter outlines with specific references to senior invitation and assist the committee in its considerations, except management how we implement our remuneration policy when issues relating to their own remuneration are being throughout ericsson in line with corporate governance best discussed or decided. practice. Details of Board Directors’ fees and remuneration of the remuneration committee has appointed an independent senior management comprising the Group management team, expert advisor, Gerrit aronson, to assist and advice the including the ceo, hereafter referred to as “Group management” committee. Gerrit aronson provided no other services to the can be found in notes to the consolidated Financial statements company during 2008. the remuneration committee is also – note c29, “information regarding employees, members of the provided with national and international pay data collected from Board of Directors and management”. the company is required external survey providers and can call on other independent to submit the formal remuneration policy for senior management expertise should it so require. for shareholder approval at the annual General meeting. the the purpose and function of the remuneration committee will proposed resolution for 2009, which remains materially the same continue going forward and its terms of reference can be found as the 2008 policy, together with resolutions relating to the on our website. these terms of reference, together with the company’s long-term variable remuneration plans are set out in remuneration policy, are reviewed annually in light of matters the notice of annual General meeting on ericsson’s website such as changes to corporate governance best practice or (www.ericsson.com). the auditors’ opinion on how we have changes to accounting, legislation, political opinion or business followed our policy during 2008 is also posted on the website. practices among peers. this helps to ensure that the policy The Remuneration Committee continues to provide ericsson with a competitive remuneration strategy and, in accordance with swedish law, the policy for remuneration processes by the nature of their sensitivity require senior management is brought to shareholders annually for clear controls. Within ericsson these controls are built on three approval. foundations: audit controls, our internal system that requires two levels of managers to approve any remuneration decision and Fixed Salary Board of Directors and remuneration committee authorization. Fixed salaries are set to be competitive within an individual’s the remuneration committee advises the Board of Directors home market, taking into account global remuneration practices. on an ongoing basis on the remuneration of Group management, the absolute levels are determined by the size and complexity of including fixed salaries, pensions, other benefits and short-term the position and the year-to-year performance of the individual. and long-term variable remuneration. the remuneration Group management salaries are, together with other elements of committee also approves variable remuneration outcomes, remuneration, subject to an annual review by the remuneration prepares remuneration related proposals for Board and committee, which considers external pay data to ensure that shareholder approval and develops and monitors the levels of pay remain competitive and appropriate in light of the remuneration policy, strategies and general guidelines for company’s remuneration policy. When setting fixed salaries the ericsson annual report 2008 remuneration 145 remuneration committee considers the impact on total General meeting. For Group management the payout is remuneration, including pension contributions and associated determined by three specific variables: the individual’s own costs. investment in shares, a long-term financial target at Group level and the share price development. Variable Remuneration and Performance all long-term variable remuneration plans are designed to form at ericsson we strongly believe that, where possible, we should part of a well-balanced total remuneration and their central role in encourage variable remuneration throughout the company to ericsson’s remuneration system was positively confirmed in our first and foremost align employees with clear and relevant targets extensive review during 2007, reported in last year’s annual and also to enable more flexible payroll costs whilst emphasizing report. ericsson has no formal guidelines for equity ownership the link between performance and pay. but the long-term variable remuneration facilitates that Group performance is specifically reflected in the variable management and a large proportion of ericsson’s employees remuneration – both in an annual variable component and in a build up a significant personal ownership in the company’s stock long-term variable part. although this may vary over time to take over time. this is achieved through a combination of personal account of pay trends, currently the target level of the short-term investment and share-based remuneration made up of three variable remuneration for Group management is between 30 and different but linked plans: the all employee stock purchase plan, 40 percent of the fixed salary, but outcomes can vary between the Key contributor retention plan and the executive zero and twice the target opportunity. the long-term variable performance stock plan. remuneration is set to achieve a target of around 30 percent of the fixed salary. in both cases the variable pay is measured The Stock Purchase Plan against the achievement of specific business objectives, the all employee stock purchase plan is designed to offer, where reflecting the judgment of the Board of Directors as to the right practicable, an incentive for all employees to participate in the balance between fixed and variable pay and the market practice company, reinforcing a “one ericsson” aligned with shareholder for remuneration of executives. all variable remuneration plans interests. employees can save up to 7.5 percent (ceo 9 percent) have maximum award and vesting limits. of gross fixed salary for purchase of class B shares at market Short-Term Variable Remuneration price on the omX nasDaQ stockholm or aDss at nasDaQ (contribution shares) during a twelve-month period. if the the annual variable remuneration is through cash-based contribution shares are retained by the employee for three years programs, with specific business targets derived from the annual after the investment and employment with the ericsson Group business plan approved by the Board of Directors. the exact continues during that time, the employee’s shares will be nature of the targets will vary depending on the specific position matched with a corresponding number of class B shares or aDss but the aim is for them to support united goals and for individuals free of consideration. the plan was introduced 2002 and to be able to affect outcomes. For Group management targets employees in 94 countries participate. in December 2008 the are predominantly financial targets at either Group level or at a number of participants was 19,000 or approximately 25 percent specific business unit level and may also include operational of employees. targets and employee motivation targets. participants save each month, beginning with august payroll, We operate global short-term variable plans for management towards quarterly investments. these investments (in november, and for sales professionals and these plans are adapted to local February, may and august) are matched on the third anniversary requirements. the Board of Directors and the remuneration of each such investment and hence the matching spans over two committee decide on all ericsson Group targets, which are financial years and two tax years. cascaded to unit-related targets, all subject to the two level management approval process. the remuneration committee The Key Contributor Retention Plan monitors the appropriateness and fairness of the target levels the Key contributor retention plan is part of ericsson’s talent throughout the year and has the authority to revise them should management strategy and is designed to give individuals they not remain relevant, stretching and/or enhance shareholder recognition for performance, critical skills and potential as well as value. employees not covered by global short-term variable plans encourage retention of key employees. under the program, may be eligible for local plans, which vary in design according to operating units around the world are given quotas that total no local competitive practice. more than 10 percent of employees world-wide. each unit then Long-Term Variable Remuneration draws up a nominations list of individuals that have been identified according to performance, critical skills and potential. share based long-term variable remuneration plans are the nominations are moderated in management teams locally submitted each year for approval by shareholders at the annual and reviewed by both local and corporate Human resources to 146 remuneration ericsson annual report 2008 ensure that there is a minimum of bias and a strong belief in the Pensions and other benefits system. participants selected obtain one extra matching share in pension benefits follow the competitive practice in the addition to the one matching share for each contribution share employee’s home country and in addition to any national system purchased under the stock purchase plan during a twelve month for social security, pension benefits may contain various program period. the plan was introduced in 2004. supplementary company plans. the basic principle is that other benefits, such as company car and medical insurance, shall also The Executive Performance Stock Plan be competitive in the local market. the executive performance stock plan was also first introduced in 2004. the plan is designed to focus management on driving to summarize, remuneration at ericsson is based on the earnings and provide competitive remuneration. senior principles of performance, competitiveness and fairness, and the executives, including Group management, are selected to obtain remuneration policy together with the mix of several remuneration up to four or six extra shares (performance matching shares) in elements are designed to reflect these remuneration principles in addition to the one matching share for each contribution share a balanced way by creating an integral remuneration package. purchased under the all employee stock purchase plan. For the For our senior management, total remuneration consists of fixed programs since 2006, the ceo is allowed to invest up to 9 salary, short-term and long-term variable remuneration, pension percent of fixed salary in contribution shares and may obtain up and other benefits. if the size of any of these elements should be to eight performance matching shares in addition to the stock increased or decreased, at least one other element has to purchase plan matching share for each contribution share. the change where the competitive position should remain performance matching is subject to the fulfillment of an earnings unchanged. per share (eps) performance target. the past and continued use of average annual eps growth relative to challenging and stretching targets as a performance measure reflects the company’s ongoing strategy of adding shareholder value through the long-term improvement of profitability. 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 committee 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. the performance targets are not capable of being retested after the end of the three-year performance period. if the minimum required performance is not achieved, all matching shares subject to performance will lapse. the Board may also reduce the number of performance matching shares, if deemed appropriate, considering the company’s financial results and position, conditions on the stock market and other relevant circumstances at the time of matching. ericsson annual report 2008 remuneration 147 Corporate Governance Report 2008 Contents Compliance with requirements ......................... 149 Ownership structure ........................................ 150 share capital and voting rights ......................... 150 Meetings with the shareholders ....................... 151 Nomination Committee .................................... 152 Board of Directors ........................................... 154 Members of the Board of Directors .................. 160 Company structure and organization ............... 164 Members of the Group Management Team ...... 166 Auditors ........................................................... 168 Audit Committee pre-approval policies and procedures ............................................... 168 Disclosure controls and procedures ................. 168 Ericsson’s disclosure policies ........................... 169 independence requirements ............................ 169 internal control over financial reporting for the year 2008 ............................................. 170 governance and processes are, the more efficiently the Board can address business and strategy issues for sustainable shareholder value creation. Our reliance on the Company’s corporate governance is dependent on a strong ethos of ethical business practices that starts at the top and permeates to all employees within the organization. Therefore, the Board is committed to high standards of corporate governance and we encourage all employees to follow our example by constantly seeking ways to make the internal controls and our oversight ever more effective and reliable. “The more effective and trustworthy our corporate ” Michael Treschow Chairman of the Board of Directors bodies according to the rules, processes or laws to which they Corporate governance describes the ways in which rights and responsibilities are distributed among the various corporate are subject. Corporate governance defines the decision-making systems and structure through which owners directly or indirectly control a company. This Corporate Governance Report is rendered in accordance with the Swedish Code of Corporate Governance (the “Code”). The report has not been reviewed by Ericsson’s auditor and does not constitute a part of the formal annual report. Highlights of 2008 • Roxanne S. Austin was elected new Board member at the Annual General Meeting (AGM) 2008. • The AGM resolved that part of the fee to the Directors, in respect of the Board assignment, should be payable in the form of synthetic shares. • Three new members joined the Group Management Team. • The AGM resolved on a reverse split of shares 1:5. • The Company’s series B shares have been delisted from the London Stock Exchange. 148 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Compliance with requirements High standards in business ethics Our Code of Business Ethics sets out how we work to achieve and maintain our high standards. it summarizes the Group’s fundamental policies and directives governing our relationships with each other and with our stakeholders. This document has been translated into more than 20 languages to ensure that everyone who works for Ericsson understands our policies and directives and the importance of conducting all business activities in an ethical manner. All employees must regularly review the Code of Business Ethics and, by signing a form as part of the recruitment and at regular intervals, 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 conducted in accordance with the rules and guidelines set forth in this document. Our Code of Business Ethics satisfies the applicable requirements of the sarbanes-Oxley Act of 2002 and NAsDAQ. As a swedish public limited-liability company with securities quoted on NAsDAQ OMX stockholm as well as on NAsDAQ, Ericsson is subject to a variety of rules that affect its governance. Major external regulations include: • The swedish Companies Act. • listing requirements of NAsDAQ OMX stockholm. • NAsDAQ stock Market Rules – including applicable NAsDAQ corporate governance requirements, subject to certain exemptions principally reflecting mandatory swedish legal requirements, as explained in “NAsDAQ Corporate Governance Exemptions”. • Applicable requirements of the us securities and Exchange Commission including the sarbanes-Oxley Act. in addition, to ensure compliance with legal and regulatory requirements and the high ethical standards that we set for ourselves, Ericsson has internal rules that include: • Work procedure of the Board of Directors. • Code of Business Ethics. • Group steering Documents including Group policies and directives, instructions and business processes for approval, control and risk management. • Code of Conduct whose provisions shall be applied in the production, supply and support of Ericsson products and services worldwide. Compliance with the Swedish Code of Corporate Governance The Code has been applied by Ericsson since July 2005. We are committed to complying with best-practice corporate governance provisions on a global level wherever possible. This includes continued compliance with the corporate governance provisions expressed by the Code without deviations. CoDE of BuSinESS EThiCS CODE OF BUSINESS ETHICS The Code of Business Ethics has been translated into more than 20 languages. The Code of Business Ethics can be found at: www.ericsson.com/ericsson/corporate_responsibility/ employees/code_businessethics.shtml information on our website does not form part of this document. TAKING YOU FORWARD ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 149 Ownership structure share capital and voting rights As of December 31, 2008 Ericsson had, according to information The share capital of Ericsson consists of three classes of shares; from the share register kept by Euroclear sweden AB (formerly VPC A, B and C shares. Each A share carries one vote, each B share AB), a total of 728,333 shareholders. Almost 80 percent of the one tenth of one vote and each C share one-thousandth of one shares are owned by institutions, swedish and international. vote. Class A and B shares entitle the holder to the same investor and industrivärden, two swedish industrial holding proportion of assets and earnings and carry equal rights in terms companies with long-term investment cycles, are the largest of dividends. Class C shares are only used for issuance and shareholders with 5.05 and 2.29 percent of the share capital and buy-back to finance the Company’s long-term variable 19.42 and 13.28 percent of the voting rights, respectively. remuneration program. When the Company has acquired the C A significant number of the shares held by foreign investors are shares, they are converted into B shares. held off record by banks, brokers and/or nominees on behalf of their To increase transparency as to the pricing of the Company’s customers. This means that the actual shareholder is not displayed in Class B share and ADs (American Depositary shares) the share register and is not included in the shareholding statistics respectively, and to obtain a number of shares more suitable for identifying the largest shareholders, e.g. for the purposes of the Company, the Annual General Meeting of shareholders 2008 appointing the members to the Nomination Committee. resolved on a reverse split 1:5 of the Company’s Class A and B shares. This implied that for five A shares and five B shares, shareholders received one A share and one B share, respectively. Apart from having a different quotient value, each new consolidated A and B share carries the same rights as those previously attached to the shares in the respective class of shares. ownERShip pERCEnTAGE (CApiTAL) 12% 34% 54% Foreign investors 54% swedish institutions 34% Private swedish investors 12% ouR GoVERnAnCE STRuCTuRE Shareholders’ Meeting Annual General Meeting/ Extraordinary General Meeting unions Board of Directors 10 Directors elected by the Shareholders’ Meeting 3 Directors and 3 Deputies appointed by the Unions Audit Committee Finance Committee Remuneration Committee nomination Committee External Auditors president and CEo Management 150 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Meetings with the shareholders Ericsson’s Annual General Meeting 2008 1,135 shareholders, representing 59 percent of the votes, The Annual General Meeting is held in stockholm. The date and attended the Annual General Meeting (AGM) held on April 9, the venue for the meeting are announced on our website, at the 2008, at the Annex to the Globe Arena in stockholm. Ericsson’s latest in conjunction with the release of the third-quarter report. Board of Directors, members of the Group Management Team shareholders who cannot participate in person may be and the external auditors were present at the meeting. Decisions represented by proxy. Additional requirements for participation apply for shareholders who have their shares nominee-registered and the shares must be registered in the name of the owner by the record date for the General Meeting. The Annual General Meeting is held in swedish and simultaneously interpreted into English. All information is also available in English. of the AGM 2008 included: • Payment of a dividend of sEK 0.50 per share for 2007. • Re-election of sir Peter l. Bonfield, Börje Ekholm, ulf J. Johansson, Nancy McKinstry, Anders Nyrén and Carl-Henric svanberg as members of the Board of Directors. • Re-election of Michael Treschow as Chairman of the Board of Directors, re-election of Marcus Wallenberg and Resolutions at General Meetings of shareholders are normally sverker-Martin-löf as Deputy Chairmen. passed by a simple majority. However, the swedish Companies Act requires special quorums and majorities in certain cases. For example, the resolution to transfer own shares to employees • Election of Roxanne s. Austin as a new Board member. • Board of Directors’ fees to remain unchanged i.e. Chairman sEK 3,750,000; other non-employed Board members sEK participating in Ericsson’s stock Purchase Plan must be 750,000 each; in addition sEK 350,000 to the Chairman of the approved by 90 percent of the votes cast and by 90 percent of Audit Committee and sEK 250,000 each to the other two the shares represented at the General Meeting of shareholders. non-employed members of the Audit Committee; and sEK The Annual General Meeting gives shareholders the 125,000 each to the Chairmen and other non-employed opportunity to raise questions regarding the Company and the members of the Finance and Remuneration committees. results of the year under review. The members of the Board of Additionally, part of the Directors’ fees shall be paid in the form Directors, the Group Management Team and the external of synthetic shares. Auditors are normally present to answer such questions. • Approval of the principles on remuneration to the top shareholders and other interested parties may also executives. correspond in writing with the Board of Directors or executive • implementation of long-Term Variable Compensation management at any time. Program. The minutes of the AGM 2008 are available at www.ericsson.com/ericsson/investors/shareholders/agm AGM ATTEnDAnCE AnD pERCEnTAGE of VoTES 2006–2008 t n e s e r p s r e d o h e r a h S l 1,600 1,400 1,200 1,000 800 600 400 200 0 AGM 2006 AGM 2007 AGM 2008 Annual General Meeting 2009 Ericsson’s Annual General Meeting 2009 will take place on April 22, in Stockholm Shareholders who wish to have a matter considered at the AGM 2009 shall make a written request to this effect to the Board of Directors no later than March 4, 2009. How to contact the Board of Directors Telefonaktiebolaget LM Ericsson The Board of Directors’ Secretariat SE-164 83 Stockholm, Sweden boardsecretariat@ericsson.com s e t o v f o e g a t n e c r e P 60% 59% 58% 57% 56% 55% 54% 53% 52% 51% 50% Shareholders present Percentage of votes ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 151 Nomination Committee Members of the Nomination Committee The Nomination Committee, appointed on the basis of the A Nomination Committee was elected by the Annual General procedure resolved by the Annual General Meeting of Meeting for the first time in 2001. since then, each Annual shareholders 2008, consists of four representatives appointed by General Meeting has appointed a Nomination Committee, or the four shareholders with the largest voting power as of April 30, resolved on the procedure for appointing the Nomination 2008: Jacob Wallenberg (investor AB, Chairman of the Committee. The Annual General Meeting of shareholders 2008 Nomination Committee), Carl-Olof By (AB industrivärden), resolved that the Nomination Committee shall consist of the Caroline af ugglas (livförsäkringsaktiebolaget skandia) and Chairman of the Board of Directors and representatives of the Mats lagerqvist (swedbank Robur Fonder) and further, four largest shareholders as per the end of the month in which Michael Treschow (Chairman of the Board of Directors). No the Annual General Meeting is held. However, as further changes in the composition of the Committee have occurred described in the procedure for appointing members to the during the year. Nomination Committee, the Nomination Committee may comprise additional members pursuant to a request by a The tasks of the Nomination Committee shareholder justified by changes in shareholder structure. such The tasks of the Nomination Committee have evolved over the requests shall be received by the Nomination Committee no later years to comply with the requirements of the Code and best- than December 31 in order to allow for continuity in the work of practice provisions. since the inception of the Nomination the Nomination Committee. The fundamental principles that Committee, its main task has been to propose candidates for characterize the procedure for appointing members to the election to the Board of Directors. The Nomination Committee Nomination Committee are: • Transparency – clear rules and objective procedures shall must take into consideration all the various rules on independence of the Board applicable to the Company, which determine the way the largest shareholders are appointed to are further described later in this report. the Nomination Committee. The Nomination Committee also proposes a candidate for • Continuity – there should at all times be a functioning Nomination Committee and its work should be allowed election of the Chairman of General Meetings of shareholders. in addition, the Nomination Committee prepares proposals continuity to the fullest extent possible. concerning the level of remuneration for Directors elected by the • Predictability – the time for the reading of the shareholding statistics in view of identifying the largest shareholder has to Annual General Meeting of shareholders but not employed by Ericsson; to the auditors and members of the Nomination be predictable, not least in the interest of foreign shareholders. Committee for resolution by the Annual General Meeting. To date, the Nomination Committee has not proposed that it should be paid any fees. Moreover, in years in which auditors are elected, the Nomination Committee proposes candidates based on the preparations carried out by the Audit Committee of the Board. ShARE of VoTES AS of AppoinTMEnT – MEMBERS of ThE noMinATion CoMMiTTEE 19.49% 2008 13.36% 62.42% 2.88% 1.85% Investor AB AB Industrivärden Livförsäkrings AB Skandia Swedbank Robur Fonder Other shareholders Shareholders may submit recommendations to the nomination Committee at any time. however, in order to be considered by the nomination Committee, such recommendations should reach the Committee no later than March 4, 2009. How to contact the Nomination Committee Telefonaktiebolaget LM Ericsson The nomination Committee c/o General Counsel’s office SE-164 83 Stockholm, Sweden nomination.committee@ericsson.com 152 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Work of the Nomination Committee for the Annual General Meeting 2009 As of February 20, 2009, the Nomination Committee has held four meetings. At the first meeting, plans for the continued work of the Committee was discussed and the Committee was informed by the Chairman of the Board on how the Board work is functioning, as well as on the Company’s strategy and future challenges, to be able to make assessments in terms of the competence and experience that is required by the Board members. The Nomination Committee has also been informed of the results of the evaluation process for Board work and procedures, including the performance of the Chairman of the Board. Further, the Nomination Committee has acquainted itself with the assessments made by the Company and the Audit Committee in terms of Auditor work, as well as the Audit Committee’s recommendation in respect of Audit fees. The work of the Nomination Committee is still in progress and more details on its work will be presented at the Annual General Meeting of shareholders 2009. woRK of ThE noMinATion CoMMiTTEE Planned meeting of the Nomination Committee and submission of proposals to the Board Fourth meeting of the Nomination Committee Third meeting of the Nomination Committee Q1 Mar Apr Q2 Feb May Jan Dec Work of the Nomination Committee 2008/2009 Jun Jul Second meeting of the Nomination Committee Q4 Nov Aug Oct Sep Q3 Annual General Meeting of Shareholders, April 9, 2008 Reading of shareholding statistics, April 30, 2008 Appointment of Nomination Committee for the Annual General Meeting of Shareholders 2009 First meeting of the Nomination Committee ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 153 Board of Directors Members of the Board of Directors Our Board of Directors consists of 10 Directors, including the The Board of Directors is ultimately responsible for the Chairman of the Board, elected by the shareholders at the organization of the Company and the management of the Annual General Meeting 2008, for the period until the close of the Company’s operations. it develops guidelines and instructions Annual General Meeting 2009, and three employee for the day-to-day management of the Company, conducted by representatives, each with a deputy, appointed by the trade the President and CEO who ensures that the Board of Directors unions for the same period of time. The President and CEO, receives regular reports regarding the Group’s business Carl-Henric svanberg, is the only Board member who is a development its results, financial position and liquidity and member of the Company’s management. events of importance to the Group. According to the Articles of Association, Ericsson’s Board of Work procedure of the Board of Directors Directors shall consist of a minimum of five directors and a Complementary to the provisions in the swedish Companies Act maximum of 12 directors, with no more than six deputies. and the Articles of Association of the Company, the Board of Directors are elected by the shareholders at the Annual General Directors has adopted a work procedure for its activities that Meeting for the period from the close of the Annual General outlines rules regarding the distribution of tasks between the Meeting until the close of the following Annual General Meeting, Board and its Committees as well as between the Board, its but can serve any number of consecutive terms. in addition, Committees and the President and CEO. The work procedure is under swedish law, unions have the right to appoint three reviewed, evaluated and adopted by the Board as required, at directors and their deputies to the Ericsson Board of Directors. least once a year. While the President and CEO of the Company may be elected as a director on the Board, the swedish Companies Act prohibits Independence of the Directors the President of a public company from being elected Chairman The composition of Ericsson’s Board of Directors meets all of the Board. independence criteria it is subject to, as described in more detail Ericsson abides by strict rules and regulations regarding under “independence requirements” later in the report. in conflicts of interest. Directors and the President and CEO cannot connection with its proposal to the Annual General Meeting of participate in any decision regarding agreements between shareholders 2008, the Nomination Committee concluded that, themselves and the Company, or between the Company and any for the purposes of the swedish Code of Corporate Governance, third party or legal entity in which the individual has an interest. at least the following persons that were proposed for election in addition, in order to ensure independence, the Audit were independent of the Company, its senior management and Committee has implemented a procedure for complying with the Company’s major shareholders: Roxanne s. Austin, NAsDAQ’s rules on related-party transactions and a pre- sir Peter l. Bonfield, ulf J. Johansson, Nancy McKinstry and approval process for non-audit services carried out by the Michael Treschow. external auditors. 154 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Work of the Board of Directors to the Board meeting. A Board meeting also typically includes The work of the Board follows a yearly cycle, starting with the the President and CEO’s report on general business and market statutory Board meeting held in connection with the Annual developments, including the performance of the Company. The General Meeting. Members of each of the three Committees of Board is regularly informed of recent developments in legal and the Board are appointed at the statutory meeting, and the Board regulatory matters and addresses, whenever necessary, the resolves on matters such as authorization to sign for the adoption and implementation of various corporate governance Company. At the next ordinary meeting, the Board handles the rules. Material for each Board meeting is distributed by the first interim report for the year along with the press release Board of Directors’ secretariat according to a pre-established related to the report. in June, a Board meeting generally takes time plan. The time plan is established with due regard for place away from Company headquarters, giving Directors a corporate governance requirements, including prompt chance to visit major Company operations. Towards the end of distribution of the minutes of Board meetings. unless July, the Board meets to handle the interim report for the second- exceptional circumstances prevent them from doing so, all quarter of the year. strategy matters are frequently addressed at Directors participate in all Board meetings. any appropriate Board meeting, but a two-day Board meeting in The Board meets with Ericsson’s external auditors at least August is entirely devoted to the overall strategy of the Group. once a year to receive and consider the auditors’ observations The August meeting also addresses the overall risk management regarding the Annual Report and internal controls. The auditors of the Group. A third-quarter interim report Board meeting is held also annually prepare reports for the management on the at the end of October. in order to allow for the Nomination accounting and financial reporting practices of the Company and Committee to be able to take into account the results of the the Group. Moreover, the Audit Committee meets with the Board work in due time, the Board thoroughly evaluates its own auditors to receive and consider the auditors’ observations on work and the results of this evaluation are presented and the interim reports. The Audit Committee reports its findings to discussed at the October meeting. The last meeting of the the Board. The auditors have been instructed to reflect in their calendar year addresses budget and financial outlook. At the first reports whether the Company and Group are organized so that meeting of the calendar year, generally in the end of January, the the accounts, the management of funds and the financial Board focuses on the financial result of the entire year and also position of the Company and Group in other respects are up to a handles the fourth-quarter report. At the Board meeting in good standard and controlled in a prudent manner. The Board February, which closes the yearly cycle of work, the Board signs has reviewed and assessed the Company’s process for financial the annual report. reporting, as described later in “internal control over financial As the Board is responsible for financial oversight, financials reporting for year 2008”. The Board’s own review of interim and are presented and evaluated at each Board meeting. Further, annual reports in combination with the Company’s internal each Board meeting generally includes reports by the Chairman controls is deemed to give reasonable assurance regarding the of each of the three Committees based on the minutes from the quality of the financial reporting. Committee meetings, which are distributed to all Directors prior ThE BoARD’S AnnuAL woRK CYCLE Budget, financial outlook meeting Q3 meeting – Q3 Financial report – Board work evaluation Q4 Dec Jan Nov Feb Q4 meeting – Financial result of the entire year Q1 Annual report meeting – Board signs the annual report Oct Sep Board meetings − yearly cycle Mar Apr Aug May Q3 Jul Jun Q2 Two-day strategy meeting – Overall strategy and risk management of the Group Q2 meeting – Q2 Financial report Statutory meeting – appointment of Committee Members – authorization to sign for the company Q1 meeting – Q1 Financial report Meeting – generally off-site ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 155 Training of the Board of Directors technology evolution. An important part of the strategic work is All new Directors receive comprehensive training tailored to their to identify and assess various internal and external risk factors, a individual requirements. introduction training includes meetings need that is intensified as a result of the financial turmoil that has with the heads of the major businesses and functions and, if characterized the year. appropriate, training arranged by NAsDAQ OMX to enhance Apart from regular matters addressed in line with the annual knowledge regarding listing issues and insider rules. in addition, Board work cycle, the Board addressed the future of Ericsson’s full-day training sessions are generally held twice a year for all mobile platform business (EMP), where Ericsson and Directors, to assist them in their work for Ericsson by enhancing sTMicroelectronics plan to merge EMP and sT-NXP Wireless into their knowledge of Group operations and by covering specific a joint venture, and the divestment of the Enterprise business to issues, as appropriate. Aastra Technologies. The Board also addressed other long and Training sessions organized in 2008 have provided the short-term strategies with regard to operator and vendor Directors with an in-depth knowledge of markets, strategy and consolidation, increased data traffic in telecom networks, the governance within the business area Global services as well as effects of migration of networks towards iP technology with its products and services. in addition, annual training has been increased focus on content and multimedia and the changing conducted to advise the Board on material issues and key focus competitive landscape among telecom operators, cable TV areas for the Company pertaining to corporate responsibility and providers and other data-network operators. sustainability. These include energy efficiency, climate change, The Heads of the three business units have provided the Board supply chain management, human rights, and telecommunications with thorough presentations of their respective areas of for social and economic development. responsibility to further enhance the Directors’ knowledge of Work of the Board of Directors in 2008 business operations and the strategies of each of the three business units. The Board is also continuously reviewing the The work of the Board of Directors is continuously characterized Management succession planning. in terms of remuneration, the by a high level of activity and 11 Board meetings were held in Board put forward a proposal for a long-Term Variable 2008. (For attendance at Board meetings see “Directors’ Compensation Program 2008 (lTV) to the Annual General Attendance 2008”). Two meetings were held away from the Meeting of shareholders 2008. For the purposes of financing the Company headquarters, one in san José, California, focusing on lTV, the Board also proposed a new directed issue and the acquired operations in silicon Valley, and one in lund, acquisition of C shares to be converted into B shares. sweden, with a focus on sony Ericsson and Ericsson Mobile The Board is continuously working to improve its ways of Platform strategies. working and procedures based on the Board evaluation along Maintaining technology leadership and profitability in an with discussions with the Chairman of the Board and the increasingly competitive landscape have been key strategic Committee Chairmen. areas of focus during the year. A leading position and effectiveness in research and development is key in the rapid oRGAnizATion of ThE BoARD woRK Board of Directors 13 Directors finance Committee (4 Directors) • Financing • Investing • Customer credits Remuneration Committee (4 Directors) • Remuneration policy • Long-Term Variable Remuneration • Executive compensation Audit Committee (4 Directors) • Oversight over financial reporting • Oversight over internal control • Oversight over auditing 156 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Board work evaluation This involves: The objectives of the Board evaluation are to ensure that the Board is well-functioning, to gain an understanding of the type of • Reviewing, with management and the external auditors, the financial statements, including conformity with generally issues that the Board considers should be afforded greater accepted accounting principles. scope to determine the areas in which additional competence is • Reviewing, with management, the reasonableness of needed within the Board. The evaluation also serves as guidance significant estimates and judgments made in preparing the to the work of the Nomination Committee. financial statements, as well as the quality of the disclosures in The Chairman of the Board initiates and leads the evaluation of the financial statements. Board and Committee work and procedures each year. The evaluation process includes detailed questionnaires as well as • Reviewing matters arising from reviews and audits performed. The Audit Committee itself does not perform audit work. Ericsson interviews and discussions. in 2008, the Chairman held has an internal audit function, which reports to the Audit individual meetings with all the Directors who responded to three Committee and performs independent audits. separate written questionnaires; one that covered the Board The Audit Committee is also involved in the preparatory work work in general, one that covered the Chairman’s performance, of proposing candidates for the election of auditors, when and one that covered the performance of the President and CEO. applicable, and monitors their ongoing performance and The Chairman and the President and CEO are neither involved in independence, as well as Group transactions to avoid conflicts of the development, compilation or evaluation of the questionnaires interest. To achieve this, the Audit Committee has implemented related to their respective performances, nor are they present approval procedures for audit and other services performed by when their respective performance is evaluated. The results of the external auditors (see “Audit Committee pre-approval policies the evaluations were thoroughly discussed in order to further and procedures”); a pre-approval process for transactions with improve the work of the Board and the CEO. related parties and a “whistle-blower” procedure for the reporting of violations in relation to accounting, internal control and Committees of the Board of Directors auditing matters. The Board of Directors has established three Committees: Audit, Alleged violations are investigated by Ericsson’s internal audit Finance and Remuneration. Members of each Committee are function in conjunction with the relevant Group Function. appointed amongst the Board members. The work of the information regarding any incidents, including measures taken, Committees is principally preparatory, they prepare matters for details of the responsible Group Function and the status of any final resolution by the Board. However, the Board has authorized investigation are reported to the Audit Committee. each Committee to determine certain issues in limited areas and may also provide extended authorization to a Committee to Members of the Audit Committee determine specific matters. The Board of Directors and each The Audit Committee consists of four members appointed by the Committee have the right to engage external expertise, either in Board from among its members. in 2008, the Audit Committee general or in respect to specific matters, if deemed appropriate. comprised ulf J. Johansson (Chairman of the Committee), Prior to each Board meeting, each Committee submits a sverker Martin-löf, sir Peter l. Bonfield, and Jan Hedlund. All report to the Board on the issues handled, resolved or referred to members, except the employee representative, are independent the Board since the previous ordinary Board meeting. The from the Company and senior management. Each member is reporting by the Chairman of the Committee on the Committee financially literate and familiar with the accounting practices of work in addition to the written report is a recurring item at each an international company comparable to Ericsson. At least one Board meeting. The minutes of each Committee meeting are member must be an audit committee financial expert. The attached to the minutes of the Board meeting following each Board of Directors has determined that ulf J. Johansson, Committee meeting. The Audit Committee sverker Martin-löf and sir Peter l. Bonfield all satisfy these requirements. The Audit Committee has appointed an external expert advisor, The Audit Committee, on behalf of the Board, monitors the Peter Markborn, formerly authorized public accountant, to assist integrity of the financial statements, compliance with legal and and advise the Committee. regulatory requirements and the effectiveness of the systems of internal control over financial reporting. The Audit Committee is also primarily responsible for reviewing annual and interim financial reports and for overseeing the external audit process, including audit fees. ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 157 Work of the Audit Committee Members of the Finance Committee The Audit Committee held nine meetings in 2008 – attendance is The Finance Committee consists of four members appointed by reflected in the table “Directors’ Attendance 2008.” During the the Board from among its members. in 2008, the Finance year, the Audit Committee reviewed the scope and results of Committee comprised Marcus Wallenberg (Chairman of the external financial audits, the independence of the external Committee), Anna Guldstrand, Anders Nyrén and Michael Treschow. auditors and monitored the external audit fees. in addition, certain services other than audits performed by the external Work of the Finance Committee auditors were approved by the Audit Committee under its pre- The Finance Committee held 13 meetings in 2008 – for approval policies and procedures. The Audit Committee attendance, see “Directors’ Attendance 2008”. approved the annual audit plan for the internal audit function and The Committee has devoted considerable time to the reviewed its reports. The Audit Committee also reviewed and increasing uncertainty in the financial market and in view of the discussed with the external auditors each interim report prior to large exposure to the currently unstable financial sector, has publishing. in addition, the Audit Committee monitored the executed its strategy to reduce the Company’s credit exposure continued compliance with the sarbanes-Oxley Act and the by re-arranging the investment policy and procedures. During internal control and risk management process. The Audit the year the Committee has also approved numerous customer Committee also approved certain related-party transactions in finance and credit facility arrangements with a continued focus accordance with its pre-approval process. on capital structure, cash flow and cash generating ability. The Finance Committee The Finance Committee is primarily responsible for: • Handling matters regarding acquisitions and divestments. • Capital contributions to companies inside and outside the Ericsson Group. • Raising of loans, issuances of guarantees and similar undertakings, and approval of financial support to customers. • Continually monitoring the Group’s financial risk exposure. The Finance Committee is authorized to determine matters such as direct or indirect financing, provision of credits, granting of securities and guarantees and certain investments, divestments and financial commitments. MEMBERS of ThE CoMMiTTEES Members of the Committees of the Board of Directors 2008 Audit Committee finance Committee • Ulf J Johansson (Chairman) • Sverker Martin-Löf • Sir Peter L. Bonfield • Jan Hedlund • Marcus Wallenberg (Chairman) • Anna Guldstrand • Anders Nyrén • Michael Treschow Remuneration Committee • Michael Treschow (Chairman) • Nancy McKinstry • Monica Bergström • Börje Ekholm 158 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 The Remuneration Committee Work of the Remuneration Committee The Remuneration Committee’s main responsibility is to advise The Remuneration Committee held seven meetings in 2008 – the Board of Directors regarding salary and other remuneration, attendance is reflected in the table “Directors’ Attendance 2008”. including retirement compensation of the President and CEO, The Committee reviewed and prepared for the Board a proposal Executive Vice Presidents and other officers reporting directly to for a long-term Variable Compensation Program 2008, which the President and CEO. Other responsibilities include: • Developing and monitoring strategies and general guidelines for employee remuneration, including variable plans and was approved by the Annual General Meeting of shareholders in April. The Committee also prepared proposals for salaries and variable pay for 2008, including remuneration of the President retirement compensation. and CEO. Towards the end of the year, the Committee concluded • Approving variable pay under the previous year’s plan (beginning of each year). its analysis of the current long-Term Variable Remuneration structure and remuneration policy to be referred to the Annual • Preparation of the long-term variable remuneration program for referral to the Board and subsequent resolution by the General General Meeting of shareholders 2009 for resolution. For further information on remuneration, fixed and variable pay, please see Meeting of shareholders. “Remuneration” in the Annual Report. • Preparation of the targets for variable pay for the following year for resolution by the Board. To achieve this, the Committee holds annual strategic remuneration reviews with representatives of the Company to determine the direction to follow, allow 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 appointed by the Board from among its members. in 2008, the Remuneration Committee comprised Michael Treschow (Chairman of the Committee), Nancy McKinstry, Monica Bergström and Börje Ekholm. The Remuneration Committee has appointed an independent expert advisor, Gerrit Aronson, to assist and advise the Committee, in particular with regard to international trends and developments. ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 159 Members of the Board of Directors Board members elected by the Annual General Meeting of Shareholders 2008 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 science, 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): 164,000 Class B shares. Principal work experience and other information: Board Chairman of the Confederation of swedish Enterprise 2004–2007, President and CEO of AB Electrolux 1997–2002 and Chairman of its Board of Directors 2004–2007. Earlier positions mainly include positions in Atlas Copco, where he served as President and CEO 1991–1997. Member of the Royal Academy of Engineering sciences. Marcus Wallenberg (first elected 1996) Deputy Chairman of the Board of Directors Chairman of the Finance Committee Born 1956, Bachelor of science of Foreign service, Georgetown university, usA. Board Chairman: skandinaviska Enskilda Banken, saab AB and AB Electrolux. Honorary Chairman: international Chamber of Commerce (iCC). Board member: AstraZeneca PlC, stora Enso Oy, the Knut and Alice Wallenberg Foundation and Temasek Holdings limited. Holdings in Ericsson 1): 142,000 Class B shares. Principal work experience and other information: Positions in 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, stockholm. Board Chairman: skanska AB, svenska Cellulosa Aktiebolaget sCA and ssAB. Deputy Chairman: AB industrivärden and the Confederation of swedish Enterprise. Board member: svenska Handelsbanken. Holdings in Ericsson 1): 10,400 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. Roxanne S. Austin (elected 2008) Born 1961, B.B.A. in Accounting, university of Texas, san Antonio usA. Board member: Abbott laboratories, Teledyne Technologies inc., Target Corporation. Holdings in Ericsson: None. Principal work experience and other information: since 2004, President of Austin investment Advisors. President and CEO of DiRECTV 2001–2003. Corporate senior Vice President and Chief Financial Officer of Hughes Electronics Corporation 1997–2000, which company she joined in 1993. Prior to joining Hughes, Roxanne Austin was a partner at Deloitte & Touche. Member of the board of trustees of the California science Center, member of the California state society of certified Public Accountants and the American institute of Certified Public Accountants. Sir Peter L. Bonfield (first elected 2002) Member of the Audit Committee Born 1944, Honors degree in Engineering, loughborough university, leicestershire, uK. Board Chairman: supervisory Board of NXP. Deputy Chairman: British Quality Foundation. Board member: Mentor Graphics inc., sony Corporation, and TsMC. Holdings in Ericsson 1): 4,400 Class B shares. Principal work experience and other information: CEO and Chairman 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 Venture Michael Treschow Marcus Wallenberg Sverker Martin-Löf Roxanne S. Austin Sir Peter L. Bonfield 160 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Partners llP, The longreach Group and Apax Partners llP. Non- executive Director of Actis Capital llP and Dubai international Capital. Board Mentor of CMi. Börje Ekholm (first elected 2006) Member of the Remuneration Committee Born 1963, Master of science in Electrical Engineering, Royal institute of Technology, stockholm. Master of Business Administration, iNsEAD, France. Board member: investor AB, AB Chalmersinvest, Husqvarna AB, scania, KTH Holding AB, lindorff Group AB and the Royal institute of Technology, stockholm. Holdings in Ericsson 1): 21,760 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 positions at Novare Kapital AB and McKinsey & Co inc. 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): 6,435 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 spectra-Physics AB, where he was the President and CEO, Ericsson Radio systems AB. Member of the Royal Academy of Engineering sciences. Nancy McKinstry (first elected 2004) Member of the Remuneration Committee Born 1959, Master of Business Administration in Finance and Marketing, Columbia university, usA. Bachelor of Arts in Economics, university of Rhode island, usA. Board Chairman: CEO and Chairman of the Executive Board of Wolters Kluwer n.v. Board member: The American Chamber of Commerce, the Netherlands, and TiasNimbas Business school. Holdings in Ericsson: None. Principal work experience and other information: CEO and Chairman of the Executive Board of Wolters Kluwer n.v. President and CEO of CCH legal information services 1996–1999. Previous positions at Booz, Allen & Hamilton, and New England Telephone Company. 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 Economics, Master of Business Administration from Anderson school of Management, uClA, usA. Board Chairman: Association of Exchange listed Companies and Association for Generally Accepted Principles in the securities Market. Deputy Chairman: sandvik AB and svenska Handelsbanken. Board member: svenska Cellulosa Aktiebolaget sCA, AB industrivärden, skanska AB, ssAB, and Ernströmgruppen. Holdings in Ericsson 1): 6,686 Class B shares. Principal work experience and other information: President and CEO of industrivärden since 2001. CFO and EVP of skanska AB 1997– 2001. Director Capital Markets of 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 Administration, university of uppsala. Board Chairman: sony Ericsson Mobile Communications AB. Board member: The Confederation of swedish Enterprise, Melker schörling AB and uppsala university. Holdings in Ericsson 1): 3,202,528 Class B shares. Principal work experience and other information: President and CEO of Telefonaktiebolaget lM Ericsson since 2003. Prior to this, Carl-Henric svanberg was the President and CEO of Assa Abloy AB (1994–2003). Various positions within securitas AB (1986–1994) and ABB Group (1977–1985). Carl-Henric svanberg does not have material shareholdings or part ownerships in companies with which the Company has material business relationships. Börje Ekholm Ulf J. Johansson Nancy McKinstry Anders Nyrén Carl-Henric Svanberg ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 161 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 unionen union. Holdings in Ericsson 1): 1,236 Class B shares. Jan Hedlund (first appointed 1994) Employee representative Member of the Audit Committee Born 1946. Appointed by the iF Metall union. Holdings in Ericsson 1): 566 Class B shares. Anna Guldstrand (first appointed 2004) Employee representative Member of the Finance Committee Born 1964. Appointed by the union The swedish Association of Graduate Engineers. Holdings in Ericsson 1): 1,153 Class B shares. Kristina Davidsson (first appointed 2006) Deputy employee representative Born 1955. Appointed by the iF Metall union. Holdings in Ericsson 1): 837 Class B shares. Karin Åberg (first appointed 2007) Deputy employee representative Born 1959. Appointed by the unionen union. Holdings in Ericsson 1): 1,292 Class B shares. Pehr Claesson (appointed 2008) Deputy employee representative Born 1966. Appointed by the union The swedish Association of Graduate Engineers. Holdings in Ericsson 1): 422 Class B shares Carl-Henric svanberg is the only Director who holds an operational management position at Ericsson. No Director has been elected pursuant to an arrangement or understanding with any major shareholder, customer, supplier or other person. 1) The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal persons. The number of Class B shares also includes American Depositary Receipts, where applicable. Monica Bergström Jan Hedlund Anna Guldstrand Kristina Davidsson Karin Åberg Pehr Claesson 162 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Board of Directors’ remuneration Board members to be paid part of the fee, in respect of the Board Remuneration to Board members not employed by the Company assignment, in the form of so-called synthetic shares. A synthetic is proposed by the Nomination Committee for resolution by the share gives the right to receive a future payment of an amount Annual General Meeting. Board members who are not employed which corresponds to the market value of a Class B share in the by Ericsson are not invited to participate in the Group’s share Company at the time of payment. The purpose of paying part of based long-term variable remuneration plans. the Board of Director’s fee in the form of synthetic shares is to The Annual General Meeting 2008 approved the proposal by further enhance the Directors’ interest in Ericsson and its the Nomination Committee for yearly fees to the non-employed financial development and also provides an opportunity for the Board members for Board and Committee work. For information Directors to have a financial interest in the Company comparable on Board of Directors’ fees 2008, please refer to the table in with that of a shareholder. For more information on the terms and Notes to the Consolidated Financial statements – Note C29 conditions of the synthetic shares, please refer to the notice “Remuneration to the Board of Directors” in the Annual Report. convening the Annual General Meeting 2008 (www.ericsson. The Annual General Meeting 2008 also approved the Nomination com/ericsson/investors/shareholders/agm). information on our Committee’s proposal that it will be possible for non-employed website does not form part of this document. DiRECToRS’ ATTENDANCE 2008 Board member Michael Treschow sverker Martin-löf Marcus Wallenberg Roxanne s. Austin 1) sir Peter l. Bonfield Börje Ekholm ulf J. Johansson Katherine Hudson 2) Nancy McKinstry Anders Nyrén Carl-Henric svanberg Monica Bergström Jan Hedlund Torbjörn Nyman 2) Pehr Claesson 3) Anna Guldstrand 4) Kristina Davidsson Karin Åberg Total 1) Joined the Board of Directors as of April 9, 2008. 2) Resigned from the Board of Directors as of April 9, 2008. 3) Joined the Board of Directors as deputy employee representative as of April 9, 2008. 4) Ordinary employee representative as of April 9, 2008. No of Board meetings No of Audit No of Finance Committee Committee meetings meetings No of Remuneration Committee meetings 11 10 10 8 11 11 11 3 10 11 11 10 11 3 8 10 10 11 11 7 7 7 7 8 9 9 9 12 13 12 4 9 9 13 7 ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 163 Company structure and organization The President and Chief Executive Officer – operational management The organization is operated in two dimensions: • legal entities: more than 200 companies in more than 100 countries. • Operational units: Group Functions (7), business units (3) and market units (23). The Board of Directors appoints the President and CEO and the Group Functions Executive Vice Presidents. Management of day-to-day operations Group Functions coordinate the Company’s strategies, is the responsibility of the President and CEO supported by the operations and resource allocation and define the necessary Group Management Team which, in addition to the President and directives, processes and organization for the effective CEO, consist of the Heads of Group Functions and the Heads of governance of the Group. By optimizing common processes, the business units. tools and the organization, the Group Functions drive operational The role of the Group Management Team is to: excellence across the Company. The Group Functions are: • Establish long-term vision, Group objectives, 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 Communication, Finance, Human Resources & Organization, legal Affairs, sales & Marketing, strategy & Operational Excellence and Technology. The Group Functions also manage common units like Ericsson Research, iT and shared service Centers. The heads of Group Functions report to the CEO. interest to Ericsson. Business units Organization and corporate culture Business units are innovators, developers and suppliers of competitive, high-quality products, services and customer Corporate culture has long been acknowledged as a very offerings. Business units define business and product strategies important factor for driving behavior, not only for compliance with and, by optimizing the product development and supply rules but also in communication, decision making, reaching of operations, ensure high-quality and competitive solutions. objectives and striving for efficiency. Respect, professionalism Business units are responsible for the profitable growth and and perseverance are the values that are the foundation of the consolidated results within their respective areas. The business Ericsson culture, guiding us in our daily work, how we relate to units reflect the product- and service structure of the business: people and how we do business. Consequently, executive Networks, Global services and Multimedia. Business unit heads management makes communication and development of the report to the CEO. Ericsson culture a key task in the management of the Company. ERiCSSoN’S CoRE vALUES ERiCSSoN oRGANi ZATioN PRofESSioNALiSM • Listen – lead through innovation • Keep commitments – be responsive • Seek the truth – know your numbers RESPECT • Build strength through a shared vision • Qualify everyday – generate energy • Diversity as a strength – provide equal opportunities PERSEvERANCE • Lead change – shape the future • Always deliver – walk the extra mile • Trusted global partner for more than a century! CEO Group Functions Business Unit Networks Market units Research Business Unit Global Services Business Unit Multimedia Global Customer Resources Multi-Country Accounts C U S T O M E R S Sony Ericsson Mobile Communications 164 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Market units Management and control Market units are marketing and sales channels and the Ericsson uses balanced scorecards as a tool for translating Company’s representatives in the local market environment. strategic objectives into a set of performance indicators for its Market units define customer strategies and, by building excellent operating units focusing primarily on: market and customer relations with customers and local authorities, drive business performance, competitive position, internal efficiency, financial growth. They manage the complete customer relations ranging performance and employee satisfaction and empowerment. from marketing to after-sales and support activities. Heads of Based on the Company’s annual strategy work, these scorecards market units report to the CEO directly or via a selected member are updated with targets for each unit for the next year and of the Group Management Team. communicated throughout the organization. The balanced Efficiency and coordination scorecard is also used as a management tool to align operating unit goals and personal goals to Company goals, follow up Each of the business and market units is supported by an internal progress towards goals and monitor identified risks. steering group. A steering group is chaired by an appointed Group-wide policies and directives govern how the member of the Group Management Team who reports to the organization works and include important areas, such as a code CEO. The chairman selects the participation in the internal of business ethics, policies on roles and responsibilities, steering group to best support the specific needs of the unit. segregation of duties, capital expenditures, management of Joint ventures intellectual property rights, financial reporting, environmental matters, and risk management. in certain areas, the Company has chosen to work with joint venture partners. The mobile handset partnership with sONY Processes and IT tools Corporation in sony Ericsson Mobile Communications has been As a leading vendor, Ericsson tries to utilize its possible in operation since 2001. During the year, the Company signed a competitive advantages through scale of operations and joint venture agreement with sTMicroelectronics for mobile therefore has implemented common processes and iT tools platform technology and wireless semiconductors. across all its operating units. Through management and Company management continuous improvement of these processes and iT tools, Ericsson reduces cost through standardized operational internal As defined in the swedish Companies Act and outlined in further controls and performance indicators. detail in the work procedure of the Board of Directors, the CEO is managing the Company’s daily operations. The CEO and his Risk management appointed Group Function heads have implemented a We broadly categorize risks into operational and financial risks. management system to ensure that the business is managed: • so that the objectives of Ericsson’s major stakeholders (customers, shareholders, employees) are fulfilled. • Within established risk limits and with good internal control. • so that the Company is compliant with applicable laws, listing requirements and governance codes and fulfills is corporate social responsibilities. Our risk management is based on the following principles, which apply universally across all business activities and risk types: • Risk management is an integrated part of the Ericsson Group Management system. • Each operational unit is accountable for owning and managing its risks according to policies, directives and process tools, with decisions made or escalated according to a well-defined delegation of authority. Financial risks are coordinated through The Ericsson Group Management System our group function Finance. The Ericsson Group Management system comprises three elements: • Management and control elements, i.e. objective setting and • Risks are dealt with on three levels: in the strategy process, in the annual planning and target setting, and in the operational processes by transaction (customer bid/contract, acquisition, strategy formulation, and steering documents, such as policies investment, product development project). They are subject to and directives. • Operational processes and iT tools. • Organization and corporate culture. various process controls such as decision tollgates and approvals. A central security unit coordinates management of certain risks, such as: business interruption, information security/iT and Ericsson is isO 9001 certified. The management system is an physical security. A Crisis Management Council deals with ad- important foundation and it is continuously evaluated and improved hoc events of a serious nature. in accordance with the isO requirements. ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 165 Members of the Group Management Team 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 Administration, university of uppsala. Carl-Henric svanberg holds honorary doctorates at luleå university of Technology, sweden, and linköping university of Technology, sweden. Chairman: sony Ericsson Mobile Communications AB. Board member: The Confederation of swedish Enterprise, Melker schörling AB and university of uppsala. Holdings in Ericsson 1): 3,202,528 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 First Executive Vice President and Chief Financial Officer and Head of Group Function Finance (since October 2007) Born 1965, Bachelor in Business Administration, university of uppsala. Board member: sony Ericsson Mobile Communications AB, svenska Handbollsförbundet. Holdings in Ericsson 1): 18,920 Class B shares. Background: Prior to these positions Hans Vestberg was Executive Vice President and Head of Business unit Global services (up to December 31, 2007) Hans Vestberg has held various positions in the Company since 1988, including Vice President and Head of Market unit Mexico and Head of Finance and Control in usA, Brazil and Chile. Bert Nordberg Executive Vice President and Chairman of Redback and Entrisphere (since 2008) Born 1956, Degree in Electronic Engineering, Malmö, Engineer in the Marines, Berga, university courses in international Management, Marketing and Finance, iNsEAD, France. Board Chairman: litos Repro i Malmö AB. Holdings in Ericsson 1): 22,482 Class B shares. Background: Prior to assuming this position, Bert Nordberg was Executive Vice President and Head of Group Function sales and Marketing (since 2004) and held other various positions within Ericsson. Johan Wibergh Senior Vice President and Head of Business Unit Networks (since 2008) Born 1963. Master of Computer science, linköping institute of Technology. Holdings in Ericsson 1): 8,555 Class B shares. Background: Prior to assuming this position, Johan Wibergh was President of Ericsson Brazil. Other former experience includes President of Market unit Nordic and Baltics, Vice President and Head of sales at Business unit Global services. Jan frykhammar Senior Vice President and Head of Business Unit Global Services (since 2008) Born 1965. Bachelor of Business Administration and Economics, university of uppsala. Holdings in Ericsson 1): 906 Class B shares. Background: Prior to assuming this position, Jan Frykhammar was Head of sales and Business Control in Business unit Global services, CFO in North America and Vice President, Finance and Commercial within the Global Customer Account Vodafone. 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 Mobile Communications AB. Holdings in Ericsson 1): 37,698 Class B shares. Background: From 2002 to 2006, Jan Wäreby was Executive Vice President and Head of sales and Marketing for sony Ericsson Mobile Communications. Carl-Henric Svanberg Hans vestberg Bert Nordberg Johan Wibergh Jan frykhammar Jan Wäreby 166 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 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 uppsala. Holdings in Ericsson 1): 1,216 Class A shares and 24,911 Class B shares. Background: Prior to assuming this position, Carl Olof Blomqvist was a partner of Mannheimer swartling law firm. 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 Ericsson 1): 18,618 Class B shares. Background: Prior to assuming this position, Håkan Eriksson was senior Vice President and Head of Research and Development. He has held various positions within Ericsson since 1986. Marita Hellberg Senior Vice President and Head of Group Function Human Resources and Organization (since 2003) Born 1955, Bachelor of Human Resources Management, stockholm university, Advanced Management Program, Cedep, France. Board member: utbildningsradion. Holdings in Ericsson 1): 23,325 Class B shares. Background: Prior to assuming this position, Marita Hellberg was senior Vice President of Human Resources of the NCC Group. Torbjörn Possne Senior Vice President and Head of Group Function Sales and Marketing (since 2008) Born 1953. Master of science, Royal institute of Technology, stockholm. Holdings in Ericsson 1): 16,586 Class B shares. Background: Prior to assuming this position, Torbjörn Possne was Head of Market unit Northern Europe and Global Customer Account Deutsche Telekom and also held other various positions within Ericsson. 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 member: stronghold and the stockholm Chamber of Commerce. Holdings in Ericsson 1): 17,403 Class B shares. Background: Prior to assuming this position, Henry sténson was Head of sAs Group Communication. Joakim 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 and Astronautics, MiT, Boston, usA. Board chairman: Absolent AB. Board member: VKR Holding A/s. Holdings in Ericsson 1): 35,646 Class B shares. Background: Prior to assuming this position, Joakim Westh was senior Vice President and Head of Group Function Operational Excellence. Member of Assa Abloy Executive Management Team. Before this, Joakim Westh was a partner with McKinsey & Co. inc. up to June 30, 2008 Kurt Jofs, former Executive Vice President and Head of Business unit Networks and Björn Olsson, former Executive Vice President and Deputy Head of Business unit Networks were members 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. Carl olof Blomqvist Håkan Eriksson Marita Hellberg Torbjörn Possne Henry Sténson Joakim Westh ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 167 Auditors Ericsson’s external independent auditors are elected by the Audit Committee pre-approval policies and procedures shareholders at the Annual General Meeting for a period of four The Audit Committee makes recommendations to the Board of years. The auditors report to the shareholders at shareholders’ Directors regarding the auditors’ performance and submits Meetings. The auditors: • update the Board of Directors regarding the planning, scope recommendations regarding auditor’s fees to the Nomination Committee. it reviews the scope and execution of audits performed (external and internal) and analyzes the result and the cost. and content of the annual audit. The Audit Committee has established pre-approval policies • Examine the year-end financial statements and report findings to assess accuracy and completeness of the accounts and and procedures for services other than audits performed by the external auditors. For other matters, an auditor submits an adherence to accounting procedures and principles. application to the CFO. if supported by the CFO, the application • Advise the Board of Directors of additional services performed (non-auditing), the consideration paid and other issues that are is presented to the Audit Committee for final approval. Pre-approval authority may not be delegated to management. needed to determine the auditors’ independence. For further The policies and procedures include a list of prohibited services. information on the contacts between the Board and the auditors, please see “Work of the Board of Directors” earlier in the report. All Ericsson’s quarterly reports are reviewed by the auditors. Statutory auditors PricewaterhouseCoopers AB was elected at the Annual General Meeting 2007 for a period of four years until the close of the Annual General Meeting 2011. PricewaterhouseCoopers AB has appointed Bo Hjalmarsson, Authorized Public Accountant, to serve as auditor in charge. Bo Hjalmarsson is also auditor in charge at other large companies such as Eniro, sony Ericsson Mobile Communications, lundin Petroleum, Vostok Nafta, Vostok Gas and Duni. Fees paid to external auditors Ericsson paid the fees (including expenses) listed in the table in Notes to the Consolidated Financial statements – Note C31, “Fees to auditors” in the Annual Report for audit-related and other services. The Audit Committee reviews and pre-approves any non-audit services to be performed by the external auditors to ensure the auditors’ independence. such services fall into two broad headings: • General pre-approval services can be pre-approved by the Audit Committee without consideration to specific case-by- case service. Tax, transaction, risk management, corporate finance, attestation and accounting services and general services have received a general pre-approval of the Audit Committee, provided that the estimated fee level for the project does not exceed sEK 1 million. The external auditors must advise the Audit Committee of services rendered under the general pre-approval policy. • specific pre-approval – all other audit-related, tax and other services must receive specific pre-approval. The Audit Committee Chairman has the delegated authority for specific pre-approval, provided service fees do not exceed sEK 2.5 million. The Chairman reports any pre-approval decisions to the Audit Committee at its scheduled meetings. Disclosure controls and procedures Ericsson has controls and procedures in place to make sure that information to be disclosed under the securities Exchange Act of 1934, and under Ericsson’s agreements with NAsDAQ OMX stockholm and NAsDAQ, is done so on time, and that such information is provided to management, including the CEO and CFO, so that timely decisions can be made regarding required disclosure. To assist managers in fulfilling their responsibility with regard to disclosures made by the Company to its security holders and the investment community, a Disclosure Committee was established in 2003. One of the main tasks of the Disclosure Committee is to monitor the integrity and effectiveness of the Company’s disclosure controls and procedures. Ericsson also has investments in certain entities that we do not control or manage. Our disclosure controls and procedures with respect to such entities are substantially more limited than those 168 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 we maintain with respect to our subsidiaries. During the year, management, with the participation of independence requirements Ericsson’s President and CEO and CFO, supervised and The Ericsson Board of Directors is subject to, and complies with, participated in an evaluation of the effectiveness of our disclosure a variety of independence requirements. However, it has sought controls and procedures. As a result, Ericsson’s President and and received exemptions from certain sarbanes-Oxley Act and CEO and CFO concluded that the disclosure controls and NAsDAQ requirements, including those that are contrary to procedures were effective at a reasonable assurance level. swedish law, see “NAsDAQ Corporate Governance There were no changes to our internal control over financial Exemptions”. reporting during the period covered by the Annual Report 2008 that have materially affected, or are likely to materially affect, our internal control over financial reporting. Ericsson’s disclosure policies Listing requirements of NASDAQ OMX Stockholm • No more than one member of the board elected by the shareholders may work as a senior executive in the company or its subsidiaries. Ericsson’s financial disclosure policies are designed to facilitate transparent, informative and consistent communication with the • The majority of the directors elected by the shareholders’ meetings must be independent of the company and its investment community on a fair and equal basis, which will reflect management. in a fair market value for Ericsson shares. We want our • At least two of the directors who are independent of the shareholders and potential investors to have a good company and its management must also be independent of understanding of how our Company works, our operational the company’s major shareholders. One of these directors performance, our prospects and the risks we face that jeopardize must be experienced in requirements placed on a listed the fulfilment of our opportunities. company. 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. • Consistent – we aim for consistent and comparable disclosure The Swedish Code of Corporate Governance independence requirements on the board of directors (excluding employee representatives): • No more than one member of the board elected by the shareholders may work as a senior executive in the company within and between reporting periods. or its subsidiaries. • simple – information should be provided in as simple a manner as possible, so readers gain the appropriate level of • A majority of the directors elected by the shareholders’ meetings must be independent of the company and its understanding of our business operations and performance. management. • Relevant – we focus our disclosure on what is relevant to Ericsson’s stakeholders or required by regulation or listing • At least two of the directors who are independent of the company and its management must also be independent of agreements, to avoid information overload. the company’s major shareholders. • Timely – we utilize well-established 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. • A reflection of best practice – we strive to ensure that our disclosure is in line with industry norms. Our website (www.ericsson.com/investors) includes comprehensive information on Ericsson, including an archive of independence requirements on the Audit Committee: • The majority of Audit Committee members must be independent of the company and senior management. • At least one member of the committee must be independent of the company’s major shareholders. • A board member who is part of senior management may not be a member of the audit committee. independence requirements on the remuneration committee: • Committee members must be independent of the company our annual and interim reports, on-demand-access to recent and the senior management. news and copies of presentations given by senior management at industry conferences. information on our website does not form part of this document. ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 169 The NASDAQ Marketplace Rules independence requirements on the board of directors: • A majority of the members of the board of directors must be internal control over financial reporting for the year 2008 independent within the meaning of the NAsDAQ rules. This section has been prepared in accordance with the swedish Ericsson has obtained an exemption from NAsDAQ allowing Code of Corporate Governance, section 10.5, and is thereby employee representative directors to be exempt from NAsDAQ’s limited to internal control over financial reporting. independence requirements. since the Company is listed in the united states, the Sarbanes-Oxley Act of 2002 and corresponding NASDAQ rules independence requirements on the audit committee: • All members of the audit committee must be independent within the meaning of the sarbanes-Oxley Act of 2002. requirements for establishing and maintaining internal controls over financial reporting and for management to report on its assessment of the effectiveness of internal controls over financial reporting, outlined in the sarbanes-Oxley Act (sOX) apply. The Company has implemented detailed controls, documentation and testing procedures in accordance with the COsO framework for internal control, issued by the Committee of sponsoring The sarbanes-Oxley Act of 2002 includes a specific exemption Organizations of the Treadway Commission, to ensure for non-executive employee representatives. compliance with sOX. Management’s internal control report NASDAQ Corporate Governance Exemptions Form 20-F, which will be filed with the sEC in the united states. Pursuant to a 2005 amendment to NAsDAQ’s Marketplace Rules, During 2008, the Company has continued to work with the foreign private issuers such as Ericsson may follow home- improvement in design and execution of its financial reporting according to sOX will be included in Ericsson’s Annual Report on country practice in lieu of certain NAsDAQ corporate governance controls. requirements. Before the amendment was adopted, NAsDAQ’s Marketplace Internal control over financial reporting Rules provided that foreign private issuers could, upon Ericsson has integrated risk management and internal control application, be exempt from certain of its corporate governance into its business processes. As defined in the COsO framework, requirements when these requirements were contrary to the components of internal control are a control environment, risk laws, rules or regulations, or generally accepted business assessment, control activities, information and communication practices of the issuer’s home jurisdiction. and monitoring. Ericsson has received (and is entitled to continue to rely thereon under the 2005 amendment) exemptions from NAsDAQ’s Control environment corporate governance requirements under the Marketplace Rules The Company’s internal control structure is based on the division 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 common market practice respectively. • Employee representatives on the Board to attend all Board and all Committee meetings (including the Audit Committee), in of labor between the Board of Directors and its Committees and the President and CEO and the Company has implemented a management system that is based on: • The Company’s organization and mode of operations, with well-defined roles and responsibilities and delegations of authority. • steering documents, such as policies and directives, and a Code of Business Ethics. • several well-defined processes for planning, operations and accordance with swedish laws concerning attendance and support. decision making processes. in addition, Ericsson relies on the exemption provided by the 2005 amendment to overcome contradictions between NAsDAQ and swedish law requirements regarding quorums for its meetings of holders of common stock. The most essential parts of the control environment relative to financial reporting are included in steering documents and processes for accounting and financial reporting. These steering documents are updated regularly to include, among other things, changes to laws, financial reporting standards and listing requirements, such as iFRs and sOX. The processes include specific controls to be performed to ensure high-quality reports. 170 CORPORATE GOVERNANCE REPORT ERiCssON ANN uAl REPORT 2008 Risk assessment based on a common iT platform with a common chart of account Risks related to financial reporting include fraud and loss or and common master data. embezzlement of assets, undue favorable treatment of counter- parties at the expense of the Company. Other risks of material Information and communication misstatements in the financial statements can occur in relation to The Company’s information and communication channels recognition and measurement of assets, liabilities, revenue and support completeness and correctness of financial reporting, by cost or insufficient disclosure. identified types of risks are making internal process instructions and policies regarding mitigated through segregation of duties in the Company’s accounting and financial reporting accessible to all employees business processes and through appropriate delegation of concerned and through regular updates and briefing documents authority, requiring specific approval of material transactions. regarding changes in accounting policies and reporting and Accounting and financial reporting policies and directives cover disclosure requirements. areas of particular significance to support correct accounting, subsidiaries and operating units make regular financial and reporting and disclosure. Control activities management reports to internal steering groups and Company management, including analysis and comments on financial performance and risks. The Board of Directors receives financial The Company’s business processes include financial controls reports monthly. The Audit Committee of the Board has regarding the approval and accounting of business transactions. established a “whistle blower” procedure for reporting violations The financial closing and reporting process has controls for in accounting, internal controls and auditing matters. recognition, measurement and disclosure, including the application of critical accounting policies and estimates, for Monitoring individual subsidiaries and in the consolidated accounts. All legal The Company’s financial performance is reviewed at each Board entities, business units and market units in Ericsson have their meeting. The committees of the Board fulfill important monitoring own dedicated controller functions which participate in the functions regarding remuneration, borrowing, investments, planning and evaluation of each unit’s performance. Regular customer finance, cash management, financial reporting and analysis of the financial results for their respective units cover the internal control. The Audit Committee and the Board of Directors significant elements of assets, liabilities, revenues, costs and review all interim and annual financial reports before they are cash flow. Together with analysis of the consolidated financial released to the market. The Audit Committee also receives statements performed at Group level, this important element of regular reports from the external auditors. The Audit Committee internal control ensures that the financial reports do not contain follows up on any actions taken to improve or modify controls. material errors. The Company’s process for financial reporting is reviewed For external financial reporting purposes, additional controls annually by management and forms a basis for evaluating the performed by a Disclosure Committee established by Company internal management system and internal steering documents to management ensure that all disclosure requirements are fulfilled. ensure that they cover all significant areas related to financial The Company has implemented controls to ensure that the reporting. The shared service center management continuously financial reports are prepared in accordance with its internal monitors the accounting quality through a set of performance accounting and reporting policies and iFRs as well as with indicators. Compliance with policies and directives is monitored relevant listing regulations. To ensure that the Company’s CEO through annual self-assessments and representation letters from and CFO can assess the effectiveness of the controls in a way heads and controllers in all subsidiaries as well as from business that is compliant with sOX. The Company also maintains detailed units and market units. The Company’s internal audit function, documentation on internal controls related to accounting and which reports to the Audit Committee, performs independent financial reporting, as well as records on the monitoring of the audits. execution and results of such controls. A review of materiality levels related to the financial reports has resulted in the implementation of detailed process controls and documentation in almost all subsidiaries. Ericsson has also implemented overall entity-wide controls in all subsidiaries related to the control environment and compliance with the policies and directives related to financial reporting. To ensure efficient and standardized accounting and reporting processes, the Company has established several shared services centers, performing accounting and financial reporting services for subsidiaries ERiCssON ANN uAl REPORT 2008 CORPORATE GOVERNANCE REPORT 171 Glossary 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 communications, for voice and data services and also video services such as tV. ARPU average revenue per user. ATM (asynchronous transfer Mode) a communication standard for transmission and management of high-speed packet-switched networks. Broadband Data speeds that are high enough to allow transmission of multimedia services with good quality. Capex capital expenditure. CATV cable-tV. Centrex solutions centrex is a telephony service for enterprises, delivered by a service provider. Downlink = to your device. DSL access Digital subscriber line technologies for broadband multimedia communications in fixed line networks. examples: ip-Dsl, aDsl and VDsl. EDGE a 3G 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 subscription penetration below 60 percent. Exabyte = billion gigabytes. FTTx Fiber-to-the-x, e.g. FttH (Fiber-to- the-home) refers to fiber optic broadband connections to individual homes. GbE (Gigabit Ethernet) ethernet is a key technology for high-performance broadband networks. GDP Gross domestic product the total annual cost of all finished goods and services produced within a country. GPON (Gigabit passive optical network) used for fiber-optic communication to the home (FttH). GPRS (General packet radio service) a packet-switched technology (2.5G) that enables GsM networks to handle mobile data communications at rates up to 115 kbps. HSPA (High speed packet access) enhancement of 3G/WcDMa that enables mobile broadband. a subscriber can download files to a 3G mobile device at speeds of several Mbps. 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. IPTV (ip television) a technology that delivers digital television via fixed broadband access. IPX (internet payment eXchange) the global payment and messaging delivery solution for sMs, MMs, Web and Wap. LTE (long-term evolution) the next evolutionary step of mobile technology beyond Hspa, allowing data rates above 100 Mbps. Managed services Management of operator networks and/or hosting of their services. MOU Minutes of use. Opex operating expenses. PBX (private Branch eXchange) a telephone exchange that serves a particular business or office. 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 replaces 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. integrates ip- telephony and the legacy circuit- switched part of the network. TDM time division multiplexing, legacy technology for circuit switching. Telecom grade 99.999 percent availability; performance requirement on telecom networks. VoIP Voice over ip, same as ip telephony. WCDMA (Wideband code Division Multiple access) a 3G mobile communication standard. WcDMa builds on the same core network infrastructure as GsM. WDM (Wavelength division multiplexing) uses multiple light wavelengths to increase the transmission capacity of fiber cables for optical networks. Uplink = from your device, e.g. to the internet. 172 ericsson annual report 2008 GLOSSARY AND FiNANciAL teRmiNOLOGYFinancial terminology Stockholders’ equity per share stockholders’ equity divided by the number of shares outstanding at end of period, basic. 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 probability during a certain period of time. Working capital current assets less current non- interest-bearing provisions and liabilities. 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, Depreciation 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 365 days. Payment readiness cash and cash equivalents and short-term investments less short- term borrowings plus long-term unused credit commitments. payment readiness is also shown as a percentage of net sales. Return on capital employed 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 stockholders of the parent company as a percentage of average stockholders’ equity (based on the amounts at January 1 and December 31). Capital employed total assets less non-interest- bearing provisions and liabilities. Capital turnover net sales divided by average capital employed. Cash conversion cash flow from operating activities divided by net income reconciled 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 quarter 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. 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, projections 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 telecommunications 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 Harley Marketing communications and paues Media Photography Felix oppenheim, andreas lind Reprographics alfaprint aB 2009 Printing alfaprint aB 2009 ericsson annual report 2008 173 GLOSSARY AND FiNANciAL teRmiNOLOGYA N N U A L R E P O R T 2 0 0 8 ERICSSON ANNUAL REPORT 2008 UNLIMITED COMMUNICATION – OUR vEhICLE fOR gROwTh Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden www.ericsson.com Printed on Maxi Offset and Mysoll matt – chlorine free paper that meets international environmental standards EN/LZT 108 9933 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2009 

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